Blockchain As A Force For Good (Part 1)
By Musaddik Ahmed
1. A Force for Good
Bitcoin was created as an alternative to government-issued “fiat” currencies, an entirely novel “digital cash” to serve as a native internet currency.[1] Using algorithms and digital signatures, Bitcoin transfers value across a network without having to rely on a central intermediary. The underlying technology of Bitcoin has since been termed blockchain. Blockchains create decentralized consensus. Later blockchains, such as Ethereum, allow for commercial arrangements to be secured by a network – facilitating the emergence of decentralized financial instruments, decentralized artwork and decentralized identities.[2] Blockchains have also been deployed by traditional institutions, such as Central Banks, to process financial transactions with greater efficiency.[3]
Many herald blockchain as an information revolution equivalent to the internet.[4] Others are less enthusiastic. The investment mogul Warren Buffet has called Bitcoin “rat poison” whilst his partner Charlie Munger thinks Bitcoin is “contrary to civilisation”.[5] Nobel Laurette Paul Krugman has attacked the economics of Bitcoin and declared blockchain’s most prominent application as “evil”.[6] Andrew Bailey, the Bank of England Governor, has warned that cryptocurrencies will “go to zero”[7]. And Janet Yellen, the US treasury secretary, has raised environmental concerns over Bitcoin’s energy usage.[8] (These accusations are addressed in Section 5).
In this two-part article, I seek to ascertain whether, despite these condemnations, blockchain technology can be seen as a force for good. In doing so, I focus on public blockchains – the blockchains that allow cryptocurrencies such as Bitcoin and Ethereum to operate. Whilst it is true that cryptocurrency markets are susceptible to a crash, that cryptocurrencies provide anonymity that facilitates crime, and that blockchain security mechanisms are energy intensive, I argue public blockchains, nonetheless, serve justice.
Part 1 explains blockchain technology and discusses the opportunities created. Part 2 looks at the dangers of public blockchains and critically evaluates the technology according to three conceptions of justice: Nozick’s multiple utopias, Sen’s comparative approach and Rawls’ reflective equilibrium. All three point towards the benefits of disintermediation outweighing the potential dangers.
2. Blockchain: The Technology
The blockchain is best understood visually. Searching How Does Bitcoin Actually Work on YouTube will be informative.[9]However, an attempt has been made below to summarize how Bitcoin’s blockchain allows nodes to reach consensus. For those less interested in the technology, the “rough explanation” will suffice before skipping onto section 3.
2.1. A Summary Explanation
Blockchains are made up of blocks of data cryptographically chained together. The blocks in a blockchain are like pages in a book: they tell a story. This story can take a particular form (e.g., Bitcoin stores transactions) or a more open form (e.g., Ethereum stores codified agreements). These stories are shared to every computer on a blockchain network. All participants in a blockchain network have a copy of the book and anybody can add a new page. Before new pages are added they must be approved by the network. This approval takes a “cryptographic” form:
- Digital signatures to identify parties
- Hash functions to connect new pages with older ones
- A consensus algorithm to make sure only correct pages are added
Cryptography means “to keep secret”. A hash is a cryptographic tool that connects information in a secret way. An algorithm is a set of instructions a computer can follow.
Blockchains reward participants who perform the necessary cryptography with a token. In Bitcoin’s blockchain, this token is called bitcoin; in Ethereum’s blockchain this token is called ether. Since executing cryptography releases value, it is calling “mining”. The miners follow the consensus algorithm and add new pages to the blockchain only if they align with the rest of the story. The formal term for the book of blockchain is a ledger.
2.2. Why do Tokens Produced by a Blockchain Network Have Value?
The author believes the reason crypto tokens have value is similar to the reason many abstract tokens have value: social consensus. Once upon a time, cowrie shells where highly valued, this was because the community of that time reached a collective decision to value those cowrie shells. This enabled better societal organization.[10] In a digital age, our communities are collectively deciding to place value in digital token. Thus, facilitating the emergence of new forms of digital organisation.
The digital tokens exist to create incentives for people to secure the network: if nothing of value was produced then no one would carry out the cryptography needed to keep transactions safe. Once the tokens are produced, their ownership can be easily checked and therefore, they become useful for digital transactions. That is, the bitcoins act as “digital cash”. From this core use of a digital transaction, the token itself becomes a commodity. A commodity is anything that can be bought and sold, examples include sugar, coffee, and gold. Many compare Bitcoin to gold and the analogy helps us understand Bitcoin’s value: energy is used to extract gold which is then traded on an exchange for whatever the market is willing to pay for it. Bitcoin’s value arises in a similar manner: energy is used to extract Bitcoin which is then sold on markets where the value of the token is determined by however much people are willing to pay for it. Thus, whilst the tokens are initially useful only for their particular ecosystem, when they are put on exchanges and traded for dollars, the value of the token is determined by the market. Whether non-digital markets will continue to value tokens beyond their core digital functionality is a difficult question which this paper does not seek to answer. However, Section 3 of this paper explores the benefits brought about by the novel digital ecosystems these tokens have enabled.
2.3. The Formal Explanation
Blockchain technology allows participants on a network to reach consensus on a state of affairs in a decentralized manner.[11] The first popular application of blockchain technology was Bitcoin: a decentralized digital cash.[12] Prior to Bitcoin, there was no way of sending money over a network (i.e., the internet) without relying on a bank or other financial institution to process the transaction. Bitcoin changed this through decentralized consensus. Bitcoin relies on a public ledger, with every participant on Bitcoin’s network holding a copy of that ledger. This distributed ledger is the blockchain.[13] Bitcoin’s innovation is allowing nodes (i.e., computers) on a network instantly reach consensus about the state of a ledger.[14]
2.3.1. Bitcoin’s Blockchain
Using pseudonymous digital identities, anyone can write on the Bitcoin blockchain. For example, if Alice wants to send 10 bitcoins to Bob, she changes the ledger and broadcasts the updated ledger to the Bitcoin network.[15] Before any updates to the ledger are accepted by the whole network, they have to be verified by “miner nodes”. A node is just a computer on the network, and mining nodes follow a set of rules contained in the Bitcoin Protocol to ensure that any new transactions are in line with the public ledger. For example, miners will only accept Alice’s transaction if the ledger shows she owns 10 bitcoins. To make sure that everyone has the same copy of the ledger, the Bitcoin Protocol uses a consensus algorithm.[16]
Bitcoin’s consensus algorithm uses a system called Proof-of-Work, whereby the chain with the most work attached to it is taken as the true chain. This “work” is in the form of computational expenditure and it is monitored by the solving of a difficult mathematical puzzle called a hash.[17] A hash is a one-way function which means that it is difficult to find (it requires a large amount of computational work) but once found it can be checked quickly. When Alice wants to send her 10 bitcoins, she broadcasts the updated ledger to the network; and miner nodes try to add those transactions to the blockchain. For the transactions to be added to the blockchain the hash function must be found; the hash function is calculated using the transaction data and the hash of the previous block. Since the verification of each new block relies on the data contained in previous blocks, all network participants can be sure that the longest chain is the honest one.[18] Miner nodes are incentivised to provide the computational work because when transactions are validly added to the blockchain the miner is paid a block reward.[19] These block rewards allow consensus to be reached and create new bitcoins. The Bitcoin Protocol dictates the block reward decreases over time, this means that Bitcoin has a fixed supply.[20]
Overall, by combining digital signatures, hash functions and consensus algorithms, Bitcoin allows value to be transferred across a network without approval from a central intermediary. This was a breakthrough in computer science technology, with a catalogue of failed attempts at attaining a true internet money.[21] All previous iterations of virtual currency were unable to solve the “double-spending” problem.[22] That is, how can we be sure when one sends a coin, someone has not sent the same coin elsewhere? Bitcoin solved the problem using a distributed ledger: the coins acknowledge all transactions which everyone can see.[23]
2.3.2. Ethereum
What Bitcoin did for money, Ethereum does for anything that can be programmed.[24] Whilst Bitcoin’s blockchain only allows you to store transaction data on its ledger which the network confirms and verifies: Ethereum lets you store anything that can be programmed. Thus, agreements between participants can be translated into code and stored on the Ethereum blockchain. Once recorded on the Ethereum blockchain, the information is secured and checked by a network of tens of thousands of computers around the world.[25] A smart contract is a piece of code set to automatically execute once pre-set conditions are met.[26] A collection of these smart contracts are placed on Ethereum to create decentralized applications. Ethereum has allowed people to organize in a decentralized way with decentralized financial instruments, decentralized artwork, and decentralized identities.[27]
Proof-of-Stake Consensus
Besides storing more than just transaction data, Ethereum will also use a different consensus mechanism to Bitcoin. Whilst Ethereum currently uses the computationally expensive Proof-of-Work, in 2022 Ethereum will be transitioning to a Proof-of-Stake system.[28] Proof-of-Stake consensus uses much less energy than Proof-of-Work; this is because instead of everyone on the network competing to solve the hash function, a user is selected (partially randomly and partially according to how much of the native currency they have “staked”) to mine a new block.[29] Therefore, only the node that is responsible for adding to the blockchain has to expend computational resources. This system maintains the same security of Proof-of-Stake since only if you put up collateral can you be selected. If nodes are not honest, the stake they put up is lost to the network. Since the stake will always be more than any transaction fees, nodes are incentivised to be honest.[30]
2.3.3. Private Blockchains
Whilst Bitcoin and Ethereum are both examples of public blockchains, other blockchains are private or permissioned.[31]As long as the rules of the protocol are followed (i.e., you have enough coins), anyone can write to the Bitcoin blockchain and thereby use it for transactions. The same is true for Ethereum and the many other blockchains that seek to provide a public platform for decentralized computing.[32] On the other hand, private blockchains operate according to Proof-of-Authority.[33] Under Proof-of-Authority, only nodes that have been granted pre-approval are able to validate transactions.[34] This method of consensus is used by traditional institutions. For example, the Depository Trust & Clearing Corporation (DTCC) is working with financial giants to move $11 trillion worth of credit derivatives onto private blockchains.[35] Whilst public blockchains offer new forms of organisation, private blockchains are deployed by businesses to make existing processes more efficient.[36] Whether private blockchains are a force of good depends on whether we find the enhancement of existing institutions desirable. On the other hand, public blockchains offer new forms of organisation. Understanding whether public blockchains have been a force for good, then, is a novel question that requires a discussion of the opportunities and risks public blockchains bring. The next section focusses on the opportunities.
3. Public Blockchains: The Use Cases
Public blockchains have led to a plethora of new use cases that threaten incumbent systems.[37] Most public blockchains have centred around cryptocurrencies and an alternative system of finance. However, public blockchain’s have also made contributions to the concept of digital property through Non-Fungible Tokens (NFTs) and the upgrading of supply chains. The good of these innovations is discussed below.
3.1 Cryptocurrencies and Finance
This section details how cryptocurrencies have led to the following financial benefits:
- A payment system outside government-controlled banking infrastructure allows money to be sent to war-torn countries and allows citizens to avoid capital controls.
- New financial instruments increase financial inclusion by providing opportunities to people in developing countries and a younger population.
- An alternative asset class gives banks and hedge funds new business opportunities.
3.1.1. Cryptocurrencies as a Public Payment System
By creating decentralized internet money, Bitcoin increased access to financial instruments in the same way the internet increased access to media resources.[38] Using Bitcoin’s blockchain network, you can send money to someone in Guatemala just as easily, just as safely and just as cheaply as to your neighbour.[39] With the decentralized verification of more than just transaction data, public blockchains have allowed for access to exotic financial instruments once reserved for institutional investment banks and their clients. Whilst decentralized derivatives are a valid cause of concern, cryptocurrencies have served society by offering greater accessibility to the most basic financial instrument: a payment system.
Bitcoin has given millions of people access to an alternative way to move money across the world.[40] This has allowed people to bypass broken banking infrastructure, crippling inflation, and capital controls. In countries where banking systems are in turmoil, sending remittance through traditional means becomes prohibitively expensive. For example, in 2018, a wire transfer from America to Venezuela incurred a 54% charge and took several weeks to process.[41] More recently, a similar situation has occurred in Lebanon where the banking system has become defunct. By using cryptocurrencies, Lebanese diaspora have been able to instantly send money back home for transaction fees that are a few percent of the transfer.[42]
Moreover, Bitcoin has been critical in helping protect people’s savings when inflation has become crippling. In 2020, the inflation rate of Zimbabwe reached 800%[43] and in 2019 the inflation rate of Venezuela reached 80,000%.[44] Using cryptocurrencies, people can avoid having their wealth vaporised. Furthermore, an alternative payment system allows citizens to circumvent authoritarian regimes. For example, the UN has used cryptocurrencies to send aid to war-torn countries which would otherwise have been blocked by corrupt governments.[45] Cryptocurrencies have also been used to avoid oppressive capital controls. More than $50 billion has been moved out of China using crypto-assets.[46] And when Nigeria banned foreign exchange for textile imports, businesses were able to stay in operation by paying their suppliers in Bitcoin.[47]
In the same way the internet lets you access news and media resources that are readily blocked by more formal channels; cryptocurrencies let you access payment services when traditional options become corrupt. By providing access to basic financial security, public blockchains have been a force for good.
3.1.2. Financial Inclusion
Besides providing an alternative payment system, cryptocurrencies have also been a form of value creation. As of August 2021, the cryptocurrency ecosystem is worth over $2 trillion.[48] This value represents the growth of an alternative financial ecosystem which has been driven by and benefitted people outside traditional financial markets. Bitcoin was first released on a computer science forum and the early adopters, who were paying a few cents in electricity for coins now worth tens of thousands, were all computer science enthusiasts.[49] Although traditional financial institutions have now entered public blockchain ecosystems, this development is recent. In July 2021, JP Morgan announced it would offer cryptocurrency products to clients,[50] but in 2017 the CEO of JP Morgan derided Bitcoin as “fraud”. [51] On the other hand, Bitcoin has had enthusiasm and engagement in internet forums much before 2021. For example, the Bitcoin subreddit has had hundreds of thousands of active users as early as 2014.[52]
Unlike institutional investment banks, the internet forums that incubated Bitcoin have no barriers and are free and open for anyone with an internet connection to use. Public blockchains operate on a similar philosophy to the internet forums that incubated Bitcoin. The network is open for anyone with an internet connection (given they follow the rules of the network). This openness has allowed those usually excluded from established financial institutions – such as people in developing countries and the younger generation – to participate in cryptocurrencies value creation.
In the developing world, cryptocurrencies have been utilised in regions where financial instruments are largely unavailable. Opening a brokerage account from rural Rohingya is nigh-impossible, but setting up a cryptocurrency wallet is quite feasible.[53] Younger participants have also been able to engage and benefit from public blockchains. Since permission hasn’t been required, entrepreneurial young minds have managed to profit from being involved in this new financial ecosystem. For example, Erik Finman bought Bitcoin at a tender 12-years-age and is now a crypto-millionaire;[54] Gajesh Naik is a 13-year old who developed a Decentralized Finance Protocol which manages $7million;[55] and 12-year-old Benyamin Ahmed has made £290,000 selling artwork verified by digital stamps on Ethereum’s blockchain.[56] Whilst such examples may be rare and isolated, a younger population in general appear to be beneficiaries of cryptocurrencies. For example, CNBC reports half of millennial millionaires have significant sums of wealth in cryptocurrencies.[57] By increasing financial inclusion and creating new routes to financial security, public blockchains have been a force for good.
3.1.3. Cryptocurrencies as an Alternative Asset
Finally, the new asset class has benefitted traditional finance itself. Financial institutions have a way to diversify their portfolios and hedge against inflation.[58] The digital scarcity of Bitcoin means it works as “digital gold”.[59] Bitcoin’s protocol dictates only 21 million coins will ever be mined. Since the block reward is always decreasing, the supply of Bitcoin will decrease over time. The expectation is demand will either increase or stay constant, therefore, making Bitcoin an asset that can store value over time. This narrative has led large institutional investors – such as Fidelity International and BlackRock – to engage with Bitcoin.[60] Furthermore, cryptocurrencies in general have become a booming asset class in the traditional financial world. PwC reports there are over 200 active crypto hedge funds, 90% of which launched in the past two years,[61] and the Financial Times predicts that 7% of all hedge funds will hold crypto-assets.[62] Moreover, institutional banks have begun to engage in cryptocurrency futures trading.[63] In creating new business opportunities, public blockchains have benefitted traditional financial institutions as well.
3.2 Digital Organizations and Digital Property: Tokenization and the Inception of NFTs
This section highlights the benefits public blockchains have brought to the wider economy:
- New forms of organisation that allow for greater user engagement with their products – more privacy, better use of resources, more choice, more Kickstarter campaigns etc.
- New forms of property that allow for very small amounts of ownership, creativity to be rewarded and flourish in different ways
- New forms of art and the enhancement of digital recreation through NFTs.
3.2.1. ICOs and DeFi
As discussed, Ethereum goes beyond mere transaction history and allows participants to verify, secure and enforce contracts in a decentralized way. This feature resulted in new forms of digital organization that facilitates entirely novel financial products. One example is the rise of Initial Coin Offerings (ICO). ICOs allow for grass-roots growth of a new company by selling tokens that act as a medium of exchange for a venture’s future products.[64] In 2019, blockchain start-ups raised $7 billion through ICOs, compared to only $1 billion through traditional venture capital funding.[65] This form of funding facilitates greater involvement of users in organizations. The tokens that people buy can give them voting rights that dictate the growth of the ecosystem, and provides them with services such as remuneration for watching adverts or sharing storage facilities.[66] Furthermore, this form of financing for start-ups sets less stringent access to capital markets which can facilitate faster innovation. Another innovation brought about by public blockchains are decentralized derivatives and options on decentralized exchanges.[67] As these offerings are made through public blockchains they are open to all. The proliferation of decentralized financial instruments on decentralized exchanges is known as DecentralizedFinance or DeFi. These new forms of organisation, whilst risky, further improve accessibility to finance and the later innovations they have permitted highlight the good they provide to society in the form of new opportunities.
In Life After Google: The Fall of Big Data and the Rise of the Blockchain Economy, George Gilder details many of these new opportunities. For example, Golem can be used to share computing resources to carry out decentralized 3D rendering, Basic Attention Token pays people for watching adverts and Blockstack lets you create and store a decentralized digital identity.[68] With the advent of decentralized arrangements new ways of fundraising, new ways of sharing media and new ways of connecting have been introduced. As blockchains mature, the good they bring ultimately resides in their ability to incentivise innovation. Such innovation is embodied by NFTs.
3.2.2. NFTs
Public blockchains have allowed for the emergence of digital property in the form of non-fungible tokens (NFTs). An NFT is a digital certificate which represents ownership on a blockchain.[69] Whilst the tokens discussed above act like money (they are fungible so they can be switched with each other), an NFT is a unique token and its value is determined through auctions in open galleries.[70] This new form of property has allowed for creatives to be rewarded for their work. As discussed, young Benyamin was able to sell his digital artwork for hundreds of thousands of dollars. More established artists are able to make much more. For example, Beeple was able to sell a collection of his work for $69 million.[71] The value of these NFTs, like the value of all art, is nebulous and intangible with price being determined through auctions. Nonetheless, by giving artists a new way to express themselves and be rewarded for that expression, public blockchains incentivise greater creative expression. Moreover, in developing countries digital artists have used NFTs to monetise their creations, thereby creating new income streams.[72] Thus, the emergence of NFTs has served the good.
Furthermore, NFTs allow people to feel more connected with the superstars and athletes they idolize. Celebrities such as Taylor Swift and Andy Murray have released NFTs that give holders access to exclusive content.[73] NBATopShots is a popular NFT platform where people buy highlights of basketball games which acts as a digital upgrade to baseball cards.[74] To the outside viewer, paying a small fortune for either a piece of plastic (a baseball card) or bunch of 1s and 0s verified by a blockchain (an NFT) will be incomprehensible. Nonetheless, letting people connect with something important to them through some tangible form – be that a collector’s item or a stamp on the blockchain – brings value to a countless number of people.
3.2.3. Metaverses
More significantly, digital property in the form NFTs are creating new revenue streams for people. Public blockchain projects like Axie Infinity and SAND have created “play-to-earn” metaverses where players are rewarded in tokens that can be exchanged for traditional currencies on financial markets.[75] For those in developing countries, the rewards from these games have allowed them to earn more than their salary.[76] Whilst earning a significant salary requires many hours of game-time and some luck, these projects are letting people retain the value they pour into games. Through the crowdsourcing of blockchain, the value gamers in the developed world place on in-game items can be translated into real-world value for gamers in the developing world. As these metaverses become more developed, the concept of digital property will become more substantiated and games will reward not just the initial designers, but those who make the games flourish. By improving people’s recreation, whether through the exclusivity of collector’s NFTs or the potential of being rewarded for gaming, public blockchains have created new forms of value for society. Therefore, they have been a force for good.
3.3 Supply Chains and Distribution networks
This section discusses the following benefits brought by blockchain-based systems:
- Increasing the efficiency of supply chains, especially in areas of crisis
- Increasing the transparency of supply chains, reducing fraud and facilitating fairer trade.
- More dynamic flow of capital and trade between companies leading to lower consumer costs from more interconnected enterprises.
3.3.1. Humanitarian Causes
Besides providing safe payment routes, public blockchains have furthered humanitarian causes such as food distribution, fair remuneration for farmers and safer supplies. The World Food Programme (WFP) has used the Ethereum blockchain to distribute food in Syrian refugee camps where people do not have government identities or bank accounts.[77] Since public blockchains are open to anyone with an internet connection, refugees can easily create digital wallets which allow the UN track individuals and manage distribution. Moreover, the United National Development Programme (UNDP) has deployed blockchains to track food production. For example, UNDP Ecuador has used blockchain to create digital token representations of chocolate bars which contain information about the farmers who picked the cocoa. These tokens can then be redeemed by consumers or returned to the original farmers for reinvestment in the production process.[78]UNDP Serbia has used blockchain technology to track food donations from retailers, with each part of the donation process verified by a blockchain system.[79] By tracking the entire production process on a blockchain, end users can be better informed about exactly how much farmers are remunerated.
3.3.2. Transparency
Moreover, supply chains on blockchain can cut out middlemen and allow for more remuneration to be paid to farmers. The transparency blockchains provide allow for more effective consumer pressure for fair remuneration. For example, consumers can scan a barcode and be fully informed about the way profits are split across the supply chain. This can add a more concrete layer to the concept of Fairtrade.[80] Blockchains have also been used to bring about greater food security in the West. Walmart has been working with IBM to place its food production process on the blockchain.[81]This has reduced the time it takes to track food from 7 days to 2.2 seconds.[82] By having greater transparency across the supply chain, Walmart can identify any faults in the food instantly and with granular precision. Therefore, blockchains are contributing to the safety of food supplies.
Furthermore, blockchain’s transparency allows end-product users to be assured of the authenticity of the products they purchase. Veechain is a blockchain project working with luxury goods producers to verify the authenticity of high-value items.[83] Thus, promoting good by preventing people from being scammed by copies that are becoming increasingly difficult to distinguish.[84]
3.3.3. Interconnected Enterprise
Finally, public blockchains will be critical in making enterprise more efficient. Whilst many are attempting to use private blockchains to take advantage of the instant consensus blockchains permit, EY argues that public blockchains will become the standard for allowing commercial counterparties to interact with each other at much lower costs.[85] As businesses become more efficient, the cost-savings will eventually be transferred to end consumers. According to Deloitte’s 2021 Digital Asset survey, reliance on blockchain based system will revolutionise “how capital is formed…how co-operate action is taken and how value is exchanged between and within companies”.[86] However, the benefits of blockchain require the adoption of public networks.
As Paul Brody, the Head of Blockchain at EY, explains, networked technologies have a monopolising tendency. Thus, no private blockchain will ever be as effective as a public blockchain because the utility of the network resides in adoption of the network. Since public blockchains are inherently more distributed and benefit from wider adoption already, a few prominent public blockchains will eventually dominate. This transition from private networks to public networks has played out multiple times. For example, in the early days of the internet, companies relied on internal intranets (essentially private networks) and only when technological solutions, i.e. Virtual Private Networks (VPNs), were developed could private companies operate on the World Wide Web (a public network) and thereby take full advantage of the internet.[87] Paul Brody describes how a similar transition is happening on blockchains with the development of Zero-Knowledge Proofs (ZKPs) allowing companies to operate on public blockchains without comprising sensitive information. As technological solutions enable enterprises to engage with public blockchains, the benefits of interconnected enterprise will be unlocked and bring benefits to society. Therefore, public blockchains are good for society.
Despite the benefits discussed above, the justice of blockchain technology remains controversial. Part 2 of this paper critically applies three moral philosophies: libertarianism, utilitarianism, and contractarianism, and assesses whether, despite condemnation, public blockchains can be seen as a force for good.
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[15] Supra no. 12, pg 16 In practise, this is done by the wallet itself which broadcasts the requires to mining nodes.
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