The Trust Machine: What blockchain can (and can’t) do for development – Paige Isaacson

Blockchain has become hugely popular amongst tech and development professionals alike, brandishing the power to “disrupt” nearly every facet of civil society, aid and international development. At a blockchain event I attended at Bond, one presenter went so far as to pose the question: Does blockchain mean the end of civil society itself?

Firstly, no, I don’t believe blockchain means the end of civil society (at least not in the near future!) though this does mirror some of the hyperbolic language of blockchain’s greatest proponents and critics. Rather, its applications are at present quite specific. In the context of international development, it has the potential to alter microfinance, peer to peer (P2P) aid, international payments such as remittances, digital infrastructure for verifying identity, registries and aid payments.

Before delving into blockchain’s potential, it’s important to understand exactly what it is as well as how it’s being used–and misused–in international development.

Blockchain 101

At its core, blockchain is a ledger–a system for public record keeping. Each ‘block’ on the blockchain is a snapshot of the entire system at a given time; it includes all transactions which take place within the span of a set interval. Users who contribute their computer processing power create unique “hashes” or representations of data used to validate and identify transactions, addresses and whole blocks. Hashes are based on cryptography, jumbling up data so it is virtually impossible to access and by extension tamper with its original source–part of what makes blockchain so secure. New blocks get added sequentially, forming a chain.

Each block in the chain bases its validity on the blocks that came before it and forms the basis of the blocks that follow. Because it is virtually impossible to alter a single transaction without affecting others, transactions actually become more secure over time, as any attempted breach becomes apparent immediately when the sequential hashes no longer match. Since the use of hashes means that transactions cannot be undone or reversed, not even by a system administrator, blockchain is often described as immutable.

It is also described as distributed and decentralised: Because information on a blockchain is shared between millions of users, it is, paradoxically, owned by everyone and no one. Unlike fiat currencies such as the pound or yen, cryptocurrencies have no central point of failure as is the case with banks, rendering them incredibly difficult and expensive to hack (though not impossible, see here for one recent example).

Finally, blockchain is borderless: It does not abide by borders and can be transferred anywhere in the world for the same transaction fee of a few US cents.

What blockchains can and cannot do

With the technical explanation out of the way, you’re probably asking yourself what this have to do with international development. The answer is not straightforward. Part of the problem is that while fintech professionals from companies competing with traditional financial institutions promise to revolutionise all areas from aid to microfinance to impact investing, there is confusion over how to use blockchain technology in actual development assistance projects.

According to Gartner Research Vice President and Research Fellow Ray Valdes, “this is the year of pointless blockchain projects”. This certainly rings true, as 80% of blockchain projects ultimately fail, largely because the technology is simply misunderstood.

Blockchain projects that are centralised or operate in a closed environment, such as Microsoft and IBM’s blockchain-as-service, are futile according to Valdes, as the whole purpose of blockchain is to form decentralised networks of trust. And contrary to current belief, blockchain is actually a very inefficient technology, because numerous participants have to use, update and validate it for it to function. Rather, its raison d’être is predicated on trust rather than efficiency.

Third parties such as banks and governments have long kept track of vital information from finances to land titles and other public records, ensuring their validity and accuracy. In part through the use of hashes, blockchain eliminates the need for third party validation to verify identities, funds, transactions etc. It has even been called “the trust machine” for its ability to ensure compliance and validate transactions without the need for such third parties. This will reduce, if not eliminate, transaction costs.

In the context of development, this has the potential to securely facilitate microfinance, P2P aid, faster and cheaper international payments such as remittances, registries (i.e. for property rights), a digital infrastructure for verifying identity and transparent aid payments.

The fact that anyone can view transactions holds the potential to make aid spending transparent in the extreme. Cryptocurrencies can be “coloured” or earmarked for a specific function – making them non-fungible. This, coupled with the fact that each unit of currency has a unique, traceable identity, means that aid can be tracked throughout the supply chain, preventing money from disappearing. (However this also presents the ethical question of how far down the chain one should require a “clean” transaction history.)

A flawed mechanism for measuring impact

“Smart contracts”, or contracts which track key milestones and terminate automatically upon completion are expected to make aid contracts extremely efficient, though this has implications as it relates to the controversial payment by results (PbR) mechanism, which releases payments upon completion of such milestones.

Fintech organisations such as Alice and Triggerise are using blockchain technology to track and create clear stories around impact. Alice uses a smart contract platform based on payment by results (PbR) whereby organisations receive funding upon completion of pre-agreed milestones. Donor money, based on the cryptocurrency Ethereum, is released if the project reaches its goals as determined by an external validator. Contract performance is publicly available, allowing donors to track progress. If the project does not meet its goals, the money is simply returned to donors. The purpose of this system is to reduce the costs associated with reporting and due diligence as well as incentivise social organisations to prioritise impact.

There’s just one problem: PbR has not yet been shown to have much positive effect on impacts. In fact, the only evidence to date on PbR pilot projects show PbR to have negligible or even negative effects (see here for examples).

The International Development Committee received evidence about the efficacy of payment by results contracting and published recommendations for DFID due to its continued use of PbR as a route to innovation and improved impact (see here, here and here). The reports found that PbR contracts can lead to illusory success due to misleading data, distorted incentives and rewards based on short-term rather than longer-term effects.

A project can appear to have been successful if it met its goals while having no real impact or even a negative effect on the true objective of the project. In that case, project implementers receive funds despite the project’s ultimate failure (see here for example).

From the implementer’s perspective, the picture looks very different. Failure to receive funds can have a critical effect on organisations, especially SMEs who lack large stores of capital to fund projects themselves. These SMEs can simply not afford the penalty imposed if they do not meet project milestones. They therefore cannot take the risk of participating in these types of projects.

While fintech organisations seem to combine the most innovative thinking to maximise impact, it is not clear that they are on the right track. Development is not something that can simply be ‘disrupted’, at least not overnight. It is often a slow game, with impacts only becoming visible years down the line.

So, what is blockchain good for?

This is not to say blockchain is not relevant to development in any capacity. The key is for donors and social organisations to recognise what exactly blockchain does and therefore what it would best be used for.

In one prominent example, the government of Georgia, together with the hardware and software firm Bitfury, launched a pilot project registering land titles using blockchain. Georgians can now check land titles against the system to ensure they are legitimate. After the successful pilot, the government and Bitfury pledged to expand to the project include registration of new land titles, purchases and sales, property demolition, mortgages and rentals and notary services. The programme to date has been a huge success and several other governments are following suit.

On an individual level, blockchain can give people a financial identity in countries with poor record keeping. This has huge implications, particularly in Africa, where mobile phone usage has skyrocketed in recent years, yet public record-keeping often lags behind. Companies such as the Kenya-based Rex Mercury use the success of mobile phone payments to give individuals financial identities. Specifically, Rex Mercury allows users to record school payments on a blockchain, reminding users to make payments through notifications and providing receipts and balance confirmations as additional proof that payments have been made. An important side effect of such transaction recordings is that users gain a financial reputation over time – a radical shift from the poor record-keeping of traditional cash payments. Rex Mercury recently won MIT’s next Billion Award, which honours teams working to spread the use of digital currency in the developing world.

As more governments and organisations adopt blockchain technology, there is a burgeoning evidence base on what works and what does not. While it is important not to simply adopt blockchain technology as the latest fad, it provides fintech and development professionals with a profound opportunity to collaborate, combining their knowledge and experience to develop innovative solutions to development challenges.

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