Blockchain 101: Is the Philippines ready for another disruptive technology?

By Rizal Raoul Reyes, Businessmirror, Jan 10, 2018

THE digital age has brought hope to peoples and countries to enable them to pursue greater transparency and better governance. Moreover, the development of the Internet has opened many possibilities to make life easier for people in almost every facet of their lives.

Twenty-plus years later, blockchain came into the picture. How it can impact the Philippines and businesses, like the Internet, remains a conundrum.

Blockchain technologies are in the early stages of a 20-year, if not a 50-year, adoption and maturation cycle. Many compare blockchain today with 1995 when Tim Berners-Lee gave the world the Web.

“[The] Internet at that time was more decentralized than it is today and built primarily with open source,” Brian Behlendorf, executive director of Hyperledger, told the BusinessMirror. “The technology is ripe with promise.”

Hyperledger (or the Hyperledger Project) is an umbrella project of open-source blockchains and related tools, started in December 2015 by the Linux Foundation, to support the collaborative development of blockchain-based distributed ledgers, according to a Wikipedia entry.

Applications

BLOCKCHAIN became a byword among techies (persons considered experts in or enthusiastic about technology, especially computing) because it is often discussed in similar context with cryptocurrencies, such as Bitcoin and Ethereum.

“However, they [blockchain and cryptocurrencies] are not one and the same,” Behlendorf explained. “Distributed ledgers do not require a cryptocurrency to work. A cryptocurrency is an application that sits on top of a blockchain and not the other way around.”

Currently, there are wide adoptions of blockchain technology in commercial applications and production.

Blockchain, also known as “distributed ledger,” can be used to record promises, trades, transactions or simple items that need to be preserved. To ensure the records do not disappear, the data are mirrored or encoded across all nodes in a given network. This allows everyone in an ecosystem to keep a copy of the common system of record.

“Nothing can ever be erased or edited,” Behlendorf said.

Being a multiparty database, he said a distributed ledger has no central trusted authority. This means that when transactions are processed in blocks according to an ordering of a blockchain, this will form a distributed ledger.

Bitcoins

CARLOS Korten, the CEO of Pasig-Hudson Consulting, said a blockchain operates on a network of independently owned computers that are joined together to form a trustless community, where every node serves as the watchdog for the others.

Korten points out that the fierce independence of each processing node is critical to the security and reliability of the blockchain network. By design, none of these computer nodes is “the hub”. He adds the community is designed as a voluntary collection of independent peers in a decentralized network that may grow or shrink in size, as members join and drop from the coalition.

Together, the University of Chicago-educated Korten said, the network establishes a “record of truth” through consensus within the community—formally, “truth” is defined by whatever 51 percent of the network agrees to be true.

For Bitcoin, a cryptocurrency launched in 2009, the first and most famous implementation of blockchain, he said the computing power of the network is provided by companies and individuals (called “miners” in Bitcoin lingo), who receive a financial incentive for participating.

Other blockchain networks may be “private”, where the computing power is supplied on a voluntary basis by the members of the community who have an interest in overseeing the integrity of the blockchain—banks, institutions, businesses or even private individuals.

Formidability

DEVELOPED to be a formidable system, Korten said blockchain technology uses advanced cryptography to prove that every document is an honest and true representation of the original.

Blockchain holds an advantage over paper contracts because it can be stored on the nodes: paper contracts can be altered, lost or destroyed. Moreover, each document is encrypted, time-stamped and locked using a digital signature.

“Next, blockchain uses a decentralized data storage scheme instead of a single data repository,” Korten said. “This means that to alter the ‘record of truth’, a hacker would need to simultaneously attack the network at multiple processing nodes scattered all across the country and around the world.”

If a criminal element decides to enter and hack the information on the blockchain, Korten said the “bad guy will need strong [computing] power to corrupt a well-implemented blockchain.”

“In structure, the blockchain can be imagined to be a massive encrypted ledger: a comprehensive list of all transactions that have ever occurred in the history of the community, stored in a long linked chain,” he explained. “Every node of the network stores and maintains [its] own copy of the ledger.”

When there is a new transaction to be registered on the blockchain—say, the transfer of digital money from one account to another, or the transfer of ownership of a land title from one individual to another, or the execution of a legal contract between two parties—Korten said one node of the network formats and encrypts the transaction into the required layout of the blockchain. It then broadcasts the details of that transaction to the network.

Community

ACCORDING to Korten, multiple transactions from across the community are bundled together into a “block”. This block is appended to the end of the ledger as the next link on the long chain.

The new block is encoded with a signature key, a “cryptographic hash”, which ensures that the transactions in that block can never be altered, and also serves to permanently secure the sequence of that block within the chain. Once encrypted and signed, Korten said the new block is published to all nodes of the network. Furthermore, the other nodes each verify that the new block is well formatted, correctly encrypted and consistent with their own version of the digital ledger.

In case two or more network nodes disagree which valid block should come next on the chain or which transactions should be included in that block, Korten said the community finds a way to arbitrate within itself.

As far as the Bitcoin community is concerned, it uses what is essentially a random lottery, called a “proof of work” (POW), to select which node of the network will have the priority and privilege to publish the next block onto the chain. Other blockchain implementations have replaced the POW with their own solutions to assign prerogatives between peers.

Verification

ONCE 51 percent of the nodes have verified and registered the new block onto their version of the blockchain, the transactions within that block are considered “posted” and become part of the permanent record. That block is now an immutable fact, unanimously agreed to by the full community.

In case somebody wants to research the history of a document or account stored on the blockchain, Korten said a searcher just needs to scan the ledger for the complete lifecycle of that object. He assures that all users are guaranteed that the record they will get is complete, accurate and incorruptible.

In the business arena, Behlendorf said majority of enterprise blockchain applications depend upon real-world trust relationships, which seeks to form a group of participants in an ecosystem that guarantees the boundaries are going to be flexible to bring in more participants in the future.

Furthermore, participants are going to be known to one another and therefore have a built-in interest in joining the consensus-making process. According to Behlendorf, the community of participants can now share data with a greater degree of security. Without requiring them to run POW mechanisms, Behlendorf told the BusinessMirror participants can resolve quicker problems than on a public cryptocurrency blockchain.

Trust

TRUST is the key component of the blockchain technology.

According to a survey of 33,000 people in 28 countries, the majority of people’s trust in major institutions, such as business, government, non-government organizations and media, experienced a sharp decline in 2016. Called the Edelman Trust Barometer, the 2017 survey showed a phenomenon not monitored since the group began tracking the level of trust in 2012.

The advent of globalization and technological change contributed to the loss of confidence of the people in institutions. Respondents said these institutions failed to protect them from the impact these changes wrought.

In the survey, 10 of 28 countries surveyed combined an above-average lack of belief that the system is working with multiple fears—the same hotspots of recent populist actions: France, Italy, Mexico, South Africa, Spain, Brazil, Colombia, the United Kingdom, Australia and the United States.

“Without trust, the system fails,” Behlendorf said. “The onus is on businesses to prove that it is possible to act in the interest of shareholders and society alike and show that free markets can succeed for all if businesses work with the people.”

Governance

KORTEN believes blockchain technology is going to be an effective tool to achieve better governance.

“Blockchain is an important public-policy tool because it is designed to create trust in a trustless environment,” Korten explained. “Governments can apply blockchain technology to create certainty and confidence in the eye of the people, the private sector and the global community.”

Korten, a Filipino-American technopreneur based in Manila and New York, emphasized that blockchain is quite important, especially for governments working to eliminate a reputation for corruption or inefficiency.

“Blockchain offers a solution that can promote commerce, attract investment and create wealth by implementing infrastructure with unimpeachable security, transparency and reliability. What makes a blockchain-based architecture different and superior to other digital solutions is the fact that the encrypted data is stored redundantly across many independent processing nodes,” Korten, a holder of an economics degree from the University of Chicago and masters in computers from Harvard University, explained.

“It is not possible for an agent to alter a blockchain document in any single database, because other copies of the same document exist across the network and any falsification would be quickly identified and superseded,” he added.

Since blockchain has an impregnable memory, it develops trust and confidence in the eyes of the community. Therefore, Korten said, there can be no proposition of corruption on the blockchain as part of the immutable public record.

Appliers

KORTEN said Sweden, Honduras and the Republic of Georgia have already announced plans to implement a title registry for their countries using blockchain technology. He said many governments are expected to follow.

An article published in digitally native news outlet “Quartz” said that Sweden is testing blockchain technology in its land registry program. Lantmäteriet, as the registry is called in Sweden, could generate savings for the average Swedish taxpayer over €100 million annually by eliminating paperwork, reducing fraud and speeding up transactions, according to an estimate by the consultancy Kairos Future, which is also involved in the project.

Meanwhile, Honduras, an underdeveloped country in Latin America, decided to use blockchain technology to solve its land title fraud cases.

In February last year, major global provider of blockchain technology Bitfury Group was selected by Georgia’s National Agency of Public Registry (NAPR) for its land titling and registration program. The move reaped a good result as the country was cited by the World Bank in its “Doing Business” survey as one of the top three countries for ease of property registration. Georgia was also among the top 20 countries for ease of conducting business, due to its transparent and user-friendly property and business registration systems.

Economist Hernando de Soto, an advisor and supporter of the Georgia land-titling project, pointed out that “by pioneering blockchain technology, we bring the systems that 5 billion people use into the global economy.”

Philippines

KORTEN said blockchain also provides the solution to digitize notary services, to issue digital passports, birth certificates, driver’s licenses and other government-issued documents, into a secure format that can be stored on an individual’s phone or on a flash drive.

He added that blockchain can be used to create digital keys for your car, to issue digital security badges for an office building, to distribute manufacturer’s discount coupons over nonsecure channels like e-mail—the breadth and variety of applications for blockchain is breathtaking.

Since blockchain is a new concept in public policy landscape in the Philippines, Korten thinks it will take a bit of time for the Philippine government to embrace blockchain technology. A source from a government agency told they are initially discussing the potentials of blockchain in government operations. “In 2018 we will further push the discourse on blockchain and invite experts to enlighten us more on this technology,” he said.

“But observers already believe the introduction of blockchain could be as profound for society as the invention of the printing press, or the launching of the Internet— events which forever altered the balance of power and toppled governments, each in their own time,” Korten adds.

At its core, Korten said blockchain challenges a government’s historical privilege as the seat of centralized authority.

“This is done postulating a governance framework where there is no central authority, to be replaced with a network of peers operating within a fixed framework, with unanimous consent, under protocols agreed to by its members and encoded into software,” Korten said.

Empowerment

KORTEN said blockchain technology is a tool of empowerment. When government agencies and public officials perform below their expectations, the people can call their attention by citing the records or data to gauge their performance.

To expound, Korten cites a hypothetical case of a corrupt title registry service. Assuming the public perceives that the elected office of title registry is abusive or negligent, and an impediment to business and social progress, Korten said a private coalition of interested parties (e.g., banks, real-estate companies, land developers, plus private individuals at large) could join forces by unanimous consent, to form a “trustless community”, to launch and operate their own private title registry service using blockchain technology as the governing backbone.

In short, the people can countercheck all data to determine if there is corruption or fraud in a government agency.

Whether this title service is endorsed by the government or not, Korten said the “private” blockchain becomes the most complete, reliable and trusted clearinghouse for titles in the community, trusted by the public at large. “Then the elected office of title registrar can be eliminated outright, in recognition of the fact that the community has become self-governing.”

‘Uber-ized’

KORTEN added that “practical, legal, financial, legislative and regulatory implications notwithstanding, the underpinnings of blockchain technology should strike any attentive bureaucrat to his or her bones: the institution of centralized government is at risk of being ‘Uber-ized’.”

Ian Yip, chief technology officer for Asia Pacific of McAfee, concurs with Korten that blockchain is an important tool for governance.

As a digitized, decentralized public ledger, a blockchain is a specialized form of a distributed database that creates a permanent record that cannot be erased or altered.

“The authenticity of the transaction can be verified by the entire community using the blockchain, instead of having to answer to any single authority,” Yip said.

Within this distributed database, Yip said trust is established through mass collaboration, computer code and the laws of mathematics, rather than through a powerful institution granted the sole power to authenticate and settle these transactions.

While cryptocurrencies and financial transactions dominate the headlines in their usage of blockchain, Yip told the BusinessMirror that other industries have begun to explore the applicability of blockchain for their needs.

Industries

AN emerging area of interest in the application of blockchain is in supply-chain management.

Blockchain helps in establishing trust between producer and consumer in the supply chain, and all the intermediaries in-between, that has drawn the interest of industries like agriculture and retail. Examples range from tracking cattle from farm through to the grocery aisles to ensure the authenticity of claims in terms of the origin of the meat and its grade and quality; to ensuring the supply chain and movement of diamonds can be authenticated and does not include any unethical sources and practices (e.g., blood diamonds).

Aside from being a distributed ledger platform, Yip said blockchain technology has other potential applications and technologies that will only become clear over time through exploration and experimentation. As such, they hold much unrealized promise for the future of society. “Therein lies the excitement and activity around blockchain. At its core, the blockchain’s value is in its ability to serve as a platform of truth and trust,” he said. “It has huge potential for disruption.”

Yip said blockchain is deployed within industries to help establish trust, accountability, integrity, transparency and availability of data among organizations and their partners while ensuring no single party has complete control over the data set and related operations.

At this stage, he said any applicability to the cybersecurity domain is tied to scenarios where these attributes are important. This could change as more work is done and we find new creative ways to use distributed ledgers.

Cybersecurity

AT present, Yip said security functions and operations that rely on absolute trust in the data stored and referenced have the most to gain from the use of blockchain. For example, domain name server (DNS) records can sometimes be fraudulently altered, sending website visitors to a rogue webpage controlled by an attacker.

“If one has absolute trust in DNS records, we can say with near certainty that the intended website we are visiting is the genuine article. In other words, storing DNS records on a blockchain will significantly reduce the risk of visiting rogue websites,” Yip explained.

Another benefit is in helping to improve resilience, particularly in ensuring the availability of the resource you are trying to access, be it an application or data. Its decentralized nature makes it that much more difficult for an attacker to compromise the availability of resources stored on a blockchain.

Nevertheless, Yip said this does not mean the requirements cannot be met by current methods, which is why the applicability of blockchain to problems needs to be properly evaluated.

“Blockchain is not the solution to all your security problems,” he said.

Definitions

IF an organization or government wishes to set up a blockchain, Yip said it would first have to define what the distributed ledger of transactions (e.g., blockchain) would be used for. Furthermore, they would also need to have the technical knowledge and talent to code and build a blockchain.

For other options, there are commercial solutions available to build their own blockchain instance.

“If an organization or government were to build their own blockchain, it would not be considered decentralized, unlike a regular blockchain,” Yip said. “However, it would still be immutable and offer a degree of transparency to transactions.”

For McAfee, Yip said the company often engages discussions with organizations about blockchain and its applicability to certain situations.

“As our focus is on cybersecurity, most conversations at this stage are in an advisory capacity and in the context of the blockchain’s potential to improve cyber resilience in the future,” he said.

Bandwagon

IN response to the growing demand for blockchain technology, software giant Oracle recently announced Oracle Blockchain Cloud Service.

“Blockchain holds the promise to fundamentally transform how business is done, making business-to-business interactions more secure, transparent and efficient,” Oracle Senior Vice President Amit Zavery said in his address to the annual Oracle Open World conference in the US.

The service provides enterprise-grade blockchain capabilities and is able to accelerate innovation for on-premises enterprise resource planning and cloud-based software-as-a-service and platform-as-a-service customers.

To help in promoting blockchain, Oracle recently joined Hyperledger. Hosted by the Linux Foundation, Hyperledger is an open-source collaborative effort created to advance cross-industry blockchain technologies. By leveraging open sources and maintaining interoperability with open standards, Oracle enables customers to benefit from all open-source innovations, and avoid vendor lock-in.

Meanwhile, PLDT Inc., which is re-presenting itself as a technology company, is still studying the application of blockchain in its operation.

According to PLDT Executive Vice President and Chief Revenue Officer Enrico Alberto, the listed company is measuring the implications and impact of the technology.

As far as Hyperledger is concerned, Behlendorf said it offers varying applications on blockchain technology such as cross-border payments, diamond supply chain, health-care records, ethical food supply, interstate medical licensing, real-estate title, music and media rights and renewable energy.