Blockchain Revolution (updated) Read online

  This is a complex issue, but blockchain can help supercharge entrepreneurship and therefore prosperity in many important ways. For the average person living in the developing world to have a reliable store of value and a way to conduct business beyond his community, all he needs now is an Internet-enabled device. Access to the global economy means greater access to new sources of credit, funding, suppliers, partners, and investment opportunities. No talent or resource is too small to monetize on the blockchain.

  Realizing Governments by the People for the People

  Buckle up for big changes in government and governance too. Blockchain technology is already revolutionizing the machinery of government and how we can make it high performance—better and cheaper. It’s also creating new opportunities to change democracy itself—how governments can be more open and free from lobbyist control, and behave with the four values of integrity. We look at how blockchain technologies can change what it means to be a citizen and participate in the political process, from voting and accessing social services to solving some of society’s big hairy problems and holding elected representatives accountable for the promises that got them elected.

  PROMISE AND PERIL OF THE NEW PLATFORM

  If there are six million people in the naked city,33 then there are six million obstacles to this technology fulfilling its potential. Further, there are some worrisome downsides. Some say the technology is not ready for prime time; that it’s still hard to use, and that the killer applications are nascent. Other critics point to the massive amount of energy consumed to reach consensus in just the bitcoin network: What happens when thousands or perhaps millions of interconnected blockchains are each processing billions of transactions a day? Are the incentives great enough for people to participate and behave safely over time, and not try to overpower the network? Is blockchain technology the worst job killer ever?

  These are questions of leadership and governance, not of technology. The first era of the Internet took off because of the vision and common interests of its key stakeholders—governments, civil society organizations, developers, and everyday people like you. Blockchain requires similar leadership. We discuss at greater length in the book why leaders of this new distributed paradigm will need to stake their claim and unleash a wave of economic and institutional innovation, to ensure this time that the promise is fulfilled. We invite you to be one of these.

  This book grew out of the $4 million Global Solution Networks program at the Rotman School of Management at the University of Toronto. Funded primarily by large technology corporations along with the Rockefeller and Skoll foundations, the U.S. State Department, and Industry Canada, the initiative explored new approaches to global problem solving and governance. We were both involved in running the program. (Don founded it; Alex led the project on cryptocurrencies.) In 2014, we launched a one-year initiative on the blockchain revolution and its implications for business and society, culminating in this book. In it, we have attempted to put the promise and the peril of the new platform into perspective.

  If business, government, and civil society innovators get this right, we will move from an Internet driven primarily by the falling costs of search, coordination, data collection, and decision making—where the name of the game was monitoring, mediating, and monetizing information and transactions on the Web—to one driven by the falling costs of bargaining, policing, and enforcing social and commercial agreements, where the name of the game will be integrity, security, collaboration, the privacy of all transactions, and the creation and distribution of value. That’s a 180-degree turn in strategy. The result can be an economy of peers with institutions that are truly distributed, inclusive, and empowering—and thereby legitimate. By fundamentally changing what we can do online, how we do it, and who can participate, the new platform may even create the technological preconditions to reconciling some of our most vexing social and economic challenges.

  If we get this wrong, blockchain technology, which holds so much promise, will be constrained or even crushed. Worse, it could become a tool powerful institutions use to entrench their wealth or, if hacked by governments, a platform for some kind of new surveillance society. The tightly related technologies of distributed software, cryptography, autonomous agents, and even artificial intelligence could get out of control and turn against their human progenitors.

  It is possible that this new technology may be delayed, stalled, underutilized, or worse. The blockchain and cryptocurrencies, particularly bitcoin, already have massive momentum, but we’re not predicting whether or not all this will succeed, and if it does, how fast it will occur.34 Prediction is always a risky business. Says technology theorist David Ticoll: “Many of us did a bad job of predicting the full impact of the Internet. ISIS type bad phenomena are among what we missed, and some big optimistic predictions turned out wrong.” He says, “If the blockchain is as big and universal as the Net, we are likely to do a comparably bad job of predicting both its upsides and downsides.”35

  So rather than predicting a blockchain future, we’re advocating for it. We’re arguing that it should succeed, because it could help us usher in a new era of prosperity. We believe that the economy works best when it works for everyone, and this new platform is an engine of inclusion. It drastically lowers the cost of transmitting such funds as remittances. It significantly lowers the barrier to having a bank account, obtaining credit, and investing. And it supports entrepreneurship and participation in global trade. It catalyzes distributed capitalism, not just a redistributed capitalism.

  Everyone should stop fighting it and take the right steps to get on board. Let’s harness this force not for the immediate benefit of the few but for the lasting benefit of the many.

  Today, both of us are excited about the potential of this next round of the Internet. We’re enthusiastic about the massive wave of innovation that is being unleashed and its potential for prosperity and a better world. This book is our case to you to become interested, understand this next wave, and take action to ensure that the promise is fulfilled.

  So hang on to your seat and read on! We’re at one of those critical junctures in human history.

  CHAPTER 2

  BOOTSTRAPPING THE FUTURE:

  SEVEN DESIGN PRINCIPLES OF THE BLOCKCHAIN ECONOMY

  Freedom is predicated on privacy,” said Ann Cavoukian, executive director of the Privacy and Big Data Institute at Ryerson University. “I first learned that thirty years ago when I started going to conferences in Germany. It is no accident that Germany is the leading privacy and data protection country in the world. They had to endure the abuses of the Third Reich and the complete cessation of all of their freedoms, which started with the complete removal of their privacy. When that ended, they said, ‘Never again.’”1

  And so it is ironic—or totally fitting—that one of the first decentralized peer-to-peer computational platforms to guarantee user privacy is called Enigma, also the name given to the machine developed by German engineer Arthur Scherbius to transcribe coded information. Scherbius designed Enigma for commercial use: through his device, global companies could quickly and safely communicate their trade secrets, stock tips, and other insider information. Within a few years, Germany’s military forces were manufacturing their own versions of Enigma to broadcast coded messages over radio to troops. During the war, the Nazis used Enigma to disseminate strategic plans, details of targets, and the timing of attacks. It was a tool of suffering and oppression.

  Our contemporary Enigma is a tool of freedom and prosperity. Designed at MIT Media Lab by Guy Zyskind and Oz Nathan, the new Enigma combines the virtues of blockchain’s public ledger, the transparency of which “provides strong incentives for honest behavior,” with something known as homomorphic encryption and secure multiparty computation.2 More simply put, “Enigma takes your information—any information—breaks it up, and encrypts it into pieces of data that are randomly distributed to nodes in the network. It doesn’t exist in one spot,” said Cavouk
ian. “Enigma uses blockchain technology to embed the data and track all the pieces of information.”3 You can share it with third parties and those parties can use it in computations without ever decrypting it.4 If it works, it could reshape how we approach our own identity online. Imagine having a black box of your personal information that you alone control and can access.

  No matter how cool it may sound, there are reasons to tread cautiously on the cryptographic frontier. First, it needs to bootstrap a large network of participants. Second, “cryptography is an area where you never want to be using the newest and greatest, because there is an entire history of an algorithm that everyone believes is secure, that’s out there for four or five years, and some very inspired scientist will come out and say, there’s a flaw, and the entire thing tumbles,” said Austin Hill of Blockstream. “That’s why we generally prefer conservative, very well-established, long-standing algorithms. This stuff is very, very well future-proofed, and bitcoin was designed with that in mind.”5

  Still, the concept is worth taking very seriously, as it has profound implications for privacy, security, and sustainability. “Enigma is offering what they say guarantees privacy,” Cavoukian said. “That is a big claim, but that’s the kind of thing we increasingly need in this connected, interconnected world.”6

  In our research, we came across a number of projects initiated on blockchain technologies whose developers had similar aspirations for enabling basic human rights—not only the rights to privacy and security, but also the rights to property, recognition as a person under the law, and participation in government, culture, and the economy. Imagine a technology that could preserve our freedom to choose for ourselves and our families, to express these choices in the world, and to control our own destiny, no matter where we lived or were born. What new tools and new jobs could we create with those capabilities? What new businesses and services? How should we think about the opportunities? The answers were right in front of us, compliments of Satoshi Nakamoto.

  THE SEVEN DESIGN PRINCIPLES

  We believe that this next era could be inspired by Satoshi Nakamoto’s vision, designed around a set of implicit principles, and realized by the collaborative spirit of many passionate and equally talented leaders in the community.

  His grand vision was limited to money, not to some greater goal of creating a second generation of the Internet. There was no discussion of reinventing the firm, changing our institutions, or transforming civilization for the better. Still, Satoshi’s vision was stunning in its simplicity, originality, and insight into humankind. It became clear to those who read the 2008 paper that a new era of the digital economy was about to begin. Where the first era of the digital economy was sparked by a convergence of computing and communications technologies, this second era would be powered by a clever combination of computer engineering, mathematics, cryptography, and behavioral economics.

  Folksinger Gordon Lightfoot crooned, “If you could read my mind, love, what a tale my thoughts could tell.” Satoshi has been incommunicado since 2011 (though the name pops up on discussion boards from time to time), but we think the trust protocol he bootstrapped lends itself to principles for reconfiguring our institutions and economy.

  Everyone we talked to has been eager to share insights into blockchain technology with us. Each conversation, each white paper, each forum thread has surfaced a number of themes that we’ve reverse-engineered into design principles—principles for creating software, services, business models, markets, organizations, and even governments on the blockchain. Satoshi never wrote about these principles, but they are implicit in the technology platform he unleashed. We see them as principles for shaping the next era of the digital economy, and an era of renewed trust.

  If you’re new to this space, we hope these principles will help you understand the basics of the blockchain revolution. If you’re a die-hard skeptic of the bitcoin blockchain, they should still serve you as you contemplate your future as an entrepreneur, inventor, engineer, or artist who seeks creative collaborations with like-minded people; as an owner or investor in assets of all kinds; or as a manager who wants to reimagine your role in this nascent blockchain economy.

  1. Networked Integrity

  Principle: Trust is intrinsic, not extrinsic. Integrity is encoded in every step of the process and distributed, not vested in any single member. Participants can exchange value directly with the expectation that the other party will act with integrity. That means that the values of integrity—honesty in one’s words and deeds, consideration for others’ interests, accountability for the consequences of one’s decisions and actions, and transparency in decision making and action taking—are coded in decision rights, incentive structures, and operations so that acting without integrity either is impossible or costs a lot more time, money, energy, and reputation.

  Problem to Be Solved: On the Internet, people haven’t been able to transact or do business directly for the simple reason that money isn’t like other information goods and intellectual property per se. You can send the same selfie to all your friends, but you ought not give your friend a dollar that you’ve already given to someone else. The money must leave your account and go into your friend’s. It can’t exist in both places, let alone multiple places. And so there’s a risk of your spending a unit of digital currency in two places and having one of them bounce like a bad check. That’s called the double-spend problem. That’s good for fraudsters who want to spend their money twice. It’s bad for the recipient of the bounced amount and bad for your reputation online. Traditionally, when making online payments, we solve the double-spend problem by clearing every transaction through the central databases of one or many third parties, such as a money transfer service (like Western Union), a commercial bank (Citicorp), a government body (Commonwealth Bank of Australia), a credit card company (Visa), or an online payment platform (PayPal). Settlement can take days or even weeks in some parts of the world.

  Breakthrough: Satoshi leveraged an existing distributed peer-to-peer network and a bit of clever cryptography to create a consensus mechanism that could solve the double-spend problem as well as, if not better than, a trusted third party. On the bitcoin blockchain, the network time-stamps the first transaction where the owner spends a particular coin and rejects subsequent spends of the coin, thus eliminating a double spend. Network participants who run fully operating bitcoin nodes—called miners—gather up recent transactions, settle them in the form of a block of data, and repeat the process every ten minutes. Each block must refer to the preceding block to be valid. The protocols also include a method for reclaiming disk space so that all nodes can efficiently store the full blockchain. Finally, the blockchain is public. Anyone can see transactions taking place. No one can hide a transaction, and that makes bitcoin more traceable than cash.

  Satoshi sought not only to disintermediate the central banking powers but also to eliminate the ambiguity and conflicting interpretations of what happened. Let the code speak for itself. Let the network reach consensus algorithmically on what happened and record it cryptographically on the blockchain. The mechanism for reaching consensus is critical. “Consensus is a social process,” blogged Vitalik Buterin, pioneer of the Ethereum blockchain. “Human beings are fairly good at engaging in consensus . . . without any help from algorithms.” He explained that, once a system scales beyond an individual’s ability to do the math, people turn to software agents. In peer-to-peer networks, the consensus algorithm divvies up the right to update the status of the network, that is, to vote on the truth. The algorithm doles out this right to a group of peers who constitute an economic set, a set that has skin in the game, so to speak. According to Buterin, what’s important about this economic set is that its members are securely distributed: no single member or cartel should be able to overtake a majority, even if they had the means and incentive to do so.7

  To achieve consensus, the bitcoin network uses what’s called a proof of work (PoW) mechanism. This may sound c
omplicated but the idea is a simple one. Because we can’t rely on the identity of the miners to select who creates the next block, we instead create a puzzle that is hard to solve (i.e., it takes a lot of work), but easy to verify (i.e., everyone else can check the answer very quickly). Participants agree that whoever solves the problem first gets to create the next block. Miners have to expend resources (computing hardware and electricity) to solve the puzzle by finding the right hash, a kind of unique fingerprint for a text or a data file. For each block they find, miners receive bitcoin as a reward. The puzzle is mathematically set up to make it impossible to find a shortcut to solve it. That’s why, when the rest of the network sees the answer, everyone trusts that a lot of work went into producing it. Also, this puzzle solving is continuous “to the tune of 500,000 trillion hashes per second,” according to Dino Mark Angaritis. Miners are “looking for a hash that meets the target. It is statistically bound to occur every ten minutes. It’s a Poisson process, so that sometimes it takes one minute and sometimes one hour, but on average, it’s ten minutes.” Angaritis explained how it works: “Miners gather all the pending transactions that they find on the network and run the data through a cryptographic digest function called the secure hash algorithm (SHA-256), which outputs a 32-byte hash value. If the hash value is below a certain target (set by the network and adjusted every 2,016 blocks), then the miner has found the answer to the puzzle and has ‘solved’ the block. Unfortunately for the miner, finding the right hash value is very difficult. If the hash value is wrong, the miner adjusts the input data slightly and tries again. Each attempt results in an entirely different hash value. Miners have to try many times to find the right answer. As of November 2015, the number of hash attempts is on average 350 million trillion. That’s a lot of work!”8