As blockchains gain traction, a U.K.-based think tank is calling for better standardization around their use. A team of financial futurists called Long Finance issued a report in November, highlighting the need for agreements about how we develop, deploy and evaluate this technology.
Blockchains are a kind of distributed database, in which multiple participants have copies of the same data. Whenever anyone participating in a blockchain makes an entry to the database, everyone else gets to check it to make sure it is accurate. This has several benefits.
Firstly, it stops any single person controlling the data, meaning that bad actors can’t change the data arbitrarily to suit their own ends. Secondly, it makes the system robust, because there is no single point of failure.
Although bitcoin was one of the first implementations of blockchain technology, the concept has since moved beyond digital currency. Banks are experimenting with it for everything from settlements through to managing private equity ownership. As it expands, Long Finance worries that without proper standards to govern the implementations of blockchains, problems could emerge.
The Long Finance initiative was created by U.K. commercial think tank Zyen and Gresham college, and it explores long-term thinking about the financial system. Its report, The Missing Links in the Chains, uses the term ‘mutual distributed ledgers’ to describe blockchains.
The International Standards Association is working on technical standards for blockchains, but the Long Finance report looks at more ‘thematic’ standards, covering the way that we use blockchains in the public and private sectors.
It highlights specific areas where their use could be risky without an accepted way of doing things, pointing to the use of blockchains to store identity information as one example, and emphasizes the need for privacy protection both in the commercial and government environments.
Smarter blockchains lead to more risk
As blockchains become more sophisticated, the risks surrounding them also increase. Smart contracts are one example, according to the document. These contracts, which are effectively computer programs running on blockchains, are being proposed as a way to implement legal contracts in code, making payments and even controlling connected devices based on the fulfillment of certain conditions.
Executed poorly, these contracts can be dangerous. The decentralized autonomous organization (DAO) was an entire company built on smart contracts that lost around $50 million in June after someone manipulated a smart contract to release its funds.
Ethereum, the smart contract-based blockchain used to build the DAO, quickly had to alter its code to help retrieve the funds, but not everyone agreed to the alteration. This led to a fork in the community and the creation of two separate Ethereums.
Incidents like this point to the need for an agreed-upon way of doing things on blockchains, and of validating their results. The Ethereum fork is a good example; wouldn’t it make sense for there to be a standard way of governing blockchain development, so that everyone knew what to expect and communities didn’t simply split when things went wrong? Governance is an area particularly ripe for standardization in the blockchain world, the report said.
The same goes for liability. Blockchains are often suitable for applications that need a strong audit trail and a clear process for sharing information, which is why heavily regulated industries such as finance are particularly interested in them. Determining roles and responsibilities for managing blockchain processes in these environments is a likely area for standardization, said the report.
Other areas where standards are needed are taxonomies – the language used to describe blockchain concepts so that everyone understands what they are – and blockchain performance. How can you tell how quickly a blockchain processes transactions, and how publicly viewable is it? How interoperable is it with other systems?
The need for blockchain standards
The report mulled the idea of using professional qualifications to mitigate blockchain risk, but said that participants in the study didn’t like the idea. Standardization is a more acceptable alternative, it suggested.
The study calls for ‘voluntary standards markets’, which are driven by audits against mutually-defined standards for blockchain implementation. Audits could be self-assessed, or carried out by independent third parties, it said.
It suggests using ISO, national standards institutions, or an open process led by a regulator, similar to that used by the Internet Engineering Task Force (IETF) when it issues requests for comment.