Blockchain has been compared to the Internet in terms of what revolution it will bring. It's incredibly hyped, there is an abundance of hubris, and the array of technologies is not yet well understood. But in amongst the content chaos, there is a simple question that blockchain asks: how would you redesign the world if trust didn't cost anything?
Since Bitcoin hit 'mainstream' status this year, and myself finishing my degree and searching for work, I'm motivated to explain my predictions for the blockchain industry. Many friends have staunch opinions about it, as with any hype-laden buzzword that makes daily headlines - it's all greed and BS, why don't they use a traditional database instead of an overengineered buzztech? Articles on Medium list the areas blockchain will disrupt. Few are clarifying the opportunity.
To recap: the blockchain is a major technological innovation based in the original use case of bankless digital money (Bitcoin). I've written successfully about the invention of the blockchain in the past, but I think in the context of developments since 2013, it is necessary to reframe my definition. A blockchain is a system where trust is free: one does not need to employ 'middlemen' to secure the procedures or data of that system.
Systems and Trust
Consider systems that we use in every day life: public transport cards, bank payments, voting, festival tickets on Gumtree. These products and services most generically consist of hardware, software, data, procedures, and people. We trust every element to do its job:
- the hardware won't fail (like the train signalling system)
- the software is reliable and quick (and can top up your travel card for instant use)
- the data is secured (so not every stranger knows your route to work)
- the procedures are followed (everyone pays for a ticket)
- the people are trusted to carry out the procedures
Every digital system consists of these elements which, depending on what is built, design different constraints:
- Modern representational democracy and voting is so because conducting secure nationwide voting is expensive - it requires an independent comission of people, to securely administer both handing out voting cards and tallying them securely and without voter fraud (the procedure).
- Secondhand festival tickets are inherently risky to buy online, because a ticket can be sold to multiple people. Tickets are simply data, and the procedures around that data is the first who holds it is allowed entry.
- Each Australian state has their own public transport card. Each decides how much they charge, what different concession statuses are available, and so on. You can't use one card in another state, despite the same underlying technology of RFID tags, because each state manages their own data and procedures of updating that. A collaboration would require a common protocol between states, and all of the bureacratic overhead that comes with updating that.
In each of these three examples, the constraints derive from who owns the procedures and data, and the cost of trusting them.
- We trust the Australian Electoral Commission to carry out representational voting for each and every citizen. It costs $193 million dollars to run such a vote for the federal election (every 3 years) .
- We trust the public transport system to honour our travel if we have funds on our card. It costs you to go to another state, acquire another card, top it up with only a certain amount, because of these independent systems. Why can't we just have one card? Because of how critical the infrastructure is to economy - it would require a nationwide system, a collaboration by bureacracy between states on data, people and procedures.
- We place trust in the bloke we met on Facebook to not have sold the ticket to someone else.
The cost of trust is huge. Trust designs systems. We don't vote at regularity due to the high cost of vote administration and counting. We incur risk when buying secondhand tickets because we can't trust they haven't been sold on. And lastly, we have duplication of transport infrastructure (huge spending) because a common protocol might stifle innnovation; and we'd need to trust that each state can keep up, a high opportunity cost.
When Trust is 'Free'
Now imagine that in each scenario, we codify/formalise the procedures and rules that are typically carried out by people:
- Ticket vending: Tickets can be owned by only one person. A person is someone who can authenticate with a unique QR code.
- Voting: Voting entails a set of candidates, and votes from each citizen. The vote counting procedure is representational voting.
- Public transport: To access public transport, you need $X on your balance. We authenticate who you are based on the info in your card. Your fare is the number of stops you go, plus whatever fare concessions apply in your state.
Blockchains are used for precisely this - a system of rules that everyone agrees on and abides by. "Putting something on the blockchain" is an action of displacing trust in people, and putting it in protocol. Tickets are now digital property that you can own and sell. Votes are acquired digitally by showing your ID at the electoral stand, and the election protocol is run automatically. Transport accounts are a nationwide account linked to your bank.
Only at the points where we can't formalise the rules, do we need to interface with trust. Such as authenticating someone's identity, being the authorised vendor of tickets for a festival, and linking a travel card to an account.
Trust being free is where the friction of clarity stems from, since we've never had it before. Every system is based in trust in some party to carry out the procedures of that system (such as administering the distribution of tickets). Try imagine a system you use that doesn't require trust in some party to function.
Internet Startups and Marginal Costs
Take my position on blockchain in light of the Internet. Ben Thompson frequently argues that the Internet's business proposition was this: marginal cost for distribution of goods. Where value was previously extracted in the music businesses by distributors, their proposition collapses now distribution is free. Where brick-and-mortar shopfronts before had to pay salesmen, Amazon hosts a digital alwaus-open shopfront for nothing. Where news was a gatekeepers environment, protected by limited TV channels and expensive production facilities for newspapers, it costs nothing for a writer to publish anything, true or fake.
A parallel can be seen in blockchain business, where the cost of trusting someone else becomes marginal. The first application of this is of course finance: it's incredibly easy to sell a product to a customer that is cheaper than the existing with no additional learning about what a blockchain is. Bitcoin and other cryptocurrencies exemplify how finance on the Internet should be - as costly as updating balances in a ledger. The products I'm most excited about are those that go further in harnessing the opportunity of free trust.
Uber was not just a better interface to private transportation: it built upon the opportunities of ubiquitous tech features available (real-time interfaces, GPS) to offer something only possible in that future - a worldwide network of private transportation. The opportunity of blockchain is no different. For a quick vision of the future, look at Colony.io, a platform for open organisations. They are taking the idea of a group of people collaborating, and formalising the system of influence and transparency that simply isn't amenable with traditional incentive systems.
When trust is divested from the middleman into the users of the system, that is where we will see opportunity in blockchains.
Which brings to the final aspect of this piece, blockchain technology in 2018.
What we're seeing right now is Ethereum. Ethereum is led by a strong governance team who depart from the libertarian culture of the Bitcoin communities. Moreso, there is a customer-led approach here by the developers, which emphasises collaboration with industry and developers alike.
The blockchain tech stack, much like the Internet's TCP/IP (communications), HTTP (interface), and JS (application) are still in evolution.
For now, blockchain infrastructure is still developing, including the dominant Ethereum becoming congested from the CryptoKitty smart contract. The technology is very early - Truebit and Dfinity) are two examples that come to mind of increasing both the speed and capacity of blockchains, BlockStack another platform to mention. Data storage is of course a big necessity, for which BigchainDB (from the inventors of the early blockchain innovators, Ascribe) and IPFS (a non-blockchain data storage layer) have emerged for decentralized storage. On the consumer technology side, Bitcoin is still the prominent cryptocurrency used, and Status is developing the first consumer-facing interface to dApps.
What Is to Come
We're still in early stages, and in 10 years since Bitcoin was announced, it has come a long way. Slowly but surely the foundations are being laid. If you're interested in the outlook of this industry, I'd encourage perusing Y Combinator's analysis of building for blockchain. There is an incredible amount of space for startups to fill here still, and I cannot wait to see how we reinvent systems in the age of trust.