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The bitcoin boom has initiated a digital Gold Rush and has also put focus on blockchain technology. But what is blockchain actually? Prof. Gilbert Fridgen explains blockchain in this interview, since blockchain offers – apart from its potential for investing and financing – surprising opportunities for a modern society.
Prof. Fridgen –blockchain seems to be the defining technology of digital transformation. Bitcoin and other crypto currencies have truly caused a Gold Rush in the last few years. We would like to investigate the technology on which those are based – the blockchain – and its potential for business. Prof. Fridgen, what is blockchain?
To put it simply, the blockchain is a network between many computers all over the world. It is different from a bank which has just one big server in its seat; the blockchain is a decentralised system with devices strewn all over the world. Just imagine the blockchain as a notebook everybody carries in their bag. But in this case, it is a notebook with special features. Whenever someone writes anything down in their book, the writing appears in everyone’s book and once I’ve written something down in my book, I cannot erase it anymore.
These features set the possibilities for crypto currencies. When I want to transfer money to you I’ll write it in my notebook and everybody can see that I have transferred you some money. The transaction becomes transparent. If you want to forward part of that money, everybody who has got a notebook can see that you are able to transfer the money because you got it from me before that. That is what you call “common truth”.
So transparency is the keyword. What opportunities does blockchain offer for society, apart from crypto currencies?
You can write a lot more than just a crypto currency on the pages of your “notebook”. The idea of the common truth is the base. Smart Contracts are the next step. These are contracts which become valid because of the features the blockchain inherits: Everybody can see the digital transactions, therefore they are transparent. Through that transparency, it is possible for them to be controlled, and via control and acknowledge, they become valid. Due to this common validity, the intermediary between two or more parties becomes obsolete. That is the interesting part.
Why is that so?
Suddenly I am able to make contracts and transactions without the need for a third party. The blockchain as a network validates a transaction or a contract on its own. For example, I do not need a bank for me to coordinate and execute my transactions any longer. That offers a lot of new possibilities – also for society.
So, will banks become obsolete in the future?
No. Banks have become aware of blockchain and crypto currencies very early on, also because they saw their positions as mediators threatened. The banks feared people no longer needing a provider for financial services. It is in fact true that in the future, some transactional processes may be executed without banks at all or at least with less barriers. However, banks provide a lot more services for society and for their clients than just financial transactions. The blockchain will not be able to substitute personal contact between humans, for example when one needs financial advice or wants to plan their pension. What is interesting about the blockchain are the cases in which there is currently no intermediary at all.
There is still a lot of control via third parties: legislature, union of states, management – at what point do we lack an intermediary?
For the most part those are fields in which there are arguments against an intermediary due to geographic or organisational reasons. One of the big fields is the International Trade Finance. There is definitely a chance for the blockchain in that department since international trade is still very much executed on paper. If a German merchant orders a container of goods from China, he not only receives the container with the goods but also a stack of paper documents about 15 cm high. These papers document the trade, control it, validate it. And this stack of papers is not delivered with the container – it is transferred between the trade partners, banks, the port authorities, and the custom services, often a few times around the world.
Why are those paper documents necessary? How can the blockchain improve the situation?
A digital standard for international trade has not yet been established. This is mostly because introducing it would be very complex. There are several parties involved with different goals that sometimes clash with each other. All these interests would have to be included in a common agreement. That is extremely important since the system is actually desperately in need of a platform provider for international trade, an intermediary to coordinate and execute the processes. But this raises some questions: where would the provider, for example the intermediary, be based geographically? Who would be providing the services?
If the Americans were to provide the service, the Chinese would not use it for their trade business, especially not if the seat of that company is geographically located in a legal area under the influence of Donald Trump. And it is the same situation the other way around – international trade is just too complex and important. This is the part where a geographically independent blockchain comes into play. All transactions, processes, contracts and actions would be transparent, based upon the idea of a “common truth”, for all parties involved in the trade, not depending on geographic borders. The blockchain could become the intermediary for international trade. And apart from that one would save a lot of paper.
„I reckon the blockchain will hit us next year, if it hasn’t done so already. I just hope you won’t notice at all”
Make an educated guess: When will this technology impact everyday life?
I reckon the blockchain will hit us next year, if it hasn’t done so already. I just hope you won’t notice at all.
Why would you hope so?
Solutions for crypto currencies, intermediaries and international trade involving the blockchain are far too complicated for amateurs. The blockchain will never be understood by everyone. That is not necessary since the consumer is not the one who uses the blockchain actively. I just think that we have to get used to stuff happening more quickly and simply in the future. The background activities involving the blockchain are not for everyone to understand. It is just like online banking: we got used to it and use it every day without questioning what is happening on our bank’s server. It just works. If you were to ask someone on the street how their online banking works, they will tell you that they open their browser to open the website of their bank and then they start transferring money. It is not important how that is happening, and that is how it will be with blockchain technology. Technology is really embedded into our lives once we do not notice it anymore.
“Costs for bureaucracy and administration will vanish since all transactions will happen transparently via blockchain”
But international trade is a complicated field to understand, with or without blockchain. Why does the blockchain offer a opportunity for society in that context?
Once the technology has entered everyday life, you will notice the details. Suddenly, groceries will become cheaper because costs for bureaucracy and administration vanish for all the transactions are executed via blockchain. Or you will read about its positive impact on the environment because there are millions of documents that will no longer need to be flown around the world. The products you buy will have a smaller ecological footprint.
That is indeed something to wish for. But are there more practical uses for the blockchain in my everyday life?
I hope that there will be opportunities for that. But I have to repeat: The blockchain is an intermediary, a transparent institution which is different from what was used before. We currently have only companies and we pay those for their services. If you were to book a trip to visit me at the University of Bayreuth, how would you do it?
I would probably go to the station and get a ticket to Bayreuth and then take the train. In Bayreuth I would get a taxi or use public transport.
Exactly. But you might go further than that. You might book a bike via a bike sharing service, using your phone, then buy a ticket, take the train to Bayreuth. In Bayreuth, you would book a car at a car sharing service and drive to my place. In any case you would start comparing different modes of transportation or combine them with each other for your journey. There are apps and online services that offer routes and possible ways of transportation. However, you do not have a “Book Now” button for all transport services at once. There is no way to book a complete trip from your stating point up to the final destination. Why does that button not exist, even though almost everyone who travels would agree on that being highly useful?
Probably because the intermediary is missing?
Exactly. Why is it missing? Because every provider would like to be the intermediary. Companies could get extra money from that, and since everyone wants to be the mediating institution, everybody blocks everyone else and, in the end, you have nobody in this position.
The German railroad company Deutsche Bahn is one of the more integrative companies. They have their own app, the “DB Navigator”, which also features other public transport systems apart from theirs in the search option. The automobile companies are also open to these possibilities. As self-driving cars become more popular, there will be self-driving taxis on the streets. That will be the future of the companies – not just building the cars, but also offering services as a mobility provider. They will want you to plan your travels with their assistance. Everybody is aiming to be the intermediary and because that could only work if everyone cooperated, the position remains vacant. There have been start-ups that tried to mediate between big companies, but as soon as a big corporate group enters the deal, everyone else quits. The economic interest is more important than usability for the customers.
So that is why the blockchain might be helpful in that context?
Exactly. Just as it is with international trade, there is no economic interest with the blockchain. Transparency for the companies and usability for the customers would be more important. I travel a lot and I would be so happy to have a “Book Now”-button, and that is how everyone who travels would feel. Nobody would care if the blockchain worked as an intermediary in the background, just as it is with online banking in the present.
Transparency, usability, fairness, unchangeable rules – sounds just like blockchain were an ultimate solution. Does that technology have disadvantages and problems, too? Could it be even dangerous?
Yes, but the major problem is the power usage. It is true that the blockchain – that is, the bitcoin blockchain – does need a lot of power. But that technology is ten years old and not up to date. That would be just like looking at the first computer and saying that It is slow and has a high power drain. The technology has been updated and more efficient systems exist now.
What is the bigger problem, then, with the blockchain?
The blockchain is a machine and therefore it acts like a machine. It acts upon the rules, contracts and processes without thinking.
Could you elaborate on that?
Sure. Some have considered digitalising our public administration via blockchain technology and using transparent contracts to do so. We’d save a lot of paper that way. Still, we would have a dimension of bureaucracy we cannot begin to imagine. The blockchain would act and decide upon hard rules. It would end up as a system without empathy and human control. We would feel like we were being chased by the machine. So that is a danger, but there is also a solution. It is quite complex, but nevertheless it is our duty to take up on that problem and solve it.
Are there further problems with the blockchain?
Yes, there are some. It is a severe problem that the blockchain is not under any legal rule because it is international and not located anywhere geographically. For example: if I transferred too much money to you and you refused to return it, and you were based in a country which is not participating in a legal agreement, then I would have no chance to solve that problem. That is why we have to establish an international legal standard for blockchains. As soon as we start to transfer more and more processes to the blockchain we will discover problems that would be hard to solve without a standard. This problem is not just technological, so we have to start working interdisciplinarily: economy, law, society.
“The hype and the gold rush are over”
Where do you think will we end up with the blockchain?
The bitcoin boom opened the topic to the public. Right away everyone wanted to be involved and a lot of people thought the blockchain would change the world in a day. I was in favour of people getting to know the new technology. The ones that were involved early on and got rich due to the bitcoin boom thrived, and rightfully so. They took the chance and are the ones who can finance their start-ups and now develop new, exciting ideas for society. Money flowed into an innovative and creative sector, so I think that was a positive aspect of bitcoin. Additionally, I think that the European Central Bank should offer the Euro as a crypto currency sooner or later. We still want to do trade with a hard currency such as the Euro; we do not like to rely on bitcoin, Ethereum or other digital currencies. That even goes as far as people printing their bitcoin as a physical coin with a code on it.
I think it is just getting started. The hype and the gold rush are over. Now companies and the creative industry will really get to know the technology and try to use its new potential. The technology will still play a role, not as a currency, but as a valuable infrastructure.
Interview: Martin Böhmer
Translation: Paulin Sander
Gilbert Fridgen is Professor for Business Informatics and Sustainable IT-Management at the University of Bayreuth. He also is deputy leader of the project group for Business Informatics at the Fraunhofer Institute for Applied Information Technics and founder as well as leader of the Fraunhofer Blockchain Laboratory.