Is the Blockchain Now Reaching a Tipping Point?

A few weeks ago, the World Economic Forum (WEF) published its annual list of the Top Ten Emerging Technologies for 2016.  The technologies on the list have been worked on for years.  But their inclusion in the Top Ten List indicates that each has now reached a market acceptance tipping point where its impact can be meaningfully felt.  The Blockchain is one of the technologies in this  year’s list, selected by the WEF panel of global experts because of its emerging potential to fundamentally change the way markets and governments work. 

What does it mean for an infrastructure technology like the blockchain to have reached such a tipping point?  The WEF report compared the blockchain to the Internet, noting that “Like the Internet, the blockchain is an open, global infrastructure upon which other technologies and applications can be built.  And like the Internet, it allows people to bypass traditional intermediaries in their dealings with each other, thereby lowering or even eliminating transaction costs.”

I agree with this comparison and find it useful to help us understand how blockchains might evolve over the years. So, I’d like to compare the state of the blockchain in 2016 to the state of the Internet 25 years ago or so.

In my opinion, the Internet reached its tipping point of market acceptance in the early to mid-1990s due to the confluence of three key factors:

• A set of serious problems.  In the early years of the IT industry, the proprietary products of different IT vendors did not work well with each other.  Just sending an e-mail or exchanging information across systems based on different vendors’ networks and applications was quite a chore.  By the late 1980s, the IT industry was facing a serious problem in integrating the expanding number of proprietary products from different vendors, a problem that threatened the continued growth of the industry.

• Technology solutions to this problem had already emerged and were being deployed in the academic and research communities, e.g., Internet networks based on TCP/IP protocols; Internet e-mail applications based on SMTP, MIME, POP, and IMAP; and the World Wide Web based on an open set of standards, - HTML, HTTP, URLs, - and the easy-to-use, graphical web browsers.  The use of open standards and open source software made it much easier to send an e-mail or share information across disparate systems and institutions.

• The private sector, government and academia came together to jointly collaborate in leveraging the Internet, Web and other promising technologies to address IT’s serious integration problems.  These various institutions now collaborated on developing the common Internet architecture, - and Internet-based applications like e-mail and the Web, - that they all were starting to deploy. 

Let’s explore how these lessons might apply to the blockchain.  The blockchain first came to light around 2008 as the architecture underpinning bitcoin.  But, as with the Internet, the Web and other major technologies, the blockchain has now transcended its original objective.  Over the years, blockchain has developed a following of its own as a distributed data base architecture with the ability to handle trust-less transactions where no parties need to know nor trust each other for transactions to complete.  Blockchain holds the promise to revolutionize the finance industry and other aspects of the digital economy by bringing one of the most important and oldest concepts, the ledger, to the Internet age.

Ledgers constitute a permanent record of all the economic transactions an institution handles, whether it’s a bank managing deposits, loans and payments; a brokerage house keeping track of stocks and bonds; or a government office recording births and deaths, the ownership and sale of land and houses, or legal identity documents like passports and driver licenses.  They’re one of the oldest and most important concepts in finance and other mission critical transaction applications.

Let’s take a look at the key factors now driving the blockchain to its market acceptance tipping point.

A Set of Serious problems.  Foremost among the problems to be addressed is the need to bolster security in our increasingly digital economy and society.  Over the past two decades, we’ve been moving to a world where information of all kinds is increasingly digital, and where many different kinds of online transactions are now taking place between people, institutions, and things.  Our current methods for securely managing personal and proprietary information are proving inadequate as evidenced by the all-too-common data breaches, identity theft and large-scale fraud around the world.  And in our increasingly digital world, applications must be robust enough to handle trust-less transactions, where no parties need to know or trust each other for transactions to complete.

Earlier this year, President Obama issued an Executive Order establishing the Commission on Enhancing National Cybersecurity, with the charge to recommend “bold, actionable steps that the government, private sector, and the nation as a whole can take to bolster cybersecurity in today’s digital world.”  The Fact Sheet accompanying the President’s Executive Order clearly articulated the challenges we face:

“From buying products to running businesses to finding directions to communicating with the people we love, an online world has fundamentally reshaped our daily lives.  But just as the continually evolving digital age presents boundless opportunities for our economy, our businesses, and our people, it also presents a new generation of threats that we must adapt to meet.  Criminals, terrorists, and countries who wish to do us harm have all realized that attacking us online is often easier than attacking us in person.  As more and more sensitive data is stored online, the consequences of those attacks grow more significant each year.”

Another problem is that a number of key financial and government legacy systems are rather inflexible and inefficient.  Over the years, institutions have automated their original paper-based ledgers with sophisticated IT applications and data bases.  But while most ledgers are now digital, their underlying structure has not changed.  Each institution continues to own and manage its own ledger, synchronizing its records with those of other institutions as appropriate, - a cumbersome process that often takes days and involves a number of intermediaries.

In a recent NY Times article, tech reporter Quentin Hardy, nicely explained the inefficiencies inherent in our current payment systems.  “In a world where every business has its own books, payments tend to stop and start between different ledgers.  An overseas transfer leaves the ledger of one business, then goes on another ledger at a domestic bank. It then might hit the ledger of a bank in the international transfer system.  It travels to another bank in the foreign country, before ending up on the ledger of the company being paid.  Each time it moves to a different ledger, the money has a different identity, taking up time and potentially causing confusion.  For some companies, it is a nightmare that can’t end soon enough.”

Emerging technology solutions.  Blockchain innovations have drawn on advances from a number of disciplines, including cryptography for secure communication, storage and data access; mathematical models like game theory that enable cooperation and decision-making among non-trusted parties; and distributed computing methods that enable large numbers of distributed systems and institutions to coordinate their actions and interact with each other to achieve common goals.

Blockchain technologies have been explained in a number of ways.  A report published earlier this year by Citigroup, describes blockchain as “a distributed ledger database that uses a cryptographic network to provide a single source of truth.  Blockchain allows untrusting parties with common interests to co-create a permanent, unchangeable, and transparent record of exchange and processing without relying on a central authority.  In contrast to traditional payment model where a central clearing is required to transfer money between the sender and the recipient, Blockchain relies on a distributed ledger and consensus of the network of processors, i.e. a super majority is required by the servers for a transfer to take place.”

The report then compares blockchain technologies to the Internet.  “If the Internet is a disruptive platform designed to facilitate the dissemination of information, then Blockchain technology is a disruptive platform designed to facilitate the exchange of value.  Blockchain has a few clear advantages relative to the current system.  First of all, it disintermediates the middle man.  It enables direct transfer of digital assets without the need for an intermediary.  Moreover, since no middle man is required, a Blockchain system has the likely benefit of fast and low cost settlement.  Another promising innovation that leverages the Blockchain is smart contracts and tokenization.  Smart contracts automate and execute pre-agreed conditions once they are met.  And lastly, Blockchain provides irrefutable proof of existence, an important feature to maintain an audit trail that tracks the ownership of the valuable asset being transferred  - this is crucial from a business and a regulatory perspective.”

The urgent need to collaborate.  In my opinion, what has brought blockchain to its tipping point is the realization that these critical problems can only be addressed by the close collaboration among companies government and research communities around the world.  You could sense this consensus emerging over the past year by the growing number of newspaper and magazine articles, as well as government and business reports.  As was the case with the Internet, the consensus to collaborate is absolutely critical for blockchain technologies and applications to move forward, - including common standards, open source implementations of key components, and marketplace experiments to see what works and what does not.

While a tipping point might have been reached, it’s too early to know to degree to which blockchain will become a major transformational innovation.  But, we’re hopeful that the necessary ingredients are now in place to propel blockchain forward.

Comments

[Don Tapscott]

Great post Irving. Can I send you a copy of Blockchain Revolution?