The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology - William Mougayar, Vitalik Buterin (2016)
Chapter 7. DECENTRALIZATION AS THE WAY FORWARD
“All things are difficult before they’re easy.”
A DECENTRALIZED TECHNOLOGY (the blockchain) will telegraph a decentralized world.
If we thought the blockchain’s destiny was just to infiltrate enterprise systems and replace intermediaries, think again. That was only the beginning. The blockchain’s raison d’être is to enable us to imagine a new world that will be largely decentralized.
Decentralization does not mean anarchy or performing illegal acts. It means that an individual user is more empowered and less restricted. It implies that many contributors, many beneficiaries, and many leaders are working in harmony. It is neither communism nor a version of cyberpunk fiction. Decentralization boosts capitalism by creating new layers of work production and value creation.
It is granted that a blockchain will move value. But go further and start imagining multiple blockchains interacting with one another, all of them trading value with one another, and you will be led to a composite of network effects, potentially more significant than the previous generation of network effects. It will be the equivalent of a huge overlay of decentralized services that are open and accessible to anyone.
Maybe the blockchain will lead us to the not-so utopian view of Nobel Prize winner, economist, and philosopher, Friedrich Hayek. He believed that the path to a functioning economy—or society—was decentralization, and asserted that a decentralized economy complements the dispersed nature of information spread throughout society.1
WHAT HAPPENED TO THE DECENTRALIZED INTERNET?
Let us remember the intended vision of the Internet. It was very much about openness in decentralization and distribution of services, with minute controls at the centers. At the dawn of the Internet life in 1994, Kevin Kelly wrote in his book, Out of Control, three important comments to remember:
1. The network is the icon of the 21st century.
2. The net icon has no center—it is a bunch of dots connected to other dots.
3. A decentralized, redundant organization can flex without distorting its function, and thus it can adapt.
No wonder Tim Berners-Lee, the inventor of the Web, started an initiative, Web We Want,2 to reclaim some of the original goals of the Web. Notes Berners-Lee and the website’s community:
We are concerned about the growing number of threats to the very existence of the open Web, such as censorship, surveillance, and concentrations of power.
The Web that drives economic progress and knowledge, is the one where anyone can create websites to share culture and information. It’s the Web where new businesses bloom, where government transparency is a reality, and where citizens document injustice.
Wow. What Kevin Kelly and Web We Want are saying is pure music to the ears of today’s believers that a more decentralized Internet can shepherd us into a better future.
If you are content with the Web today, stop and think for a minute whether you are happy with this situation. Web We Want observes:
Millions of spam blogs and websites are visited by bots to cash in on ads. Even quality websites are so overloaded with automated ads and trackers that using an ad blocker is the only responsible way to surf the Web. Every click is monitored and monetized, and we are pushed to consume more and more repetitive content.
What happened to the Web being a public good?
The blockchain symbolizes a shift in power from the centers to the edges of the networks. This is a vision that we have romanced in the early days of the Internet, but a re-decentralization of the Web could actually happen this time.
Some see the world as being pinned down by trust-controlling central authorities. Others see it more democratized, flatter and resting on new governance models that strike a better balance between center and edge control. The blockchain favors that better balance, and enables it to grow.
Forget the Internet for a minute, and see how we reacted to the financial crisis of 2008. The natural response of policy makers was to overshoot with more regulation. U.S., European, and Asian regulators dictated a consolidation of regulatory agencies, resulting in further centralization of post-trade in the over-the-counter derivatives markets, reducing that oversight to a single point of failure. The Dodd-Frank’s3mandatory central counterparty clearing provisions were a heavy-handed policy that actually amplified systemic risk, instead of reducing it. As a result, central counterparty clearinghouses have become a new class of “too big to fail” institutions, whereas, ironically, they were previously more widely distributed.
In a 2012 New York Times article titled “Stabilization Will not Save Us,” Nassim Nicholas Taleb, author of Antifragile and The Black Swan, opined: “In decentralized systems, problems can be solved early and when they are small.”4
Indeed, not only was the Web hijacked with too many central choke points, regulators supposedly continue to centralize controls in order to lower risk, whereas the opposite should be done.
IT’S NOT EASY BEING DECENTRALIZED
Apple’s iTunes is a typical centralized marketplace. If it were decentralized, Apple would not fancy a 30% commission on sales. Instead, app publishers could spread their distribution and marketing costs in a decentralized manner, and Apple would not deserve that 30% to choke the access and search points. Of course, this is a hypothetical scenario, but the nugget of thought behind it is that the value is at the edges of the network, not at its center.
Technically speaking, search and discovery is not a central specific function, and the same experience could be delivered in a distributed manner. Nothing happens without users that add value, so why not recirculate a part of that value back into the network to make it stronger? New decentralized applications are being built on the blockchain, and they do not require a central toll-based app store structure.
It’s not easy to become decentralized if you were not designed that way. But it’s easier if you start being decentralized from the ground up, as a decentralized network, platform, service, product, currency, or marketplace.
WHAT WILL DECENTRALIZATION LOOK LIKE
It used to be that nothing happened without central authorities, central powers, central regulations, or central approvals. With decentralization, the tables are turned. A lot happens at the edges, and at the nodes near the peripheries of the overall network.
The concept of “central operations” is shattered, because maybe it does not exist. An underlying decentralized protocol (like OpenBazaar for commerce) enables decentralized operations at the edges of the network, and that is where the activity and value resides.
It is completely possible to build a system where value starts with the users who are the key actors in a decentralized organism. If users benefit, then the network benefits collectively, and it spills over to the original creators of the network.
With decentralization, you do not install a center first. You first install a platform that enables the network to flourish where the “center” of attention (used figuratively) and interconnects nodes of activity among peripheral users. Then, you build your business model on the shoulders of that initial construct. For example, what used to be a paid option in the old central version might be free in the decentralized version, but you will have the opportunity to create new monetization methods that are more organic to the decentralization itself.
We should not compromise on the decentralization concept by picking and choosing which of its characteristics we want to adopt and which ones we reject, because that approach would weaken it.
There is a certain magic that occurs when you are running business logic on a decentralized consensus layer that is not controlled by any single entity, yet it is jointly owned and operated by several parties who collectively benefit from this arrangement. There is magic when you figure out the blockchain’s touch points to your business and you start offering new user experiences that didn’t exist before.
These new areas will include banking without banks, gambling without the house’s edge, title transfers without central authorities stamping them, e-commerce without eBay, registrations without government officials overseeing them, computer storage without Dropbox, transportation services without Uber, computing without Amazon Web Services, online identities without Google, and that list will continue to grow. Take any services and add “without previous center-based authority,” and replace with “peer-to-peer, trust-based network,” and you will start to imagine the possibilities.
The general characteristics of decentralization-based services include:
· Speed in settlements
· No intermediary delays
· Upfront identification and reputation
· Flat structure with no overhead
· Permission-less user access
· Trust built inside the network
· Resiliency against attacks
· No censorship
· No central point of failure
· Governance decisions by consensus
· Peer-to-peer communications
THE CRYPTO ECONOMY
What started as Bitcoin, the poster child cryptocurrency that captured our imagination, is leading to a multiplicity of blockchain-enabled businesses and implementations. Going forward, this is metamorphosing into something bigger: a cryptotech-driven economy with unparalleled global value creation opportunities, not unlike the Web’s own economy.
Welcome to the crypto economy.
Contrary to what is seemingly visible today, this crypto economy will not be born by attempting to take over the current financial services system, nor by waiting for consumers to transfer their sovereign-backed currency holdings into cryptocurrency wallets. It will emerge by creating its own wealth, validating new types of services and businesses that extend beyond money transactions.
The crypto economy is part of the next phase of the Internet’s evolution: the decentralization era.
To understand how cryptocurrency-based blockchain markets can lead us into this new frontier, let us revisit the relationships between money, value, rights, payments, and revenues within the context of cryptocurrency. From there, let us answer two basic questions:
· What is money?
· What is the purpose of money?
Money is a form of value. But not all value is money. We could argue that value has a higher hierarchy than money. In the digital realm, a cryptocurrency is the perfect digital money. The blockchain is a perfect exchange platform for digital value, and it rides on the Internet, the largest connected network on the planet. The resulting combustion is spectacular: digital value that can move fast, freely, efficiently, and cheaply. That is why we have called the blockchain a new “value exchange” network.
The purpose of money is to pay for something that has a value attached to it. Typically, you pay to obtain “rights” for owning or using something.
Cryptocurrency, because of its programmability aspects, embodies digital information that can enable other capabilities. When you “pay” via cryptocurrency, that transaction could include additional trust-related rights, such as for property, information, custody, access, or voting.
Therefore, the blockchain enables a new form of meta-transaction where the value is represented by what it unlocks at the end of the transaction, not just by an intrinsic monetary value that gets deposited in a static account. It sounds like a type of stock market functionality that allows the trading of an unlimited number of unregulated value elements, unlike financial securities that are regulated. And, it is more distributed, more decentralized, and more active in the sense that your “wallet” can trigger actions that are directly wired into the real world.
For example, you could start earning cryptocurrency tokens by sharing your automobile driving data via an app (such as La’Zooz for transportation). The next day, you could catch a shared ride with another La’Zooz driver, and the tokens you earned will be automatically deducted to pay for the ride you are taking.
In this case, no real money was exchanged, and no payment was offered. Instead, cryptocurrency was earned passively (by just driving), information rights were given to the driver (that you were a legitimate passenger with a good reputation), other rights were confirmed to you (that the driver was trustworthy), a service was provided (to be driven somewhere), and value was exchanged (cryptocurrency) in combined forms of physical and virtual settings. This is an excellent example in the “difficult” category among blockchain-related applications, because many variables and market conditions need to exist for this whole value exchange ecosystem to work. (This is why the La’Zooz service has not launched yet, almost two years after its initial inception)
Hopefully, we will see additional examples of closed loop value exchange where you are getting paid to share information that leads to a transaction opportunity.
La’Zooz is the archetype crypto economy model that creates its own mini-economy with a liquid market of value exchange between producers and consumers. Following the example of this operating model, blockchains can enable the creation of cryptocurrency markets, an important feature that goes beyond and above the blockchain’s incomplete depiction of being simply a “distributed ledger.”
This will create new movement choices for value creation, beyond what traditional currencies enable.
How do we get there? With most enabling technologies, we typically begin by duplicating old habits, often by doing the same processes faster or cheaper. Then we start to innovate by doing things differently, and by applying new ideas that we could not see before. Similarly, the Internet took off as soon as we started to program it with “Web applications,” precisely the same path that the crypto-tech revolution is on.
This gets us to the next nugget in this emerging puzzle: how do we create new value?
You create value by running services on the blockchain.
Blockchain services will succeed by creating a new ecosystem (just like the Web did), and it will get stronger on its own over time.
There is a precedent to what has already happened in cyberspace. With the Internet, we had e-commerce, e-business, e-services, e-markets, and later the social web arrived in the form of large-scale social networks. Each one of these segments created its own wealth.
Thus far, there is no clear segmentation in the emerging field of “blockchain services,” but they will be in the form of services where a trust component is stored on the blockchain (identity, rights, membership, ownership, voting, time stamping, content attribution), services where a contractual component is executed on the blockchain (wagers, family trusts, escrow, proof of work delivery, bounties, proof of bets, proof of compliance), decentralized peer-to-peer marketplaces (such as OpenBazaar or La’Zooz), and Distributed Autonomous Organizations (DAO) whose governance and operations run on the blockchain.
What is common to these blockchain services? They run on a blockchain, can multiply and grow without central control, and they are fueled by cryptocurrency. The cryptocurrency is like fuel; it’s collected in part as toll, in part as earnout by the participating users and those that provide these services. You can start to see how cryptocurrency is generated out of crypto-services to instigate a new economy of wealth creation.
Over time, there will be a critical mass of users with significant cryptocurrency balances in their accounts, and further network effects benefits will ensue. Only then can the crypto economy claim to have made potential dents in the current financial system in contrast to the “one nation-one sovereign currency” paradigm.
A NEW FLOW OF VALUE
The blockchain enables a new “flow of value,” a concept related to 2001 Nobel laureate in economics Michael Spence’s5 work on how digital technologies transform global value chains through the dynamics of information flows.
Michael Spence observed that emerging economies were growing at rates not seen before, primarily due to the enabling effect of the larger global economy. He attributed the acceleration in the flow of knowledge, technology and learning, as the main linkage to the acceleration in their growth.
We have a similar situation relating to what the blockchain is enabling. The emergence of a new global crypto economy will have similar growth characteristics as the global economy: it will let its actors participate in large markets, and gain access to knowledge, technology, and know-how.
The blockchain is the latest digital value leveler as it impacts and shifts value within the cryptospace and into our physical spaces. The blockchain moves the power of transactions closer to the individuals, and it empowers any user on earth to align themselves with a decentralized application or organization, and start generating or moving their own nucleus of crypto value. Another benefit of this phenomenon is to put the sharing economy on steroids, as it melds (crypto) capital and labor with mobile, location-agnostic marketplace environments.
We are in the early stages of understanding the movement, distribution and creation of “value” outside of the traditional norms of currency, commodity and property as the main vehicles for value transfer and appreciation. A new frontier will appear.
HOW TECHNOLOGY PERMEATES
Time to look into a crystal ball and predict the future of Bitcoin, blockchains, cryptocurrency, decentralized applications and cryptography-based protocols and platforms. All of this activity is under what I like to call Crypto-Tech, a parallel to Info-Tech, which is everything related to information technology.
At the macro level, the future of Crypto-Tech will unfold in ways that may not be so different from how the Internet unfolded. From an endgame point of view; over the past 20 years, the Internet has generated impact along these four dimensions:
1. New Internet-only companies have emerged, and they introduced new user behaviors.
2. Existing organizations (and governments) have adopted the Internet inside their operations.
3. Some industries were threatened or transformed, as the Internet radically changed or hurt them.
4. Web-based software development became a technology staple for any software application development.
Fast forward 10 years from now, you could replace the word Internet by Crypto-Tech, and the same endgame would hold true: 1) new Crypto-Tech giants will emerge after being startups, 2) organizations and governments will adopt new solutions, 3) industries (and some companies) will be threatened and will be affected, and 4) Crypto-Tech development will become part of the software development fabric.
So how will we get there? Let us peer into 2025.
PEERING INTO 2025
There is a long list of predictions for the remainder of this decade and the early parts of the next one. Let us depict the wide range of scenarios that the blockchain will enable.
New Companies & Behaviors
· Online identity and reputation will be decentralized. We will own the data that belongs to us.
· We will self-manage our online reputations, and as we interact with various people or businesses, only the relevant slices of data will be revealed to them.
· Cryptocurrency-only banks will emerge, offering a variety of financial services based on virtual currencies.
· Decentralized prediction markets will enter the mainstream and offer frequent and credible predictions.
· Distributed Autonomous Organizations (DAOs) will become viable, with self-governed operations and user-generated value creation that tie-back directly to services and financial rewards.
· Spontaneous and trusted commerce will happen between peers, without central intermediaries, and with little to no friction.
· Content distribution and attributions will be signed on the blockchain in irrefutable ways.
· Ownership authenticity will be easily verifiable for digital assets and physical products alike.
· Digital or hardware e-wallets will become mainstream, or embedded in smartphones and wearables.
· Seamless micro-transactions will be routine, as easily done as giving tips in real life.
· Registry services for assets will exist and become more routinely done online than by visiting physical authorities.
· Any person will be able to implement business logic and agreements between other people, and easily enforce them on blockchains.
· Services where users earn cryptocurrency by performing routine services will grow in popularity.
· Blockchains will become large repositories of semi-private information, revealed only when two or more parties agree to disclose it.
· Global remittances will be routinely performed from smartphones or computers, and as easily done as sending an email.
· Users will touch blockchain-based technology without being aware of its existence, just like using databases in the background.
· New decentralized financial clearing networks will challenge existing clearinghouses.
· Digital representations of any physical commodity or asset (as examples: gold, silver, diamonds) will be traded on blockchains, anywhere in the world.
· There will be dozens of commonly used, global virtual currencies that will be considered mainstream, and their total market value will exceed $5 trillion, and represent 5% of the world’s $100 trillion economy in 2025.
Inside Existing Companies
· Healthcare medical records will be instantly, securely, and permanently shared between patients and doctors. They will be routinely updated in a decentralized fashion from secure, trusted locations and healthcare providers.
· Legally binding governance-related matters will be easily implemented across distributed teams.
· Remote voting will be trusted, even at national levels, in legally binding political elections.
· Trading exchanges (stocks, commodity, financial instruments) will adopt blockchain-based trust services for validating transactions, and streamlining their market-clearing activities.
· Most banks will support routine bi-directional cryptocurrency transactions (between regular currency and cryptocurrency).
· Most merchants will accept cryptocurrency as a payment option.
· Accounting, billing and financial packages will include cryptocurrency as standard choices, including crypto-equity.
· Digital goods will be invisibly stamped for their origin authenticity, as a routine. Users will be given visibility into global productions by peering into the transparency of supply chains. We will know the utmost provenance details for a variety of products, ensuring their authenticity, quality, and origins are truthfully disclosed.
Threatened or Transformed
· Any business that does not combine its real-world information into a blockchain, just as the Web mirrors and extends an existing business into the online and mobile worlds.
· Clearinghouses with high latency, steep fees, and too much centralization of risk.
· Any broker/dealer that do not offer blockchain-enabled asset value transfers and trades.
· Central lenders that do not evolve how they lend money.
· Banks not adopting crypto-technologies.
· Government services that do not offer even more remote services, such as registries, record keeping, licenses, and identifications.
· Notaries who cannot operate virtually with cryptographically secured documents.
· Anyone who is empowered to issue contracts, signatures, escrows, trusts, certifications, arbitration, trademarks, licenses, ownership proofs, wills, or other private records.
· Decentralized consensus protocols will become a common part of any technology stack implementation, both in public and private settings.
· Commonly used technologies will include Distributed Hash Tables (DHT) and the InterPlanetary File System (IPFS).
· Key-value store databases will be more commonly used.
· Special browsers will enable unique blockchain peering capabilities.
· Smart contract languages will proliferate.
· Writing decentralized applications will become as popular as writing Web apps today.
· Open source protocols will be used and support the creation of new business services and products.
· Running business logic that contains trust and verification components will be plug and play in the practical sense.
· Peer-to-peer decentralized base layers will be common in data storage, computing infrastructure, identity, and reputation.
· Decentralized trust will be relegated to the network and embedded inside the applications instead of controlled by intermediaries.
· University degrees in Cryptography and Game Theory will become popular.
· More decentralized forms of cloud computing will emerge.
This all comes with one warning from a key lesson I learned during the Internet dot-com crash of the year 2000.
Speed in hyping what the blockchain can do will end-up derailing it, putting us ahead of reality. This type of disconnect is guaranteed to disappoint those who expect benefits faster than what is possible.
That said, keeping with Carlota Perez’s6 model of explaining how technological revolutions unfold, there may be no escaping the fact a crash will happen somewhere between the blockchain’s installation phase (2015-2018), and its resulting deployment phase (2018 and beyond). Carlota Perez is a known scholar who researched the concept of techno-economic paradigm shifts and the theory of great surges. This means that, if Carlota Perez is right, we will likely overshoot with exuberance into the installation phase, before smooth sailing into a prosperous deployment phase.
KEY IDEAS FROM CHAPTER SEVEN
1. Blockchains are not just for the enterprise. They also enable decentralization and ultimately, the creation of a new crypto economy, similar to the Web economy which we are familiar with.
2. Getting to decentralization is easier if you start from scratch. It is more difficult to transition from central services to decentralized ones.
3. Crypto economy markets will exist, and they will create their own wealth and economic systems, where participants get paid to provide value that leads to a transaction opportunity.
4. The blockchain enables a new flow of value, enabling the emergence of a global crypto economy, and creating large markets opportunities where value is exchanged between the cryptospace and physical spaces.
5. Blockchain technology will permeate our economy, creating new players, threatening others, and forcing change on incumbent organizations that want to survive.
1. The Use of Knowledge in Society, F.A. Hayek, http://www.kysq.org/docs/Hayek_45.pdf, 1945.2. Web We Want, https://webwewant.org.3. Dodd-Frank Wall Street Reform and Consumer Protection Act, Wikipedia, https://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street_Reform_and_Consumer_Protection_Act.4. “Stablization Will not Save Us,” Nassim Nicholas Taleb, New York Times, http://www.nytimes.com/2012/12/24/opinion/stabilization-wont-save-us.html?_r=0.5. Michael Spence, Wikipedia, https://en.wikipedia.org/wiki/Michael_Spence.6. Carlota Perez, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, Elgar Online, 2002.