“Blockchain has been hyped up”

ETH News: You expressed reservations when blockchain was mentioned as the topic for this interview. Why is that?
Roger Wattenhofer: The topic is exciting, but there is a bit too much hype surrounding the term ¡°blockchain¡±. I get questions about it every day, from all directions ¨C from the media, private individuals, and companies. I¡¯ve never been a more popular professor (smiling).

If you search the internet for information about it, you get the impression that blockchain is going to turn the world upside down. Is the topic overvalued?
At the moment, yes, but it will wear off. A blockchain involves several important technical discoveries, particularly in the areas of distributed computing and cryptography. I assume that many people have only become aware of what is currently possible with technology as a result of the blockchain hype. The concept of digital signatures, for example, has also entered public consciousness thanks to the term ¡°blockchain¡±.

As a layperson, one nevertheless gets the impression that it¡¯s time to jump on the bandwagon before it¡¯s too late.
Part of the popularity of blockchains has to do with the buzz surrounding bitcoin. Bitcoin is important, and cryptocurrencies will change the world ¨C I¡¯m certain of that.

How does a blockchain work?
The term is used in different ways. Some people use it in a narrow sense, as a tool for bitcoin ¨C in other words, a sort of internet bank for transferring and storing money virtually. A broader definition of a blockchain is a digital bookkeeping system. A ¡°chain of blocks¡± is used to execute and store all kinds of transactions in a fault-tolerant way ¨C for example, money transfers, marriage certificates, ownership changes for properties, etc.

What¡¯s the advantage of that?
A bitcoin blockchain is ¡°glasnost¡±: Anyone can monitor which transactions are completed and when. Whoever is behind the transactions, however, is encrypted. A blockchain therefore offers an interesting opportunity for transparent administration.

And this system is cast-iron and watertight?
I¡¯m fond of saying, ¡°Don¡¯t bring a blockchain to a gun fight.¡± In a world of complete anarchy, the stronger will prevail, with or without blockchain.

How long has this technology been around?
For a long time, actually. A blockchain uses distributed computing and cryptography, two fields with a long tradition and many Turing awards. The combination of the two ideas has even been around for 25 years now. What is new is the bitcoin hype. Many people are coming across the term ¡°blockchain¡± because of bitcoin.

It sounds to me like it still isn¡¯t suitable for everyone and everything. Who does it benefit, and who is using it?
That¡¯s not entirely clear. There are perhaps two main user groups of bitcoin at the moment: the majority are speculating on bitcoin and investing in this cryptocurrency. They¡¯re hoping that its value will continue to increase. Others are putting bitcoin to use for dubious purposes, including tax evasion, weapons and drug trafficking, and ransom demands. In illicit circles, bitcoin is the perfect tool for conducting business undetected.

How will the system continue to evolve?
Bitcoin and other cryptocurrencies will certainly become more important. Bitcoin is a highly decentralised, unregulated form of cryptocurrency. The value of a bitcoin isn¡¯t influenced by a national bank, but rather only by the market and by the users¡¯ trust in their currency. Bitcoin doesn¡¯t care about inflation or the unemployment rate. National banks attempt to control inflation through monetary policy. Bitcoin and other cryptocurrencies are still niche products. If they were actually that important, national banks would have to formulate some kind of response.

What¡¯s the alternative?
I¡¯m convinced that national banks will issue their own cryptocurrencies, such as an electronic British pound. Electronic Swiss francs probably won¡¯t be available any time soon. I have the impression that the Swiss National Bank is a bit conservative ¨C even though there would be plenty of expertise to draw on here. At ETH Zurich, for example, there are several professors who are well-versed in the topic. Recently, ETH Zurich was even named the top research institution on blockchain technology. In the future, electronic Swiss francs might make it possible to create contracts that are purely digital. That would simplify, speed up, and improve many legal concepts, because mathematical expressions are more precise than verbal ones. The next generation of lawyers should learn how to program (smiles).

So do we still need bankers?
Their profession will transform too. Personally, I think that digitalisation will transform many professions in the future; many jobs will become superfluous. Jobs will disappear wherever machines can do the work better than people. The blockchain is only one of many different aspects of this digitalisation process. I¡¯m interested in how society will function when in the future, only a third of the population are employed.

Do you think full employment is on its way out?
Yes, full employment is pass¨¦. I¡¯m surprised that politicians don¡¯t pay more attention to the issue. They simply maintain that there will be enough new jobs. I¡¯m not so sure about that.

So things are going to get interesting ¨C or frightening?
It¡¯s going to be interesting. Politicians need to discuss the welfare state of the future. What can people in Switzerland expect to see? A universal basic income? If yes, what will this basic income include? How will this basic income be financed? Through the national budget and more taxes, or money creation by the national bank?

For you, what¡¯s on the horizon for digitalisation?
The wave is probably already rolling in, but it¡¯s hard to see. Switzerland is already a high-tech country. Economically, it has even become stronger since the financial crisis. We have yet to notice any big effect from digitalisation. Instead, we¡¯re seeing more high-tech jobs being created in Switzerland, for example at Google. But in countries like Spain and Greece, the crisis in the labour market is already a reality. These countries are already feeling the impact of high unemployment on their daily lives and on society.

Aren¡¯t these simply vague fears?
I don¡¯t think so. There is some evidence. One example is the labour share, which measures the ratio of labour cost to sales, a ratio that has been falling for 25 years. Another example is unemployment. After all, the official unemployment rate does not measure actual unemployment, but rather ¡°new¡± unemployment. An alternative metric is what is referred to as the labour force participation rate, which represents the number of working-age people currently in a paid occupation. In Switzerland, this rate is high and very stable. Yet it¡¯s dropping around the world, albeit slowly ¨C but it¡¯s been happening continuously, also for the last 25 years! There are many reasons for this, including increasing life expectancy. However, I believe that falling labour share and labour force participation rate are at least partially due to digitalisation.