25 October 2017

Why Blockchains

Private and public organizations have shown how the blockchain can transform banking, energy, supply chain, healthcare and other industries, leading to billions of dollars in cost savings and benefits. With blockchain technology, costly intermediaries and fees can be removed from payments and supply chains. The time it takes to make an asset transfer or other transaction can be reduced from months to minutes or less. And the blockchain’s real-time transparency can dramatically reduce the time needed to update people and the costs of maintaining redundant data. If a change needs to be made after a transaction is executed, the transaction and corrective change will be captured on the blockchain. In this way, data integrity is ensured. As a result, organizations around the world have projects to harness blockchain technology as part of their digital transformation strategy.

However, blockchain infrastructure and applications can be time consuming to deploy, expensive to manage, difficult to scale, and challenging to integrate with other blockchains. Blockchain resources are difficult to find. Blockchain protocols change and frequently. As businesses evolve, they are adding new types of blockchains to better address use cases. Now, when I speak to large organizations, they have projects on 2 or more types of distributed ledger technology.


Evolution of Blockchains

In 2017, the cryptocurrency market grew to $100B in market cap, larger than the market cap of Starbuck’s, a brand name company that started over 45 years ago. While Bitcoin has been highlighted by the Wall Street Journal as the investment to make, over half of the cryptocurrency market cap comes from cryptocurrencies other than Bitcoin. Initial coin offerings (ICOs) have grown considerably, further increasing the number of coins and blockchains. The evolution of these cryptocurrencies provide insight into how people interact with multiple blockchains.

For example, people are beginning to use multiple cryptocurrencies as they use different types of payment today. People are using Bitcoin as a store of value due to the higher transaction fees, and they’re using other blockchains such as Litecoin and Dash to make smaller payments as they have lower fees.


Criteria for Blockchains

The purpose of having blockchain criteria is to help identify the blockchain(s) best fit for a group’s goals. A blockchain's success depends on tapping into motivations of those in the ecosystems. These criteria encompass social and technical considerations. Not every use case needs the highest levels of every criteria. Rather, given the use case, there are likely a few criteria that are more important than others. And optimizing for a use case will help identify the blockchain best suited for the use case, as opposed to trying to make every use case address a single blockchain.

Criteria for evaluating blockchains includes:

  • Trust model
  • Openness
  • Scalability
  • Privacy
  • Governance
  • Fungibility

Below, each of the criteria will have a definition, the tradeoffs and use case examples of when one blockchain or another better addresses that criteria.  


1. Trust Model

Definition: What is most innovative about the blockchain and has many concerned about their futures is consensus. When there is consensus on the blockchain, a transaction is confirmed, without having to involve intermediaries. Consensus is achieved when miners effectively solve a complex math problem. Miners are rewarded for solving this problem as quickly as possible. The trust model is about how consensus is achieved and the level of trust a participant has with other participants.

Tradeoffs: In situations where no one participant should have more power than another or where no participant wants another participant to have more power, the model where no one trusts one another is preferred. Collusion is more likely in situations where participants know each other well, such as permissioned and consortium chains. Another issue with trust and permissioned chains is security. For example, if one participant is taken over and begins acting maliciously. As the other participants inherently trust each other, more damage can be done by this malicious participant. Assuming trust on a permissioned blockchain also begs the question, what is the difference between a permissioned blockchain and a database? If everyone knows each other or there is one entity in control, why have a blockchain? 

Use case examples: Depending on the things people need to agree on and who they trust, there will be a different entity or distributed ledger that makes sense for them to use.

Who do I trust to maintain a truthful record?
What are the things I need people to agree on?
Central Authority
Group of Known actors
Ownership of on-platform assets
Central bank, commercial bank
Bitcoin, Litecoin, Dash
Ownership of off-platform assets
Custodian bank
Colored coins
Obligations & rights arising from an agreement

2. Openness

Definition: Ability for anyone to access the network or participate in securing the network

In 2017, the cryptocurrency market grew to $100B in market cap, larger than the market cap of Starbucks, a brand name company that started over 45 years ago.
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Tradeoffs: Advantages of using the blockchain over existing technologies include settling transactions in a distributed way and establish an immutable record of transactions from people and companies that today would not provide that data. If we have a group that is restricted to the small group as it is today (e.g. a small group of suppliers and the manufacturer they supply to), there is less value in replacing what exists today with the blockchain. If engaging new markets or tracking transactions from suppliers that would not otherwise share that data is a goal, a public blockchain makes more sense to implement.

Use case examples: Engaging the unbanked or any new market that is not currently in the company’s closed network requires greater openness. An example of a new market is sharing renewable energy, requiring distributed transfer of energy for payment. In these markets, the blockchain participants most likely would not know each other. The Unbanked represents the largest segment of the population that can use blockchains to transact and make payments.


3. Scalability

Definition: Given the computation power required to verify and confirm each block of transactions, scalability is defined as the number of transactions that can be processed per second, given the available network to process those transactions. Scalability also takes into account degradation over time.

Tradeoffs: Many blockchains require significant computational power (e.g. electricity) to verify and confirm each block of transactions. As a result, the cost of scalability becomes a very important consideration and something to trade-off for other criteria. In addition to scaling over time, degradation over time needs to be considered. For example, even though Ethereum is relatively new, it takes a long time to download and verify. While there has been a lot of interest in using Ethereum for supply chain use cases because of smart contracts, it’s important to weigh computing resources versus contract complexity.

Use case examples: If a use case requires visibility into every step executed in a smart contract, e.g. audit purposes, then using Ethereum might make sense as you can have that visibility. Another use case where you have scalability tradeoffs is payments. Here, transactions fees and time are critical. Today a bitcoin transaction can take minutes to complete and cost over $1. Contrast that with Dash, a fork of bitcoin, that costs cents or less and takes seconds to complete a transaction. While Bitcoin is a great store of value, given the economics, it will likely be used for a high value transactions. And Dash makes more sense for lower value transactions that need to be faster. For contracts with complex terms and logic, it will make more sense to use Ethereum. For simple transactions, smart contracts may be overkill.


4. Privacy

Definition: Ability to conceal and then choose which parts of a domain (e.g. transaction) can be accessed, when and by whom

Tradeoffs: In financial and energy transactions, entities do not want others to know about the size of their financial transactions. The tradeoff for greater privacy is scalability. While ZCash offers a lot of transaction privacy, it has poorer performance than other blockchains.

Use case examples: There are times when you want data to be public, for example proving compliance with government regulation, such as paying duties for shipment of goods across international borders. On the other hand, in other financial and energy transactions, entities don't want others to know about the size of their financial and energy transactions for competitive, legal and security reasons.


5. Governance

Definition: How a blockchain community governs development of a protocol and network, how members of the community developing and using the protocol they work together, how these members make decisions on technical issues and social incentives

One of the benefits of the blockchain is there is no dispute whether an entity received payment. Payment has either been made or not. A transaction is either confirmed by the network, or it is not. If the transaction is confirmed, it appears on the blockchain, clear for everyone to see. Once an entity receives funds, those funds can be stolen from a wallet holding the funds-- but that is after a transaction has been made. 

Legally, in the U.S., Vermont and Arizona have enacted laws to make blockchain evidence self-authenticating and clarify that signatures obtained through blockchain technology are valid electronic signatures. Forty-seven U.S. states have enacted some form of Uniform Electronic Transaction Act (“UETA”). In addition to payments on blockchains, smart contracts on blockchains can revolutionize how we do business. Smart contracts can encode business logic and automate the work that intermediaries are manually doing today. Between federal Electronic Signatures in Global and National Commerce Act (“ESIGN”) and state laws modeled on the Uniform Electronic Transaction Act (“UETA”), there is sufficient legal foundation for blockchain-based smart contracts to be enforced under current law.

Living in a multiple blockchain world means having choice. Instead of trying to make a blockchain fit all our needs, we can choose the blockchain best fit for each need we have.
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Governance of a protocol has to do with how a blockchain community governs development of a protocol and network, how members of the community developing and using the protocol work together, and how these members make decisions on technical issues and social incentives. 

Tradeoffs and examples: Hyperledger has been marketed as an enterprise blockchain. It has a model of design by committee, which can be slower than some prefer. After years of development, Hyperledger Fabric 1.0 just recently came out. Users say it is so different from the previous version that their development on the previous version is totally unusable. In addition, IBM is also clearly the largest and most dominant member of the community. Some organizations may not want that dominance, while others do. Contrast that with other governance models.

  • Satoshi Nakamoto, the mysterious author of Bitcoin’s white paper, has never been public. So Bitcoin’s early developers have taken the role of shepherding the protocol forward. For some, that type of governance has been at times dramatic. But Bitcoin has never failed as a payment network and has continued to grow.
  • Vitalik Buterin, the founder of Ethereum, on the other hand, has been prominent and vocal in expressing how the Ethereum protocol should develop and work. He has also been active in starting communities in Toronto and cities around the world to promote Ethereum.
  • In the last year, the Enterprise Ethereum Alliance has taken a prominent role in trying to influence the development of Ethereum for corporations with its Technical Steering Committee and Working Groups. The Alliance includes large organizations across industries, including Financial Services, Oil and Gas, Telecommunications, and Technology.
  • Tezos, the startup that recently gained over $200M in funding from an Initial Coin Offering, has made governance a differentiating feature of their blockchain. You can update governance on their blockchain to ensure incentives for using the blockchain are properly maintained.
  • Dash sets aside 10% of transaction fees to a treasury that funds marketing, business development, development. Members vote on proposals using the Dash network that are and completely transparent. That governance model has enabled Dash to invest in continued scalability and low transactions fees for the network. It also means people agree on the future of the network instead of forking.

Use case examples: Banks had joined R3 initially only to later as goals diverged. Large companies and banks have said as the R3 Consortium has grown, the time it takes to get things done has grown longer. Some enterprises have refrained from using Hyperledger Fabric because of IBM’s dominant role while others have used Fabric for that very reason. Dash, through its governance model and work with BlockCypher, has been able to seed projects in newer market areas such as healthcare.


6. Fungibility

Definition: Ability for equal units to be interchangeable

Tradeoffs: Fungibility is important for blockchains with cryptocurrencies as users want their you want your assets money to be completely interchangeable. With the rise of cryptocurrencies and Initial Coin Offerings, the question for investors is liquidity. But the same question holds true for government backed currencies. The difference with cryptocurrencies is the price is based on a number of things, including technical things like mining difficulty that can be calculated.

Use case examples: Each bitcoin carries a legacy. It is more difficult to spend bitcoins that have been used in a dark market as opposed to coins just created when a block is found. This is not true for Zcash and Monero, where it is much more difficult to see the history of a coin. Due to the pseudo anonymity of Bitcoin, terrorists have refrained from using bitcoin.


Gaps with Existing Blockchains

As Gartner discusses in their report on Blockchain Platforms, there are limitations in current blockchains that are being addressed by blockchain platform vendors. One of the biggest challenges is interoperability across blockchains as we’ve discussed in the Government, Energy and Healthcare Payments use cases. Interoperability is defined as the ability for equal units to be interchangeable. Interoperability can mean a number of things. It could mean:

  • An application can execute transactions on multiple blockchains. For example, an ecommerce application can choose to execute payment on one blockchain over another based on which blockchain has lower transactions at that point in time.
  • A person or entity can be identified on multiple blockchains. In the healthcare example, a patient may be insured by multiple payers and therefore identified on multiple blockchains.
  • A transaction that was on one blockchain moves to another blockchain. As a result of that move, the transaction is no longer on the other blockchain. In the energy example, a family may move. As a result they switch from using the wind energy blockchain that was prevalent in their old home to the solar energy blockchain that is prevalent in their new home.

Vendors have unique approaches to address interoperability. The successful ones will work in partnership with regulators and consortiums to establish standards for interoperability.


Next Steps

Living in a multiple blockchain world means having choice. Instead of trying to make a blockchain fit all our needs, we can choose the blockchain best fit for each need we have. We can also consider and determine the most important criteria for a given use case. For example, in some cases, privacy is more important than transaction speed. In others, transaction speed is more important than privacy as the transactions are smaller and commodity or trivial purchases.

As countries around the world adopt blockchains at varying speeds, it's worth noting the differences in international acceptance and the reasons for those differences. The feeling that something is being taken away can draw a strong, emotional response in people. Governments and financial institutions are not immune. Some financial institutions and government officials see digital currency as a threat to their world order. Others see it as an opportunity. International acceptance of digital currency may reflect how much a country has to lose. In Europe, Gibraltar has embraced the use of blockchain and announced plans to become the first regulated exchange to implement a blockchain for its trading and settlement systems. The Central Bank of Russia welcomes cryptocurrencies and publicly supports the use of the digital currency. In Asia, the Japanese are breaking new ground using and regulating bitcoin. China, on the other hand has banned bitcoin and cracked down on ICOs. For China, I don't see the ban or crackdown as going against cryptocurrencies. It maybe more of a control issue. China’s Central Bank has investigated the use of digital currencies and will probably come out with their own digital coin that they control and want everyone to use. Bitcoin and ICOs present unwanted competition to that digital coin. Here in the U.S., you see the control issue manifest itself as well. While Jamie Dimon from J.P. Morgan attacks Bitcoin, his firm is actively working on new blockchain implementation that banks can use-- and control.

It’s also important to keep an eye on newer blockchains. Initial coin offerings continue to flourish, and older protocols evolve.

  • Tezos has differentiated its blockchain with governance and smart contract language. With Tezos, what is unclear is if it’s smart contract capabilities will remain differentiated. As Ethereum continues to evolve and make its smart contract language more developer friendly, the gap between Tezos and Ethereum may shrink.
  • While Ethereum quorum attempts to address privacy and high transaction speed, it is an implementation of Ethereum. On the other hand, MimbleWimble is an example of a blockchain coming in the next year that has built-in high performance, scalability and privacy.


Transactions are at the core of so many processes. As a result, outside of the ICO hype, more industries today are investing in blockchain applications. Companies are investing in distributed applications to transform their businesses. Distributed transactions can empower as well as dramatically reduce costs and increase efficiencies. As blockchains proliferate, it is becoming clearer how organizations will use multiple blockchains. To live in this multiple blockchain world, organizations will need to evaluate which blockchains best fit their needs and address blockchain interoperability. We are at the beginning of a revolution that will last for years, and we are entering new markets we have been not able to, before.

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