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In Davos, blockchain expert and management consultant Eyal Shani discovered a widespread (and costly) misunderstanding of what blockchain actually is and where and how it should be used. He calls upon the blockchain community to better define the term and establish proper guidelines for its application. There are three main areas in which true “blockchain” activity is concentrated. As for the rest…
Don’t call it blockchain!
by Eyal Shani, founder of Aykesubir
History will remember January, 2020 as when Covid-19 began marching toward global pandemic status. For others, like me, January, 2020 marked the 50th anniversary of the iconic World Economic Forum, which I attended as a blockchain protocol researcher and management consultant monitoring how regulatory changes would affect the use of emerging technologies. (Editor’s note: Eyal was not the only Xinovian in attendance at this year’s climate change-focused event)
Rubbing elbows with some of the world’s greatest minds and deepest pockets, I was prepared to brainstorm blockchain-leveraging strategies that, together with shifting regulatory hurdles, would open new growth horizons. Instead, I was surprised to discover how muddied the blockchain waters had become in the 12 years since Satoshi Nakamoto’s landmark paper opened the floodgates of Bitcoin and distributed ledger technology.
Too often, people didn’t know what blockchain actually is. But lack of knowledge isn’t stopping many from paying hefty sums for ill-advised investments. This is more than a shame. It’s a lost opportunity and a potential black eye on the reputation of one of the most valuable and truly innovative technologies for digital transformation… when applied correctly.
Hey brother, got any blockchain?
While at the event, I was surprised when a top executive managing a multinational conglomerate told me his strategic team plans to use blockchain to solve the inherent problems of managing various balance sheets across many countries. When I asked him if internal fraud or trust issues are a main concern when a company undergoes a hyper-growth stage he promptly answered, “no.” Unsure of any other rationale for his utilization, considering blockchain was invented to solve trust problems among non-trusting participants, I followed with, “What problems then are you solving with blockchain?” To which he replied that he must attend another panel, and fled.
I was no less amazed when an entrepreneur running (yet another) blockchain-based real estate STO platform asked me to join his sales efforts. He was hoping that my blockchain experience would boost sales of his newly minted digital securities. I felt like I was traveling back to the crypto gold rush of 2017. To his surprise, I responded that he would gain more value from engaging with the actual real estate architect of his homes than a software solution architect.
Lost in blockchain space
Being in the protocol business since its early days, I understand the source of all the confusion. For many, crypto, blockchain, protocols and trust-sharing all emerged at once. From that point, the concept developed many arms. For some, blockchain remains synonymous with high-stakes gambling on digital currency like Bitcoin. For others, it is a system for digitizing processes involving transactions originating from many different stakeholders, such as payments or supply chain management. For many more, it represents the constant fight for open banking services and easing of regulations on the entrance of consumer-friendly fintech solutions.
Whatever the case, when you hear the term “blockchain” today, it is most likely not referring to the true innovation located beneath the title of Satoshi Nakamoto’s groundbreaking 2008 paper, “Bitcoin: a peer-to-peer electronic cash system.” This leads to costly confusion among everyone involved in the space.
Twelve years after rising from the ashes of the global financial crisis, I’m calling on the 2020 blockchain community to get organized and establish set criteria for how to use the term Blockchain. Doing so will provide clarity on this beautiful field for its fruitful, rather than frivolous, utilization. And better understanding of terms will certainly help me avoid future real estate endeavors cloaked in the guise of blockchain.
Blockchain isn’t Bitcoin
Let’s start with the easy part. Cryptocurrencies and blockchain are not the same thing. Blockchain, when it was first introduced to the public, was a tremendous breakthrough. Some called it the most important innovation since the internet. It gave the scientific community a completely new perspective on an old computer science problem called the “Byzantine Generals Problem.”
This important computational concept solves the riddle of how to get several parties, who cannot trust each other, to agree upon a strategic course while relying on faulty communication channels. In short, what we call “reaching consensus” consists of creating decentralized ledgers managed collectively by many non-trusting parties; for example, banks who wish to settle payments among themselves without one centralized clearing party.
Before Satoshi, the few theoretical solutions to the Byzantine Generals Problem did not scale to reaching consensus among dynamic sets of parties. In other words, instead of having five banks settle their payments among themselves, imagine a general payment network into which banks could hop in and out of without identifying themselves. Sounds hard to reach consensus, doesn’t it?
Together with his scientific achievement, Satoshi delivered a working software suite that solves that exact scenario. It can be used to build trust-distributing (consensus for dynamic sets), persistent and append-only ledgers. Since those ledgers keep the internal transactions in blocks of information generated roughly every ten minutes, the technology was given the now infamous name, Blockchain.
Those ledgers can be utilized in various other scenarios, from supply-chain management, to clearing processes, identity management and more. Satoshi also suggested the most famous use case of his newly developed technology: a ledger accounting for a digital currency. That was the idea behind Bitcoin, the first use case of a decentralized blockchain.
“I know many smart people who believe blockchain is important and interesting. Though, I haven’t met any smart people who think Bitcoin is important and interesting.” –Warren Buffet
What really happened in 2008
The relentless media hype on Bitcoin’s soaring price and the ever-expanding list of newly minted crypto millionaires made it easy to miss the true innovation in Satoshi’s paper, especially for those new to the field. But to understand that innovation, let’s look at what was not newly invented in 2008:
- The ability to create digital cash was definitely not unheard of by 2008. In fact, it is believed that only 8 percent of the world’s currency exists as physical cash. Even the idea of creating an unregulated electronic currency isn’t unheard of. The Liberty Reserve was launched in 2001, way before Bitcoin, and was shut down by the US authorities 12 years later. Mainly for looking the other way when their clients processed all sorts of illegal and stolen funds through their platform.
- What about digitally sharing trust? Protocols such as Tendermint and HotStuff, which powers Facebook’s Libra, are based on PBFT. That is a consensus protocol which was invented in 1999, years prior to blockchain. While today’s protocols do scale better, the concept of sharing trust among, say, a few banks, instead of creating a centralized governing body, was technically possible years ago.
- And blockchains? The idea of processing data in chunks is far from new. In fact, clearing systems such as the ACHbatches transactions to process them once every 24 hours, sometimes even faster. Moreover, Haber and Stornetta proposed a system for time-stamping digital documents in an append-only fashion already in 1991. In fact, Satoshi himself cited their work in his original paper.
The true innovation within Satoshi’s paper lies in how he conceptualized the ability to share the trust involved with collectively managing a ledger among masses of unidentified entities. He solved a problem by suggesting a conceptually new way of thinking about consensus, a strikingly brilliant idea that changed the academic community who had been trying to solve the problem since the 70s.
Yet, does this solution solve something the market demanded?
Mapping the blockchain world
A hard look at the blockchain industry uncovers three main areas in which most activity performed under the title “blockchain” are concentrated.
Tokenization = Digitization + Standardization
Several industries are still in the stone age in terms of technology adoption. To this day, they collect folders stuffed with papers, send them via international courier and curate them in big rooms. There is no doubt that digitization can improve these processes significantly. Developing those digital assets under the same software standard is further beneficial.
A unified coding standard for digital assets can lower the barrier to entry for new solutions. This especially benefits end users. It will be easier than ever to create aggregators and to move your assets from one network to another. If you are a market leader, however, it is less obvious you’d enjoy those trends, since users could easily switch to the competition.
To conclude, digitization, standardization and tokenization are all important processes that could create value, mainly to the end user. Yet, none of them needed help from Satoshi and the rest of the cypherpunks to pursue this vision. Stop calling it blockchain.
Regulation
Some say that technology and regulation go hand-in-hand. That might have been true were technology’s velocity not exponentially faster than the turtle-like pace of regulation. However, the blockchain industry re-ignited debate on age-old questions concerning the fundamentals and dynamics of the economy.
Many Blockchain centers and advocacy groups emerged around the globe. Their shared mission was to promote the use of technology as if it were the white knight to solve the problems posed by the tension between exponentially accelerating technology and the glacial speed of economic regulation which, while necessary, needs innovation.
Questions often repeated at blockchain events, and in Davos, include:
- Should fractional reserve banking come to an end?Maybe, but do we need Bitcoin for that?
- Should Central bank money be available for all?It certainly could, yet as mentioned earlier, digital money can be easily implemented without blockchain. The addition of complete decentralization doesn’t help in this case.
- To what extent should the government protect retail investors?The concept of Crowdfunding was around for quite some time. Internal fraud and front-running are certainly a risk, but it can be mitigated by many means other than blockchains. In fact, Israel’s parliament eased the regulation around crowd funding back in 2017. The move created new opportunities both for startups and retail investors. In the process, not a single blockchain technology was used.
- How to better balance KYC/AML regulation without choking new entrants to the fintech market?A very interesting problem which can certainly be solved if there was, say, one safe and secure database holding everyone’s KYC information. Yet, a country can run it without decentralized blockchains, if it chooses to.
Those questions are all weighty and discussion-worthy. The introduction of completely decentralized blockchains can come in handy in case the government decides to strip away their public-protection mechanisms. Yet it doesn’t necessarily mean the government should do so. I do support advocating for a better and healthier society but please, stop calling it blockchain.
Trust sharing
As mentioned earlier, systems that enable trust sharing and a group to collectively manage a shared database, in the non-dynamic case, have been known since the seventies. Yet, thanks to the massive influx of great minds and money into the field, today we have fully functioning prototypes. Coded, audited, tested by crowds and ready for use.
Those solutions lower the barriers to entry for new ventures in the field. If you are working on a product that requires trust sharing because of regulation of market demands, do so. But don’t call it blockchain. Call it trust sharing, or come up with a better name.
Take Facebook. The company from Menlo Park decided that sharing Libra’s ledger with a coalition of trusted brands will help with the adoption of their payment protocol. Yet, the project’s whitepaper clearly says: “The Libra Blockchain is a decentralized, programmable database designed to support a low-volatility cryptocurrency.” Further reading into the paper confirms they have no plans to store blocks of data, but only process the data in blocks–just like ACH systems.
If a giant like Facebook needs to use the word blockchain to draw attention to their payments projects, what can we expect from the small startups fighting for investment and influence?
Finally, if you are working on truly decentralized systems based on modern blockchains, still don’t call it blockchain. Rather, call them decentralized systems. Without knowing much about your product, I can guess that if you were to base it on Direct Acyclic Graphs or Hashgraphs instead, it would not change it by much.
Looking ahead: the next decade of blockchain
To be sure, the term, Blockchain has been of great service to everyone involved in the community for many years. We need to thank it for the massive influx of money and minds into the field, pumping resources into the Fintech world that would have taken years to acquire otherwise.
Yes, some projects done under guisee of Blockchain have been more dubious than others. It’s lead to ambivalent reactions from the public. I’ve personally worked with investors who would immediately reject a project at the mention of the word, Blockchain, while others raced ahead, certain that their own slice of Bitcoin supremacy was right around the corner.
Regardless, all good things eventually come to an end. It is time to say goodbye to blockchain as many of us know it and embrace a new generation of client-centric value-creating solutions. I wish you all a decade full of productive trust sharing solutions, exciting market-opening regulation advancements, and value capturing digital asset solutions.
All that… but with a little less blockchain.
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Eyal Shani is the founder of Aykesubir, a leading boutique management consulting firm trusted by governments, enterprises and investors for providing strategy, diligence and product planning services tailored for the fintech market.