While economic entities rely on the central government and trusted intermediaries to facilitate business transactions, blockchain technology reduces their need for intermediaries by building a trusted, tamper-proof data system that can be applied to multiple financial and non-financial sectors. However, the application of blockchain technology also raises various ethical, legal, economic and social issues.
In March 2022, the U.S. Government Accountability Office (GAO) evaluated blockchain applications developed or used for finance, Government, supply chain management, and organizational management; Interviewed a range of stakeholders, including government, industry, academia and venture capital firms; Expert meetings in collaboration with the National Academies of Sciences, Engineering, and Medicine; Key reports and scientific literature were reviewed to make technical assessments of blockchain applications and make policy recommendations.
What is blockchain?
Blockchain combines multiple technologies to provide parties with a trusted, tamper-proof record of transactions that can be used in a variety of financial and non-financial domains, including cryptocurrencies, supply chain management, and legal records. The GAO found that blockchain works well in some areas, but has limited or even problematic effects in others. For example, applications between participants with low levels of mutual trust may be effective because of its tamper-proof capabilities; But it may be too complex for some trusted users, and traditional spreadsheets and databases are more helpful. Blockchain could also pose security and privacy challenges, as well as environmental concerns due to the large amount of power required to build consensus mechanisms.
Blockchains fall into two main categories: permissionless and permissioned blockchains, which determine which nodes can access, read, and write to the blockchain. Unlicensed blockchains are open to everyone and share data, anyone has the right to publish blocks on the unlicensed blockchain, and anyone can read and publish transactions. But because the network is open and more likely to be attacked, such networks typically use a consensus protocol, which discourages malicious behavior by rewarding block publishers who maintain the system with cryptocurrencies on the blockchain. Licensed blockchains are privately run, and only authorized users are allowed to access the network and make transactions. This type of blockchain could come into play when sensitive information needs to be stored, such as blockchain technology used in supply chains.
Financial applications of blockchain
The most extensive application of blockchain is in the financial field, including virtual currency, stablesoin, decentralized finance, etc. The financial application of blockchain has the potential to reduce costs and make the financial system universally accessible, but it also faces multiple challenges. Perhaps the most widely known use is virtual currencies, a digital representation of value protected by cryptography that facilitates payments, some of which, like Bitcoin, are known to be volatile. Staboins may help mitigate this risk by maintaining the value of virtual currencies in three ways: real world asset support, virtual asset support and algorithms. Individuals living in countries where the value of fiat money is unstable may consider stablesoins to be a more stable store of value than their fiat money.
The emerging field of decentralized finance offers services such as blockchain-based lending, where DeFi (Decentralized Finance) is a lending platform that allows borrowers and lenders around the world to remain anonymous and strike deals without relying on the trust of all parties. Fully secured defi-based mortgages lock up the collateral temporarily in smart contracts and release it only after the debt is repaid. Some aspects of DeFi are more inclusive than traditional financial products and can reduce transaction costs for users because they do not rely on intermediaries for transactions. Defi-based loans are open and transparent, which can also help regulators monitor illegal activities or systemic risks in financial markets. However, these services also face some challenges. For example, compared to traditional finance, blockchain-based financial applications can invite illegal activities, reduce consumer and investor protections, and in some cases are subject to unclear and complex rules.
Potential non-financial applications of blockchain
Figure: Potential non-financial applications of blockchain
Beyond finance, blockchain has many potential non-financial applications for organising supply chains, creating organisations with fewer layers and registering property titles. These applications can solve some problems: for example, in the coffee supply chain, consumers can trace the coffee product by linking the whole supply chain information; Decentralized Autonomous Organization (DAO), a new organizational form generated by the application of blockchain technology, can help organizations to make decisions and execute from bottom to top, thus radically changing the existing organizational form.
However, most of these applications are not beyond the pilot stage and face multiple challenges. For example, blockchain applications lack interoperability and common standards. Most blockchain networks are unable to integrate with other blockchain networks. Communication, thus creating the possibility of data islands that make it difficult for users to transfer data across the blockchain. At the same time, blockchain applications also face legal and regulatory uncertainties, as well as a lack of general awareness among businesses and consumers, which requires concerted efforts from multiple parties to solve.
Policy recommendations for blockchain
The GAO made four policy recommendations for blockchain, including standards, monitoring, educational materials, and appropriate applications, that can help increase the benefits and reduce the problems associated with blockchain technology adoption. The recommendations identify actions that can be taken by policymakers, including Congress, federal agencies, state and local governments, academic research institutions, and industry groups.
