by Don Tapscott
Reputation: Because the network records the transaction on the blockchain, a positive review from each user improves your respective reputations. The risk of a negative review motivates each party to remain honest. Remember, people with good reputations can use the same persona across multiple DApps and benefit from continuity as a good person.
Identity Verification: Because we are not dealing with a centralized system that checks ID on our behalf, each party needs to confirm the other party’s identity. The blockchain calls up a contract from a “VerifyID” application, one of many contracts that bAirbnb, SUber (blockchain Uber), and other DApps use to verify real-world identity.
Privacy Protection: VerifyID doesn’t track and store all transactions in a database. It simply returns a TRUE or FALSE when it receives a request for verification of a public key (persona). Different kinds of DApps can call VerifyID, but VerifyID never knows details of transactions. This separation of identity from activity greatly improves your privacy.
Risk Reduction: Home owners currently store customer identities and financial data on their own servers, which can be hacked and leaked, exposing owners to litigation and large liabilities. On the blockchain, you needn’t trust a vendor with your data; there is no central database to hack and leak. There are only individual peer-to-peer pseudonymous transactions.
Insurance: Today Airbnb offers $1 million insurance for owners and compensates them for theft and damage. On bAirbnb, owners can get the bAirbnb insurance DApp. Renters with good reputations like you have lower insurance rates and needn’t subsidize renters who lack caution, scrutiny of prospects, or poor treatment of property. When you submit a booking request, bAirbnb sends your public key (persona) to the insurance contract for a quote. The insurance DApp contacts a list of trusted providers; fake insurers need not apply. Insurers perform their own calculations in real time through autonomous agent software based on the inputs to the contract—such as the market value of the owner’s house, how much the owner wants insured, owner reputation, your reputation as a renter, and rental price. bAirbnb takes the best bid and adds it to the nightly fee the owner wants to charge. The blockchain processes this calculation in the background; owners and renters have a comparable user experience to that of Airbnb but a superior and more equitable value exchange.
Payment Settlement: Of course, on the blockchain, you transfer funds to the owner in seconds, not days as with Airbnb. Owners can manage security deposits more easily with smart contracts. Some parties use escrow accounts to release payments partially (nightly, weekly, hourly, etc.) or in full as the parties agree. In disputes involving smart contracts, parties can call for arbitration.
Property Access Using Smart Locks (IoT device): A smart lock connected to the blockchain knows when you have paid. When you arrive, your near-field communication-enabled smart phone can sign a message with your public key as proof of payment, and the smart lock will open for you. Owners need not drop keys off to you or visit the property unless they want to say hello or address some emergency.
You and the owner have now saved most of the 15 percent Airbnb fee. Settlements are assured and instant. There are no foreign exchange fees for international contracts. You need not worry about stolen identity. Local governments in oppressive regimes cannot subpoena bAirbnb for all its rental history data. This is the real sharing-of-value economy; both customers and service providers are the winners.
GLOBAL COMPUTING: THE RISE OF DISTRIBUTED APPLICATIONS
Before we examine the other possible distributed business entities like bAirbnb, a word on how the underlying technology enables decentralization. Until the blockchain, centralized organizations have held concentrated computing power.
In the first decades of enterprise computing, all software applications (apps) ran on the computers of their owners. GM, Citibank, U.S. Steel, Unilever, and the U.S. federal government owned huge data centers that ran proprietary software. Companies rented or “time shared” computer power from providers like the 1980s giant CompuServe to run their own applications.
As the personal computer matured, the software market specialized: some developed client apps (the PC) and some, server apps (a host computer). With widespread adoption of the Internet, specifically the World Wide Web, individuals and companies could use their computers to share information—initially as text documents and later as images, videos, other multimedia content, and eventually software apps.3 Sharing began to democratize the information landscape. But it was short-lived.
In the 1990s, a new variant of time-sharing appeared, initially called virtual private networks (VPNs) and then cloud computing. Cloud computing enabled users and companies to store and process their software and data in third-party data centers. New technology companies like Salesforce.com built fortunes by harnessing the cloud model to save customers the big costs of developing and running their own software. Cloud service providers like Amazon and IBM built ginormous multibillion-dollar businesses. During the 2000s, social media companies like Facebook and Google created services that ran on their own vast data centers. And to continue this trend of centralized computing, companies like Apple moved away from the Web’s democratizing architecture to proprietary platforms like the Apple Store where customers acquired proprietary apps, not on the open Web but in exclusive walled gardens.
Again and again in the digital age, large companies have consolidated—created, processed, and owned or acquired—applications on their own large systems. Centralized companies have begotten centralized computing architectures that have, in turn, centralized technological and economic power.
Some red flags: With single points of control, companies themselves are vulnerable to catastrophic crashes, fraud, and security breaches. If you were a customer of Target, eBay, JPMorgan Chase, Home Depot, or Anthem, or for that matter Ashley Madison, the U.S. Office of Personnel Management (second breach!), and even Uber, you felt the pain of hacking in 2015.4 Systems of different parts of a company still have big challenges communicating with one another, let alone with systems outside the firm. For us users, it means that we’ve never really had control. Others define our services with their implicit values and goals that may conflict with ours. As we generate reams of valuable data, others own it and are building vast fortunes—perhaps the greatest in history—while most of us receive little benefit or compensation. Worst of all, central powers are using our data to create mirror images of each of us and may use these to sell us stuff or to spy on us.
Along comes blockchain technology. Anyone can upload a program onto this platform and leave it to self-execute with a strong cryptoeconomical5 guarantee that the program will continue to perform securely as it was intended. This platform is public, not inside an organization, and it contains a growing set of resources such as digital money to incent and reward certain behavior.
We’re moving into a new era in the digital revolution where we can program and share software that’s distributed. Just as the blockchain protocol is distributed, a distributed application or DApp runs across many computing devices rather than on a single server. This is because all the computing resources that are running a blockchain constitute a computer. Blockchain developer Gavin Wood makes this point describing the Ethereum blockchain as a platform for processing. “There is only one Ethereum computer in the world,” he said. “It’s also multiuser—anyone who ever uses it is automatically signed in.” Because Ethereum is distributed and built to the highest standards of cryptosecurity, “all code, processing, and storage exists within its own encapsulated space and no one can ever mess with that data.” He argued that critical rules are built into the computer, comparing it to “virtual silicon.”6
As for DApps, there have been warm-up acts prior to blockchains. BitTorrent, the peer-to-peer file-sharing app, demonstrates the power of DApps as it currently consumes over 5 percent of all Internet traffic.7 Lovers of music, film, and other media share their files for free, with no central server for authorities to shut down. Iconoclastic
programmer Bram Cohen, who incidentally is less than enthusiastic about bitcoin because of all the commercial activity around it, developed BitTorrent. “The revolution will not be monetized,” he said.8
Most of us think that generating revenue and economic value through technological innovation is positive, as long as the revolution is not monetized by the few. With blockchain technology the possibilities for DApps are almost unlimited, because it takes DApps to a new level. If, as the song says, “Love and marriage, love and marriage, go together like a horse and carriage,” then so do DApps and blockchains. The company Storj is a distributed cloud storage platform and a suite of DApps that allow users to store data securely, inexpensively, and privately. No centralized authority has access to a user’s encrypted password. The service eliminates the high costs of centralized storage facilities; it’s superfast; and it pays users for renting their extra disk space. It’s like Airbnb for your computer’s spare memory space.
THE DAPP KINGS: DISTRIBUTED BUSINESS ENTITIES
How do DApps infuse greater efficiency, innovation, and responsiveness into the structure of the firm? What new business models can we make with DApps to generate value? And if powerful institutions are capturing the benefits of the Internet today, how can we move beyond “outsourcing” and “business webs” to truly distributed models of innovation and value creation that can distribute prosperity and the ownership of data and wealth? We mapped what we believe to be the four most important innovations onto a two-by-two matrix.
The Y-axis identifies the degree to which humans participate in the model. At the left, the model requires some human involvement. At the right, the model requires no people.
The X-axis describes the functional complexity of the model, not its technical complexity. At the lower end are models that perform a single function. At the top are models that perform diverse functions.
These are all components of the blockchain economy because they use blockchain technology and often cryptocurrencies as their foundation. Smart contracts (discussed in the last chapter) are the most basic form: they involve some complexity that requires human involvement, increasingly in the form of multisignature agreements. As smart contracts grow in complexity and interoperate with other contracts, they can contribute to what we call open networked enterprises (ONEs). If we combine ONEs with autonomous agents—software that makes decisions and acts on them without human intervention—we get what we’re calling a distributed autonomous enterprise that requires little or no traditional management or hierarchy to generate customer value and owner wealth. And we think that very large numbers of people, thousands or millions, might be able to collaborate in creating a venture and sharing in the wealth it creates—distributing, rather than redistributing, wealth.
Open Networked Enterprises
At very low cost, smart contracts enable companies to craft clever, self-enforcing agreements with previously improbable classes of new suppliers and partners. When aggregated, smart contracts can make firms resemble networks, rendering corporate boundaries more porous and fluid.
Blockchain technology also drops Coase’s search costs and coordination costs so that companies can disaggregate into more effective networks. An auto company could check a supplier’s trustworthiness by just scanning the analytic services online. Soon, just type “axle” or “window glass” into any number of industry exchanges on the blockchain and negotiate the price online.
We can extend that simple scenario to finding a replacement part, a supply chain partner, a collaborator, or a piece of software for managing a distributed resource. Need steel from China, rubber from Malaysia, or glass from Wichita, Kansas? No problem. Decentralized online clearinghouses operating as DApps for each commodity will enable purchasers to contract for price, quality, and delivery dates with a few clicks of a mouse. You’ll have a detailed searchable record of previous transactions—not just how various companies were rated but precisely how they honored their commitments. You can track each shipment on a virtual map that shows its precise location in the journey. You can microschedule goods to show up just in time. No warehouse required.
AUTONOMOUS AGENTS
Imagine a piece of software that could roam the Internet with its own wallet and its own capacity to learn and adapt, in pursuit of its goals determined by a creator, purchasing the resources it requires to survive like computer power, all while selling services to other entities.
The term autonomous agent has many definitions.9 For our discussion, it is a device or software system that on behalf of some creator takes information from its environment and is capable of making independent choices. We could describe some autonomous agents as “intelligent” although they lack general intelligence. However, they are not “just computer programs” because they can modify how they achieve their objectives. They can sense and respond to their environment over time.10
The computer virus is the most cited example of an autonomous agent; the virus survives by replicating itself from machine to machine without deliberate human action. Unleashing a virus on the blockchain could be more difficult and certainly costly because it would likely have to pay the other party to interact with it, and the network would quickly identify its public key, crash its reputation score, or not validate its transactions.
For positive blockchain examples, consider the following. A cloud computing service rents processing power from various sources, growing to Amazon’s size by making rental deals with other computers that have excess capacity.11 A driverless car owned by a community, company, individual, or perhaps itself moves around the city picking up and dropping off passengers and charging them appropriate fees. We’re interested in agents that can do transactions, acquire resources, make payments, or otherwise produce value on behalf of their creator.
Vitalik Buterin, who created the Ethereum blockchain, has theorized about these agents and developed a taxonomy to describe their evolution. At one end are single-function agents like viruses that go about working to achieve their limited goals. Next up are more intelligent and versatile agents, say, a service that would rent servers from a specific set of providers like Amazon. A more sophisticated agent might be able to figure out how to rent a server from any provider and then use any search engine to locate new Web sites. An even more capable agent could upgrade its own software and adapt to new models of server rental such as offering to pay end users for rental of their unused computers or disks. The penultimate step consists of being able to discover and enter new industries, leading into the next evolution of the species—full artificial intelligence.12
Weathernet
Could an autonomous agent use blockchain technology to make money forecasting the weather? Flash-forward to 2020. The best weather forecasts globally are coming from a network of smart devices that are measuring and predicting the weather all around the world. That year, an autonomous agent named BOB is released onto this network to collaborate with these devices to create a business. Here’s how BOB works.
Distributed environmental sensors (weatherNodes) on utility poles, in people’s clothes, on roofs of buildings, traveling in cars, and linked to satellites are all connected in a global mesh network. No need for an Internet service provider for connectivity. Rather than communicating with a central database, they store their data on a blockchain.13 Many are solar powered and so they don’t need the electrical grid; they can effectively operate indefinitely.
The blockchain handles a few functions. First, it settles payments. As an incentive, each weatherNode receives a micropayment every thirty seconds for providing accurate weather telemetry (temperature, humidity, wind, etc.) at a particular location in the world.
The blockchain also stores all weatherNode transactions. Each weatherNode signs all of its data with its public key stored on the blockchain. A public key identifies the weatherNode and allows other entities to determine its reputation. When the node produces accurate weather data, its reputation is enhanced. If a node is broken or compromised
and produces inaccurate data, it loses status. Nodes with low reputation receive less bitcoin than nodes with high reputation—the beneficiary being the creator of the app—whether an individual, company, or cooperative.
The blockchain also allows data providers and data consumers to participate peer to peer on a single, open system, rather than subscribe to dozens of centralized weather services around the world, and program their software to communicate with each of their application programming interfaces (APIs). With smart contracts we can have a global “WeatherDataMarketplace DApp” where consumers bid for data in real time and receive the data in a universally agreed-upon format. Centralized data providers can ditch their proprietary systems and individualized sales efforts, and instead become data providers for the globally accessible WeatherDataMarketplace DApp.
WeatherDApp: Sensors LP
In the first era of the Internet, technical innovation occurred only in the center; centralized utilities like energy companies, cable corporations, and central banks decided when to upgrade the network, when to support new features, and whom to give access. Innovation couldn’t occur at the “edges” (i.e., individuals using the network) because the rules and protocols of closed systems meant that any new technologies designed to interact with the network would need the central power’s permission to operate on it.
But central powers are inefficient because they don’t know exactly what the market wants in real time. They have to make educated guesses that are always less accurate than what real-time markets demand. We end up with WeatherCorp, a centralized service that installs sensors and puts up satellites so that it can sell subscriptions to data that few people may want.