Blockchain – the automation of trust
Whether a bank facilitates a payment or investment or whether an insurer pays out a claim they are basically delivering two trusted services:
- Keeping record of their clients’ asset balances
- Enabling changes to these asset balances based on a specific set of circumstances
The vast majority of these asset balances are stored digitally. As we know digital information, unlike other value stores such as precious metals, can be copied. Financial institutions need to go to great and expensive lengths to keep their digital files scarce. Their trusted services therefore depend upon the maintenance of digital scarcity.
In 2008 the digital currency Bitcoin was invented. Bitcoin’s underlying technology, the blockchain, dealt with the issue of digital scarcity by recombining well-known and well-used cryptographic methods into an immutable digital ledger. This was done in such an efficient means that digital scarcity could be achieved through the reliance on cryptography and computer code alone instead of third parties. Not only could this technology be described as the automation of trust it is also highly accessible. Accessible to the point that it can be used to transfer value without reliance on third parties.
Apart from the abovementioned financial service providers these attributes make remittance, foreign exchange and ancillary services such as record keeping, accounting and auditing ripe for blockchain-powered disruption.
Disruption beyond finance
Few physical or digital products are manufactured by a single company. Customer value is rather delivered by means of a coordinated effort of various companies. Examples of this include high-end manufacturing, logistics and digital service production and distribution.
This means of production relies upon the IT systems of these organizations to interface with each other. For various reasons this process is far from seamless and leads to suboptimum results. This interfacing dilemma can be solved by means of having different companies in the same supply chain interact on one blockchain-powered decentralized network. This configuration has the potential for new business models in manufacturing, process automation and authentication.
The ability to maintain complex, transactional networks without relying on third, centralized parties has also paved the way for prediction market platforms and asset registries. It has also been used to financially bootstrap blockchain-based ideas via initial coin offerings (ICOs) to raise large amounts of funds (at the time of writing 8 of the top 30 best funded crowdfunding projects were ICOs). Industry experts even talk about a blockchain-based rethink of corporate structure.
The dilemma of being disruptive
In the innovation classic How the refrigerator got its hum Ruth Schwartz Cowan retraces how we opted for an electric refrigerator while the superior option of gas refrigeration, which required no moving parts that needed servicing and was completely silent, fell by the wayside.
The lesson learnt from this paper is that our technology is not the result of an optimized linear progression. It is rather where we find ourselves after multiple rounds of opting for one route instead of another during critical junctures. To compound the matter the decisions are not just technological they are also socio-economic and not so straightforward as one may hope.
There are currently circa 680 cryptocurrencies, every major bank is in a blockchain consortium and there is a plethora of start-ups claiming to use blockchain technology. One may think that given the promise and the disruptive potential of the blockchain the collective decision has been made. We therefore stand on the verge of some blockchain-powered technological renaissance of sorts.
I argue that because of the disruptive and completely novel nature of blockchain it also brings a host of new technological and socio-economic decisions with it. The quality of the decisions that role players make with regards to (1) regulation, (2) implementation and (3) governance will eventually decide the way, shape form and extent of blockchain-powered disruption.
Being disruptive does not come without dilemmas.
The regulation innovation dynamic
Blockchain is not a technology that was developed by a software company and sold to select clients under a license agreement. It is open source, in development and open for interpretation by anyone. There are dark markets (markets that sell illegal goods and services) that make use of privacy-centric cryptocurrencies, ransomware (software that hold IT systems “hostage” until a payment is made in Bitcoin), corrupt cryptocurrency exchanges, hacks and fraudulent cryptocurrencies.
The shiny disruptive potential of blockchain therefore has a darker dilemma to it. This puts legitimate blockchain startups at odds with the regulators. These startups actively seek regulatory guidance while regulators don’t want to take a stance barring more information or further development from the startup. Due to resource constraints these startups never get off the ground or go shopping for clearer or more favourable regulation in other locales.
This dilemma poses a challenge to regulators to develop proactive regulation development practices that creates regulation at speed to ensure consumer protection and systemic stability without stifling blockchains disruptive potential or channelling it into suboptimal directions.
Public versus private implementations
Blockchains can be implemented publicly or privately. Public blockchains such as Bitcoin allow anybody to participate on the blockchain. Private networks only allow vetted parties to participate on their own blockchain. Due to competition, privacy and transaction speed considerations financial institutions typically favour private blockchains.
Private blockchains typically do away with many facets of public blockchains (a native currency and dynamic incentive models) that could lead to breakthrough innovations. Public blockchains are therefore a disruptive technology facing the dilemma of being applied in a suboptimal way due to the technology only being partly embraced.
The major drawing card of legitimate blockchain platforms is that they operate in an immutable and transparent manner on the base of auditable computer code instead of relying on human intervention. In reality changes need to be made to the code – by humans – to either keep the platform disruptive or keep it from being disrupted. These changes have highlighted dilemmas in governance and consensus building surrounding the two most disruptive platforms namely Bitcoin and Ethereum.
On 17th of June 2016, a decentralized venture capital firm running on the Ethereum smart contract platform, crowdfunded to the tune of $168 million, was hacked. A change was made to Ethereum’s software to ensure that investors would not lose their funds. Although some see this decision as essential many commentators interpret this as a betrayal of the core principles of the project. This led to a schism in the Ethereum community to the point where another implementation called Ethereum Classic was created.
Bitcoin faces issues on how the implementation is going to scale to accommodate ever-increasing transaction volumes. Proposals focussing on the size of transaction blocks, the size of transactions and how transactions are stored have been proposed and debated. Bitcoin’s decision-making model is based on consensus and each change would create winners and losers between the different types of roleplayers. After a year of heated debate, where some influencers put the feasibility of Bitcoin into question, consensus around a proposal called Segregated Witness is being formed.
The impact of a disruptive technology is the result of the decisions made during critical junctures. These decisions are not only technological but also socio-economic in nature. They are also difficult but we get the technology we deserve – be it blockchains or refrigerators.
BY GYS HOUGH, LEADERS OF TOMORROW COMMUNITY