Smart Shift

In April 2014, Ben Schlappig chose¹ to sell his house in Seattle. To anyone else this would be a normal affair, but for Ben it was different: rather than move to another property, he had decided to dispense with such earthly considerations. Not that he was financially rich, as such; rather, he had managed to amass so many frequent flyer points, using a variety of schemes and tricks (from affiliated credit cards to deliberately getting bumped from a low-cost flight), he can now travel wherever he likes, whenever he likes.

Ben Schlappig is neither the first, nor the best at the game. This mantle has to go to Randy Petersen, who founded his frequent flyer consulting service back in 1985, embracing the Internet with his WebFlyer.com² site a few years later — indeed, Ben’s own blog is hosted by one of Randy’s sites, BoardingArea.com³. Across hotels, flights, retailers and other services, the market for loyalty points in the UK alone is suggested to be running at about £6 billion’s worth of (potentially untapped⁴) value.

The fact that frequent flyer miles and other loyalty points can be bought and exchanged⁵, for products and even money, should leave nobody in any doubt: these are, to all intents and purposes these are forms of currency. It has been estimated⁶ that an ‘airmile’ is worth 10-12 cents. Not a great deal perhaps, but as we all know, look after the pennies… And it’s not just loyalty points. M-Pesa, Kenya’s mobile money success, started out as credit points for mobile phone calls. The story is that when the banks complained that its provider, Vodafone, wasn’t a bank, the company was immediately granted a banking license. Meanwhile, in gaming we have XBox and Steam⁷ points, and in-game auction houses with the ability to top up with cash.

So perhaps it should have come as no surprise when Bitcoin arrived on the scene to almost immediate acceptance. Bitcoin isn’t even the only ‘crypto-currency’ in play⁸, though it is the de facto currency on the dark net. This is not only to its virtual nature, but it comes with an additional twist: it was designed to be distributed. Whereas other currencies — from traditional money to loyalty schemes — each required their own central authority, Bitcoin and others use a powerful technology which is known as the Blockchain. Blockchain started out as a “system of record” for Bitcoin. Simply put, if I give you a Bitcoin, how can the transaction be verified as having taken place? The answer is for a third party to oversee the creation of a block — a package of data containing not only this, but multiple other transactions and some ‘other stuff’ to enable the authenticity of the block to be proved.  This does not exist in any one place, rather, each Bitcoin account keeps a copy. Every time a Bitcoin transaction takes place, it is written to each and every copy of the Blockchain. This, plus the (also distributed) checking process in place, makes it almost impossible to conduct a fraudulent transaction.

Note that this means Bitcoin was never designed to be anonymous. “Bitcoin is probably the most transparent payment network in the world,” explains Bitcoin.org. Each Bitcoin transaction⁹ contains a ‘hash’, a 25-byte address directly traceable to its instigator. It has to be, otherwise it wouldn’t be provably correct. Once independently verified, each transaction is then stored in what is, to all intents and purposes, a globally, publicly accessible database — the blockchain. While it might take some digging, if we all used Bitcoin, it would be like having access to each other’s account details. (As a consequence, for those wanting to cover their virtual tracks, the general advice is to create a new address every time. While this can prevent a series of transactions being linked to a single source, it’s still public.) 

As it happens, transactions stored on the Blockchain don’t have to involve the transfer of bitcoins, they could represent any event — say (and why not), a declaration of undying love. Indeed, any piece of information can be captured and stored as a blockchain event: once created, the record will exist for as long as the concept of the blockchain exists.  Once the transaction has been added to the system of record, it is duplicated across every computer storing a copy of the Blockchain. As a result of both their indelibility and programmability, blockchains have been seen as a way of managing a whole range of situations and transactions. Of course money transfers (crypto- or traditional currency) but also such situations as preventing forgery and pharmaceutical fraud, as an identifier associated with an item (a painting or a drug) can be proven to be correct.

Equally, the virtual world has room for more than one blockchain. Bitcoin has its own, and other crypto-currencies have theirs. You can create a (different) blockchain for whatever purpose you like. While Bitcoin is gaining interest therefore, it is the Blockchain that has really inspired. For example, the Australian stock exchange has announced¹⁰ that it will be testing a blockchain for the next version of its trading platform. Blockchains have also been seen as a useful way of storing medical records, in a way that is both secure for the individual and difficult to corrupt.

The immediate impact on certain types of business has not gone unnoticed. A particular area of interest is the arts, as these mechanisms enable transactions to take place directly between artists, consumers and other stakeholders. For example the use of bitcoin-based models to create a financial conduit directly from consumers to artists, enabling¹¹ ‘fairness’. Imogen Heap¹², who released a single with a Bitcoin pay-what-you-like mechanism, has also launched the Mycelia project to investigate this further. "I dream of a kind of Fair Trade for music environment with a simple one-stop-shop-portal to upload my freshly recorded music, verified and stamped, into the world, with the confidence I’m getting the best deal out there, without having to get lawyers involved.” … “Enabling record labels and streaming services – who aren’t all bad to say the least, and who still will of course have a valid and much needed place in this new landscape – to find, nurture and be a beacon for artists but in a fair environment,” she says.

And the model is being extended, to incorporate Blockchain¹³. Qointum¹⁴ is one example[^ http://www.blockchainsummit.io], as is Ethereum. And meanwhile, blockchains have been founded to store information about both transactions and what has been termed ‘smart contracts’ — that is, programmable code that defines when a transaction should take place, or links to where and when an item was created. Explains¹⁵ Zoe Keating, “I’m interested in using the blockchain to track derivative works. What if you could know the actual reach of something? … I can imagine a ledger of all that information and an ecosystem of killer apps to visualise usage and relationships. I can imagine a music exchange where the real value of a song could be calculated on the fly. I can imagine instant, frictionless micropayments and the ability to pay collaborators and investors in future earnings without it being an accounting nightmare, and without having to divert money through blackbox entities like ASCAP or the AFM.”

In other words, if you want to listen to a song, you have a mechanism which enables you to directly and automatically pay the artist, and enables the artist to set the price, then directly and automatically pay other people involved. When used in this way the whole process, and resulting transactions, can become completely transparent and verifiable.  As a result the way in which we produce, buy and consume our ‘content’ could be deep in transition. As people do it more for themselves, as production mechanisms become easier, the way we pay is being looked at again, potentially spawning new intermediaries — after all, somebody has to manage the technology.

Companies like Kobalt, for example, who are in no doubt of how to differentiate against the opaque business models the music industry has traditionally employed. “If Kobalt has been able to gain market traction based on the competitive advantage of transparency, what does that say about the industry at large?" says George Howard, the company’s counder. More transparency looks like a way forward. There’s a going rate that can be defined, then mechanisms that can reinforce it - so that the ultimate goal, that both effort and enjoyment are recognised in monetary terms - is achieved. Such models will doubtless be fought against by the industry. Comments George, "Bitcoin can’t save the music industry because, the music industry will resist the transparency it might bring.” Elaborates Ashton Motes at Dropbox, "Even indie labels – it’s not clear that they’d be willing to disclose who makes what, and what people sell. The whole industry is driven on smoke and mirrors.”

While Bitcoin and Blockchain offer new mechanisms, and therefore hope to a number of sectors, numerous challenges lie ahead. Some of these are technical — for example, that current blockchain mechanisms were not designed to handle the volumes of transactions, nor resulting sizes of records, that could result from mass adoption in such a wide variety of domains. The Blockchain used by Bitcoin now contains gigabytes of data, which needs to be stored (or at least referenced) by anyone looking to conduct a Bitcoin transaction.

The knock-on effect is that the blockchain mechanism is now pretty difficult to change. “Implementation changes to the consensus-critical parts of Bitcoin must necessarily be handled very conservatively. As a result, Bitcoin has greater difficulty than other Internet protocols in adapting to new demands and accommodating new innovation,” explains¹⁶ a paper on the subject, which offers the concept of ‘pegged sidechains’ in response — essentially mechanisms to allow transfers between blockchains. “This gives users access to new and innovative cryptocurrency systems using the assets they already own,” continues the paper. Sidechains are indeed driving a number of initiatives, as are other efforts[^ exemplify] to create alternative blockchains, and indeed, alternatives to blockchain.

These are very early days, it is clear to see. It is neither obvious what platform or tool to deploy to what end, nor are blockchain facilities yet straightforward for organisations or consumers to access. Skills in blockchain design and integration are in short supply, as is experience in writing smart contracts that make sense. Which makes for a fascinating time ahead, as a head of steam builds up around the technology and as standards start to appear, not just in terms of base mechanisms but what becomes de facto in how people use them. For the record, nobody should expect cryptocurrencies and the broader world of distributed systems of record as ushering in any brave new world of open value exchange — we’re not likely to return to some technologically enhanced barter system. Such tools can just as easily be used by incumbent organisations and intermediaries as altruism-oriented startups; just as the big banks are investing in blockchain, equally, it is by no means clear that music consumers will default to more artist-friendly models. 

Finally of course, such mechanisms will inevitably be exploited in non-salubrious ways for nefarious purposes. Vast quantities of Bitcoins have already been stolen, for example (in one case by a supposed law enforcement agent); while it might be difficult to defraud the Blockchain, it is possible to use Bitcoin as the currency du choix when conducting other, fraudulent or otherwise dodgy activities — not least tax evasion, but also money laundering, paying for illegal goods and so on. It’s the potential for cryptocurrencies to be misused that has led authorities around the world to propose¹⁷ they should be better controlled, bringing them within the auspices of existing legislation.

Not that, as we have seen, the Blockchain can be made less ‘anonymous’, as transactions are already transparent? The issue is rather, whether transactions can go under the radar, as says a recent EU report on the topic: "Highly versatile criminals are quick to switch to new channels if existing ones become too risky.” The concerns are understandable given how cryptocurrencies are evolving. While the idea of an untraceable transaction does not yet exist, it remains technologically possible — it would not be hard to conjure a sidechain-based mechanism which would make it nigh impossible to trace the originator of a transaction. Bitcoin and its alternatives may create challenges for law enforcement but should be seen as the latest stage of an eternal game of cat-and-mouse. Equally, so we probably have laws already in place to deal with it. For example¹⁸, Bitcoin ’tumbling’ services (essentially virtual coin-for-coin currency exchanges) could potentially be used for money laundering or fraud — both of which are already illegal¹⁹.

Just as water finds its way through rock, so does criminality seek the easiest route. The dark truth is that humans have an equal propensity for good and evil, an eternal battle which has been fought throughout our histories, across our stories and indeed, within our daily lives. We are all corruptible, should sufficient opportunity come our way, or circumstance drive our behaviour. Trying to suppress this reality plays to the dark side, inadvertently creating more problems. We can see it in the ongoing encryption debate in the UK’s ongoing legislation[^ check title], which pitches civil liberties and personal privacy against the institutional desire to keep bad things from happening. And in the case of Bitcoin, attempts to control an transparent currency mechanism could drive less transparency, not more. While the future may be marked by more transparency, not less (not just in Bitcoin but other²⁰ data-based domains), if the authorities want to protect their citizens against the sometimes downright nasty vagaries of human behaviour, they need to think way beyond what could become a mere way post on the road to our technologically augmented future.

Behind all such debates, perhaps currency itself is already under the cosh. While money has served a useful purpose as an mechanism to simplify trading between goats and timber, since the dawn of the institution of banking it has become a slave to its own mathematical nature. Simply put (though there is no ’simply’ about it) most financial mechanisms benefit in one of a number of ways: by adding a margin as an intermediary; or by controlling the flow of currency; or by betting on an outcome, potentially in such a way that changes its probability. One way or another, the idea of replacing cash with near-frictionless data transfers is going to have a significant impact on our financial systems — either by removing the advantages of controlling existing flows, or by creating new ways of doing so.

And as we have discussed, it’s not just about the money. The high levels of interest across such a variety of industries suggests that blockchain-based capabilities will have a considerable role to play in our near future. For better or worse, cryptocurrencies in general, and blockchains in particular, are here to stay. But are we ready for the consequences?