The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology - William Mougayar, Vitalik Buterin (2016)

Chapter 5. LIGHTHOUSE INDUSTRIES & NEW INTERMEDIARIES

“Fool you are to say you learn by your experience! I prefer to profit by others’ mistakes, and avoid the price of my own.”

-PRINCE OTTO VON BRISMARCK

THIS CHAPTER COVERS the blockchain’s impact in a handful of industries outside of banking and capital markets.

Outside the realm of corporations, there are larger, global problems that are potential targets for the blockchain, and they are related to the economy, industries, government, or society. Some of these problems are rooted by philosophical or ideological underpinnings. Pick your flavor of grievance or issue around the world, and there might be a decentralization-based alternative flavor for a solution that is undoubtedly linked to a blockchain.

If you want to look at true innovation with the blockchain, the common denominator points to no incumbents in that equation. The new startups give no regards to existing central services, and they attempt to build a better service that takes advantage of the decentralization features of the blockchain.

Here is another new paradigm about the blockchain: data and programs are public. Semi-public to be precise, because the information is cryptographically secure, and only visible if you have access rights. It means anyone can publish data on the blockchains. Previously, everything important was behind hidden databases, or a physical service counter, and we had to go somewhere to verify something. Now, we will learn to expose data, and break databases into pieces, without security fears.

You need to believe that you can safely run programs on a public infrastructure that is arguably more secure than some traditional computing environments. Blockchain infrastructures have multiple built-in redundancies, and are very resilient.

THE NEW INTERMEDIARIES

Old intermediaries that are threatened by technology always die hard. They do not simply roll over. They keep fighting while they are shrinking. Newspapers, cable television providers, and travel agents are some examples.

The blockchain attacks some old intermediaries: central counterparty clearinghouses, notaries, escrow services, and any services with a built-in trust component. While the blockchain chips away at some functions from these existing intermediaries, it also enables the creation of new players.

Initially, blockchain services will look like “alternative” offerings that are adjunct to the mainstream, but this is how Internet services started. With increased adoption, these alternative choices become mainstream.

Unbundling is the main reason why new intermediaries emerge. Unbundling takes away some layers of functionality, creating entry point weaknesses for new intermediaries who exploit them. What is unbundled around the core stops protecting the core.

The Web was a new intermediary platform that replaced newspapers, entertainment media, and travel agents.

Who will be the new blockchain-based intermediaries?

Proof of Trust Authorities

Soon, we will be able to get a “proof for everything.” The vision is this: trust checking should be a frictionless process, as easy as your searches on Google.

We can imagine a flurry of blockchain-based services that will become the new “trust authorities.” You start by time-stamping something. Others can verify what you have done. Here are some examples to get inspired from:

· Proof of Identity: Get your identity verified by blockchain-based certificate authorities.

· Proofs of Existence: Record an audio/video, take a picture or receive a file, and share these proofs.

· Oracles-as-a-Business: Oracles will become reference authorities, because they contain useful information that is always updated.

· Smart Contracts-as-a-Service: Consult smart contracts directories straight from your browser (e.g., Pax Directory)

· Proof-of-Affidavit: Verify that you purchased something, such as a licensed arm, a lotto ticket, a medication, or a fishing license.

· Proof-of-Location: Prove that you were in a given location.

· Proof-of-Ownership: Answer the question, who owns this?

· Proof-of-Leads Generation: Help ensure that you are buying credible marketing leads, without fraud.

The DAOs Are Coming

One representation of decentralized governance is depicted by the arrival of Distributed Autonomous Organizations (DAOs) whose governance and operations run on the blockchain. Arguably, this could be the epitome of business decentralization. In the near future, anyone will be able to “work” for a DAO without permission, and benefit economically from it.

The concept of a Distributed Autonomous Organization/Corporation (DAO/DAC) is an idealistic outcome of the crypto-tech revolution. Its roots originate in themes on organizational decentralization that were depicted by Ori Brafman in The Starfish and the Spider (2007), and ones about “peer production,” aptly described by Yochai Benkler in The Wealth of Networks (2007). But these two themes were recently joined by the advent of cryptocurrency-related technologies by Dan Larimer who observed that Bitcoin is the original DAC, and Vitalik Buterin who expanded on that construct by generalizing it further as a DAO, noting that the DAO has “internal capital.” Deregulation of crowdfunding and unbundling of services were two aliitionally paired themes that alied to this combustion, and the whole thing was turbo-charged by a crypto-tech governance layer of technologies and trust-based automations to allow DAOs to “run without any human involvement under the control of an incorruptible set of business rules.”1

We are still missing real experiences and a deeper dive into the realities of operating a DAO. Certainly not all DAOs will be born by following a cookbook. And there will be variations and shades of purity in DAO principles, for practical purposes.

So how do you get there, and what are the pieces of the puzzle from an operational/practical view?

Just because we can ali crypto-tech does not mean that the DAO will be successful.

Although it is possible to aim for a DAO from day one of planning, it is also possible to evolve towards it, and it is equally feasible to incorporate parts of a DAO construct into a traditional organization. If the DAO is the actual nirvana in terms of autonomous agents doing their work through artificial intelligence or smart programs, then we could imagine a path to an evolutionary sequence, where each subsequent stage builds on the functions of the previous one, according to the following evolution:

· Participative - users voluntarily and independently participate in loose tasks

· Collaborative - users collaborate and ali value towards common goals or objectives

· Cooperative - users expect some shared gains to be returned

· Distributed - starts the propagation of these functions by multiplying them across a wider net

· Decentralized - further scalability is reached by instilling more powers to the edges

· Autonomous - autonomous agents, smart programs, and (later) increased levels of artificial intelligence and AI algorithms provide self-sustainability in operations and value creation at the centers, edges, and arteries of an organization.

There are various pieces that you need to think about in a methodical manner, as an implementation checklist that you gradually tackle:

1. What Scope? The users are at the center of this evolution, and so is the architectural backbone to support these user actions. Note that the participative, collaborative, cooperative functions are user-based, whereas the distributed, decentralized, autonomous ones are architecture-based.

2. Types of Ownership Stake. There are three ways to be involved in a DAO. You can buy shares, cryptocurrency, or tokens; they can be granted to you; or you can earn them. The earning part is interesting because it involves some work that is active or passive. An example of active working includes delivering on bounties for specific projects such as finding bugs, developing software, ethical hacking, or any task that is required by the DAO. Passive working is typically accomplished by sharing something, such as your computer processing cycles, Internet access, storage, or even your data.

3. Units of Value. What you receive in return for your stake can also take many forms. Of course, the traditional instrument is a share (or a warrant/option for shares), but value can also come in points, tokens, rewards or a cryptocurrency. Note that tokens could have multiple purposes, as they can represent product usage rights or ownership rights tied to some intrinsic value.

4. Transparency in Governance. Getting governance right is not easy, but it must be done. Autonomy does not imply anarchy, so you’ll need to think about the various parts that make up governance, whether or not stakeholders are involved actively (e.g., voting, managing, creating rules, checking rules, decision-making, reporting, regulations), or passively (e.g., feeling empowered, valued, respected, fairly compensated2). Regardless, transparency in governance must prevail.

5. Gains Appreciation. In the traditional sense, we have had profit sharing or dividend participation as a form of collective gain redistribution. But in a DAO these benefits might include voting/special rights, or being given a special status. Ultimately, there has to be value growth happening through internal capital appreciation, either in the form of cryptocurrency or cryptographically secure tokenization of some sort.

6. Crypto-based Technology. The blockchain and crypto-currency-based protocols and platforms are just enablers for the consensus mechanism. Typically, these are open source decentralized consensus and decentralized trust protocols that enable the irrefutability, verifiability and veracity of all transactions and smart programs. These protocols can be general purpose (e.g., Ethereum, Bitcoin), or special purpose (e.g., La’ZooZ for decentralized transportation or MaidSafe for decentralized storage). There are three aliitional functional components that should be included in the technology platform: a) a user data layer, with an assumption that data is owned by the user, and only accessible in a specific aggregate or blind form by the DAO, b) smart programs which are the actual transaction engines, and c) various application program interfaces (APIs) to interface with value-alied services or partners that are ancillary to a DAO.

A key objective of a DAO is value creation or production, and to make that happen, there needs to be a specific linkage between user actions and the resulting effects of those actions on the overall value to the organization, as symbolized by the value of the cryptocurrency that is underlying it. That is where entrepreneurial creativity needs to take place, and where business models will be concocted.

Usage without value linkage is a waste, and will result in a failure backlash. Yes, this is a a warning. Many of these DAOs will be theoretical in their inception stages. A cryptocurrency crowdsale only enables the DAO to start on a path. At the end of the day, a new DAO is like a startup. It requires a product/market fit, business model realization, and a lot of users (customers) to move forward. Early on, a lot of assumptions are made, and the DAO may resemble a science fiction project, until the product or service hits the reality of market forces that decide its viability. The “proof of success” will be sustainability in the market, not the crowdfunding success.

Despite its coveted status, getting to a DAO is a step-by-step, gradual building block process that cannot be artificially accelerated. A DAC/DAO has degrees of purity in its implementation. There will be cases where only a percentage of a company is a DAC or operates like one.

LIGHTHOUSE INDUSTRIES

Governments and Governance

Governments and governance-related applications are ripe for blockchain technology. We categorize them in three segments:

1. Existing jurisdictions in national, state, provincial, county, city or municipality settings

2. Virtual governance for nations or organizations

3. Board governance for companies

Existing “brick and mortar” governments who move some of their services to the blockchain will see it as an evolution from the current e-services being offered.

However, governments will take a long time to implement these services. They will undoubtedly start by analyzing the full impact and ramifications of such projects, then evaluate the scalability requirements. The bar will be very high on their expectations, because government services cannot fail, once launched. Smaller countries, counties or cities may have an advantage in trying early projects, as they avoid potential blockchain scalability limitations.

With virtual governance, BitNation offers an example of what is possible. It is a DIY smorgasbord covering legal, insurance, social, security, and diplomacy services. It includes a global public notary service where anyone can record their legal documents on the blockchain, and file them by permanently time-stamping their existence on the blockchain.

Estonia has implemented the BitNation public notary service. For example, If a couple gets married on the BitNation public notary,3 it does not mean they get married in the jurisdiction of Estonia, or in any other jurisdiction. They get married only in the “blockchain jurisdiction.”4

Ukraine is pioneering a blockchain-based election platform (on Ethereum) that will allow multiple levels of elections, including political primaries, elections, online petitions or referenda.5

For traditional companies, BoardRoom6 is an out-of-the-box board governance platform that relies on the blockchain to manage decentralized consensus with table proposals that can be voted on and executed through democratic assembly. One of its most interesting features is a direct linkage from governance decision-making to funds clearing. Says Nick Dodson, its creator, “It allows funds to be disbursed to a recipient party, based on pre-set rules, as soon as a vote passes a resolution, cutting the time it takes to get paid from several weeks to instant clearing.”

If you want to incorporate your company and run its governance affairs on the blockchain, Otonomos7 lets you “order” a new company in Singapore, Hong Kong or the United Kingdom. You can allocate share capital to shareholders, appoint directors, issue options to employees, or convertible notes to investors (via smart contracts) from the convenience of a dashboard and without touching a piece of paper.

There is another potential application of DIY Government 2.0. suppose a country’s real government is failing, concerned citizens could create a shadow blockchain governance that is more fair, decentralized and accountable. There are at least 50 failed, fragile, or corrupt states that could benefit from an improved blockchain governance.8

Health Care

When we look at the healthcare industry spectrum, it is tempting to presume that the blockchain’s capabilities are going to be a silver bullet that will fix the challenges with medical records and patient data privacy.

Compiling a transportable, yet integrated medical record is an old and hard problem to solve. We cannot expect the blockchain to aliress all the issues related to health care and technology. The regulatory hurdles are not to be underestimated, especially if blockchain approaches create a conflict with the current laws.

The theory is attractive: publish your medical record safely on the blockchain and be assured that you or an authorized person can access it anywhere in the world. That is what the government of Estonia has done—a good case of blockchain technology in healthcare. Using Guardtime’s large scale keyless data authentication, in combination with a distributed ledger, citizens carry their ID credentials which unlock access to their healthcare records in real-time. From that point forward, the blockchain ensures a clear chain of custody, and it keeps a register of anyone who touches these records, while ensuring that compliance process is maintained.9

Other healthcare usages might include:

· Using a combination of multisignature processes and QR codes, we can grant specific access of our medical record or parts of it, to authorized healthcare providers.

· Sharing our patient data in the aggregate, while anonymizing it to ensure privacy is maintained. This is helpful in research, and for comparing similar cases against one another.

· Recording and time-stamping delivery of medical procedures or events, in order to reduce insurance fraud, facilitate compliance and verification of services being rendered.

· Recording the maintenance history of critical pieces of medical equipment, for example, an MRI scanner, providing a permanent audit trail.

· Carrying a secure wallet with our full electronic medical record in it, or our stored DNA, and allowing its access, in case of emergency.

· Verifying provenance on medications, to eliminate illegal drug manufacturing.

· “CaseCoins:” originating specific altcoins that create a cryptocurrency market around solving a particular disease, such as FoldingCoin, a project where participants share their processing power to help cure a disease, and get rewarded with a token asset.10

Energy

Blockchain applications can help achieve a more efficient management of the power distribution grid, low-cost microtransactions between peers or machines, secondary markets creation, or rule-based payments.

RWE, a German energy company, is looking at connecting electric vehicles charging stations to a blockchain (via Slock.it, which is running on Ethereum). This service allows users to charge their cars and pay in microtransaction slices. The charging station handles user authentication, payment processing and loyalty point assignments as part of one single immutable transaction. This simplifies the billing and provides simpler accounting, an existing bottleneck in the energy market.11

TransActive Grid, a joint venture of LO3 Energy and ConsenSys, has developed a business logic layer that delivers real-time metering of local energy generation, enable residents to buy and sell renewable energy to their neighbours. The first demonstration of this project took place in March 2016, in a Brooklyn, New York neighborhood between 10 customers, and received interest from 130 others.12

Accenture has revealed a proof-of-concept of a smart plug prototype that works with other house gadgets that monitor power use. When demand is high or low it searches for energy prices and then uses the modified blockchain to switch suppliers if it finds a cheaper source. It could help many people on lower incomes who pay for their power via a meter.13

Grid Singularity14 is experimenting with the blockchain to authenticate energy transactions. The company is targeting developing countries, where it wants to make pay-as-you-go solar more secure. Its eventual goal is to build a blockchain platform for energy systems that can be applied to any type of transaction on the grid.

KEY IDEAS FROM CHAPTER FIVE

1. The story of the blockchain’s impact will not be complete until it propagates further into a variety of industries, government, and horizontal cases.

2. While the blockchain chips away at some functions from existing intermediaries, it also enables the creation of new players.

3. Soon, we will be able to get a “proof for everything,” as easily as google searching for everything.

4. Outside financial services, government, health care and energy are the next potential industries that will experience increased activity in blockchain-based innovation.

5. Distributed Autonomous Organizations (DAOs) are an important application of the blockchain, but their practical implementation is still in its early stages.

NOTES

1. “Bitcoin and the Three Laws of Robotics, Let’s Talk Bitcoin," https://letstalkbitcoin.com/bitcoin-and-the-three-laws-of-robotics#.UjjO0mTFT7v, 2013.2. “Do Peers Really Want to Govern Their Platforms?," Brad Burnham, Union Square Ventures, https://www.usv.com/post/54c7abcd570e2300033262e6/do-peers-really-want-to-govern-their-platforms, 2015.3. BitNation Public Notary (BPN),https://bitnation.co/notary/.4. “Bitnation and Estonian Government Start Spreading Sovereign Jurisdiction on the Blockchain," IB Times, Ian Allison, http://www.ibtimes.co.uk/bitnation-estonian-government-start-spreading-sovereign-jurisdiction-blockchain-1530923, November 2015.5. “Ukraine Government Plans to Trial Ethereum Blockchain-Based Election Platform," Bitcoin Magazine, https://bitcoinmagazine.com/articles/ukraine-government-plans-to-trial-ethereum-blockchain-based-election-platform-1455641691, February 2016.6. BoardRoom, http://boardroom.to/.7. Otonomos, otonomos.com.8. List of countries by Fragile States Index, Wikipedia, https://en.wikipedia.org/wiki/List_of_countries_by_Fragile_States_Index.9. “Guartime Secures over a Million Estonian Healthcare Records on the Blockchain," Ian Allison, IB Times, http://www.ibtimes.co.uk/guardtime-secures-over-million-estonian-healthcare-records-blockchain-1547367, March 2016.10. “Blockchain in Healthcare: From Theory to Reality," Jonathan Cordwell, http://blogs.csc.com/2015/10/30/blockchain-in-healthcare-from-theory-to-reality/.11. “Partnering with RWE to Explore the Future of the Energy Sector," Stephan Tual, https://blog.slock.it/partnering-with-rwe-to-explore-the-future-of-the-energy-sector-1cc89b9993e6#.w3oj745sc.12. “Blockchain-based Microgrid Gives Power to Consumers in New York," New Scientist, https://www.newscientist.com/article/2079334-blockchain-based-microgrid-gives-power-to-consumers-in-new-york/, March 2016.13. “Bitcoin Could Help Cut Power Bills," BBC, http://www.bbc.com/news/technology-35604674.14. Grid Singularity, http://gridsingularity.com/.