It’s time to learn blockchain

This post is written by Josh Solinger, Operations Data Analyst, Pierce County, Wisconsin, USA.

• The problem: The development of blockchain technology is rapidly expanding, with new uses occurring almost every day. However, governments are often among the last organisations to adopt new technologies.

• Why it matters: Some blockchain use cases hold the potential to create paradigm changes across numerous industries, and even within society, in part due to their decentralized nature.

• The solution: Governments at every level, all over the world, should be learning about blockchain technology and preparing to interact with it to some degree.

Have you heard people talking about cryptocurrencies or smart contracts and wondered what it’s all about? You are not alone, but if you serve in government, it is important to begin learning the basics.

By learning some blockchain basics, public servants can help leverage the technology to improve their communities.

"A smart contract is a contract, written in one of several programming languages, that automatically executes when terms of the agreement are met."

Blockchain 101

The first important point about blockchain technology is that blockchains are not monoliths. There are different types of blockchains, such as public, private, and hybrid. Blockchains of the same type, such as public blockchains like Ethereum and Solana, can also be different due to the underlying programming.

A block is simply a collection of transactions that have hashes, or a string of characters, associated with them. The hashes are combined down to a single, final hash. The final hash, known as a Merkle Root, becomes incorporated into the next block in the chain of blocks, along with a timestamp and some additional information. Attempts to change a past transaction would cause an error because such a change would create a cascade effect on the transaction, its hash, and all subsequent hashes down to the Merkle Root.

As we review use cases, it’s important to remember that all of them involve transactions that become immutable records stored on a blockchain in the manner described above.

Smart contracts

A smart contract is a contract, written in one of several programming languages, that automatically executes when terms of the agreement are met. Because the smart contract is written in the same code as the underlying blockchain, the smart contract monitors information in the blockchain for the conditions needed to execute the contract.

Blockchains derive some of their security by being closed off from the outside world. By restricting outside information from coming on-chain, blockchains are protected from a number of security vulnerabilities found across the internet. For a while, this restriction also limited the number of practical, real-world use cases for blockchains.

The advent of oracle technology allowed real-world information to come on-chain in a secure manner, allowing for smart contracts to receive and monitor real-world information. Oracles are a type of middleware that exist between blockchains and real-world data sources. Real-world data is first verified in oracles using any one of a number of methods before moving on-chain for use in smart contracts.

One use case is parametric crop insurance, and farmers can receive automatic insurance payments when oracles feed weather data into a smart contract proving adverse weather conditions achieved a threshold enumerated in the contract. The Associated Press has even begun transmitting real-world data on-chain through oracles.

Use cases for smart contracts will grow as development continues and the amount of data generated in the real world grows. Governments should be aware of the time required to monitor and execute their contracts and keep a lookout for alternatives. Smart contract development will continue to mature, expand, and eventually offer a time-saving alternative.

A case study

In past work, I monitored property values of private developments for which my municipality had a contract to provide the developer with financial incentives if property value guarantees were met. A smart contract that receives verified property values through an oracle could automatically execute payment from a government to a developer when the property value threshold is reached. This would require both parties to have digital wallets and also utilise a cryptocurrency.

Digital wallets are where users store cryptocurrencies needed to exchange value on blockchains. Each wallet has a searchable address used to see activity in the wallet, the balance of cryptocurrencies in the wallet, and to see other wallets transacting with it. The transparency enabled by wallets is ideal for governments because anyone can monitor how funds flow into and out of any given wallet in near real-time.

Cryptocurrencies and stablecoins

According to Statista, there are roughly 7,500 cryptocurrencies worldwide as of November 2021. In most cases, cryptocurrencies are required to participate in the blockchain projects for which the currencies were issued. Most reputable blockchain projects have a whitepaper that explains the purpose of the project and the “tokenomics” of the project’s token, a.k.a. cryptocurrency. In the case of an oracle, applications requiring real-world data will pay for an oracle service in the service’s native cryptocurrency.

Because cryptocurrencies are volatile, stablecoins were created as a way to mirror using government-backed currencies on blockchains. For example, the US Dollar Coin (USDC) maintains a consistent value of roughly one dollar, but it is not government-backed. A number of central banks are currently exploring cryptocurrency versions of their currencies, or central bank digital currencies (CBDC). If CBDCs become widespread, governments will be able to hold government-backed cryptocurrencies on their balance sheets and transact with them using digital wallets, including for grants.

"It seems inevitable that DAOs will form for parks or neighbourhood associations for members to vote on a common direction."

Grant processing and overhead

If you have been involved in grant performance monitoring, performance reporting, and submitting reimbursement requests, then you know how much time goes into grants. In addition to the monitoring and reporting challenges, grants paid as reimbursements impose cash flow challenges on the recipient who must spend money and wait weeks, or longer, before reimbursement.

The US Treasury Department’s Bureau of the Fiscal Service is testing blockchain technology to enhance transparency, reduce reporting burdens, and enhance internal controls. In addition, grant payments could be made between digital wallets in minutes.

Decentralised autonomous organisations

Another way blockchains may impact governments is through decentralised autonomous organisations (DAOs). According to the Ethereum whitepaper, DAOs are virtual entities with members who have a right to collectively decide the direction of the organisation. DAOs have their own token and members utilise their token to exercise their vote. A DAO’s rules and transactions are enumerated in a smart contract and recorded on a blockchain.

DAOs have grown in size and complexity since the Ethereum whitepaper was written, with recent examples including a climate action DAO and a DAO organized to buy one of the surviving first printings of the US Constitution - which ultimately failed in its goal. It seems inevitable that DAOs will form for parks or neighbourhood associations for members to vote on a common direction and perhaps set up a digital wallet to interact with their local government.

A DAO could eventually encompass an entire city or country, with residents being token holders directly participating in votes for a wide range of questions. The technology needs to advance further to address the many implications of delineating DAO membership by geography, but DAOs have already come a long way in just a few years. In a few more years, I suspect there will be an answer.

"It is critical that every government has at least one person who is aware of the emerging use cases in blockchain."

Sooner rather than later

The ongoing labour shortages and supply chain bottlenecks are creating conversations about automation. One of the biggest benefits of using blockchain technology is automation, and I expect it will be widely applied as a solution for supply chain management. As use cases grow and become more intertwined with our everyday lives, I believe the growth of blockchain adoption will become exponential relative to today. As the preceding examples in this article show, governments will also be impacted by and benefit from the growth of blockchain adoption.

Hopefully this article has helped demystify terms like blockchain and cryptocurrency for you. If not, there is a wealth of information online that goes far beyond what I was able to cover in this article. I believe it is critical that every government has at least one person who is aware of the emerging use cases in blockchain.

The window of opportunity is open to engage with and stay current on an emerging technology that will soon be integrated with much of what we do. Let’s use the opportunity wisely!

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