By Lance Koonce
Every so often—and now more frequently than ever before—we are treated to a deluge of media stories telling us why some new technology will change our lives. Recently, the thundering drumbeat of technology topics has included artificial intelligence, robotics and virtual reality, to name just a few. Certainly each of these waves of development is worthy of close attention as they promise to affect our lives significantly over the coming decades.
Another development that has received a good deal of attention over the past year is blockchain technology, the convection engine that powers bitcoin and that is now finding its way into other systems. Blockchains are rightfully touted as having the potential to disintermediate many existing market inefficiencies, whether in the financial industry (where it has already had a substantial impact) or music royalty networks or energy grids.
However, perhaps the most interesting thing about the blockchain tempest is that it does not just involve blockchains. In remarkable ways, the discussion around blockchains appears to be leading to a new mode of thinking about the architecture of our digital world generally. This involves rethinking much of the existing infrastructure. As a result, energizing discussions about first principles are now arising in many different areas.
So what does this mean as a practical matter? It means that a wide range of industries stands to be disrupted and reinvented and that the winds of change are going to blow in from every quadrant. But let’s start with some brief background.
Distributed, Decentralized and Disrupted
Distributed computing has been around since at least the 1970s. At their core, distributed systems are networks of computers where each node can act on its own and has its own storage but where the nodes also can work together to handle tasks by passing messages back and forth. For many years, computer networks were typically controlled by central servers. Decentralized computing broke through in the late 1990s with the introduction of peer-to-peer networks such as Napster. Under these systems, centralized infrastructures are unnecessary as software is distributed to all of the nodes, and then the nodes communicate directly with each other.
The primary breakthrough introduced by Bitcoin in 2009 was that it made use of a decentralized, peer-to-peer structure to validate and record transactions between computers. In other words, it created a distributed database that does not require any centralized arbiters of trust, plus a transaction system for moving data (value). Thus value, in the form of bitcoin, can move swiftly between parties without middlemen. This creates enormous efficiencies.
Transactions facilitated by blockchain technology are automatically verified by a multitude of computers, and the transactions are recorded in a digital ledger that exists on all of those computers simultaneously. The ledger grows with each additional transaction and, thus, can be used to confirm not just the most recent transaction but all of those on the chain. Thus blockchains are both transparent and secure.
As the underlying blockchain technology has been adopted for systems not related to bitcoin, the advantages of the technology have become even more clear. The potential to eliminate intermediaries and thereby create market efficiencies has generated a massive storm surge of investment in companies building blockchain solutions. Further, the blocks of data that are verified and recorded in the distributed ledger of a blockchain can contain virtually any type of information, permitting a variety of digital assets to be securely exchanged and making the records of those exchanges virtually immutable.
For this reason, blockchain solutions are being proposed in numerous industries, from media to advertising to e-commerce.
Tearing Down and Building Up
Blockchains appear to be just the starting point, however. A company known as Ethereum has created a robust programming platform built upon a blockchain structure, which allows the creation of much more complex solutions. In particular, the Ethereum blockchain is designed to facilitate “smart contracts,” which are agreements that parties can set up to execute automatically on the occurrence of a predetermined event or the input of specific data. For example, an export company in one country could agree with an import company in another country to automatically send instructions to a shipper to send products to the importer when a certain amount of money is received. All of this would execute automatically without the need for third parties.
Separately, companies building blockchain solutions involving digital content such as music and images have recognized that it may be important to have a distributed database for storage of the content itself (blockchains are not efficient mechanisms for actually transmitting large files; they are, instead, good at storing and moving cryptographic identifiers for underlying files). Thus, there has been a convergence between some blockchain solutions and other decentralized, distributed solutions such as the proposed Interplanetary File System, which aims to be a global, peer-to-peer database of content files.
In a recent white paper, IBM argued that decentralization is a necessary ingredient for a robust Internet of Things (IoT)–the vast interactive network of sensors, appliances and other distributed devices. While IBM noted that blockchains are a key component, they are only a part of the solution. IBM’s report states that a decentralized IoT will require peer-to-peer messaging, distributed file sharing and autonomous device coordination.
Other examples of a new distributed and decentralized, global infrastructure include decentralized autonomous organizations (or corporations), which would be entities run by a set of business rules, enshrined in software code and recorded permanently on a blockchain. In fact, one experimental “DAO” was recently created and attracted substantial investment (nearly $200 million) and then was quickly hacked, resulting in losses of around a quarter of that value, demonstrating both the attractiveness of such structures and also the Wild West nature of the current ecosystem.
When the internet came into existence and then became ubiquitous, it restructured the way we communicate with each other at a fundamental level. Blockchains and related technologies may have the same type of impact on the way value is transferred and stored. The internet revolution allowed forward-thinking individuals and companies to reimagine entire industries. Similarly, this new wave of technologies is facilitating profound discussions about long-established principles that underpin many business structures.
One example that we have been following is the music business. Blockchains and related technologies may offer a means of creating a new, global database for music. However, there is a healthy debate occurring among many of those involved in this effort about exactly what the right approach should be. Should we create a new standard for music metadata that everyone must agree upon? Should we create interoperable systems that permit the ingestion of multiple sets of competing metadata? Can we fix the problem of bad metadata for existing music at all, or should we concentrate only on the future? Will tackling the existing problems make things better or worse for musicians and consumers? How will the record labels and music publishers and technology platforms fit within the new structures?
Supply chains may gain significant efficiencies from blockchain-based registries of transactions, and at the same time blockchain technology promises to provide much greater transparency as to each step along the way. Each item passing through the supply chain could conceivably have an indelible record of its precise history—want to know exactly where those apples you’re eating came from (what type of farm and where), and where they stopped along the way? Some companies will embrace this new transparency, but others may avoid it, and one might expect to see some consumers begin to shift to suppliers who provide more complete information about the history of their products, which could also create radical shifts in the marketplace.
Another example is the problem of unpublished research papers. According to some, unpublished papers and raw research are rich sources of information that remain largely inaccessible. For instance, while publications tend to look for papers describing breakthroughs, often it is important for other researchers to know that a particular approach failed. A decentralized, distributed global database of scientific research available beyond the walls of particular institutions might help fundamentally change the way science is done.
As mentioned, blockchain and related tech (sometimes referred to as the Internet of Value) may become inextricably linked with the IoT. One branch of the latter is the Industrial IoT, which involves manufacturing components embedded with sensors that “talk” to one another and other systems. Many people also are discussing the potential for smart factories where much of the manufacturing process is autonomous. Decentralized networks may play a huge role in facilitating the adoption of these technologies which, in turn, will disrupt the entire manufacturing process from bottom to top.
These are just a few possibilities. Virtually any system or network or business structure that relies on centralized authority, or on “trusted intermediaries” to enable transactions, can potentially be the target of the disruptive forces to come (or not: centralized networks continue to be perfect solutions for many situations). Issues such as how existing laws and regulations will apply to these new structures will be of critical importance.
To be fair, focusing on decentralization and distributed, peer-to-peer networks like blockchains may be the equivalent of gazing out of just one narrow window upon what is almost certainly a much larger sea change. There are a very wide variety of emerging technologies that could be converging to radically alter our world.
But what is important to recognize is that these winds of change, whatever their source, provide enormous opportunities to reimagine from the ground up what infrastructure might provide the soundest framework for future growth and give nimble companies exciting new business opportunities.
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Lance Koonce is a partner in the DWT media group, based in our NY office.