Should governments buy into blockchain-enabled infrastructure?

Governments will always be overtaken by technological innovation. The Internet, or more broadly cyberspace, is a unique domain that governments have yet to successfully navigate as they have with land, sea, air and space. It was the first technology to mature into an intangible commodity that could not be produced, distributed and regulated in the traditional sense.

There is growing evidence that current political strategies are not working with cyber and, more specifically, with blockchain technology. Blockchain creates an unbreakable, permanent and largely permissionless system that negates the traditional basis of trust provided by public authorities and large corporations. The key to understanding this phenomenon is that while blockchain technology is closely associated with decentralized finance and cryptocurrency, its utility extends beyond these arenas.

IBM defines blockchain technology as “a shared, immutable ledger that simplifies the process of recording transactions and tracking assets in a business network”. The fundamental innovation of blockchain is that it enables a peer-to-peer network with a shared history of messages and no central authority. A blockchain message content can be anything a network agrees is valid and can even include program installation and execution messages.

Authorities must recognize that their traditional strengths and regulatory capabilities are not as effective in this digital world. Instead, they increasingly rely on private sector innovation to protect national interests. At the same time, the private sector is becoming less dependent on authorities. This operational shift occurs as strategic global power competition overshadows a realistic assessment of these changes and their implications.

Blockchain is enabled by a network of nodes that cross-check and verify information and acts as a distributed ledger that is an ever-growing record of all transactions. The technology enables high transparency without compromising anonymity. Stored data cannot be changed or deleted – all information can be tracked and verified as true and accurate by the user community. Crypto wallets, for example, allow users to remain largely anonymous without compromising the integrity of transactions. Smart contracts are protocols that run on the blockchain to ensure that transactions occur securely when predetermined conditions are met.

Central to understanding the long-term implications of blockchain technology is that the network cannot be broken or torn down by a single authority. It would take an event that affects the operation of the internet globally for it to stop working, which is highly unlikely.

These features of blockchain technology have facilitated the creation of hyperstructures, defined as ‘crypto protocols that can run for free and forever, without maintenance, interruptions or intermediaries’. Hyperinfrastructures fundamentally challenge the traditional role of governments, multinationals and critical national infrastructure providers because these services and platforms can be operated and maintained without them.

The permanence of hyperstructures also affects how some public goods are created, maintained and owned. A hyperstructure typically functions as a decentralized autonomous organization, or DAO – a legal structure with no governing body. Ownership and decision-making are shared by the DAO’s members, who make decisions for the benefit of society at large as opposed to individual interests.

There is great potential for hyperstructures to act as a common good in the form of a digital backbone for critical national infrastructure such as water treatment plants, power plants and other utility providers. Hyperstructures limit the risk of human error and cyber-attacks and remove the burden of responsibility and ownership from a single provider by acting as a DAO. These plants can operate independently and forever.

While the technology is still in its infancy, hyperstructures demonstrate the potential blockchains have for social, political and economic organization by changing the currency of trust. Trust enables reliable, efficient and truthful exchanges in society and is often facilitated by an intermediary such as a government agency or a company. Trust has not always been guaranteed by governments.

For example, the Soviet Union’s failure to provide sufficient trust in its institutions gave rise to an effective mafia culture. Criminal organizations were able, through brute force and protection services, to secure alternative avenues of trust for economic, political and social exchanges where the state failed. Now, while trust in states is not necessarily failing, blockchain and hyperstructures offer an alternative. Although the continuity of the Mafia’s success in the Soviet Union could not be guaranteed, the enduring, permissionless and unstoppable properties of blockchain technology are assured. This reflects a changing balance of power between the public and private sectors.

The popular non-fungible token (NFT) marketplace Zora is an example of a working hyperstructure that has been used to influence global events. In March 2022, an NFT of the Ukrainian flag was auctioned off by social advocates, including the Russian protest group Pussy Riot, using the Zora marketplace in support of the Ukraine crisis. The NFT sale raised €6 million. The auction could not be stopped by participants, opponents or Zora administrators. The event illustrates how instantaneously technology can be used to achieve a goal without the need for intermediaries, such as governments, to support or facilitate the allocation of funds or assistance. The funds could then be traced directly and transparently to the intended recipient.

Blockchain’s ability to enable trust in the authenticity and provenance of information is used by organizations such as Starling Lab, which capture, store and verify information. The research and experimentation ensure continuous trust in digital information. Starling Lab has used the technology to document and ensure the integrity of digital evidence of Russian war crimes in Ukraine. That the public can use blockchain to hold states accountable shows how the technology is likely to reduce reliance on government to validate and provide trust.

The same principles are used by the Decentralized Identity Foundation, which uses blockchain to develop protocols that enable individuals to be securely and accurately identified without the need for a centralized system or authority. The successful use of these protocols could even reduce the reliance on governments to provide items such as driver’s licenses and passports to authenticate personal information, if a digital identity is equally reliable.

The Decentralized Identity Foundation’s concept involves a unique digital identity that is interoperable between service providers and organizations, reducing the amount of personal data stored in individual profiles at each company. The digital identity can be reliably plugged in and out of their systems with reliable authenticity. Debates about data sovereignty and the security of personal information are set to be affected by this concept, because blockchain will give individuals transparency about how their data is used.

These examples show how the private sector can use changes in public trust infrastructure to distance itself from the authorities. Blockchain technology is transforming the way we store, communicate and control data. Being decentralized, it provides an alternative to the traditional role of the government and large corporations in providing trust between two agents.

Because blockchain is in its formative stages, there is an opportunity for governments to consider how involved they want to be in shaping its development, domestically and globally. Canberra must consider buying into DAOs so that it can interact effectively with public infrastructure and represent Australia’s wider security interests in governance structures. Without ownership in the governing hyperstructures of DAOs, governments would have little ability to influence their operations. In practice, this will basically involve identifying hyperstructure projects that have value for critical national infrastructure or that are already used by providers.

The government must also consider whether active engagement with decentralized infrastructure and governance systems is consistent with the liberal democratic principles of Australian politics. This opens up an opportunity for discussion about how radically the government is willing to expand its regulatory toolbox.

The 2020 National Blockchain Roadmap outlines Australia’s tentative investment in research to “capitalize on opportunities and address challenges”. However, this is a rapidly changing field, and the use of technology during the Ukraine crisis shows how quickly and ingeniously it can be adapted to meet different needs. How Canberra can be informed, active and creative in this period of innovation needs to be at the forefront of the discussion. Regulation must be less short-term and reactive, and should instead proactively assess the long-term relationship with the private sector.

The key to this is learning to adapt to the changing balance of power between the private sector and government. Ultimately, as the mechanisms of social trust change, so must the government’s view of its domestic and international capabilities and intentions.