The first four decades of the Internet brought us e-mail, the World Wide Web, dot coms, social media, the mobile Web, big data, cloud computing, and the early days of the Internet of Things. It has been great for reducing the costs of searching, collaborating, and exchanging information.
It has lowered the barriers to entry for new media and entertainment, new forms of retailing and organizing work, and unprecedented digital ventures. Through sensor technology, it has infused intelligence into our wallets, our clothing, our automobiles, our buildings, our cities, and even our biology.
It is saturating our environment so completely that soon we will no longer “log on” but rather go about our business and our lives immersed in pervasive technology.
Overall, the Internet has enabled many positive changes—for those with access to it—but it has serious limitations for business and economic activity. The New Yorker could rerun Peter Steiner’s 1993 cartoon of one dog talking to another without revision: “On the Internet, nobody knows you’re a dog.” Online, we still can’t reliably establish one another’s identities or trust one another to transact and exchange money without validation from a third party like a bank or a government.
These same intermediaries collect our data and invade our privacy for commercial gain and national security. Even with the Internet, their cost structure excludes some 2.5 billion people from the global financial system. Despite the promise of a peer-to-peer empowered world, the economic and political benefits have proven to be asymmetrical—with power and prosperity channeled to those who already have it, even if they’re no longer earning it. Money is making more money than many people do.
Technology doesn’t create prosperity any more than it destroys privacy. However, in this digital age, technology is at the heart of just about everything—good and bad. It enables humans to value and to violate one another’s rights in profound new ways.
The explosion in online communication and commerce is creating more opportunities for cybercrime. Moore’s law of the annual doubling of processing power doubles the power of fraudsters and thieves—“Moore’s Outlaws” 1—not to mention spammers, identity thieves, phishers, spies, zombie farmers, hackers, cyberbullies, and datanappers—criminals who unleash ransomware to hold data hostage—the list goes on.
In Search Of The Trust Protocol
As early as 1981, inventors were attempting to solve the Internet’s problems of privacy, security, and inclusion with cryptography. No matter how they reengineered the process, there were always leaks because third parties were involved. Paying with credit cards over the Internet was insecure because users had to divulge too much personal data, and the transaction fees were too high for small payments.
In 1993, a brilliant mathematician named David Chaum came up with eCash, a digital payment system that was “a technically perfect product which made it possible to safely and anonymously pay over the Internet. . . . It was perfectly suited to sending electronic pennies, nickels, and dimes over the Internet.” It was so perfect that Microsoft and others were interested in including eCash as a feature in their software. The trouble was, online shoppers didn’t care about privacy and security online then. Chaum’s Dutch company DigiCash went bankrupt in 1998
Around that time, one of Chaum’s associates, Nick Szabo, wrote a short paper entitled “The God Protocol,” a twist on Nobel laureate Leon Lederman’s phrase “the God particle,” referring to the importance of the Higgs boson to modern physics. In his paper, Szabo mused about the creation of a be-all end-all technology protocol, one that designated God the trusted third party in the middle of all transactions: “All the parties would send their inputs to God. God would reliably determine the results and return the outputs. God being the ultimate in confessional discretion, no party would learn anything more about the other parties’ inputs than they could learn from their own inputs and the output.” 4 His point was powerful: Doing business on the Internet requires a leap of faith. Because the infrastructure lacks the much-needed security, we often have little choice but to treat the middlemen as if they were deities.
A decade later in 2008, the global financial industry crashed. Perhaps propitiously, a pseudonymous person or persons named Satoshi Nakamoto outlined a new protocol for a peer-to-peer electronic cash system using a cryptocurrency called bitcoin. Cryptocurrencies (digital currencies) are different from traditional fiat currencies because they are not created or controlled by countries. This protocol established a set of rules—in the form of distributed computations—that ensured the integrity of the data exchanged among these billions of devices without going through a trusted third party. This seemingly subtle act set off a spark that has excited, terrified, or otherwise captured the imagination of the computing world and has spread like wildfire to businesses, governments, privacy advocates, social development activists, media theorists, and journalists, to name a few, everywhere
This protocol is the foundation of a growing number of global distributed ledgers called blockchains—of which the bitcoin blockchain is the largest. While the technology is complicated and the word blockchain isn’t exactly sonorous, the main idea is simple. Blockchains enable us to send money directly and safely from me to you, without going through a bank, a credit card company, or PayPal.
Rather than the Internet of Information, it’s the Internet of Value or of Money. It’s also a platform for everyone to know what is true—at least with regard to structured recorded information. At its most basic, it is an open source code: anyone can download it for free, run it, and use it to develop new tools for managing transactions online. As such, it holds the potential for unleashing countless new applications and as yet unrealized capabilities that have the potential to transform many things.
HOW THIS WORLDWIDE LEDGER WORKS
Big banks and some governments are implementing blockchains as distributed ledgers to revolutionize the way information is stored and transactions occur. Their goals are laudable—speed, lower cost, security, fewer errors, and the elimination of central points of attack and failure. These models don’t necessarily involve a cryptocurrency for payments.
However, the most important and far-reaching blockchains are based on Satoshi’s bitcoin model. Here’s how they work.
Bitcoin or other digital currency isn’t saved in a file somewhere; it’s represented by transactions recorded in a blockchain—kind of like a global spreadsheet or ledger, which leverages the resources of a large peer-to-peer bitcoin network to verify and approve each bitcoin transaction. Each blockchain, like the one that uses bitcoin, is distributed: it runs on computers provided by volunteers around the world; there is no central database to hack. The blockchain is public: anyone can view it at any time because it resides on the network, not within a single institution charged with auditing transactions and keeping records. And the blockchain is encrypted: it uses heavy-duty encryption involving public and private keys (rather like the two-key system to access a safety deposit box) to maintain virtual security. You needn’t worry about the weak firewalls of Target or Home Depot or a thieving staffer of Morgan Stanley or the U.S. federal government
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.” 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.” 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
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.”
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
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.
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
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
A PLAN FOR PROSPERITY
Prosperity first and foremost is about one’s standard of living. To achieve it, people must have the means, tools, and opportunities to create material wealth and thrive economically. But for us it includes more—security of the person, safety, health, education, environmental sustainability, opportunities to shape and control one’s destiny and to participate in an economy and society. In order to achieve prosperity, an individual must possess, at minimum, access to some form of basic financial services to reliably store and move value, communication, and transactional tools to connect to the global economy, and security, protection, and enforcement of the title to land and other assets they possess legally
Creating a True Peer-to-Peer Sharing Economy
Pundits often refer to Airbnb, Uber, Lyft, TaskRabbit, and others as platforms for the “sharing economy.” It’s a nice notion—that peers create and share in value. But these businesses have little to do with sharing. In fact, they are successful precisely because they do not share—they aggregate. It is an aggregating economy. Uber is a $65 billion corporation that aggregates driving services. Airbnb, the $25 billion Silicon Valley darling, aggregates vacant rooms.
Others aggregate equipment and handymen through their centralized, proprietary platforms and then resell them. In the process, they collect data for commercial exploitation. None of these companies existed a decade ago because the technological preconditions were not there: ubiquitous smart phones, full GPS, and sophisticated payment systems. Now with blockchains, the technology exists to reinvent these industries again. Today’s big disrupters are about to get disrupted.
Rewiring the Financial System for Speed and Inclusion
The financial services industry makes our global economy hum, but the system today is fraught with problems. For one, it is arguably the most centralized industry in the world and the last industry to feel the transformational effect of the technological revolution. Bastions of the old financial order such as banks go to great lengths to defend monopolies and often stymie disruptive innovation. The financial system also runs on outmoded technology and is governed by regulations dating back to the nineteenth century. It is rife with contradictions and uneven developments, making it sometimes slow, oftentimes insecure, and largely opaque to many stakeholders
Protecting Economic Rights Globally
Property rights are so inexorably tied to our system of capitalist democracy that Jefferson’s first draft of the Declaration of Independence listed the inalienable rights of man as life, liberty, and the pursuit of property, not happiness. While those aspirational tenets laid the groundwork for the modern economy and society we enjoy in much of the developed world, to this day much of the world’s population does not reap their benefits. Even though some progress has been made in the departments of life and liberty, a majority of the world’s property holders can have their homes or their bit of land seized arbitrarily by corrupt government functionaries, with the flick of a software switch in their centralized government property database. Without proof of property ownership, landowners can’t secure a loan, get a building permit, or sell the property and they can be expropriated—all serious impediments to prosperity.
Ending the Remittance Rip-off
Just about every report, article, or book reviewing the benefits of cryptocurrencies discusses the opportunity of remittances. And for good reason. The largest flow of funds into the developing world is not foreign aid or direct foreign investment. Rather, it is remittance money repatriated to poor countries from their diasporas living abroad. The process takes time, patience, and sometimes courage to travel each week to the same wire transfer office’s seedy neighborhood, fill out the same paperwork each time, and pay the same 7 percent fee. There is a better way
Cutting Out Bureaucracy and Corruption in Foreign Aid
Could blockchain solve problems with foreign aid? The 2010 Haiti earthquake was one of the deadliest natural disasters in recorded history. Somewhere between 100,000 and 300,000 people perished. The government in Haiti proved itself a liability in the aftermath. The global community donated more than $500 million to the Red Cross, a known brand. An after-action investigation revealed that funds were misspent or went missing altogether
Feeding the Creators of Value First
Under the first generation of the Internet, many creators of intellectual property did not receive proper compensation for it. Exhibit A was musicians and composers who had signed with record labels whose leaders failed to imagine how the Internet would affect their industry. They failed to embrace the digital age and reinvent their own business models, slowly ceding control to innovative online distributors
Reconfiguring the Corporation as the Engine of Capitalism
With the rise of a global peer-to-peer platform for identity, trust, reputation, and transactions, we will finally be able to re-architect the deep structures of the firm for innovation, shared-value creation, and perhaps even prosperity for the many, rather than just wealth for the few. This doesn’t mean smaller firms in terms of revenue or impact. To the contrary, we’re talking about building twenty-first-century companies, some that may be massive wealth creators and powerful in their respective markets. We do think enterprises will look more like networks rather than the vertically integrated hierarchies of the industrial age. As such there is an opportunity to distribute (not redistribute) wealth more democratically
Animating Objects and Putting Them to Work
Technologists and science fiction writers have long envisioned a world where a seamless global network of Internet-connected sensors could capture every event, action, and change on earth. Blockchain technology will enable things to collaborate, exchange units of value—energy, time, and money—and reconfigure supply chains and production processes according to shared information on demand and capacity. We can attach metadata to smart devices and program them to recognize other objects by their metadata and to act or react to defined circumstances without risk of error or tampering
Cultivating the Blockchain Entrepreneur
Entrepreneurship is essential to a thriving economy and a prosperous society. The Internet was supposed to liberate entrepreneurs, giving them the tools and capabilities of big companies without many of the liabilities, such as legacy culture, ossified processes, and dead weight. However, the high-flying success of dot-com billionaires obfuscates an unsettling truth: entrepreneurship and new business starts have been steadily declining for thirty years in many developed economies. In the developing world, the Internet has done little to lower the barriers of would-be entrepreneurs who must suffer deadening government bureaucracies. The Internet has also not liberated the financial tools essential to starting a business available to billions of people. Not everyone is destined to be an entrepreneur, of course, but even for the average person trying to earn a decent wage, the lack of financial tools and the prevalence of government red tape make doing so challenging.
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.
PROMISE AND PERIL OF THE NEW PLATFORM
If there are six million people in the naked city, 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.