Experts: Vitus Ammann (SBB), Thomas Puschmann (Universität Zürich)
Blockchain technology is a method for storing information securely and transparently. In recent years, the cryptocurrency bitcoin and the attention it has received have led to a wave of ideas about where else this technology could be used. Many applications are currently at the experimental stage.
Picture: Shubham, Unsplash
The blockchain principle is used for distributed and secure storage of information in a kind of database. The information to be stored is combined to form ‘blocks’ that are placed in a ‘chain’. To link the individual blocks, each one contains a kind of summary (the hash value) of the preceding block, thus ensuring that the information stored is secure. Thus, for unauthorised modification of information that has already been stored, the entire chain would have to be changed all at once.
Public blockchains in particular, meaning those with an unlimited user group, are not stored on a single computer, but in a decentralised network. Accordingly, copies of the same blockchain are located on various computers. This distributed storage increases security, as any unauthorised modification would also have to be carried out on the majority of copies of the same blockchain. Although this is theoretically possible, in practice it requires an almost impossible amount of computing capacity.
It is necessary to determine whether each new block is legitimate or not. If legitimate, it is added to all copies at the same time. There are various methods for doing so, which sometimes depend on whether the blockchain is public or private. In contrast to private blockchains, anyone can, in principle, participate in public blockchains. To prevent an unlimited number of new blocks from being created in the latter though, participation is restricted to the extent that, in order to create new blocks, participants must either have invested correspondingly large assets (proof of stake) or high computing capacities (proof of work). The proof-of-work method in particular entails enormously high power consumption. The cryptocurrency bitcoin, which uses such a proof-of-work mechanism, has a power consumption equivalent to twice that of Switzerland. By switching from proof of work to a proof-of-stake procedure, Ethereum has been able to reduce the energy consumption of the world’s most widely used blockchain by 99 percent.
The data in a blockchain can pertain to contracts, non-fungible tokens (NFTs), cryptocurrencies (fungible tokens), certificates or other information.
The terms ‘blockchain’ and ‘distributed ledger technology’ are often used synonymously and without any clear distinction between them. Technically though, blockchains actually constitute a subcategory of distributed ledger technologies.
The fact that the release of blockchain technology coincided with the creation of bitcoin may partly explain why blockchain technology was initially used for cryptocurrencies in particular and why a transfer to more conventional banking domains is currently taking place. The Swiss stock exchange SIX is one of the pioneers of applying blockchain technology to bonds.
Enthusiasts see blockchains as part of a new infrastructure for the next generation of the internet: the Internet of Value and the Internet of Trust. If they are right, this will have major implications for service providers and industry, with new and interesting applications for industry potentially emerging, especially in combination with the Internet of Things (IoT for short). One example is the trade in electricity. Equipping buildings with smart meters and solar panels makes it possible to manage electricity consumption. In a fully automatic procedure, such buildings sell surplus electricity to another building or to the grid operator. Such smart contracts also represent a potential application of blockchain technology. They enable computers to trade with each other and exchange (for example) energy for an appropriate monetary consideration.
All the various areas of application that are emerging are those in which information has to be stored in such a way that it can be read, but not subsequently changed. Blockchain thus takes on the role of trustworthy intermediary. In practice, the applications are extremely wide-ranging and include, for instance, documenting supply chains in the pharmaceuticals industry and managing certificates. Another emerging area of application is that of digital state-recognised proof of identity (eIDs). The new Swiss solution and probably also the European one will be based on a distributed ledger or blockchain as a trust network. Such eIDs make it possible to unequivocally identify a person in a network. This will also pave the way for e-government applications.
Another application area currently being researched is that of so-called central bank digital currencies (CBDCs), digital currencies issued by central banks, such as digital Swiss francs. Two different approaches are conceivable: the wholesale CBDC and the retail CBDC. While the former would only be issued to commercial banks, a retail CBDC would also allow private individuals to obtain digital francs from the Swiss National Bank, much like cash. Currently, the wholesale approach seems to be gaining ground in Switzerland. The question of whether such a CBDC will be based on blockchain or another system is yet to be answered.
Many blockchain applications are currently at the experimental stage, prompting sceptics to see blockchain as a technology yet to find the problem that it is the solution to.
While pilot projects have been running in many companies in recent years, it is evident that applications for end users sometimes fail due to the lack of a trustworthy digital currency and simple digital proof of identity. Only when these two challenges have been overcome can applications be implemented that go beyond a predefined limited user group.
Alongside these infrastructural challenges, there are other challenges regarding further development of existing systems, for instance when it comes to connecting to the existing financial system or combining different blockchain systems. Companies that wish to implement blockchain solutions often struggle with the complexity of such applications even at pilot project level. This challenge is not blockchain-specific though and crops up in most large digitalisation projects.
Blockchain technology leads to greater (data) transparency and can thus aid sustainable industrialisation, e.g. by enabling traceability in supply chains. The combination of sustainability and blockchain technology has recently emerged as a separate field of research.
The Swiss blockchain arena is already well developed. There are around 1,100 start-ups in Switzerland and Liechtenstein combined, with more than 6,000 employees. For this to remain the case, or for Switzerland’s position to be further enhanced, there are at least three crucial success factors: the availability of talent nurtured by a sound education at Swiss universities; a properly functioning ecosystem comprising universities of applied sciences, other universities, established companies and start-ups; and finally a flexible regulatory and legal framework that provides legal certainty, even in a changing technological environment.
