Unblocked

by Alison McCauley

  “When ATMs first came out,” Eva went on, “everyone thought it would be difficult for customers. There were some people who needed an explanation, of course, but now we have so many people that never go into a bank, because they can do everything online. Now I see this next generation who will be able to do anything on their phones—sell a house, buy something, without intermediation.”32

  The First Technology with Democratization Baked In?

  Columbia Law School professor Tim Wu has found that throughout history, information technologies, from the telegraph to radio to movies and the internet, behave in a similar, recurring cycle. From a utopian, democratic birth, they end up centralized and hegemonic.

  “History shows a typical progression of information technologies: from somebody’s hobby to somebody’s industry,” Wu says in his book, The Master Switch: The Rise and Fall of Information Empires. “From jury-rigged contraption to slick production marvel; from a freely accessible channel to one strictly controlled by a single corporation or cartel—from open to closed system. It is a progression so common as to seem inevitable.” When radio operators began stringing up towers in the early 1920s, he goes on to explain, it was so people could talk to each other and share ideas over an open broadcast medium. The assumption was that disconnected communities and houses would be united through radio as they were never united by the telegraph and telephone. But that’s not what ended up happening. By the mid 1920s AT&T and RCA had created the National Broadcasting Corporation, NBC, which controlled access to bandwidth via what has become a massive multinational company. Wu believes there is no question more important than who owns the platform by which people access and share information. “Before any question of free speech,” he writes, “comes the question of who controls the master switch.”33

  But decentralization of that switch can be baked into blockchains, which, if done well, makes them less susceptible to co-opting. Could this be the first technology that successfully resists centralized control? In its original design, the first blockchain intended just that. It is important to note, however, that an authoritarian regime could require use of a restricted, private blockchain to gain access to government services and participate in the economy. In this case, that regime would control the master switch—and could thus use it to exert dystopian, near-complete control and monitoring of all its citizens’ data, including their economic activity, crime records, education history, military service, and health records.

  Amber Baldet is the former blockchains lead at J.P. Morgan and now the cofounder and CEO of blockchain startup Clovyr. She recently wrote about how several nations are experimenting “with creating tokenized versions of their sovereign currency on ledgers they control, which gives them much more granular access to individual transactions of its citizens and anyone else using the new currency. Combined across supply chains that span people, businesses, and government entities, these projects may end up giving governments, banks, and businesses alike more direct access to all our day-to-day financial activity than ever before.”34

  Like any technology, this one can be used in a way it was never intended. But with their promise to create opportunity that sits outside of centralized control, blockchain capabilities conceptually match up in seemingly ideal alignment to a brewing “perfect storm” of discontent. They come at a particularly potent time. Entire populations are activated and ready for change. In many ways, blockchains represent not just a technical revolution, but a political, social, and economic movement all rolled up into one.

  Chapter 5. TORTOISE OR HARE?

  Everything changes and nothing stands still.

  Greek philosopher Heraclitus (535 BC–475 BC)

  How Far Along Are We?

  It’s still achingly early.

  Satoshi Nakamoto’s 2008 whitepaper was ignored by all but a fringe group of cypherpunks for a handful of years. They were joined by a group of particularly visionary entrepreneurs a few years later. Then, the idea catapulted into broader public awareness in 2017 with blustery media attention to bitcoin’s stratospheric ascent. Fast-forward to today: this single whitepaper spawned a massive global computer network with over 10,000 nodes and a vast ecosystem of developers, users, and companies around the globe in a few short years. Now, thousands of companies (both new and established players) are looking to build businesses or experimenting with blockchains in parts of their business.

  But what they are building today is often clunky, ugly, and frustrating, and it doesn’t scale well. In a recent New York Times article, journalist Nathaniel Popper warned, “Few blockchains have been used and battle-tested in the real world for any amount of time, which leaves significant questions about how they will perform once they make it into use.”35 Right now, blockchains are also painfully slow. Of course, this was how the web looked back in 1994—and a YouTube launched back then would have failed. As with anything so new, we first need brave pioneers to build infrastructure, increase speed, battle-test innovations, experiment with business models, and improve user experience.

  But the pressure on these pioneers is extremely high, with new technology bumping up against the expectations of a particularly active hype cycle. Compared to a Web 2.0 timescale, “it’s like we’re dealing with 1991 technology, but 1999 economic enthusiasm and 2018 customer expectations—all colliding at once,” says Gina Bianchini, the founder and CEO of Mighty Networks, who also cofounded social platform Ning with Marc Andreessen in 2004.36

  The speed of innovation and adoption will vary widely—some initiatives will take off in a matter of years, while others will take decades to mature and encounter major setbacks along the way. But one thing is clear: for new players who eventually get it right, it is a chance to threaten incumbents. And for incumbents, internal forces provide sufficient motivation to explore moves in advance of market demands: those that are more visionary see an opportunity to cut costs and build platforms that deliver more flexibility, efficiency, and capabilities for future growth. Many are immersing themselves in blockchain-driven experiments, collaborations, or formal consortiums. In certain segments, like financial services and supply chain, having a blockchain strategy is already an expectation. Juniper Research found that nearly 60% of large corporations are either actively considering, or in the process of, deploying blockchain technology.37 According to research firm CB Insights, 119 corporations (or their venture arms) invested in blockchain companies in 2017.38 The EU has invested more than €80 million in projects supporting the use of blockchains, and the European Commission has said around €300 million more will be allocated by 2020.39

  Within a few years, average consumers may be interacting with blockchain-driven applications, cryptoassets, and smart contracts without even knowing it.

  While the impact of true blockchain-led transformation will be enormous, it will most likely take decades to fully seep into the foundations of our economic and social institutions.

  While the impact of true blockchain-led transformation will be enormous, it will most likely take decades to fully seep into the foundations of our economic and social institutions. Even the core idea of decentralization is still taking shape. Meltem Demirors is an advocate for thoughtful development in the space. She is also Chief Strategy Officer at CoinShares, is cocreator of the Oxford Blockchain Strategy Programme and Future Commerce at the MIT Media Lab, and manages her own investment and advisory firm, Shiny Pony Ventures. She warns, “There are so many people mindlessly using words like ‘decentralization’ in a very esoteric and poorly defined manner.”40

  A battle rages in the blockchain community over what decentralization really means, with tension between those who consider blockchains that aren’t purely decentralized to be flawed, and others who feel there can be many degrees of decentralization. Extreme decentralization can be inefficient and conflicts with a natural tendency for both synthetic systems and biological networks to become hierarchical. Hierarchy can improve both performance and speed adaptation to new environments�
��but only to a point.41 Extreme hierarchies also breed inefficiency, and it is likely that this is where the shift will begin. Meltem explains, “Decentralization exists on a spectrum, not as an absolute.”42 Instead of an abrupt transformation to “decentralized everything,” it’s possible we’ll see more of a gentle progression toward more equitable distribution, less hierarchy, and all the benefits that come from that—and this will take time to do well. Sheila Warren explains, “Centralization is as natural to human beings as entropy is to systems. We have an inherent bias towards centralization because we don’t have time to research every decision. As we push against centralization mechanisms, we need to be careful which we choose, when, and how. This is going to be hard to get right.”43

  Nick Soman, the CEO of a health care company that leverages blockchain technology, explains, “We think about responsibly decentralizing over time, and I think the projects that will be taken seriously, that touch the real world, will take this approach. Decentralization is not our core value—our core value is to deliver more affordable health care to our customer, and we see decentralization as a way for an inefficient and misaligned system to become far more efficient.”44

  There are other challenges. Few applications can boast a consumer-ready user experience, and key scalability challenges have yet to be solved. But there is another battle to fight before the space can go mainstream: the money flooding into blockchain startups has also attracted scams—making headlines, creating negative perceptions of the space, and making it harder to see the signal within the noise even from the inside.

  “Blockchain technology is early, but it should not be written off,” warns Diana Biggs, of HSBC. “It is important to experiment and test—and especially to learn. Certainly right now there are people, given the energy and excitement around the space, that are playing off the fact that many people don’t have the technical literacy to be able to gauge what is real and what isn’t. And it’s early—saying something isn’t scalable right now doesn’t mean it will not be useful in the near future.”45

  “I think most of us got into crypto because we believed it would change existing power structures in our world,” Meltem Demirors tells me. “I have seen a lot of problems over the last few years—so many scammers, so many people in it to make money. People mismanaging or abandoning projects. People signing contracts without reading them. Trying to be first and rushing to market. It’s innovation theater. And there will be political and social consequences. But I am here for the next 20 years to make sure this is built the right way.” Meltem started investing in crypto companies while at Digital Currency Group, and built Shiny Pony Ventures to support projects that she believes could make a difference in the world. Together with the entrepreneurs she advises and works with, Meltem told me, “We are going to break some #@$%.”46

  She cautions that that won’t happen if teams remain stuck in their current technology-centric mode. “Really great projects are about winning hearts and minds,” she said. “I don’t know how my iPhone works, nor do I care. There needs to be more thoughtful communication and more education on why blockchains matter.”47

  In Crossing the Chasm, organizational theorist Geoffrey Moore gives a framework for how new breakthroughs happen. At first, only those people willing to tolerate the risk and uncertainty of a novel technology get on board, a trade they make for the benefits of being early adopters. This is followed by a gap, which Moore calls the “chasm.” Any idea has to cross the chasm to access a larger audience, the early majority. According to Moore, this ability is the true mark of successful innovation.48

  When I sat down with Eric Ly, the cofounder of LinkedIn who is now the CEO of blockchain startup Hub (known as Human Trust Protocol), our conversation quickly moved to this challenge of consumer adoption. Eric offered a historical perspective. “I remember in the late ’90s when the web was new, people didn’t seem to understand what a URL was, or a link, and it took them a while to see that they could type an address into a web browser and see something interesting,” he said. “It’s that kind of education process that the mainstream audience will need to go through with blockchains as well. Hopefully there are not too many things they will have to learn.”49

  In 2005, Lou Kerner was running the largest user-generated content streaming service, Yashi, when someone uploaded the SNL skit Lazy Sunday to tiny competitor YouTube. That day, YouTube became the fastest-growing website in the history of the internet and the rest was, well, history. “It was lightning in a bottle,” Lou, now the cofounder of consulting firm and advisory CryptoOracle, told me over coffee. “And now, we have some of the smartest people in the world going into crypto. They’re leaving McKinsey and Goldman and MIT. With all this incredible brainpower, we are going to get that lightning in a bottle that takes crypto mainstream sooner rather than later.”50

  Analyst firm Kaleido Insights founding partner Jessica Groopman shares her perspective on adoption at the corporate level, and the challenges it faces. “Right now, there is a lot of activity in certain industry sectors—partnerships, announcements, pilots, proof of concepts, alliances, and industry consortia. With scalability issues and the magnitude of what these companies are trying to overcome, they’re running into brick walls, hindered by core physics. Yet,” she continues, “at the same time, there are a lot of technical levers to pull to drive evolution, and we’re seeing innovation in every single one. There are new designs, new consensus mechanisms, new predictive capability in chips, lower compute costs—and more advancements continually coming down the pipe. I am optimistic.”51

  Change does take time. Broad adoption that stretches across industries will be gradual, not sudden. Initial versions may be hybrid models: semi-centralized, partly “on-chain” and partly “off-chain.” But over time, maturity will begin to catch up to vision. And the maturation cycle will be propelled by a totally new age of innovation.

  The Age of Open Innovation

  Chris Anderson, the curator of TED, tells a story about a filmmaker named John Chu. One day, John came across a YouTube video of Anjelo Baligad, a six-year-old-boy from Hawaii, performing dance moves that even professional adult dancers would find difficult. John realized that dancers around the world were using online video to learn and evolve dance at a speed never seen before. What had started with challenge videos posted by rival groups of street dancers had exploded into a kind of global laboratory for dance innovation. “Kids in Japan are taking moves from a YouTube video created in Detroit, building on it within days and releasing a new video, while teenagers in California are taking the Japanese video and remixing it to create a whole new dance style in itself. This is happening every day. And from these bedrooms and living rooms and garages with cheap webcams come the world’s great dancers of tomorrow,” Chris quoted John in an article he wrote for Wired.52

  Open innovation propels hyperspeed evolution. This idea and its importance have been around for a while and are well documented. Henry Chesbrough, Director of UC Berkeley’s Center for Corporate Innovation, talks about using both external and internal ideas to advance an organization’s technology.53 MIT professor Erick von Hippel speaks to the impact of distributed and open innovation in the evolution of everything from surfboards to software security.54 Chris Anderson calls it “crowd accelerated innovation.” And open source software became a force that changed the course of technology, releasing an explosion of software development that has influenced nearly every industry.

  But what has happened in the last five years of blockchain development is unlike any kind of open innovation we’ve ever seen. The technology was born to be open. The culture that galvanized around the technology is markedly open. But there was also a brief, year-long moment in which billions flowed into the community in an unprecedented open funding mechanism. Even as the frenzy receded, it left in its wake the beginnings of an all new Age of Open Innovation.

  Unlocking the New Tools of Open Innovation

  In 2013, J.R. Willet, a software engineer
living in Seattle, published a paper describing a new protocol layer he wanted to build on top of the bitcoin blockchain. He included an address that anyone could use to send him bitcoin in exchange for a piece of that new protocol. He raised $500,000, and the concept of the initial coin offering (ICO) was launched.55

  Since then, well over 1,000 teams have raised over $20 billion through ICOs, and in so doing have forever changed the magnitude of open innovation.

  These ICOs (sometimes called token sales) raise money by issuing their coin, also known as a token (which is a cryptoasset). In exchange for the investment, investors receive these digital coins, which will also be used as a medium of transaction when (and if) the product is built. As Matt Levine of Bloomberg News has said, it’s like “the Wright Brothers sold air miles to finance inventing the airplane.”56

  It took some time, but regulatory agencies eventually clamped down on this fundraising method, and ICO activity dramatically plunged from a high of 114 ICOs in December 2017 (and for a four-month period, over $2 billion each month) to just 6 ICOs a year later, in December 2018.57

  However, as ICOs became, in the words of one executive, “unfashionable,” new approaches sprung up in their place. Security token offerings, or STOs, became a popular way to issue tokens designed as securities. Initial exchange offerings (IEOs) are now offered through several exchanges. IEOs mirror ICOs, but are hosted by the exchange, on their platform—and currently ban US investors. While the models (and names) are still evolving and the regulatory environment still shifting, it has become clear that the initial ICO rush roused desire for low-friction, open forms of fundraising. We most certainly have not seen the last of this phenomenon.