Blockchain … some high level thoughts

Finally got some time to catch up on blockchain. Some thoughts.

The academic paper …

The initial academic paper published is probably the most interesting part of it. What are we looking at on the deeper abstract level? Peer to peer technology with a fairly robust verification process of truth/non-fraud if the population of “miners” is large – using some limit theory here – under absence of a central authority. I don’t get the game theory argument everyone throws in, because it’s a statistical and not so much a game theory argument. The game theory argument would be one of defection, but the whole argument is about economics behind the cost of cheating the system under a rising number of participants. Which is not a game theoretical problem after all, at least not in the first sense. But anyway, peer to peer with an invisible hand rather than a benevolent dictator is a good feature.

The technology …

When you look at the intrinsics how the system is set-up, it is simply beautiful from a technical point of view. The entire design is funny and entertaining and simple appears to work. It fosters anonymity, provides reasonable identity security and has a lot of incentive features that make the overall system attractive. This video shows the basics of why it is elegant in a way a mathematician would use the word. (Looking for the link. Lost it)

The applications … blockchain money

Bitcoin is a nice story for everyone to write about and it has this mystique around it, coming from deep web applications and times where people would try to find “zero cost” access to power supply (flatrate rents) to hook up entire rooms with cheap hardware optimized for bitcoins and becoming millionaires if they scored to make a few thousand bitcoins. The attention is there now, but is hard to trust that this is going anywhere. Enterprises will build joint ventures and consortiums to use the technology for cheaper financial transactions and settlement. It just cuts out some middle men and is a good use case when there is no regulatory authority required. But chances are there will be a similar solution backed by central banks to replace it and nobody knows the future of the bitcoin world. For the purely financial exchange transaction, bridging the chasm under the current set-up will lead to intervention likely and more likely is an earlier intervention to bridge the chasm.

The applications … smart contracts

From the smart contracts and ethereum perspective, there is certainly a very interesting ancle that could provide some interesting investment cases. But the same is true, here. A sustainable market will likely rely on authority. Not a centralized authority, because the entire technology is focused on basically getting rid of a single authority and all the risk of abuse of power that this brings. But at the same time, an ungoverned system with complete open access to the internet just appears as a long-term un-sustainable solution from a security perspective. With adoption rising, even small tails in the probability distribution of an attack and fraud occuring can be destablizing for the system and be too risky for the overall use case. An additional case being that a lack of at least of a group of legally existing entities being liable, there is no way to ensure liability from government actors and that is simply a threat to sovereignity that won’t sustain in the long term if mass adoption would take place. It appears much more likely – although still unlikely – that a single entity controlling sth. such as a next generation etherium will build ecosystems of consortiums that regulate standardized protocols for smart contract management. This also makes more sense from a “whole product” perspective, where you would argue that you fail to bridge the chasm to the mass adoption if you are leaving the hard part of figuring out freely evolving smart contract mechanisms to a semi-educated crowd. Even worse so, if no forms of litigation and legal framework are around to protect interests. The idea is simply too radical that everyone would fortify his current rights as a consumer in the global legal frameworks to save money on transaction fees for a large portion of risk with the counterparty.

Overall, the entire smart contract framework breaks down in its use case without a service authority for the simple “whole product” argument. The time to design and validate smart contract frameworks will likely destroy the economic value add from having standardized smart contracts for particular transaction types.

The applications … from client-server to client-to-peer-to-peer

I didn’t find too much on this, yet. But the idea of P2P-distributed environments that replace the server environment to serve clients makes a bit more sense to generate use cases without any authority. Remember that Web 1.0 broadly was classified as isolated content provided by server hosts to clients that knew the URL, Web 2.0 was classified as the technology to mix content and services offered by the Web 1.0 servers and mash them up to provide user experiences in the form of random permutations on bundled data from several servers using single interfaces. The discussion around Web 3.0 no replacing the Web 1.0 server content is more interesting. Certainly that would still viaolate the legal understanding of liability about content serving, but we already see that in P2P networks and in the evolution of legal / digital rights frameworks and it is more plausible to e.g. see that Wikipedia is no longer required to fund its servers and manage the entire security around data persistence, but that such solutions could move the backend to the front-end users using distributed content-serving mechanisms. Sounds a bit like IPFS from Protocol Labs and I am sure there are others working on file serving mechanisms from distributed P2P storage.

Interestinly enough, this area appears to follow a completely different evolution pattern that truly doesn’t require a commitment and aggreements of a consortium, but it could just randomly pop up as a new hype in the developer communities. Getting extra code hosting or premium features on developer communities for renting out compute and storage space and making the architecture break free from hosts joining and leaving the network all the time could be some thing that we see in the future. This isn’t likely something that enterprises will adopt, unless resource sharing increases access to innovation and enterprises decide to provide their legacy server systems resources to such P2P / truly serverless [not the serverless concept from IaaS] “servers”.

Roll-Over Blockchains

Another application area would likely be interesting when Blockchain actually stops tracking transactions over long time periods, but starts to calculate balances and kills the prior transaction history. With transaction histories become elusive, but time windows where transaction histories could be made to use, this could be something where chat and communication protocols could start to be interesting. Just think of a weekly chunk of anonymized, but readable chat content that deletes any trace of transaction every week, but still feeds ML systems to train their language processing. Not sure if anything of that like provides a business use case, but it could be somthing we can observe in the near term on the technical evolution of blockchain.

Overall view on the topic

Blockchain appears to be technology that can be used to cut out middle man in transaction validation and reduces agency risk and economic cost of every transaction. Good enough, that looks like an opportunity to form consortiums and restructure inter-company relationships around certain types of transactions.

Smartcontracts bears the same opportunity, if the design of the contracting mechanisms is well thought out and curated by agents specialized in the field. It doesn’t look like a mass-ready flying idea when thinking of randomly growing universes of contract types that then have to made searchable and have to be curated from a meta-information ancle. It appears much more interesting to academically, legally and economically design perfect contracts around certain use cases and manage the complexity of choosing the flexibility and complexity of the prototypical contract of e.g. real estate contracts. In this sense, it appears like an enabling technology for legal tech and an integrative technology that allows open source communities to look into what is going on, add potential improvements and eventually participate in the improvements financially.

There certainly is a larger issue of how to balance the pros and cons of freedom vs. compatibility with our current legal world. Long-term chances to escape tax regimes. The complete freedom from any form of jurisdiction and litigation chance for counterparties will likely lead to a classic lemon market and will end the mass adoption quickly, so we will see regulation at some point. We are not even talking fat tail distributions and Black swans, but fraud – not on the system level, but – on the contract level will become a feature rather than a bug if there is no bridge to current legal frameworks and the typical customer protection mechanisms that exist.

The idea of getting rid of any central or governmental influence is a nice dream for hacktivists and anarchist thinkers that do not dare to think on a whole product level, but it will simply not fit into the strong informational and competency assymetries of market participants and will lead of a loss of a adoption and hence a loss of value of the entire technology framwork.

Thoughts for entrepreneurs and investors

For both, the intuitive answer is simple. Proceed with caution. We will very likely see features being build and there might be M&A activities around them in the overall sense of enterprises trying to gain access to talent pools and IP. Something interesting to see but very likely common in a market where a technology is almost surely to be adopted in the mid-term and having an extra edge in intrinsics in the technology is a pro in consortium negotiations and becoming a leader in the establishment of new industry standards and the capture of rents around it.

For founders and technology enthusiasts, the entire goal is similar and adds the complexity of adding an oversighting function to the whole issues. If all experts are entering this technology for the mere purpose of monetizing development and learning costs, the information assymetry between players forming industry standards and the end users living under these standards can lead to exactly what creaters of the technology did not envision: a sustained power assymetry between vendors offering services around this new technologies and users continuisly depending on it. Probably a battle over margins and ROIs, but also a battle over just and fair mechanisms that require attention from academic research, regulators and the developer and open source community.

So the overall recommendation probably is not to ignore it, try to understand the economic and intrinsical impact of the developments, somehow manage gains and losses from dealing with the technology and trying to see if this technology, after all, will be buried for another decade or make it through.

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