How can Blockchain Help you?

How can Blockchain Help you?

Understanding the Obstacles to Adoption and Unlocking Abundance

 

Two weeks ago, Brendan (co founder and CEO of Constellation Labs) and I gave a talk to a group of engineers from Tesla, Google, Facebook, Oracle, and Apple at a blockchain meetup in Sunnyvale (watch it here). After hearing the first presenter articulate what bitcoin and blockchain is – we realized that people were looking for a bit more in the weeds understanding – the why.  

After the speaker sat down, Brendan and I changed our game plan on how we were going to present. We turned to the audience and asked “How can we help you?”. There are a myriad of obstacles to understanding the cryptocurrency and blockchain industry – most of it is how it affects our day-to-day lives. Furthermore, the obstacles that we heard most voiced by the attendees at the meetup was not “what is bitcoin” but “how do I get involved” and “how does it impact me?”

Over the past year, I have become accustomed to hearing companies trying to boil the ocean of opportunity and solve the world’s problems through blockchain based frameworks and the power of the cryptocurrency community. I am inherently skeptical when I hear that nearly every business and everything can be solved by this technology. Not to mention that most of these ideas are being built on Ethereum’s platform (which has limited scalability and throughput for enterprise and consumer grade applications).  As a result, and through a lot of my research in the space, I have distilled down a few major hurdles that exist in the face of adoption. Moreover, if entrepreneurs, investors, and engineers can pave a path through overcoming one of these primary obstacles, then we will see wider support of the technology.

After reading a recent study by JP Morgan  I have listed some of their obstacles while I simultaneously try to articulate the opportunities that exists through these obstacles. Hopefully, as a community that attempts to find applications and adoption of the technology, we will pick and choose which obstacle to overcome and come together as value-add strategic partners:

  • Technology: How do we encourage engineers to build new platforms leveraging blockchain and adopt different infrastructure governance?
  • Cost Benefit Analysis: What are the costs and benefits associated with using the technology (blockchain in particular)?
  • Legal: How do we overcome a myriad of legal structures to create seamless transactions and communications?
  • Regulation: Every government is attempting to understand the implications of crypto currency – how do we embrace regulation as it is being defined and how do we navigate governments that are malleable to these crypto companies?  
  • Security: Blockchain technologies bring unprecedented security to technology through decentralized governance – how and will we truly embraces trustless technology for mainstream entities and the consumer/retail trust?

By identifying each obstacle more succinctly, I believe that we will usher in a new era of strategic partners and crypto companies can create viable roadmaps to adopting a completely new framework for business and applications in a global setting.

Hurdle #1. Technical

This is probably the easiest obstacle to be overcome. There are several technical hurdles that exist in the space:

  • Legacy systems being replaced by blockchain
  • New programing languages that must be learned in order to program in particular protocols
  • Developer evangelism

The leading blockchain company will certainly be responsible for the successful application(s) that are built on the underlying infrastructure – enterprise adoption won’t be the deciding factor. Many enterprise organizations see that replacing existing infrastructure is too costly in relation to the value-add that blockchain provides. For example, the Bank of Canada has done numerous blockchain pilot campaigns, namely with Jasper, and have seen very little cost savings- see JP Morgan 2018 CryptoCurrency summary. For some aspects of the business, there isn’t significant ROI to justify wide adoption.

The digitalization transition for major industries has repeated itself time and time again across major industries: commerce to e-commerce, digitization and access of music, peer-to-peer lending. For all those sitting on the sidelines that are waiting for enterprise to adopt blockchain as the sign to jump in, let’s remind ourselves that Sony Entertainment didn’t create the iPod (they tried with some weird mini disk thing) and they didn’t create Spotify or Pandora. Instead, they focused on shutting down Napster while innovation spawned in a million ways.

The other major technological hurdle, and something that Constellation is focused on, is getting the developer community to adopt blockchain. The major barrier here is that various protocols require engineers to learn a new language, like Solidity for Ethereum or Ivy for Bitcoin. Many developers are not going to want to take the time to learn a new language when they have spent years in other coding languages – especially within enterprise organizations.

It will most likely be a startup company, that ushers in mass adoption of the technology. First, we need to make it easy for developers to utilize blockchain and plug it into existing applications. For example, we at Constellation Labs, are using one of the most common coding frameworks – Java Virtual Machine (JVM) – to work with engineers existing skill sets. Secondly, I envision that a couple of the major blockchain protocols will build an enterprise global banking solution, an evolution of say Venmo, vs. having one of the major financials institutions create a “decentralized” banking solution – it just isn’t in their DNA: (Salim Ismail writes about the “immune system” of major corporations in his best selling book Exponential Organizations). Finally, economically emerging countries like Philippines, where nearly 86% are unbanked, will be the first of countries to adopt these radically new technologies that bring more people online and into the digital revolution.

Hurdle #2. The Cost-Benefit Analysis

This seems relatively simple – do the benefits of adopting X outweigh the costs associated? Everyone interested in blockchain is hyper focused on finding real world use cases for adoption of blockchain. As a result, it seems that if you apply a thin layer of blockchain to your business – you have created a use case and an investment worthy venture. Putting a band-aid over something doesn’t cure it – same goes here. Since cryptocurrency has proven itself to be a large channel to raise capital, it doesn’t mean that you can apply blockchain to your business and all of a sudden you have opened a new channel to investors and businesses are going to sign up for your new technology. Most businesses are still digitizing many aspects of their operations and services – let alone understanding blockchain.

I recently heard a company pitch about fixing the supply chain of oil and how we put EVERY aspect of the supply chain on the blockchain and ultimately save millions of dollars across the industry. You don’t need to be an expert investor to ponder whether any oil executive cares about blockchain other than using the verbiage in a press release to get a bump on the old stock exchange. What is the cost-benefit of being an early adopter in a new technology for an oil executive that has spent a lifetime weaving a spider web of policy makers and has built in incentives for latency and imperfections in the supply chain?

It could be that the redundancies and breaking points in an industry prevent competition from entering the market. Additionally, the use of distributed ledger is the antithesis of existing centralized and hierarchical business models and frameworks. Finally, and something that we will explore later on, is the cost to switch over from legacy platforms – Does it outweigh the savings and/or if it fails – will people lose their jobs?

We are all hyper focused on finding real world use cases for adoption of blockchain technology. While it is great that the cryptocurrency space has democratized investing to a whole new level, it is critical to think about some of the fundamental aspects, like cost-benefit analysis, to switching over to this new technology and whether you are really solving a problem or discovering an opportunity that will have easy buy in and adoption.

Hurdle #3. Legal

One of the pressing claims is that Ethereum’s Smart Contract (an application/dAPP that sits on the Ethereum protocol) has the ability to “revolutionize” the legal industry and do away with lawyers. Or so this neo-capitalist perspective goes.This revolution is far off as the legal profession will need to be comfortable with commoditizing some of their services and will need to find legal language that transcends borders.

A Smart Contract is a coded contract that sits on the public blockchain and when the terms of the agreement are met, assets and collateral attached to the agreement are instantly distributed to the parties outlined in the Smart Contract (no delay on deliverables and transfers of rights). Just last week a Tennessee court ruled that Smart Contracts would be upheld in courts while Estonia and the top legal firms became the first country to adopt Smart Contracts through Agrello. These are small legal bodes – sure, but it is the genesis of precedent.  We are far from global acceptance of Smart Contracts as every country has their own legal structure and regulatory bodies. We are a long way out from disrupting the legal profession – not to mention the technological chasm that exists.

The individuals that will win in this are in fact the legal entities that attempt to commoditize certain areas of their business, like standardizing lease agreements, as an attempt to lean up their legal practice and secure more margin by having less bodies in the office purely serving as intermediaries. The US and many countries have painfully slow legal procedures and structures that are so archaic that that even our 6th amendment “right to a speedy trial” takes on a new meaning of speedy.  But it isn’t broken and is built on hundreds of years of case law (precedent). Smart contracts will replace the burden of several intermediaries and streamline the asset custodian role while ultimately paving a path where lawyers are consultants. On a global level, and for true adoption of the Smart Contract-esque applications, the legal profession will need to pilot and piecemeal cross-border regulations.

Hurdle #4. Regulation

Navigating regulatory environments  are on the forefront of most people’s mind in the cryptocurrency space. Over the last several years, regulatory agencies around the globe are trying to define cryptocurrency and the impact it has on multiple stakeholders: government, citizens, businesses, the unbanked, etc. Specifically for the U.S., we are going through another era where we try and understand technology through traditional lenses. Accountants and lawyers alike are constantly trying to stay ahead of the curve and interpret what various governments are going to do about crypto. And once again, startups are pushing the envelope.  

AirBnb and Uber are probably the go to examples for early stage businesses that battle with regulation. Whether it is 1099’ing drivers, reimagining the home rental taxation policy, or cities and small governing bodies attempting to push out the emergence of tech companies, modern technology companies are facing a backlash from non-economic participatory individuals and governments attempting to protect the minority. The interesting learning here is that these these tech companies are carefully monitoring regulations while trying to help local governments understand their impact. This is an ongoing battle for both Uber and Airbnb as locales are attempting to understand the economic outcomes.  What is noticeable is the net economic impact of Uber and Airbnb is their effect on demonetizing their respective industries.

The economic crunch of demonetization implies that traditional expenses and costs, like a mortgage or a car payment, can be offset by monetizing it in a more agile way so much that our day-to-day expenses are no longer day-to-day expenses (they are subsidized by markets). Furthermore, demonetization of traditional economic levers unlocks the abundance of supply – the famous adage here is Uber is the largest taxi company and doesn’t own one car; Airbnb is the largest hospitality chain and doesn’t own any real estate.

What is important to note is that these regulatory obstacles where not attempted to be resolved by the entities themselves, but instead allowed special interest groups to help understand the existing legal and accounting frameworks while they continued to build their business and further unlock more abundance.

While cryptocurrency will follow the same path of defining its structure and implications from a regulatory standpoint, it will not directly come from the entities themselves, but more so from the special interest groups that want to be trailblazers in the regulatory game.The key takeaway is that as regulators across the world attempt to understand the impact of cryptocurrency – the winners will be those that attempt to spend time educating on the economic impact of the technology and the shifting problem set. Furthermore, for every government that is attempting to over regulate, there is another government welcoming cryptocurrency companies with open arms. The ones that close the doors will miss out on this 4th industrial revolution entirely.

Hurdle #5. Security

While blockchain’s main features are the ability to be hyper secure because of a decentralized ledger shows any transaction in a public ledger, it is still not 100% secure.  For consumer grade applications, Fed-level monetary organizations, and Fortune 500 companies to widely accept blockchain technologies, it will require additional redundancies and reconciliation practices, beyond blockchain’s existing infrastructure.

While decentralization means that there is not a single point of vulnerability in the infrastructure, it also means that there is no central authority to reconcile data breaches and hacks. There is no point contact to take accountability and thus the community as a whole takes a hit.

To build a trustless network, and to enforce a decentralized infrastructure, blockchain companies create a consensus which relies on global network of computers/individuals to mine and validate transactions. For many blockchain companies, like Bitcoin and Ethereum, entire network consensus is needed to confirm and validate a transaction thus being prone to latency issues with large networks. These latency issues are directly tied to the scalability of the technology and thus we need to further explore the technology scaled to identify security gaps that may exist.

The future success of blockchain security will be a mix of key characteristics from both centralized and decentralized systems. Furthermore, consensus models that reimagine Bitcoin and Ethereum’s proof of work concept will have to be rethought so as to create additional redundancies that prevent inadvertent centralized control. For example, Constellation’s proof of meme is a consensus model that rewards good behavior and randomizes the delegate selection process while implementing double signing to create byzantine fault tolerance. This ensures a meritocratic governance of our trustless economy  – click here to see a brief presentation on our architecture that our CTO Wyatt did at De/Centralize 2018 in Singapore.

Summary

My general point is that every profession and industry is going to run a cost-benefit analysis of shifting over various services and aspects of their industry. At Constellation, we are very mindful of the hurdles that exist for the blockchain and cryptocurrency space to come into maturity. As we monitor these obstacles, we selectively focus on those that we can overcome while simultaneously fostering a dialogue with individuals that are better suited to overcome the obstacles respective to their skill set.

While enterprise and government entities are exploring blockchain, success of the industry will rely on the crypto/blockchain companies themselves developing applications and use cases that dramatical shift the problem set – much like we saw with companies like AirBnb and Uber in their respective industries. Additionally, regulation is most certainly coming into the space and we will need to surround ourselves with industry specialists to help us navigate these waters.

Amazon was not started by Walmart; Apple was not started by IBM; Spotify and Pandora were not started by Sony Entertainment and Universal Records; and Yahoo was not started by CNN. It will be a huge undertaking for any major established company to shift aspects of their business over and onto blockchain technology. The companies that successfully do shift large pieces of their businesses operations on-chain will be small early stage companies that use blockchain to remove redundancies and intermediaries. These companies will exponentially grow with increased margins and more agile organizations to their traditional and established counterparts that are faced with an unbalanced cost-benefit analysis.

Blockchain is ushering a cultural revolution as well as a technical revolution: engineers and entrepreneurs are being attracted to the space as it invites new incentivization structures to an open source community and new channels of capital for fundraising. While I do see that blockchain can be sprinkled like fairy dust on existing inefficiencies and allure investors and entrepreneurs, it isn’t always necessarily needed. I believe that we will see multiple industry leaders attempt to migrate blockchain solutions to minimize inefficiencies and improve margins – but let’s be cautious of this all encompassing panacea.  The real winners in the space will be those that attempt to that zero in on one or a couple of the obstacles that exist within the space and be the custodians for those obstacles.

Understanding the obstacles of adoption unlocks the abundance within.

For more info on Constellation visit: www.constellationlabs.io or join us on Telegram.

This piece was originally published on April 9, 2018 on Constellation Labs by Ben Jorgensen.

 

 


Also published on Medium.

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