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Blockchain Technology: Next Generation Internet

March 20, 2017/0/0
Home / Our Publications / Blockchain Technology: Next Generation Internet

The Internet of Value

Wealth creation and corporations rely on things of value – assets, or stocks, or loyalty points, or intellectual property, or art. Things like votes. For all of these assets, sending a copy is a terrible idea. If I send you a hundred dollars, you want to know I don’t still have the money, having sent it.

Cryptographers call this the ‘double spend’. It’s a problem that’s managed through large intermediaries. But recently it’s become clear that they’re in need of a lot of help.

Companies provide the basic transaction logic for every type of commerce – they enable the clearing and settling of transactions, they keep records, they enable us to trust one another. But there are growing problems. Security is a big one. These systems can be hacked. They are kind of arcane and slow – at least in terms of their computing and operations. It can take days for money in computers to move down the streets of a big city.

Also, they take a cut, and it’s quite a big piece of the action. Transaction surcharges are made. They don’t have the wherewithal or the capability to include everyone in the financial system – and overall they’re capturing our data. There’s a crazy situation – that throughout the developed world there’s declining prosperity.

So what if there were not just an Internet of Information, but an Internet of Value? Some global vast distributed ledger, that runs on computers all across the world, enabling anything of value to be stored and transacted?

What about a protocol for a new kind of digital cash? Cash doesn’t move around in the financial system today – messages do. This is not about bitcoin. Bitcoin is an asset. It’s also a crypto-currency. But the real pony here is the underlying technology – blockchain.

Why is blockchain so important? It gives intermediaries a powerful new tool, because it enables people and organizations to trust each other, to transact, and to do business peer to peer. The intermediaries are being forced to change their game. Trust is key. And it’s achieved by cryptography, collaboration, and clever code.

Permission-less blockchain

There are different blockchains, with different methods of achieving consensus. But this started with permission-less blockchains available to anyone. All around the world there are people called miners, competing to find out the truth. They have massive computing power.

Every ten minutes or so, a block gets created, which contains all the transactions that took place in the last ten minutes – whether that’s what land title was registered, or whether someone got married. The transactions involve assets, and the miners compete to be the first to validate that block and get some of the cryptocurrency from that chain. Each block gets linked to the previous block, and the one before that, and the one before that, to create a chain.

So if I wanted to hack a block, I’d have to hack that block, plus the entire block chain – and the entire history of those transactions – all of them using the highest level of encryption. It’s not impossible, or unhackable, but it certainly is tough.

Hyperledger

Another type of blockchain is Hyperledger – an extraordinary development to create enterprise-ready blockchains led by Linux and IBM – among others. This enterprise-grade platform has capabilities for smart contracts.

Ethereum

There’s also Ethereum – a decentralized platform that has strong tools for building applications on top, without chance of fraud, censorship or third-party interference.

What does blockchain mean for competitiveness?

A few months ago, The Economist did a cover story called ‘The Trust Machine’ – where they compared blockchain to double entry accounting, which was the foundation of the corporation of the capitalist system.

But what does all this mean for competitiveness? To answer that, we need to start with a question: ‘Why does the firm exist?’ Why isn’t everybody an independent contractor? The answer is: transaction cost. The cost of trying to find the right assets on the open market are prohibitive. The cost of coordination is a barrier. And so is the cost of establishing trust.

Our research is that blockchains are beginning to devastate these categories of cost. The cost of transactions in an open market were greater than the costs of bringing these activities within a firm.

Then we saw the rise of the enterprise, and then with the internet of information, vertically integrated companies began to unbundle. The old mantra back then was ‘focus on what you do best’. Now, imagine, a trust protocol implemented across enterprises and across the economy where these transaction costs can drop in some cases to zero.

How we orchestrate capability is undergoing a profound change.

The Distributed Autonomous Organization

Could you have a company with no management and no people, just a bunch of smart contracts, autonomous agents on a blockchain? The week after our book came out, we became aware of an organization that works in just this way. In just three weeks, through crowdfunding, the Distributed Autonomous Organization (DAO) raised $163million and set about doing its business. Unfortunately a coding flaw led the organizers to give the money back because of security concerns.

Examples of blockchain cooperatives:

Let’s look at some examples of blockchain cooperatives.

  1. Sharing economy: Like Air B&B or Uber.

Technically, these are service aggregators, not sharers. But the question remains: could we have Air B&B that was a distributed application on a blockchain? Everything they do, more or less, could be done with software. It’s a database. Smart contracts have a bank account, so when you check out the payment is made, and you can rate the room after you stay. That would turn the owners of rooms into a cooperative, and that big tax of 20% could be reduced.

  1. The rights creators: people who create but don’t get compensated.

Music’s a good example of this. Without an Internet of Value we just published music without a trust network. 35 years ago if you wrote a platinum song, you’d get $45,000 dollars in royalties – enough to live on. Today, you’d get $35. Could blockchain be helpful in fixing this? Imogen Heap is one of the people trying to reinvent the music industry through the blockchain platform. She has a song inside a smart contract – if you want to listen to it, it’s a few micro cents. If you want to put it in a movie, it’s different. Money flows through the song back to the artist. She says that the song acts as a business. This could also work for artists, journalists – anyone who creates.

  1. Disintermediation

Lots of people send money to relatives overseas. The transactions can take days to clear, but Blockchain tools like Pay Chase work peer-to-peer – and can transfer money in just seconds.

Beyond financial use cases

So much for financial examples, but what about the industrial use cases? Could we move towards a distributed power grid based on blockchain, for example? The internet of everything needs a ledger of everything.

Supply chains are perfect candidates for blockchains – it’s all about tracking, metabolism, knowing the providence of assets, prediction and security – the kinds of things that blockchain does well.

Sales, complex sourcing – all of these involve assets. Moving through a process where you want transparency – big joint ventures, huge projects that involve all kinds of commitments – these can be done by smart contracts.

The physical world is becoming alive. Objects can have their own individual IP addresses, so that your fence and sprinkler system can talk to each other. We are animating the physical world and all of these devices won’t just be collecting information and changing our environments for us – a lot of them will be managing transactions for us. This is a perfect candidate for blockchain.

Platform builders and the financial services

The financial services remind me of a Rube Goldberg machine – a ridiculously complicated machines that does something simple like crack an egg in as complex a manner as possible. If the banks were to get together and build a platform, there would be no three day settlement period. So the financial industry has been a big focus for this technology, as it’s ripe for disruption.

Let’s break down what this industry does:

  • Authenticate
  • Test
  • Identify
  • Transfer money / assets
  • Store value
  • Fund and invest
  • Insure
  • Account for and audit value

Every one of these tasks can be profoundly changed. This is not just an opportunity to cut costs – but to think strategically and enter into new areas of business. Take auditing, for instance. With triple entry accounting, in theory you wouldn’t really need an audit, because you’d have a real-time audit all day long.

This platform has come from companies that are real innovators. This is happening very quickly – a huge convulsive change is underway. All kinds of companies are playing in this space.

Turning consumers into producers

It’s also an opportunity to turn consumers into producers. Threadless, for instance, is a clothing company that invites customers to design their own products. Or you might think of the Doritos advertising campaigns for Super Bowl – created by nobodies – not advertising executives, but customers themselves.

Data and identity

Big data is going to change things fundamentally.

Right now this data that we create is being fracked to create something of extraordinary value. One example of a data fracker is DataMiner – a company that uses everyone on Twitter as a censor, to spot and recognize emerging patterns.

Facebook is the ultimate example of a fracker, and there’s a problem here, because we create this asset, but someone else gets hold of it. The identity you’ve created may know more about you than you do – it remembers a purchase you made last year for example, while you may have long forgotten it.

We need to get our identities back and use them responsibly. So what if we had our own blockchain identity, which mopped up data and holds it securely for us. This identity is protecting my information and creating a resource that I can use. Building trusted identity networks is a big step towards a whole new world, where companies are going to have to negotiate with individuals via smart contracts as to how they can manage and use their data.

A new public sector

There are opportunities for a new public sector too. Better, cheaper government, and a culture of public deliberation and accountable politicians, for example. Or the chance to reinvent central banks with cryptocurrency that is owned or controlled by the state. You could helicopter drop your money into wherever’s important. You can see real-time whether people are spending, or saving, or investing.

To conclude: this is a new paradigm. Once again the genie has escaped from the bottle. It’s giving us another kick at the can to make some big changes and perhaps even rewrite the economic order of things for a more prosperous world.

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