Bitcoin for farmers – Part II
The basic principles of bitcoin and blockchain technology were set out in my previous post. The possible applications of the technology, as well as why it has not yet materialised, are discussed in this post.
Blockchain technology at its most basic level makes it possible to create a decentralised, undisputable, tamper-proof chronological ledger of transactions – even if non of the accessing parties trust each other.
Blockchain technology theoretically has various applications in agriculture, for example, digital grain contracts, the confirmation of the authenticity of stud animals using a unique and unchangeable “digtal” brand mark, and the traceability of products by linking them to a unique identity number. However, these applications are yet to materiliase due to the restrictions of current blockchain technology.
Poor payment method
Although some people are convinced that bitcoin is the currency of the future, it is simply not possible. As was mentioned in the previous column, miners earn bitcoin as compensation to confirm the transactions in a new block, and compete to earn the right to add the next block to the chain. Estimations are that it currently costs between $5 000 and $7 000 in electricity alone to mine a single bitcoin. Consequently, it currently costs $26 to transfer a bitcoin which serves as payment for the miners to validate the transaction.
However, the costs are not the biggest drawback. With bitcoin being built on a first-generation blockchain, the system can currently only handle approximately three transactions per second, and it takes between 10 and 60 minutes for the transaction to be confirmed. Imagine you had to wait that long every time you used your credit card. In comparison, the global payment network, Visa, can process an estimated 24 000 transactions per second.
For a blockchain to serve as the basis of a global payment network it would have to be capable of processing at least the same number of transactions per second. Naturally, developers have been working this challenge for years, with Ethereum emerging as the leading to the so-called second-generation blockchain technology. However, Etherium can only process 12 transactions per second and it still takes 10 to 20 seconds to confirm a transaction.
Ethereum does have the advantage that it is programmable, which makes it possible to create so-called smart contracts with it. With these smart contracts, the terms of the contract are captured within the contract itself, so that actions can be executed automatically once a condition has been fulfilled. For example, a down payment can be released automatically from a document deposit account (escrow) once the conditions of the contract have been fulfilled.
Despite the low number of transactions per second, the large scale use of Ethereum is being held back by the fact that a transaction on the network currently costs between $3 to $23, this wide margin is because they are determined by the number of transactions on the network and the price of Ethereum. The developers of Ethereum are currently creating a new version that will address these issues, but it is not clear when it will be ready or how it will work.
An exciting alternative is the Hedera Hashgraph technology developed by two Americans, Leemon Baird and Mance Harmon. As with a blockchain, their technology also establishes a decentralised, undisputable, chronological ledger but in its case, without using blocks of data. They use a mathematical method for this where all the computers (nodes) in the network ‘gossip’ with each other until they reach consensus about transactions.
This technology is not only faster and cheaper, but also offers the highest level of security (asynchronous byzantine fault tolerant).
Their technology can process more than 10 000 transactions per second, it reaches consensus within 3 to 5 seconds and transaction costs are pegged at $0,0001 per transaction.
Various international investors are actively involved in and with the development of the Hedera distributed ledger, in contrast to the many blockchain projects driven by a community of individuals who share the fact that they want to upset the existing world order. The international investors include Google, Boeing, IBM, LG, Deutsche Telekom, Avery Dennison and ten others. Because these companies are actively involved in the development of Hedera and the fact that this third-generation blockchain still holds all the advantages, but are addressing the transaction speed and cost issues, it is certain that the commercial application of this will increase strongly.
In the third and last issue of this series of columns next week, the possible applications of this technology in agriculture will be looked at in more detail.