This week, we have two make-up articles. I realize not everybody visiting an online service club might be interested in long articles about managing Todo lists, and we’ve had two in a row, so we’ll have another article about transactions online – which, as a Rotary E-Club, has much more relevance to our service.
The video below speaks about block-chain encryption and the democratizing effect it can have on financial institutions. A written summary is below.
Right now, most things sent over the internet – an email, a website, a facebook private message with a picture of the kids – are sent by making copies. A copy stays in my computer or phone, and a copy gets sent to the recipient.
Problem is that some things – most importantly money – need to have 1 copy. If I send fifteen happy dollars to the Rotary Club over the internet, it’s really important that I have 15 less dollars on my end, and 15 dollars gets added to the Rotary Club side. This is called the Double Spend problem in cryptography.
An example of the shift from copies getting sent over the internet to having a single thing transferred around the internet happened in music. Before, when a song was sent over email, I still had the MP3 file of that song, as well as the recipient, which caused problems with copyright and intellectual property. The implementation of a system where the free transfer and duplication of music was a struggle and it’s one of the biggest achievements of Steve Jobs – who got everyone to pay 99 cents for a song, whose file was restricted in the devices it could be played and copied, instead of downloading them for free without any of those restrictions.
For now, the Double Spend Problem for sending money over the internet is solved by large centralized intermediaries – financial institutions, social networks, etc – who keep records of these transactions and distribute the funds to payees and withdraw them from the payer. Establishment of a trust-worthy means of transferring funds over the internet has been critical to the creation of internet commerce, which has made things like our E-Club possible.
However, problems exist also – for one thing, centralized entities can be hacked – as they have been in recent years. (Even the US Federal Government has been hacked). Of interest to Rotarians who strive to fight poverty, these institutions limit access to banking to those who qualify or can afford banking. More importantly, since all of internet transfer of money goes through a few places, the wealth created by internet commerce has also transferred disproportionately to these middlemen.
The problems with centralized processing of payments is its centralized nature. It’s like holding all the gold in Fort Knox – security requirements are tremendous and grow with time as computers become more powerful and better able to challenge encryption. Centralized distribution systems tend to concentrate wealth to themselves. For example, a song writer who gets his/her song streamed a million times receives $36 from the streaming service. Before the advent of internet, such a song would have brought $45,000 to the song writer from radio play.
A separate, decentralized approach has been developed, called Block Chain. It involves each computer (block) in a chain that is millions of computers long holding a ledger of financial transactions in an encrypted form. The computers talk to each other over the internet and update the transactions (X sent $Y to Z on September 1st, 2016 9:05PM) and check for agreements among themselves and self correct discrepencies. This way, in order to cause a Double Spend Problem in a block-chain, every one of the millions of computers would need to have their encryption overcome and the record of transactions changed individually, which requires more computing power than is available.
This has been famously used in the crypto-currency Bitcoin. Bitcoin is an anonymous currency, but it is also a large block-chain program, that updates the ledger of every user of the bitcoin program every time someone spends bitcoin online. The libertarian implications of a non-government backed currency aside, the block-chain can be used to update and amend contracts, update existing financial institutions like the stock market and make transactions instant.
All in all, a virtually cost free, unhackable, open system of shared exchange will have a democratizing effect on government record keeping, privacy, financial institutions and a redistributing effect on wealth.