One informal way to describe the value of blockchain is that it can manage trustworthy electronic transactions between strangers without a trusted third party. It is, definitely, a significant breakthrough that will create a vast variety of new and exciting business applications.
Nowadays, our economy is strongly based on intermediaries who guarantee or certify a transaction or some information. The intermediaries are usually expensive, slow and, often, offer little value. Some of them are banks, insurances, public registers (land, commerce, etc.), notaries, certification organizations and, of course, governments. One of the main functions of the public authorities is managing information and provide official documents or certificates about licenses, permits, registration in public databases, etc.
Internet was a revolution of communication and information. Since 1993, we can connect and share any information with anybody at any time, at the cost of zero. The blockchain is argued to be the revolution of trust between foreigners: the promise of disintermediation. But, let’s be fair, there are many areas where the intermediaries still provide value (not just keeping a database of transactions) that cannot be replaced by a distributed ledger or by smart contracts. In some situations (not all), notaries, official registers, etc., provide worthy legal advice, very hard to automate.
One of the areas where blockchain has already created popular business cases is in cryptocurrency (bitcoin, etherium, and a hundred more). It seems likely that the future of currency will be based somehow on the blockchain. We could expand it to the tokenization of assets, either digital or physical. For instance, Singapore (a financial center in East Asia) has announced the development of a blockchain platform for stock exchange securities’ settlements.
What are the limitations of blockchain?
The blockchain is a disruptive technology, but to take real advantage of it, we should have a clear understanding of its limitations. Let’s explain some of them:
- It does not record information: It just saves logs (date, time, quantity, origin, destination, hash, etc.) and, at most, small pockets of data used to execute and guide smart contracts. But it is not designed for data storage. For example, it records the metadata that you have a property, but not the official document and detailed information that describes your property.
- It is not cheap. Each transaction saved in a public blockchain network cost a few cents to fund the members of the network and the huge energy consumption. If we have a business case that generates millions of transactions, it will be a costly project, much more than a centralized database. We can create a private or a consortium blockchain, but then there are, again, relevant costs to build the network and maintain it.
- It is not fast. Transactions are grouped in blocks, but by security reasons, a difficult puzzle has to be solved, and it has to be validated by most of the members of the network, before being added to the distributed ledger. So, that means a block is not saved immediately. Depending on the network and the complexity of the algorithm, it may take seconds 10 seconds (Etherium), 10 minutes (Bitcoin) or even hours (some services aggregate many blocks to reduce costs).
- Anonymity but no confidentiality. The DNA of the blockchain is to manage anonymous transactions: it is not known who is behind each one. But all of them are published in all the nodes of the blockchain network and, therefore, there is no confidentiality (unless some encryption techniques are used). By design, Governments are designed (regulated) on the other way around: the users are very well identified, and the data is confidential.
- It is not easy to scale, as each transaction (and block) is saved in all the members of the network.
There are complementary technologies to overcome some of these limitations, but it requires additional developments and costs. It is essential to understand what blockchain was designed for and what is good at. The blockchain can be used in almost any current use case, but because of its limitations, it is not always the best option.
Because of all these constraints, some experts are now talking about distributed ledger technologies (DLT) instead of the blockchain. The blockchain is just a type of DLT, a democratic one where all are equal, and all record the same information. We are in a learning phase, and some experts are already pointing out that the best solutions would be a sort of DLT, which may not be exactly the blockchain we know now.
Where are we now in the hype cycle?
There is a lot of fuss, but the reality is that we are just in the early stages and there are very few real (in production) blockchain projects in governments. Gartner estimates that blockchain will reach ‘maturity’ in the next five to ten years. It has already passed the “peak of inflated expectations,” and now it is going “through the disillusionment phase.
The Economist magazine stated in a recent article “Blockchain has been hyped to the skies’ (August 30th, 2018), “progress has been slower than hoped, and some apparent successes turn out to have been exaggerated.” Cryptocurrencies are far from being in our daily lives yet. For instance, it is very difficult to find a shop where to pay online or offline with bitcoins, at least in Barcelona where I work.
To learn a bit more about the limitations and the hype, I strongly recommend to have a look at the following videos:
- What should NOT go on a blockchain? (5′) by Andreas M. Antonopoulos a renowned blockchain expert
- What is the difference between a Blockchain and a database (27′) by Gideon Greenspan CEO and founder of Coin Sciences
Approaches about using the blockchain
Although it is not mature yet, governments have the responsibility to learn, experiment, and evaluate government use cases to be well-prepared when the revolution comes and make sure that the public authorities take advantage of it. That means promoting prototypes and pilots in use cases that make sense from the public value perspective to provide better and innovative services to citizens.
When planning blockchain projects, there are two radically different approaches:
First approach: the blockchain can be used in almost every use case. Projects are usually launched on the criteria to have the most significant media impact. It is a fair approach, but we have to be honest: we will basically learn about how to use the blockchain technology, not about the added public value it provides in comparison with existing technologies.
Moreover, there is the risk to create problems where we already had good solutions because we change applications that have been performing fine for years without any relevant issue, just because we now have a trendy new technology. Unfortunately, most of the initiatives fall in this approach. There are several guides to help you decide where the blockchain is the suitable technology.
Second approach: let’s identify the public challenges that we have not been able to solve so far with existing technologies and then analyze if blockchain can help us out. It is a disruptive technology, so let’s use it in disruptive business cases. This approach is much harder because we have to understand first, what are the public challenges, and then the restrictions of the blockchain.
In Jim Collins’ brilliant book “Good to Great”, there is extensive research about successful long-term companies. One of the conclusions is that “they do not adopt a new technology just because it is the latest trend or state of the art: if it does align with your mission and strategy, then you need to take it by the horns and become a pioneer in it. But, if it isn’t, then you should ignore it.”
So, the key question is what are the government business cases unsolved or with a poor performance where disintermediation could create better public services. In this approach, it is essential to foster experimentation and prototyping blockchain labs to learn about their potentialities, where any government with a good idea can prove the concept with a small effort and cost. We should encourage the start-up’s methodology of learning by doing, “fail fast, fail cheap” and user validation of the value proposition.
Let me point out a couple of interesting use cases (at least in Spain) that I am working right now:
- Global identity for both, public and private sector, based on evidence provided by governments (ID card, passports, driver license, etc.), private companies (banks’ documents, insurance contracts, telecom operator registers, etc.) and social reputation (your social network activity that has been validated by many other users). Your identity is not based on a piece of plastic issued by the government. Your identity is the collection of evidence about your life.
- Empowering citizens with the control of their personal records: citizens own their data, and they can share it with governments and with private organizations, with their explicit consent. The blockchain can support this initiative by having the logs about the authenticity of the data/documents and recording the authorized data exchanges.
Real use cases of blockchain in government
There are hundreds of potential use cases that are in the research or the development phase. The Illinois Blockchain Initiative has done excellent work to create a database tracker to compile the blockchain projects in government worldwide.
In this database, we can find (at them moment of writing this article) 17 in-production/live projects, with a description and a project link for additional information. But, sadly, only 11 of them (4 from Estonia) have a project link to a government website: some of them have a link to media articles and some even don’t have a link. Furthermore, some of the 11 initiatives were temporary projects and, in others, the described project is live but, related about using blockchain, they are at the development phase and they are not using it in production yet: that is why in some of the government project links they do not mention blockchain at all.
One of the live projects is the Official Gazette of the Republic of Argentina. They deserve a lot of credit to be innovative but the fact is that they have followed the 1st approach and the way they are using blockchain in this use case is not providing any added value to the existing technologies and, at the end, it is less usable for a citizen to understand and to validate the published date.
I definitely go for the second approach to focus on disruptive business cases and learning by doing, fostering experimentation, pilots and evaluating the impact in government. We are living exciting times, and we have great opportunities to create better transparent, open, efficient, and trustworthy governments. The blockchain may help the process as long as we are smart enough to focus its application to provide public value and not just create great marketing campaigns.
Whoever wants to learn more about blockchain in Government I highly recommend the OECD guide “Blockchains Unchained: blockchain technology and its use in the public sector”
- I am not a technology expert in the blockchain, but I have extensive experience in digital government transformation. This article is based on the learning of the blockchain technology application in the public sector during the last year.
- Thanks to Daniel Martínez for his contributions
- This article was originally published on October 28, 2018. It was reviewed in Novembre 11, 2018.
- Berryhill, J., T. Bourgery and A. Hanson (2018), “Blockchains Unchained: Blockchain Technology and its Use in the Public Sector”, OECD Working Papers on Public Governance, No. 28, OECD Publishing, Paris, https://doi.org/10.1787/3c32c429-en.