Edukamu: First Notes on Blockchain

This chapter discusses the different applications of blockchain. These areas are under constant development and breakthroughs, some of them more competed than others. The list is in no way complete but considering where the highest number of new technologies have emerged, we study tourism, logistics and of course financial markets. As the course is only in the beginning, we do not go too deep into technical details. It is important to note however, that most of the three application areas are heavily dependent on not only blockchain technology itself but also on blockchain jurisdiction (part II, Chapter 6) and business (part II, Chapter 7). There are plenty of sources available on tourism, logistics and finance online. This Section merely sums up the discussion available in the sources in the end of this Section, “Further Reading”, below.

The most prominent of the blockchain applications is the Bitcoin. It was invented under a pseudonym of Satoshi Nakamoto, allegedly in Japan in 2008, along with the concept of blockchain, and has gradually been built to become the flagship of blockchain technologies. Investors have also found Bitcoin, also called cryptocurrency, a profitable investment. When Bitcoin started to rate bitcoins in a real-world currency in 2011, one token had the price of $0.30. In January 2019, one similar bitcoin token had a price of $3,747, with an increase 10,000-fold from 2011. Although there has been slumps in this development, it is safe to say that Bitcoin has so far been a success. During the COVID-19 in 2020, different instances have shown a remarkable interest in investing to Bitcoin (Wikipedia, Bitcoin). However, some very prominent economists have deemed Bitcoin as a bubble waiting to burst.

The disbelieve on Bitcoin’s future prospect is grounded in economic theory. As Bitcoin has no value of its own, being only a speculative currency with nothing to make it valuable except its demand, the critique says, it must collapse sooner or later. What critics miss is that it is the change in basis of financial transactions that make Bitcoin so lucrative. In last Chapter, we discussed peer-to-peer network and centralized network, and as it turns out, Bitcoin is a completely decentralized peer-to-peer network-based currency. Anyone can join and (possibly) make a profit, there is no gate keeper. The transactions are done and accepted by peers and there is no central authority. The whole Bitcoin is managed by blockchain that by its rules keeps the system running with no chance of fraud within the system. There have been attacks on Bitcoin as there have been against other cryptocurrencies, but it has been noted that these attacks have failed against Bitcoin because of its robust way of dealing with anomalies.

The decentralization that Bitcoin offers gives ground for many different actors, from households to black market actors and from banks to governments to make their own transactions without any control from other actors except the rules of the blockchain. These transactions can be done unidentified, so that acquiring and selling is impersonal, leaving no trace other than the transaction itself. Bitcoin has been criticized of its tendency to give criminal organizations a free hand, but reportedly banks have not been too keen to track transactions done through them either – at least when the transactions are big enough. In addition, Bitcoin transactions do not carry tax requirements, but neither do ones made in tax paradise. It can be seen that what has enabled Bitcoin to succeed in the financial markets is on top of its robust system the fact that many financial transactions are today less controlled by any legal entities, giving grounds for Bitcoin to continue its functions.

Figure 2.1 Bitcoin fundamentals.

For anyone to start Bitcoin trade all they need is a laptop and a small software called the “wallet software” (see Figure 2.1). One can get bitcoins by directly buying them from sellers with real-world currency, as is the case with traditional currencies, or by mining. Bitcoin mining is a way to keep the cryptocurrency running and this is where the blockchains come in. All transactions done in ca. 10 min time are always saved into a block which is encrypted. Mining means securing this block, meaning that the transactions done are according to the rules of the blockchain. Each of the blocks are put together to form a chain (“blockchain”), so that all the transactions are saved into the same database. This database is publicly available online, so that the procedure of mining (mining the blocks, it is called) can be traced back, all the way to 2008, when the first Bitcoin blocks were mined.

Video 1: Bitcoin and Its Functionalities as a Blockchain

The great success of Bitcoin and other cryptocurrencies launched initiatives around the globe on finding other application areas to blockchains. So far, both logistic and tourism sector have seen the most prominent, although compared to Bitcoin (and its predecessors, like Decentralised finance, or DeFi sector, which holds already in summer 2021 a staggering 80 billion dollars’ worth of assets) have experienced only tentative steps of creating blockchain application systems, although some applications already exist commercially.

Logistics is a highly competed field of economic activity, although its functions are far from perfect. Every day a sum of $140,000,000 is tied on disputes of payments. Every invoice takes on average 42 days to process. Administrative costs are about 20 percent of the whole cost of transporting a good from A to B. (for more numeric data, see Winnesota in Further reading Section below). With blockchain all of this can be made more effective (see Figure 2.2). Along with sending money, as shown in Figure 2.2, a similar system can also be used to define goods that are being transported to a peer-to-peer network.

Figure 2.2 A blockchain taking care of a financial transaction.

First, a blockchain can be used for better freight tracking. When a peer-to-peer network is in place, following the shipment of goods to and from land- and seaborne vehicles, all the actors in the logistics network have ready, up-to-date information on the goods. As whole network must authenticate the data on a given shipment, forgery of shipment logs becomes much harder and almost impossible.

Second, when the blockchain-based network is in place, sensor data can be added on the flow of information inside the network. This is particularly useful when shipment has refrigerated components that need monitoring to ensure that undamaged goods are arriving to their destination. When this information is available through blockchain, it cannot be tampered with and enables trust between blockchain users.

Third, vehicles doing the shipping can be connected to a blockchain network, updating their status and functionality to the network. This enables maintenance and division of labor to be more efficient and eases the risk of breakdown of machinery and/or vehicles. Also, in a case of breakdown the shipments can be allocated to another vehicle in the vicinity.

Of course, these development areas are not based solely on blockchain but correct and up to date blockchain ledger is needed alongside internet of things and artificial intelligence solutions to make this type of utopia real. These applications of the blockchain technology can be reality in a very short time frame and are developed by many companies.

Tourism is the same as logistics in a sense, although it is about transportation of people and not goods (seldom refrigerated). In addition, tourism is about experiencing new and authentic locations, which is of course done without blockchain, and before travelling, booking of travel tickets and housing. Both booking and travelling can be enhanced by blockchain technologies. These can further be broken down to find very similar development points as for logistics (see Figure 2.3).

Figure 2.3 Technological solutions enabled by blockchain in the travel industry.

Finance, logistics and tourism have all been in a phase of fast and vast development during the last 20 years. There have been long strides technologically all the time, and blockchain is just another one of these strides. Cryptocurrencies have already been developed as stand-alone applications for blockchain, most notably Bitcoin. Logistics and tourism industry are more likely to develop their auditing, validating and identity network through blockchain, leaving less room for inefficiencies and frauds. Every one of these three industries, however, are facing a rapid development because of blockchain technologies.