With cryptocurrencies like Bitcoin regularly hitting the headlines, blockchain technology is surrounded by lots of hype, some trepidation and a number of misconceptions. To better understand the future of blockchains, research is being undertaken across a wide range of areas – from cryptography to the ethics of design to political science.
In a recent LSE Research Showcase, Professor Andrew Lewis-Pye, from the Department of Mathematics at LSE, explored the question of how to build better blockchains. He argues that technology is not the bottleneck when it comes to improving blockchains and that there are opportunities to harness the genuine innovation taking place across the sector.
There are some people who believe that Bitcoin could end up being the world currency.
So, how does blockchain technology work? Essentially blockchains are a process for reaching consensus amongst a group of participants – rather like a voting process. The difference is that blockchains function even when there is no trusted ‘‘central’’ point of control: in other words, there is no equivalent to the person counting the votes. In addition, rather than make a single decision, blockchains are geared towards making a continual sequence of decisions.
As Lewis-Pye explains: ‘’Imagine there are six different Google servers in countries around the world tasked with maintaining a single database between them. Different servers might be receiving different instructions at different points in time. Maybe some of those servers might break down from time to time. What you want is that somehow, as a whole, this group of servers maintains this common database. That’s what a blockchain does for you. They all remain in sync.’’
While blockchain technologies might seem a contemporary concern, they have been studied since the 1980s and are well understood in the realm of computer science. They are also commonly used by companies including Google and Facebook.
The innovation that the cryptocurrency Bitcoin offers – perhaps the most highly publicised example of blockchain technology – is that it works even when we have no idea who is taking part. With the Google server example, Professor Lewis-Pye explains, we know precisely who is involved in the process. With Bitcoin, ‘’now you have a scenario where anyone can come along and join a process. They can come and go as they please.’’
Last time I checked, Bitcoin uses more electricity than The Netherlands.
The promise of decentralisation
This ‘‘permissionless’’ entry and exit is the key promise of blockchains such as Bitcoin – they enable the decentralised implementation of services on the internet that would otherwise be provided by a centralised entity, like a government or country. This could be for the implementation of currencies – as with the emergence of cryptocurrencies – or to provide decentralised versions of social media sites without a single point of control.
While some people believe that blockchain could take over and ‘‘Bitcoin could end up being the world currency’’, many in the UK accept that a currency controlled by the government generally works fine. From this perspective, blockchain technologies like cryptocurrencies might be seen as dangerous meddling in an established system. But with social media, Professor Lewis-Pye argues, ‘‘there are strong arguments to be made for decentralisation’’.
The future of Crypto and Blockchain
Watch: What makes cryptocurrencies attractive and what is the role of decentralisation? Professor Andrew Lewis-Pye explains.
The idea that you can use blockchain technology to make things transparent, to make the flow of information transparent, that’s a solid idea.
As more and more of our lives are conducted online, including financial transactions, the web has become dominated by a small number of big companies. These companies control your data, often with little transparency; they also determine who sees what information. As Professor Lewis-Pye explains, ‘‘what a lot of proponents of blockchain, or Web 3.0, would argue is that perhaps this creates a dangerous situation. The claim is that blockchain technology can provide an alternative. You can use blockchain technology to run these things in a decentralised way so that, hopefully in some sense, they are more democratic.’’
Overcoming technological obstacles
The future of blockchain is hard to predict and dependent on different factors, some of which are technological in nature, others more human. For Professor Lewis-Pye, the key message is that ‘‘the technological things are easier to predict. My position here is that the technological issues are either solved or completely solvable.’’
To give one example, a key challenge for blockchain has been transaction rates. Bitcoin can process seven transactions per second. In comparison, Visa can process 50,000-60,000 transactions per second. As Lewis-Pye acknowledges, ‘‘that’s a big difference. But it’s entirely solvable.’’ It’s an issue people have been working on since 2008, and protocols are continuously improving and becoming faster. You can build ‘‘Layer 2’’ systems that sit on top of the blockchain, such as The Lightning Network, which is layered on Bitcoin. This makes the blockchain more efficient by offloading some of the work from the blockchain itself.
‘‘Sharding’’ is the innovation being used by Ethereum, the second largest cryptocurrency by market cap after Bitcoin, which could lead to the processing of 100,000 transactions per second. The standard way that blockchain operates is that every ‘‘node’’ in the blockchain – in other words, each participant – has to process every single transaction. As Lewis-Pye observes, ‘‘that puts a fundamental bottleneck on how quickly you do things.’’
Sharding is a way of overcoming this bottleneck. ‘‘Sharding is an approach that says okay, somehow we will maintain the security of the blockchain, but by dividing up the work, so that different people are processing different transactions. That’s surprisingly hard to achieve, but there are various ways you can do that.’’
Another challenge is that Bitcoin nodes require a large (and growing) storage capacity. Bitcoin also uses a tremendous amount of energy – typically more than many medium-sized countries – as a way of maintaining the security of the system. As Professor Lewis-Pye notes, ‘’last time I checked, Bitcoin uses more electricity than The Netherlands.’’
But again, he argues that these issues can be solved. Ethereum has implemented a process called ‘‘proof-of-stake’’, which has reduced energy use and made the blockchain more secure. In essence, ‘‘the basic message here is that all the technological problems are solvable. Technology isn’t the problem.’’
As well as all the scams … there is a lot of genuine innovation taking place.
Professor Lewis-Pye’s position is that ‘‘if the appetite is there, then the technology will deliver.’’ But the public’s appetite for blockchain technology, as well as its regulation, remains harder to predict. He explains that ‘‘the idea that you can use blockchain technology to make things transparent, to make the flow of information transparent, that’s a solid idea.’’ Yet, he acknowledges that ‘‘I can stand here and argue there is some motivation for having decentralised social media sites, but if I build one and people aren’t actually interested in that and no one turns up, then it won’t work very well.’’
Perhaps a factor affecting appetite is uncertainty over blockchain security and whether blockchain is vulnerable to manipulation and scams. Professor Lewis-Pye argues that ‘‘you certainly need regulation to stop that happening. But as well as all the scams, I would say there is a lot of genuine innovation taking place as well. To my mind, it would be a shame if that was all killed off.’’ In this area, he sees an opening for the UK. In the US, there are a number of parties who seem interested in shutting down the crypto space altogether. ‘‘Maybe if the UK has a different attitude, there are opportunities there.’’
As Professor Lewis-Pye concludes, ‘‘the future of blockchain is uncertain, especially when it comes to the regulatory future, but technology is not the bottleneck. There are good motivations for encouraging – in the right way – the innovative technologies being developed.’’
This LSE Research Showcase was written up by Rosemary Deller, Knowledge Exchange Support Manager at LSE.
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