Market News

Is Blockchain the Major Next Step in the Internet’s Evolution? – WSJ

JUNE 25, 2017Blockchain is a foundational technology, whose full transformational impact will take time–decades rather than years

By IRVING WLADAWSKY-BERGER

 

Peter Smith, CEO of Blockchain Ltd., a company that named itself after the distributed online ledger technology, speaks in Berlin, June 22, 2017.Peter Smith, CEO of Blockchain Ltd.

In the Fall of 1995, IBM Corp. made the decision to embrace the internet and make it the centerpiece of its strategic directions. As the general manager of the newly formed , I spent a lot of time thinking how to best articulate the promise of the internet. Looking back, I often described that promise using some variation of: The Internet has the potential to transform the economy, society and our personal lives.

It’s taken a a few additional innovations for its historical impact to be fully evident, but by now, most everyone agrees that the internet has become one of the most transformative technologies the world has ever seen–right up there with electricity, telecommunications, cars and airplanes.

About a year ago, the World Economic Forum (WEF) published its annual list of the , and  as one of the technologies in the 2016 list. 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.”

As Don Tapscott and Alex Tapscott wrote in the opening paragraph of their recently published book , “It appears that once again, the technological genie has been unleashed from its bottle. Summoned by an unknown person or persons with unclear motives, at an uncertain time in history, the genie is now at our service for another kick of the can – to transform the economic power grid and the old order of human affairs for the better. If we will it.”

. For the past two years, I’ve read lots of article on blockchain technologies, and  in my blog on the subject. When discussing the long-term potential of blockchain, I once more find myself saying something like: Blockchain has the potential to transform the economy, society and our personal lives. And, to help me better understand how such a transformation might evolve over the years, I’ve found it quite useful to compare the current state of blockchain to that of the internet in its early years.

 

In , an article published earlier this year in the Harvard Business Review, Harvard professors Marco Iansiti and Karim Lakhani noted that, like the internet, blockchain is a foundational technology, whose full transformational impact will take time–decades rather than years. The  of foundational technologies like the internet and blockchain is gradual, incremental and steady, because they must overcome many different kinds of barriers–technological, organizational, governance and political.

We shouldn’t view the internet and blockchain as two distinct foundational technologies, but as part of a multi-decades evolution in the development of a 21st century global, digital infrastructure. Blockchain Revolution reminds us that the internet “has enabled many positive changes – for those with access to it – but it has serious limitations for business and economic activity… Doing business on the Internet requires a leap of faith.”

To take its major next step, the internet must overcome three such serious limitations: security, complexity, and trust. Let’s briefly discuss each of these.

Over the past few decades, we’ve been moving to a world where information of all kinds is digital, and where many different kinds of online transactions are now taking place between people, institutions, and things. At the same time, large-scale fraud, data breaches, and identity thefts are becoming more common, and companies are finding that cyber-attacks are costly to prevent and recover from.

Fundamentally, the internet is a general purpose data network supporting a remarkable variety of applications. A major reason for the internet’s ability to keep growing and adapting to widely different applications is that it’s stuck to its basic data-transport mission, just throwing bits around. The internet has no idea what the bits mean or what they’re trying to accomplish. That’s all the responsibility of the applications running on top of it. Consequently, there’s no one overall owner responsible for security, let alone identity management, over the internet. These important responsibilities are divided among several actors, making them significantly harder to achieve.

Blockchain technologies should help us enhance the security of digital transactions and data, by developing the required common services for secure communication, storage and data access, along with open source software implementations of these standard services. As was the case with key internet protocols, we would expect such standard blockchain services to be support by all blockchain platforms, such as Hyperledger and Ethereum.

Security standards are necessary, but not sufficient. Identity is the key that determines the particular transactions in which individuals, institutions–and the exploding number of IoT devices–can rightfully participate, as well as the data they’re entitled to access. But our existing methods for managing  are far from adequate.

As  in this excellent , identity is essentially a collection of information or attributes associated with a specific individual, institution or device. In general, the needed attributes to validate an identity are siloed within different private and public sector institutions, each using its data for its own purposes. To reach a higher level of privacy and security we need to establish a , which requires the interoperability and sharing of data across the various institutions involved. The more data sources a trusted ecosystem has access to, the higher the probability of detecting fraud and identity theft.

It’s not only highly unsafe, but also totally infeasible to gather all the needed attributes in a central data warehouse. Few institutions will let their critical data out of their premises. MIT Connection Science, a recently established research initiative led by MIT professor Sandy Pentland, has been developing a new  that would enable the safe sharing of data across institutions. Instead of copying or moving the data across, the agreed upon queries are sent to the institution owning the data, executed behind the firewalls of the data owners, and only the encrypted results are shared. MIT Connection Science is implementing such an identity framework in its  and  projects, both of which make extensive use of cryptographic and blockchain technologies.

As firms now rely on ecosystem partners for many of the functions once done in-house, one of their major organizational challenges is how to best manage their increasingly  across a network of interconnected companies. Distributed operations can make firms more efficient, but they can also lead to increased risks, unanticipated consequences and large transaction costs.

“The long history of human progress has been a steady march against friction,” . “From the introduction of money to replace barter and the gradual replacement of wax seals by digital signatures, we have seen steady progress facilitated by digital innovations. The internet primed friction for a free-fall. Since then, some frictions fell while others rose.”

Enterprises, supply chains and global ecosystems have scaled in recent years. But “the added complexity of operations has grown exponentially while revenue growth has remained linear. The result? At a certain point, organizations are faced with diminishing returns. Blockchains have the potential to eradicate the cost of complexity and ultimately redefine the traditional boundaries of an organization.”

A similar point was made in the . “Contracts, transactions, and the records of them are among the defining structures in our economic, legal, and political systems… yet these critical tools and the bureaucracies formed to manage them have not kept up with the economy’s digital transformation. They’re like a rush-hour gridlock trapping a Formula 1 race car. In a digital world, the way we regulate and maintain administrative control has to change…”

“With blockchain, we can imagine a world in which contracts are embedded in digital code and stored in transparent, shared databases, where they are protected from deletion, tampering, and revision. In this world every agreement, every process, every task, and every payment would have a digital record and signature that could be identified, validated, stored, and shared… Individuals, organizations, machines, and algorithms would freely transact and interact with one another with little friction…”

“TCP/IP unlocked new economic value by dramatically lowering the cost of connections. Similarly, blockchain could dramatically reduce the cost of transactions. It has the potential to become the system of record for all transactions. If that happens, the economy will once again undergo a radical shift, as new, blockchain-based sources of influence and control emerge.”

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.

Starting over 50 years ago, institutions have been transforming their paper-based ledgers into highly sophisticated IT applications and data bases. But while most ledgers are now digital, their underlying organization 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. By contrast, blockchain-based distributed ledgers can be shared and updated in near real-time across a group of participants.

Blockchains hold the promise to bring the ledger to the internet age. In an October, 2015 article, The Economist noted that blockchain “offers a way for people who do not know or trust each other to create a record of who owns what that will compel the assent of everyone concerned. It is a way of making and preserving truths.”

“Today thoughtful people everywhere are trying to understand the implications of a protocol that enables mere mortals to manufacture trust through clever code,” wrote Don and Alex Tapscott. “This has never happened before – trusted transactions directly between two or more parties, authenticated by mass collaboration and powered by collective self-interests, rather than by large corporations motivated by profit.” The blockchain is essentially “the World Wide Ledger of value… – a distributed ledger representing a network consensus of every transaction that has ever occurred.”

Irving Wladawsky-Berger worked at IBM for 37 years and has been a strategic advisor to Citigroup and to HBO. He is affiliated with MIT, NYU and Imperial College, and is a regular contributor to CIO Journal.

Advertisements