The biggest thing since the internet 23 November 2015

In the last few years, I must have tried ten times to figure out the blockchain. I’ve always found it hard to get my head around it.

Some technology types are convinced it’s the future of everything. It was on the cover of The Economist recently – a senior editor called it their most important technology cover story since the Internet.

According to its fans it will do the following things, and more besides:

  • Replace passports, land registries, voting systems
  • Replace all contracts
  • Get rid of fees on financial transactions
  • Replace all keys: for homes, cars, hotel rooms and so on
  • Eliminate spam
  • End digital piracy of music, films and TV
  • Lead to self-owning self-driving cars
  • Lead to thousands and thousands of job losses at banks and other bureaucracies

Anyway, two years later, I finally “get it”. I see what all the fuss is about now.

Let’s see if I can explain it in two minutes.

The trust machine

Okay step one. What, literally, is meant by the word blockchain?

The blockchain is a type of computer code. It uses cryptography to create a trusted public ledger that anyone can inspect, but no single person controls.

Why do we need “a trusted public ledger that anyone can inspect, but no single person controls”?

It comes down to that word trust. The blockchain is a big deal because it uses clever computer code to create something that everybody can trust is accurate and legitimate.

Why is trust such a big deal?

We take trust for granted. In modern Britain we trust complete strangers all the time. Examples: buying food with a credit card, selling a few shares over the phone, buying a house safe in the knowledge that someone won’t just seize it.

Obviously we’re not stupid. We do that because we’ve built up a whole big system to make sure strangers can trust each other. A government land registry proves you own your house. A credit card company “vouches for you” when you want groceries. And your broker is one of about six layers of middle men who make sure your shares get transferred to their new owner when you sell them.

In the developed world at least, a lack of trust isn’t exactly a big problem, because we’ve got a huge complicated system of governments and banks and insurance companies and so on which act as a middle man so we can trust each other. Everyone trusts the middle man, so strangers who don’t trust each other can do business.

So if it’s not a big problem, why do we need blockchain?

Because it costs less! Those trust-creating bureaucracies we’ve invented, banks and governments and the like, don’t come cheap!

I’ll start with an example you’ll be familiar with: buying a share. Most brokers will charge you around £14, all in, to buy a share.

And they’re not ripping you off! The market for brokers is pretty competitive these days. Prices have come way down over the last decade or two. But someone has to pay for all those middlemen at the brokers, the clearing houses, and so on.

Or how about money transfers. I’m Irish, so I’ve been known to send money across the Irish Sea from time to time. There’s no easy way for me to get money where it needs to be in Ireland. So I need to pay a trusted middleman – my bank – to do it for me. For the privilege I pay about £30 each time.

Land registries are pretty boring, at least in the UK. But in many parts of the world they don’t exist or they don’t work. There are stories of Russian Mafiosi turning up at people’s front doors and claiming the rights to their house – with notarised papers to prove it. Trustworthy government institutions are relatively rare on this planet. And where they do exist, they cost a lot of money to run.

Isn’t this something to do with bitcoin?

Sort of. Bitcoin, which is a digital currency, is an application of blockchain technology. But it’s just one application of the blockchain.

In five years’ time we could have a world with millions of different blockchains, each doing different jobs. There might be one for proving ownership of company shares (Nasdaq is already building this by the way). Toyota might have one to pair you with your car. Citibank for transferring funds. Cleethorpes city council might replace their land registry. There are many, many, many applications.

Interesting stuff – but how will it affect me?

Adam Ludwin of Chain, a small Blockchain company, makes the analogy between the blockchain and voice over IP (VOIP). VOIP became the new standard in telephony back in the 2000s. Before VOIP phone calls were still transmitted using the old analogue cables and switches and routers. When VOIP came along, everything went digital “under the hood”.

The user experience for ordinary people didn’t change much, at first. Maybe a slightly better call quality. But the new system made it way cheaper to send a person’s voice from point A to point B.

And now it’s essentially free to call anyone, anywhere in the world, using Skype, FaceTime, WhatsApp calls, Viber, etc etc. VOIP made that possible.

VOIP is a neat example, but it’s small-fry. The telecoms industry is way smaller than all the industries the blockchain has in its sights. If you can trust a simple piece of computer code then county council bureaucrats, back office bankers, copyright lawyers, and er, locksmiths could all be in trouble.

Neat story. But can I make money from it?

According to Ludwin, the penny has dropped in the last six months. Big banks and companies are rushing to prepare their blockchain strategies. Nasdaq is “distrupting itself” by creating a bitcoin share register. This thing has started to move.

The first Blockchain companies are starting to appear on Aim already – for example, Coinsilium is planning to float this year.

If I’m right about the potential applications of the blockchain, this isn’t going to stay restricted to a few small Aim stocks for long.

Expect big things from the companies building the trust machine.

Posted by Sean Keyes on the Daily Reckoning UK website 13th November 2015