To Kill a Blockchain — Part III (In Blockchain We Trust)

The Fall of Bitcoin

We published the first article of To Kill a Blockchain — Part I on 16 January 2018. On that day, bitcoin was trading at around c$11,300, down roughly 42% from the peak in Dec 2017 (c$19,000). Today, bitcoin is trading at c$7,600, meaning someone who bought bitcoin in Dec 2017 could have lost more than 60% of the value in three months.

However, our confidence in the blockchain technology, the byproduct of bitcoin, hasn’t diminished at all. Instead, as the valuation fell substantially, it could be a better time to find investment opportunities.

Over the last quarter, we worked on blockchain research with our partner at Cook Pine Capital LLC and shared our latest “Allocators without Borders” presentation with several families in Hong Kong, Shanghai and Taipei. Our mission is not simply sharing the information of new investment opportunities, but rather explaining the concept in the natural language so that people outside of the financial industry can understand the importance.

The article below is our collaboration with Cook Pine Capital. This is the last piece of our “To Kill a Blockchain” trilogy.

In Blockchain We Trust

I’m reasonably confident… that the blockchain will change a great deal of financial practice and exchange… 40 years from now, blockchain and all that followed from it will figure more prominently in that story than will bitcoin.” — Larry Summers, Former US Treasury Secretary, at Consensus 2016 (May 2016)

Cryptocurrencies have grabbed the media’s attention over the last 12 months, but the underlying blockchain technology is not limited to cryptocurrencies (like Bitcoin). The initial concept of blockchain existed as early as 1991 but was not practical until the late 2000s when computers became fast enough for a multi-party data verification process. Blockchain is a chain of irreversible time-stamped pieces of information, written once and appended. The records comprising the blockchain database, once uploaded and accepted, cannot be changed.

Source: Cook Pine Capital, Star Magnolia Capital; Wikipedia

The Internet is a powerful innovation that has connected unknown parties globally and seamlessly. But a problem remains: How can we trust data on the Internet? Blockchain resolves the issue of trust with a multi-party authentication process of inputs and information, and it can be used in a variety of applications. Some applications include accessing government services, voting, and managing sensitive personal and health data.

Key Features of Blockchain

Blockchain technology has unique characteristics that make it a powerful tool for managing and storing data. By design, a blockchain database is open and visible to everybody; however, the data is encrypted and is unintelligible without a password. Blockchain data is also anonymous, but it is still trackable via unique identification codes. In addition, the distributed nature of blockchain ensures that the data will be immutable, although building and operating a robust blockchain network could be very expensive.

Source: Cook Pine Capital, Star Magnolia Capital

The concept of blockchain is abstract, so we will explore blockchain’s potential using the example of Estonia, where the technology is widespread.

The Emergence of Estonia, a Digital Republic

The Republic of Estonia restored its independence from the USSR in 1991. The current population is 1.32 million, similar to Maine in the US (1.32 million). Estonian society and the government began adopting internet-based solutions as early as 1996.

In 2007, Estonia became the first country in the world to experience a nationwide cyberattack (presumably by Russia). The attack was a wake-up call that the country’s digital infrastructure needed to be more secure. The Estonian government started testing blockchain technology for ensuring the integrity of the government’s e-services in 2008–6 months before bitcoin was launched. Since 2012, blockchain has been used in Estonia’s data registries, such as the national health, judicial, legislative, security, and commercial code systems, as well as for personalized medicine.

Timeline of the Digital Republic

Source: Government of the Republic of Estonia; Cook Pine Capital, Star Magnolia Capital

Introduction of a Digital Identity

The Digital Signatures Act was enacted in 2000, and the first national ID was issued in 2002. Estonians can use a digital identity card for authentication and digital signing, including for voting, paying taxes, releasing personal medical records, and purchasing insurance policies. In 2016, Estonia’s 1.32 million residents generated 80 million digital authentications and 35 million digital transactions.

Source: Eurostat; Estonia

Roughly 400 municipal and state services have been integrated into the authentication process, and more will be added to the state portal. Citizens and residents can access nearly all of their own data online through the state portal using a two-step authentication process, which requires an identity card (via scanner) and a PIN. More recently, Estonia introduced a special SIM card containing a digital signature, so one can use one’s phone as ID.

Source: Estonia

Blockchain Applications: Secure Online Voting

Since the restoration of independence in 1991, Estonia has held 17 elections at the local, national and European levels.

For the last 8 elections, Estonians have been able to vote over the Internet. While Switzerland and Canada have piloted online voting, Estonia is the only country in the world that offers a nationwide opportunity to cast legally binding votes online. More than 30% of votes are now cast online.

Blockchain Applications: Managing and Securing Health Records

Using Estonia’s e-Health system, Estonians enjoy safe and convenient access to their own health records. Though Estonia’s e-Health system looks like a centralized national database, it actually retrieves data from various service providers who may be using different systems. A single patient portal enables patients to access their own records as well as those of their children. The data is encrypted, and patients control who has access to different components of their health records. In emergencies, hospitals and doctors can still access time-critical information (e.g. blood type).

The system uses blockchain technology to manage and secure the health records so that all access and/or alteration history are recorded permanently and cannot be changed later. Since accessing information leaves a mark on the blockchain, the network can easily detect when someone has accessed sensitive information. Accessing someone’s personal data without authorization is a provable and punishable crime.

All hospitals and pharmacies in Estonia are also connected to the Digital Prescription Service. Since 2015, over 95% of all prescriptions in Estonia are issued electronically. Estonia’s efforts to improve the efficiency and transparency of its healthcare system are likely contributing to its low healthcare spending relative to many other developed countries.

Source: Estonia; OECD

Blockchain Applications: Other e-Government Initiatives

Estonia has implemented several other government initiatives, including e-Taxes and e-Court. Approximately 97% of tax declarations are now filed electronically. Tax filing takes only 3–5 minutes because most of the data is pre-loaded, and taxpayers typically receive refunds in five days.

Fully automated court processes and electronic communication enables citizens to file an initial legal claim via a public portal 24/7. Within one hour, the court clerk can confirm the case and appoint the first hearing, and hearings for simple cases can be held online.

The Estonian government reduced its public sector labor force by 12% from 2014 to 2016 in part due to their long-term efforts to increase government efficiency.

Source: Estonia: OECD

Blockchain Applications: Managing Non-Medical Body Data

New technologies are enabling companies to collect and store body data, but this data could be managed more securely and efficiently using blockchain technology. Using a blockchain network, a customer could choose to provide her most updated body data to apparel makers, who could then create custom clothing for her. The same data could also be used for other purposes (e.g. health monitoring).

Source: Cook Pine Capital, Star Magnolia Capital

Conclusion: Blockchain’s Trust Infrastructure Will Drive Innovation and Disruption

Blockchain is not just cybercurrency; it is a new type of infrastructure like the Internet. Data recorded on blockchain is immutable and authentic. Estonia, one of the most digitally advanced governments, uses blockchain technology extensively to protect the data of its citizens. Blockchain’s features can be used for a variety of other applications as well, including legal contracts, logistics, and intellectual property. The technology can be — and will be — used beyond cybercurrencies, and it enables many solutions that could change our lives.

To Kill a Mockingbird (1962)

Small-town Alabama, 1932. Atticus Finch is a lawyer and a widower. He has two young children, Jem and Scout. Atticus Finch is currently defending tom Robinson, a black man accused of raping a white woman. Meanwhile, Jem and Scout are intrigued by their neighbours, the Radleys, and the mysterious, seldom-seen Boo Radley in particular. (source: iMDB)