Unblocked

by Alison McCauley

  The potential to miss the true significance of blockchains and the waves of disruption they will set off is further obscured by breathless, frantic coverage in the news about blockchains and digital currency (also called cryptocurrency), especially bitcoin, the cryptocurrency that was the first application of blockchain technology. There is plenty to report that is suspect, scammy, or distractingly sensational, and these headlines tend to consume editorial real estate more than the steady progression toward real change.

  All of these factors pool together to create a formidable barrier for anyone who wants to get in—except those lucky enough to have someone who cared enough to pull them through, and who had the fortitude to navigate the morass. This barrier makes it easy to tune out the true power that blockchains and related technologies represent. It puts you in danger of not understanding the full extent of how they could change our world—and your life—until it is too late.

  But there is massive opportunity in this moment. Right now, we have the chance to grab a front-and-center seat as the next digital foundation is forged. It’s a chance to see the threats and to spot the opportunities—before they snap into focus for your competitors. To foresee the uptick of adoption that will occur just before this movement accelerates to broad acceptance. To lend a voice to how it should be shaped before new power structures take hold. And to bank the knowledge that will—when the time is right—enable you to make potentially trajectory-changing moves to build, join, acquire, or partner.

  This moment offers a chance to grab a front-and-center seat as the next digital foundation is forged.

  My hope is that this book will be a field guide to help you enter the world of blockchains. In these pages I work to lower the barrier, pull back the curtain, and welcome you inside. Instead of giving in to the conventional temptation in this space to throw every feature and piece of functionality at you at once, I cover basic driving forces that blockchains unleash, and give you a glimpse into how this could impact you and change our world. I give you a taste of the work that is already being done so you get a feel for the direction things are moving. And I give you some ideas for things you can do right now to prepare for what’s coming.

  This book will not only help you grasp the basics and give you the context to better understand developments in the space, but also help you think about if, when, and where to do the important work of experimenting with this new technology. It is written for executives and leaders and business owners in established enterprises as well as emerging companies that are not blockchain-first. It paints a story of a world that is being actively architected today, and is poised to grow quickly from awkward adolescent to a force strong enough to change what your customers expect from you. This book speaks to a future of indeterminate horizon, as that will vary greatly based on your particular business and the traction that early pioneers achieve. But regardless, Unblocked will help you accelerate your learning, increase your blockchain literacy, give you a framework with which to better understand new developments in the space as they evolve, and equip you to act on those developments more wisely. It will prepare you to see that dawning horizon as it clicks into focus.

  The Six Forces of an Unblocked Era

  I’ve organized Part II by six basic key forces that will drive change in this next era, and will be important for every organization to grasp. Obviously, they don’t cover all implications of blockchains and their related technologies, nor does this framework focus on the immense potential to drive efficiency in back office operations (although the same principles apply there as well). I am focusing on these six elements for their enormous potential to drive new customer expectations and evolve the relationship between customer and business as blockchain functionality is more broadly integrated and adopted.

  The first three forces are cultural shifts: More Value, Deeper Transparency, and Fair Compensation. The final three are strategic shifts that blockchains make possible, and that businesses will need to understand and potentially leverage to be successful in this next era: Aligned Incentives, Bigger Data, and New Models. This matrix is illustrated in Figure 2-2.

  Figure 2-2. The six forces of the unblocked era

  For each of the six forces I:

  give you context to understand why it matters,

  help you understand what new things the technology enables,

  outline implications,

  list some cautions and considerations to think about, and

  show you examples of the projects early pioneers are working on.

  At the end of the book, I share some guidance on how to think about raising blockchain literacy in an organization, including case studies of several organizations who are doing this exceptionally well.

  It’s Time

  Some of what you read here will feel esoteric, and all of it ambitious, so consider a pause to pour a glass of wine or steep a cup of tea, and come sit down to geek out with me on this new world. As you do, think about how all of the unfolding developments you’ll read about could change the rules of your business or infringe on your existing models. The more you read, the more you will discover your own questions and insights. Please ask, and please share. This is a space that needs dialogue from many voices and many perspectives to achieve its potential.

  If you are inspired, check out my website at www.alisonmccauley.io, where you’ll find links to more resources. At the very least, you’ll have cool examples to throw out at the next cocktail party when someone mentions blockchains.

  My hope is that I will not only help you gain knowledge, but also inspire you to learn more about this space. Just please, don’t neglect to eat and sleep.

  Chapter 3. WHAT IS A BLOCKCHAIN?

  So basically, this is just a safe, secure way to exchange pretty much anything of value on the internet with someone you don’t know.

  Beth, my yoga instructor, after I explained blockchains

  Beth Is Correct

  Looking to understand the technology behind blockchains is a little like asking for an explanation of what makes the internet work. While I believe more technical knowledge is always better, this doesn’t make your average executive better at using it to deliver business value. And blockchains are complex. In a recent New York Times article, journalist and author Nathaniel Popper wrote, “If you ask even the people who work with blockchains to define the technology, you are likely to get a stuttering response.”20 In his book Radical Technologies, the urban designer Adam Greenfield calls blockchains the first technology that’s “just fundamentally difficult for otherwise intelligent and highly capable people to understand.”21

  But with press coverage of cryptocurrency’s sensational ascent, blockchains have received more curiosity and engagement than most early technologies. There is a craving to understand—and explain to others—what this thing is. It serves, thus, to have some working knowledge. What follows on these next few pages is a basic explanation to ground you before we return to the main business at hand: to help you understand why blockchains matter.i

  Before we dive in, a caveat: I must note that many components of blockchain technology aren’t really new. The core idea behind blockchains—a database that is maintained by a network of users—was described in a 1991 paper by Dr. Scott Stornetta and Dr. Stuart Haber, while working at research center Bellcore.22 However, some clever game theory and cryptography twists were added to this idea to make it possible to do some cool new stuff.ii

  At the Center: Decentralization

  At its most rudimentary level, you can think of a blockchain as a very special database. What makes it special is that it can be used very flexibly to directly transfer anything of value safely from one party to another without central institutions or middlemen getting involved. This makes all sorts of new things possible, but if you were to simplify it down to one single attribute that makes the technology revolutionary, this would be it.

  You can think of this database as a ledger, but not the kind you learned about
in accounting class—this one has new superpowers. This ledger not only ensures the transfer is secure and records this transfer permanently for all of time, but also gives everyone in the world (who wants it) instant access to that record. In fact, in place of a single ledger maintained by a central party, blockchain technology maintains a multitude of exact copies (sometimes thousands), distributed all over the world—and every time there is a transaction it is recorded simultaneously in all of them.

  Confused already? Let’s unpack that. First, let’s look at what we mean by “anything of value.” That’s anything that can be represented digitally—which is truly just about anything. You’re no doubt familiar with certain assets that already are in digital form—for example, a photo, music, a medical record, or even a collectible in an online game. You’ve likely heard quite a bit about cryptocurrency, or digital money. You may be aware that internet-enabled sensors (like a Nest thermostat) gather digital data—all of this has value too. Valuable certifications such as a college degree, land title, or even a vote are also commonly represented in digital form today. But it may surprise you that even physical assets like a house, a car, or a piece of fine art can be represented in code as well. The ownership of all these things could be securely transferred with a blockchain, and we’ll look more closely at some of these examples and more in the rest of the book.

  Next, let’s examine that word “transfer.” Digital things are easily copied. Traditionally, someone could copy a digital asset and use its value more than once. But blockchains track everything on a ledger, and because each transfer is confirmed against the ledger, it prevents “double-spend.” Thus ownership is truly transferred.

  Next, let’s look at “from one party to another.” To use the blockchain, each party is assigned a set of keys, which are unique numeric identifiers. These keys are linked to each other through cryptography.

  One key is given out publicly and acts as a pseudonym, or proxy, for your identity. The other key is kept private—this is the secret code that gives the owner of that key control of anything associated with it. No one can make any changes, share information, or transfer things of value without this private key.

  This pseudo-identity can be tied to anything—it could be a specific person, or even a thing (for example, you could establish an identity for your car or that Nest thermostat). However, if the owner of the key allows it, it is possible for the blockchain to verify that a particular pseudo-identity meets certain criteria or attributes, without visibility to that real identity. For example, the blockchain could validate that this is a real person (rather than a bot), or is someone who has earned a certain reputation (like size of social network or number of degrees). This unlocks the possibility of all sorts of interesting functionality, which we will cover later in the book.

  The transfer of value is direct, and because the blockchain does the work of a middleman—ensuring that the parties involved have the item of value, that the transfer occurs, and that the result is recorded—there is no need for any other party to be involved, obviating the need for middlemen or intermediaries. Value could be transferred in just one direction, or in two (i.e., an exchange).

  Finally, let’s look at some of the attributes that make sure the transfer is secure. Blockchains are cleverly designed to render all the elements needed to create trust between two or more strangers into code. They:

  Verify identity (even while the actual identity may remain anonymous).

  Record the transaction permanently and immutably—no one can reverse it or change it.

  Send an exact copy of the transaction to distributed nodes around the world. (A node is an important point of connection within a network. In this case the nodes serve as the validators of every transaction on the blockchain record. For the first blockchain, the bitcoin blockchain, there are about 10,000 nodes globally, so far.) Every node compares the record to make sure it is the same. If a certain number of nodes don’t agree (as set in the governance rules for that particular blockchain), the record is rejected.

  Are open to anyone. If you were technically inclined, you could download a copy to inspect right now. If you want to take just a glimpse, there are multiple websites, often called block explorers, that enable you to look at it without technical expertise.

  Okay, so frankly, this isn’t standing up to all the excitement yet, is it?

  Well, consider this: because the record is distributed immediately, and because the parties are transferring value without a middleman, the entire system is decentralized. Which means it operates outside of the control of any organization or sovereign—there is no central point that can be hacked. Blockchains inherently resist attack, censorship, and control.iii

  Blockchains are ownerless, stateless, value-transfer systems. This gives blockchain technology the potential to scatter and decentralize today’s centers of power.

  Value Exchange Made Smarter Through “Smart Contracts”

  Things get really interesting when you can put rules around the circumstances in which value is exchanged. This is done through something called a smart contract that sits on top of the blockchain and self-executes transactions based on pre-set instructions. Many times when people use the word “blockchain” they are actually talking about smart contracts.

  An easy way to picture how this works is to pretend we have a bet on the highest temperature your nearest city will reach tomorrow, and the winner gets one bitcoin. We could code the terms into a smart contract, which would check the weather for us at the appointed time (using a source we have agreed upon), and automatically execute our agreement, sending the bitcoin to the winner of the bet—no third parties involved.

  In a business, this opens up all sorts of new possibilities for efficiency, automation, or even new applications or services for customers. Smart contracts could release passwords, distribute funds, or allow the next step in a business process to take place. We are just starting to see the potential, and we have a long way to go before smart contracts can reliably enforce rules as intended.iv However, this will be a rich area of innovation. Smart contracts play a significant role in many shifts described in this book.

  Why is it Called a Blockchain?

  Each of those transactions we’ve been discussing is recorded (with a group of other transactions) onto a “block.” These “blocks” serve as a container for this data, a sort of protective cocoon that is very difficult to hack.v Each block is linked to all previous blocks, from all of history, in a permanent and auditable chain—thus “blockchain.”

  The link between each block is called a hash and serves a powerful role. The hash not only links two blocks together, but also functions as a unique ID generated by running the previous block’s hash and the data stored in the current block through a cryptographic algorithm. This makes a sort of thumbprint that carries with it the history of the blockchain from all of time—if the data was altered in any block it would produce a different thumbprint for the current block. Said differently, no one can mess around with a single block without changing all the subsequent blocks.

  Different blockchains have different governing rules, but to add a new block to the bitcoin blockchain, for example, computers around the world, owned and maintained by “miners” (for more on mining see “WHO ARE THE MINERS?”), race to guess the hash. Once the winning computer solves this cryptographic puzzle, the block is added (“hashed”) to the chain, and the owner of the computer that solved it receives cryptocurrency or tokens as a reward (in this case, bitcoin). While the winning miner’s computer is responsible for hashing the new block to the chain, the miner can’t alter any of the transactions in the block.

  As soon as one puzzle is solved, computers around the world start racing to solve the next. The system self-regulates so that solving each puzzle takes about 10 minutes. All the transactions over that time period are included, up to the maximum capacity, and any transactions that exceed the maximum capacity are rolled into the next block.

 
; It would take great effort to hack just one block. If you think of each block as an apartment, and the blockchain as an entire city, hackers would need to take down more than half the city to truly change the record of transactions. This is far less attractive to hackers than attacking centralized “honeypots” of data sitting on corporate servers—even before you consider that the change would be immediately caught by the other computers on the network and rejected.

  Blockchain or Blockchains?

  Often people use the word “blockchain” on its own when they are referring to the entire space, which is actually composed of many, many blockchains. This has contributed to confusion about whether there are one or many.vi Developers are continually releasing new blockchains, each a different flavor, optimized for a specific set of use cases. There is a blockchain optimized for building applications and smart contracts. There are blockchains that are built to make it easier for illiquid assets like houses and art to become divisible, liquid assets. Some are used to build reputation around a unique identity, whether that is a person or an IoT device. Still others track the rights of music or photographs, or components as they move from partner to partner through a supply chain.