Blockchain Revolution (updated) Read online

  Every ten minutes, like the heartbeat of the bitcoin network, all the transactions conducted are verified, cleared, and stored in a block which is linked to the preceding block, thereby creating a chain. Each block must refer to the preceding block to be valid. This structure permanently time-stamps and stores exchanges of value, preventing anyone from altering the ledger. If you wanted to steal a bitcoin, you’d have to rewrite the coin’s entire history on the blockchain in broad daylight. That’s practically impossible. So the blockchain is a distributed ledger representing a network consensus of every transaction that has ever occurred. Like the World Wide Web of information, it’s the World Wide Ledger of value—a distributed ledger that everyone can download and run on their personal computer.

  Some scholars have argued that the invention of double-entry bookkeeping enabled the rise of capitalism and the nation-state. This new digital ledger of economic transactions can be programmed to record virtually everything of value and importance to humankind: birth and death certificates, marriage licenses, deeds and titles of ownership, educational degrees, financial accounts, medical procedures, insurance claims, votes, provenance of food, and anything else that can be expressed in code.

  The new platform enables a reconciliation of digital records regarding just about everything in real time. In fact, soon billions of smart things in the physical world will be sensing, responding, communicating, buying their own electricity and sharing important data, doing everything from protecting our environment to managing our health. This Internet of Everything needs a Ledger of Everything. Business, commerce, and the economy need a Digital Reckoning.

  So why should you care? We believe the truth can set us free and distributed trust will profoundly affect people in all walks of life. Maybe you’re a music lover who wants artists to make a living off their art. Or a consumer who wants to know where that hamburger meat really came from. Perhaps you’re an immigrant who’s sick of paying big fees to send money home to loved ones in your ancestral land. Or a Saudi woman who wants to publish her own fashion magazine. Maybe you’re an aid worker who needs to identify land titles of landowners so you can rebuild their homes after an earthquake. Or a citizen fed up with the lack of transparency and accountability of political leaders. Or a user of social media who values your privacy and thinks all the data you generate might be worth something—to you. Even as we write, innovators are building blockchain-based applications that serve these ends. And they are just the beginning.

  A RATIONAL EXUBERANCE FOR THE BLOCKCHAIN

  For sure, blockchain technology has profound implications for many institutions. Which helps explain all the excitement from many smart and influential people. Ben Lawsky quit his job as the superintendent of financial services for New York State to build an advisory company in this space. He told us, “In five to ten years, the financial system may be unrecognizable . . . and I want to be part of the change.”6 Blythe Masters, formerly chief financial officer and head of Global Commodities at JP Morgan’s investment bank, launched a blockchain-focused technology start-up to transform the industry. The cover of the October 2015 Bloomberg Markets featured Masters with the headline “It’s All About the Blockchain.” Likewise, The Economist ran an October 2015 cover story, “The Trust Machine,” which argued that “the technology behind bitcoin could change how the economy works.”7 To The Economist, blockchain technology is “the great chain of being sure about things.” Banks everywhere are scrambling top-level teams to investigate opportunities, some of these with dozens of crackerjack technologists. Bankers love the idea of secure, frictionless, and instant transactions, but some flinch at the idea of openness, decentralization, and new forms of currency. The financial services industry has already rebranded and privatized blockchain technology, referring to it as distributed ledger technology, in an attempt to reconcile the best of bitcoin—security, speed, and cost—with an entirely closed system that requires a bank or financial institution’s permission to use. To them, blockchains are more reliable databases than what they already have, databases that enable key stakeholders—buyers, sellers, custodians, and regulators—to keep shared, indelible records, thereby reducing cost, mitigating settlement risk, and eliminating central points of failure.

  Investing in blockchain start-ups is taking off, as did investing in dot-coms in the 1990s. Venture capitalists are showing enthusiasm at a level that would make a 1990s dot-com investor blush. In 2014 and 2015 alone, more than $1 billion of venture capital flooded into the emerging blockchain ecosystem, and the rate of investment is almost doubling annually.8 “We’re quite confident,” said Marc Andreessen in an interview with The Washington Post, “that when we’re sitting here in 20 years, we’ll be talking about [blockchain technology] the way we talk about the Internet today.”9

  Regulators have also snapped to attention, establishing task forces to explore what kind of legislation, if any, makes sense. Authoritarian governments like Russia’s have banned or severely limited the use of bitcoin, as have democratic states that should know better, like Argentina, given its history of currency crises. More thoughtful governments in the West are investing considerably in understanding how the new technology could transform not only central banking and the nature of money, but also government operations and the nature of democracy. Carolyn Wilkins, the senior deputy governor of the Bank of Canada, believes it’s time for central banks everywhere to seriously study the implications of moving entire national currency systems to digital money. The Bank of England’s top economist, Andrew Haldane, has proposed a national digital currency for the United Kingdom.10

  These are heady times. To be sure, the growing throng of enthusiasts has its share of opportunists, speculators, and criminals. The first tale most people hear about digital currencies is the bankruptcy of the Mt. Gox exchange or the conviction of Ross William Ulbricht, founder of the Silk Road darknet market seized by the Federal Bureau of Investigation for trafficking illegal drugs, child pornography, and weapons using the bitcoin blockchain as a payment system. Bitcoin’s price has fluctuated drastically, and the ownership of bitcoins is still concentrated. A 2013 study showed that 937 people owned half of all bitcoin, although that is changing today.11

  How do we get from porn and Ponzi schemes to prosperity? To begin, it’s not bitcoin, the still speculative asset, that should interest you, unless you’re a trader. This book is about something bigger than the asset. It’s about the power and potential of the underlying technological platform.

  This is not to say that bitcoin or cryptocurrencies per se are unimportant, as some people have suggested as they scramble to disassociate their projects from the scandalous ventures of the past. These currencies are critical to the blockchain revolution, which is first and foremost about the peer-to-peer exchange of value, especially money.

  ACHIEVING TRUST IN THE DIGITAL AGE

  Trust in business is the expectation that the other party will behave according to the four principles of integrity: honesty, consideration, accountability, and transparency.12

  Honesty is not just an ethical issue; it has become an economic one. To establish trusting relationships with employees, partners, customers, shareholders, and the public, organizations must be truthful, accurate, and complete in communications. No lying through omission, no obfuscation through complexity.

  Consideration in business often means a fair exchange of benefits or detriments that parties will operate in good faith. But trust requires a genuine respect for the interests, desires, or feelings of others, and that parties can operate with goodwill toward one another.

  Accountability means making clear commitments to stakeholders and abiding by them. Individuals and institutions alike must demonstrate that they have honored their commitments and owned their broken promises, preferably with the verification of the stakeholders themselves or independent outside experts. No passing the buck, no playing the blame game.

  Transparency means operating out in the open, in the light of day.
“What are they hiding?” is a sign of poor transparency that leads to distrust. Of course, companies have legitimate rights to trade secrets and other kinds of proprietary information. But when it comes to pertinent information for customers, shareholders, employees, and other stakeholders, active openness is central to earning trust. Rather than dressing for success, corporations can undress for success.

  Trust in business and other institutions is mostly at an all-time low. The public relations company Edelman’s 2015 “Trust Barometer” indicates that trust in institutions, especially corporations, has fallen back to levels from the dismally low period of the 2008 great recession. Edelman noted that even the once impregnable technology industry, still the most trusted business sector, saw declines in the majority of countries for the first time. Globally, CEOs and government officials continue to be the least credible information sources, lagging far behind academic or industry experts.13 Similarly, Gallup reported in its 2015 survey of American confidence in institutions that “business” ranked second lowest among the fifteen institutions measured; fewer than 20 percent of respondents indicated they had considerable or high levels of trust. Only the U.S. Congress had a lower score.14

  In the preblockchain world, trust in transactions derived from individuals, intermediaries, or other organizations acting with integrity. Because we often can’t know our counterparties, let alone whether they have integrity, we’ve come to rely on third parties not only to vouch for strangers, but also to maintain transaction records and perform the business logic and transaction logic that powers commerce online. These powerful intermediaries—banks, governments, PayPal, Visa, Uber, Apple, Google, and other digital conglomerates—harvest much of the value.

  In the emerging blockchain world, trust derives from the network and even from objects on the network. Carlos Moreira of the cryptographic security company WISeKey said that the new technologies effectively delegate trust—even to physical things. “If an object, whether it be a sensor on a communications tower, a light bulb, or a heart monitor, is not trusted to perform well or pay for services it will be rejected by the other objects automatically.”15 The ledger itself is the foundation of trust.16

  To be clear, “trust” refers to buying and selling goods and services and to the integrity and protection of information, not trust in all business affairs. However, you will read throughout this book how a global ledger of truthful information can help build integrity into all our institutions and create a more secure and trustworthy world. In our view, companies that conduct some or all of their transactions on the blockchain will enjoy a trust bump in share price. Shareholders and citizens will come to expect all publicly traded firms and taxpayer-funded organizations to run their treasuries, at minimum, on the blockchain. Because of increased transparency, investors will be able to see whether a CEO really deserved that fat bonus. Smart contracts enabled by blockchains will require counterparties to abide by their commitments and voters will be able to see whether their representatives are being honest or acting with fiscal integrity.

  RETURN OF THE INTERNET

  The first era of the Internet started with the energy and spirit of a young Luke Skywalker—with the belief that any kid from a harsh desert planet could bring down an evil empire and start a new civilization by launching a dot-com. Naïve to be sure, but many people, present company included, hoped the Internet, as embodied in the World Wide Web, would disrupt the industrial world where power was gripped by the few and power structures were hard to climb and harder to topple. Unlike the old media that were centralized and controlled by powerful forces, and where the users were inert, the new media were distributed and neutral, and everyone was an active participant rather than a passive recipient. Low cost and massive peer-to-peer communication on the Internet would help undermine traditional hierarchies and help with the inclusion of developing world citizens in the global economy. Value and reputation would derive from quality of contribution, not status. If you were smart and hardworking in India, your merit would bring you reputation. The world would be flatter, more meritocratic, more flexible, and more fluid. Most important, technology would contribute to prosperity for everyone, not just wealth for the few.

  Some of this has come to pass. There have been mass collaborations like Wikipedia, Linux, and Galaxy Zoo. Outsourcing and networked business models have enabled people in the developing world to participate in the global economy better. Today two billion people collaborate as peers socially. We all have access to information in unprecedented ways.

  However, the Empire struck back. It has become clear that concentrated powers in business and government have bent the original democratic architecture of the Internet to their will.

  Huge institutions now control and own this new means of production and social interaction—its underlying infrastructure; massive and growing treasure troves of data; the algorithms that increasingly govern business and daily life; the world of apps; and extraordinary emerging capabilities, machine learning, and autonomous vehicles. From Silicon Valley and Wall Street to Shanghai and Seoul, this new aristocracy uses its insider advantage to exploit the most extraordinary technology ever devised to empower people as economic actors, to build spectacular fortunes and strengthen its power and influence over economies and societies.

  Many of the dark side concerns raised by early digital pioneers have pretty much materialized.17 We have growth in gross domestic product but not commensurate job growth in most developed countries. We have growing wealth creation and growing social inequality. Powerful technology companies have shifted much activity from the open, distributed, egalitarian, and empowering Web to closed online walled gardens or proprietary, read-only applications that among other things kill the conversation. Corporate forces have captured many of these wonderful peer-to-peer, democratic, and open technologies and are using them to extract an inordinate share of value.

  The upshot is that, if anything, economic power has gotten spikier, more concentrated, and more entrenched. Rather than data being more widely and democratically distributed, it is being hoarded and exploited by fewer entities that often use it to control more and acquire more power. If you accumulate data and the power that comes with it, you can further fortify your position by producing proprietary knowledge. This privilege trumps merit, regardless of its origin.

  Further, powerful “digital conglomerates” such as Amazon, Google, Apple, and Facebook—all Internet start-ups at one time—are capturing the treasure troves of data that citizens and institutions generate often in private data silos rather than on the Web. While they create great value for consumers, one upshot is that data is becoming a new asset class—one that may trump previous asset classes. Another is the undermining of our traditional concepts of privacy and the autonomy of the individual.

  Governments of all kinds use the Internet to improve operations and services, but they now also deploy technology to monitor and even manipulate citizens. In many democratic countries, governments use information and communications technologies to spy on citizens, change public opinion, further their parochial interests, undermine rights and freedoms, and overall to stay in power. Repressive governments like those of China and Iran enclose the Internet, exploiting it to crack down on dissent and mobilize citizens around their objectives.

  This is not to say that the Web is dead, as some have suggested. The Web is critical to the future of the digital world and all of us should support efforts under way to defend it, such as those of the World Wide Web Foundation, who are fighting to keep it open, neutral, and constantly evolving.

  Now, with blockchain technology, a world of new possibilities has opened up to reverse all these trends. We now have a true peer-to-peer platform that enables the many exciting things we’ve discussed in this book. We can each own our identities and our personal data. We can do transactions, creating and exchanging value without powerful intermediaries acting as the arbiters of money and information. Billions of excluded people can soon enter the
global economy. We can protect our privacy and monetize our own information. We can ensure that creators are compensated for their intellectual property. Rather than trying to solve the problem of growing social inequality through the redistribution of wealth only, we can start to change the way wealth is distributed—how it is created in the first place, as people everywhere from farmers to musicians can share more fully, a priori, in the wealth they create. The sky does seem to be the limit.

  It’s more Yoda than God. But this new protocol, if not divine, does enable trusted collaboration to occur in a world that needs it, and that’s a lot. Excited, we are.

  YOUR PERSONAL AVATAR AND THE BLACK BOX OF IDENTITY

  Throughout history, each new form of media has enabled mankind to transcend time, space, and mortality. That—dare we say—divine ability inevitably raises anew the existential question of identity: Who are we? What does it mean to be human? How do we conceptualize ourselves? As Marshall McLuhan observed, the medium becomes the message over time. People shape and are shaped by media. Our brains adapt. Our institutions adapt. Society adapts.

  “Today you need an organization with endowed rights to provide you with an identity, like a bank card, a frequent flyer card, or a credit card,”18 said Carlos Moreira of WISeKey. Your parents gave you a name, the state-licensed obstetrician or midwife who delivered you took your footprint and vouched for your weight and length, and both parties attested to the time, date, and place of your arrival by signing your birth certificate. Now they can record this certificate on the blockchain and link birth announcements and a college fund to it. Friends and family can contribute bitcoin to your higher education. There, your data flow begins.