Canadian Government Executive - Volume 23 - Issue 02

Central banks are investigating the potential of cryptocurrencies. There are many more promising use cases for governments, which rely heavily on ledgers to manage their affairs. Note that most of these applications are merely theoretical and are at the proof-of-concept or pilot stages of development. They fall into three general categories. Turning a theoretical benefit into reality means designing the system in which a blockchain operates. A few parts of that system deserve careful consideration. EXCHANGE INVENTORY REGISTRY Supply chains can be managed on a common blockchain platform. Sharing of property (such as intellectual property) can be managed securely. Distributed ledgers can form backbone of new record-keeping systems . Copies of information can be secured and distributed to prevent censorship . Access and entitlement can be verified with block- chain identity systems . Asset ownership and provenance of valuables can be tracked. A blockchain can make verification of digital voting systems more open. A digital notary is a trusted, inexpensive, immutable registry of historical facts. Smart contracts govern economic relations in real time with coded terms. Blockchain tokens can be used for new digital payment systems . Projects can be funded using a blockchain as a crowd-sourcing platform. Blockchains can govern bidding in blind auctions and tendering systems . Tokens (such as bitcoins) are the unit of value for a cryptocurrency. They also shape incentives for valid- ating transactions and discouraging malicious behaviour in other types Bitcoin’s “mining” process controls the creation of new blocks and rewards those who validate transactions in good faith, all without the need of a central authority. A block is difficult to create (hence the math problem and a pay out) but easy to verify: a consen- sus mechanism called “proof of work.” Other mechanisms exist for public blockchains. With “proof of stake”, for example, certain nodes in the network are randomly selected to “mint” blocks. A node must first put up collateral which is forfeited if it does not abide by the consensus rules. Users need a compelling reason to use a blockchain. Networking, storage, and computing resources used by nodes in the network are costly, adding to the rationale for an incentive system that adequately rewards effort. Many peer- to-peer-sharing systems fail because of “free riders” who do not contribute. There are many potential benefits to blockchains. The challenge, however, is formulating those benefits into a coherent and sustainable system with a clear goal . Blockchains fail when enthusiasm for the technology gets ahead of a compelling business model. A cryptocurrency relies on a public blockchain —a reference to the network model . Anyone can join the network. No one is required to trust one another. Members of the network may be anonymous (or pseudonymous). The trade-off, alas, is that a large amount of com- plexity and resources goes into making the system self-policing. Members of the network may know each other and have a pre-existing basis for trust. It is possible to create a permission blockchain with controlled membership and conven- tional auditing, such as with enter- prise or industry applications. A few schemes create a federated mix of public and permission models to try to get the best of both worlds. BATTERIES NOT INCLUDED Bitcoin’s mining uses a large city worth of energy for no productive purpose. of blockchain. The token usually has no value separate from the system. That said, some blockchains (includ- ing non-public ones) will tie tokens to real-world assets. February 2017 // Canadian Government Executive / 13