Guest post: Harnessing Blockchain for Development – Part 1
Ramin Daswani, Intern at A4ID, examines the potential for blockchain to benefit the international development sector.
Harnessing Blockchain for Development – Pt 1
Ramin Daswani, Pro Bono Intern, A4ID
On Thursday 18 October 2018, A4ID hosted its Trade, Debt and Finance Knowledge Group on “Harnessing Blockchain for Development”. This guest blog post by one of A4ID’s Pro Bono Interns explores some of the issues we covered in the event. This post will be followed by a second part that will detail some of the extra points arising from the event.
“Blockchain is the greatest thing since sliced bread!” or “No! It’s the best thing since the dawn of the internet!” or “No, no, no!” insist yet others, with fervour: ”It’s better than eating thick slices of bread, warmly toasted and buttered, evenly spread with a perfectly bitter orange marmalade, as one sits quietly, browsing the internet!” This sort of happy debate gives you but a glimpse of some of the breathless devotion one encounters when first entering the blockchain world… But it is an enthusiasm not without merit.
Blockchain promises to bring fundamental change, and the Development Sector is one of the many potential beneficiaries. However, does that mean blockchain will revolutionise the Development Sector? Perhaps. Perhaps not. This article will discuss how blockchain, as is true of any other technology, is not separate from the environment in which it operates. However, we will demonstrate that, in coordination with proper regulatory laws, blockchain may itself actually be able to offer solutions to many of the limitations it faces.
The first section of this article will offer a non-technical, fit-for-purpose description of what blockchain is. The article will then proceed to describe some benefits that blockchain can offer to the Development Sector. The proposed benefits are not without realistic limitations, and these limitations, too, will be outlined. Through this overview, we will explore how blockchain could hold the answer to clearing these limitation hurdles. In the next section, we will examine what many consider to be blockchain technologies’ most significant limitation (1), its environmental energy demand. Finally, we will examine the legal regulation that will be required if blockchain is to fully reach its potential within the Development Sector.
What is Blockchain?
First, let’s correct a misnomer. Blockchain is not spelt B-I-T-C-O-I-N. So then: what is it?
Founded in 2008, blockchain technology, defined simply, is a “data innovation that amounts to a self-verifying record of transactions between parties that requires no intermediaries and no institutional record-keeper.” Its primary purpose is to help untrusting transactional parties trust one another. This is achieved by “miners” (or “forgers,” depending on the system used) within a blockchain system, who verify a transactional ledger. Verification takes place by completion of a complex mathematical puzzle, a process known as cryptography. Once the data is verified, it is entered into a block, along with other verified transactions. This block is then amended to previous blocks, forming a blockchain. This block is then distributed to other nodes within the system, making all ledgers within the block a distributed ledger. Once the data is distributed, it is immutable, and all nodes in the system are constantly synchronised with one another.
Therefore, the data is deviant-proof. A person with sinister intentions would be unable to change the data within the blockchain, because the other synchronised nodes will pick up on any inconsistency and report on it, kicking the corrupted data and user out of the chain. So then, a primary benefit of blockchain is that the data, once entered into the blockchain, can be completely trusted as unchangeable. How then, can this immutability be used to the benefit of the Development Sector?
Crypto-donors, Transparency, Trust, and Supply Chains
The Development Sector is facing a trust crisis (2). UNICEF’s Global Fundraising Specialist, David Cravinho, states that the most significant barrier to donations by millennials is their lack of trust in and a perceived lack of transparency on the part of organisations. The use of blockchain-based crypto-currencies by organisations that solicit donations could change this.
Let us imagine, for a moment, an NGO that is based in the United Kingdom working in The Gambia with the project to build 30 wells. By accepting crypto-currency, the NGO enables its donors to track exactly where money is being spent, end-to-end, in real time. This will serve to build a point of close association to the project for the donor. No longer will a donor have to wait six months for a piece of literature to come through the mail. But is the purchase and use of crypto-currency so straightforward?
Critics have often cited the relative complexity, for new users buying crypto-currencies, as a limitation (3). If people are unable or unwilling to purchase crypto-currencies, isn’t the blockchain’s utility within the Development Sector basically null? Not quite. And groups have already developed measures to alleviate this problem.
Groups such as Disberse have obtained the approval of the UK’s Financial Conduct Authority to receive a variety of currency types and to utilize them within a blockchain system. In addition to the transparency offered by using blockchain, it has also enabled Disberse to save upwards of 2.5% on various transactional costs because they are able of cut out intermediaries such as banks.
These saved transactional costs represent money that can then be injected directly into the projects intended beneficiary, making donations go even further – a considerable financial advantage when donors are scarce. But blockchain offers still more benefits.
Blockchain can also offer supply-chain tracking and smart contracts. Through the use of blockchain, products can be tracked from origin to source. This helps to increase ethical practices and reduce unsustainable practices. For example, big tea retailers could, with the scan of a QR code, be assured that their purchase of Assam Tea is coming from and supporting sustainable farms. Furthermore, there is tremendous potential for blockchain when it is paired with smart-contract, an application that digitally verifies the performance of an agreement: consumers who use such paired technology would have the ability to shop online for products that have been verified as coming from a specific supply chain. However, these benefits do not come without limitations – limitations that reflect the human environment in which blockchain operates.
It is important that we not be paralysed into inaction by the use of blockchain. NGOs and donors cannot become overly reliant on blockchain to ensure sustainable supply chains. Global Witness discusses this sentiment, measuredly stating that blockchain cannot be used to track and quantify every aspect of a supply chain. Data inputted into the blockchain is still open to human error — or, more cynically, falsehoods. But this vulnerability still does not argue against the use of blockchain.
As always, rather than an over-reliance on the blockchain to solve all problems, a holistic approach should be encouraged. Blockchain does not take away the need for organisations to conduct on-the-ground investigations into their supply chain, for instance. However, we now must consider a bigger problem: the environmental impact that blockchain itself poses.
The Environmental Impact
The energy demands of blockchain are exceptionally, and quite dangerously, large. For example, before 2018 ends, the bitcoin mining operations in Iceland will consume more electricity than does the rest of the country’s entire domestic consumption (4).
The reason for blockchain’s large energy demand lies in the system that verifies transactions, the Proof of Work (PoW) system. Here, miners, using a great deal of computational power, compete to be the first to verify a new piece of data. The miner who first verifies the data by completing the relevant cryptographic puzzle is rewarded in valuable crypto-currency. However, as the demand for blockchain continues to grow, it does not pose a sustainable method to the environment. Nevertheless, the blockchain has already started to evolve and some of its proponents have already proposed solutions.
The Proof of Stake (PoS) system demands a fraction of the energy that the PoW system requires. PoS accomplishes this by its equivalent of a “miner,” known as a “forger”, staking his coins in order to complete the cryptographic puzzle and verify the transaction. Those with a bigger stake have a higher chance of being chosen. This reduces the need for competing miners to utilize large amounts of energy. Indeed, major blockchain players, such as Ethereum (the platform on which the social impact network Alice is built), have already started the process of moving to this more energy-friendly method of verification.
It has so far been shown that blockchain, with proactive and innovative actions from both the Development Sector and proponents of blockchain, can effectively be applied to support the efforts of the Development Sector. However, we will now touch upon the regulatory and legal issues that result from the use of blockchain.
The Murky Law
Once data is in the blockchain, it stays there. This very immutability of blockchain’s nature, which is its strength, also poses a problem. It raises various data and privacy concerns, all of which need to be met by and addressed by the law.
In addition, we are faced by the multi-jurisdictional nature of blockchain. If something goes wrong within the blockchain — say, an NGO does not release funds for a promised project — where would the issue be arbitrated? Every participating node within the system, be it one in Italy or one in Australia, can make a legitimate case for arbitration within its own jurisdiction.
This is where blockchain is in need of some help in order for it to be fully effective within the Development Sector. Blockchain’s time can well and only truly come once the relevant legal and regulatory bodies have formed clear and specific means for dealing with some of these issues.
Blockchain does indeed hold significant promise — and, as we have seen, that promise is certainly not empty. Blockchain has thus far worked through many of the hurdles inherent in its technology, a good sign for any new technology. However, for its potential to be fully realised within the Development Sector, NGOs must stop on-the-ground efforts; efforts which will remain wholly necessary. Finally and in addition, appropriate regulatory law will need to be introduced in order to fulfil the promise of blockchain.
*The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of A4ID