Irving Wladawsky-Berger: Is Blockchain the Major Next Step in the Evolution of the Internet?

Irving Wladawsky-Berger

June Nineteen, 2017

In the Fall of 1995, IBM made the decision to embrace the Internet and make it the centerpiece of its strategic directions.   As the general manager of the freshly formed IBM Internet Division , I spent a lot of time thinking how to best articulate the promise of the Internet.   Looking back, I often described that promise using some variation of: The Internet has the potential to convert the economy, society and our private lives.

It’s taken a a few extra innovations, – e.g., smartphones, social media, cloud computing, big data, IoT, – for its historical influence to be fully evident, but by now, most everyone agrees that the Internet has become one of the most transformative technologies the world has ever seen, – right up there with electrical play, telecommunications, cars and airplanes.

About a year ago, the World Economic Forum (WEF) published its annual list of the Top Ten Emerging Technologies for 2016, and named The Blockchain as one of the technologies in the two thousand sixteen list.   The WEF report compared the blockchain to the Internet, noting that “Like the Internet, the blockchain is an open, global infrastructure upon which other technologies and applications can be built.   And like the Internet, it permits people to bypass traditional intermediaries in their dealings with each other, thereby lowering or even eliminating transaction costs.”

As Don Tapscott and Alex Tapscott wrote in the opening paragraph of their recently published book   Blockchain Revolution , “It emerges that once again, the technological genie has been pulled out from its bottle.   Summoned by an unknown person or persons with unclear motives, at an uncertain time in history, the genie is now at our service for another kick of the can – to convert the economic power grid and the old order of human affairs for the better.   If we will it.”

I wholeheartedly agree .   For the past two years, I’ve read lots of article on blockchain technologies, and written over fifteen entries in my blog on the subject.   When discussing the long-term potential of blockchain, I once more find myself telling something like: Blockchain has the potential to convert the economy, society and our individual lives.   And, to help me better understand how such a transformation might evolve over the years, I’ve found it fairly useful to compare the current state of blockchain to that of the Internet in its early years.

In The Truth about Blockchain , an article published earlier this year in the Harvard Business Review, Harvard professors Marco Iansiti and Karim Lakhani noted that, like the Internet, blockchain is a foundational technology, whose total transformational influence will take time, – decades rather than years.   The adoption process of foundational technologies like the Internet and blockchain is gradual, incremental and constant, because they must overcome many different kinds of barriers, – technological, organizational, governance, political.

We shouldn’t view the Internet and blockchain as two distinct foundational technologies, but as part of a multi-decades evolution in the development of a 21st century global, digital infrastructure.   Blockchain Revolution reminds us that the Internet “has enabled many positive switches – for those with access to it – but it has serious limitations for business and economic activity… Doing business on the Internet requires a leap of faith.”

To take its major next step, the Internet must overcome three such serious limitations: security, complexity, and trust.   Let’s shortly discuss each of these.

Over the past few decades, we’ve been moving to a world where information of all kinds is digital, and where many different kinds of online transactions are now taking place inbetween people, institutions, and things At the same time, large-scale fraud, data breaches, and identity thefts are becoming more common, and companies are finding that cyber-attacks are costly to prevent and recover from.

Fundamentally, the Internet is a general purpose data network supporting a remarkable multitude of applications.  A major reason for the Internet’s capability to keep growing and adapting to widely different applications is that it’s stuck to its basic data-transport mission, i.e., just moving bits around.   The Internet has no idea what the bits mean or what they’re attempting to accomplish.   That’s all the responsibility of the applications running on top of it.   Consequently, there’s no one overall proprietor responsible for security , let alone identity management, over the Internet.   These significant responsibilities are divided among several actors, making them significantly stiffer to achieve.

Blockchain technologies should help us enhance the security of digital transactions and data, by developing the required common services for secure communication, storage and data access,  along with open source software implementations of these standard services.  As was the case with key Internet protocols, we would expect such standard blockchain services to be support by all blockchain platforms, such as Hyperledger and Ethereum.

Security standards are necessary, but not sufficient.   Identity is the key that determines the particular transactions in which individuals, institutions, – and the exploding number of IoT devices, – can rightfully participate, as well as the data they’re entitled to access.  But , our existing methods for managing digital identities are far from adequate.

As explained in this excellent two thousand sixteen WEF report, identity is essentially a collection of information or attributes associated with a specific individual,   institution or device.   In general, the needed attributes to validate an identity are siloed within different private and public sector institutions, each using its data for its own purposes.   To reach a higher level of privacy and security we need to establish a trusted data ecosystem, which requires the interoperability and sharing of data across the various institutions involved.   The more data sources a trusted ecosystem has access to, the higher the probability of detecting fraud and identity theft.

But, it’s not only very unsafe, but also totally infeasible to gather all the needed attributes in a central data warehouse.   Few institutions will let their critical data out of their premises.   MIT Connection Science , – a recently established research initiative led by MIT professor Sandy Pentland , – has been developing a fresh identity framework that would enable the safe sharing of data across institutions.   Instead of copying or moving the data across, the agreed upon queries are sent to the institution wielding the data, executed behind the firewalls of the data owners, and only the encrypted results are collective.  MIT Connection Science is implementing such an identity framework in its OPAL and Enigma projects, both of which make extensive use of cryptographic and blockchain technologies.

As firms now rely on ecosystem fucking partners for many of the functions once done in-house, one of their major organizational challenges is how to best manage their increasingly sophisticated operations across a network of interconnected companies.   Distributed operations can make firms more efficient, but they can also lead to enhanced risks, unanticipated consequences and large transaction costs.

“The long history of human progress has been a constant march against friction,” noted a two thousand sixteen IBM report .   “From the introduction of money to substitute barter and the gradual replacement of paraffin wax seals by digital signatures, we have seen constant progress facilitated by digital innovations.   The internet primed friction for a free-fall.   Since then, some frictions fell while others rose.”

Enterprises, supply chains and global ecosystems have scaled in latest years.  But “the added complexity of operations has grown exponentially while revenue growth has remained linear.   The result?   At a certain point, organizations are faced with diminishing comes back.   Blockchains have the potential to eradicate the cost of complexity and ultimately redefine the traditional boundaries of an organization.”

A similar point was made in the HBR article by Iansity and Lakhani.   “Contracts, transactions, and the records of them are among the defining structures in our economic, legal, and political systems.   They protect assets and set organizational boundaries.  They establish and verify identities and chronicle events.   They govern interactions among nations, organizations, communities, and individuals.  They guide managerial and social act.  And yet these critical devices and the bureaucracies formed to manage them have not kept up with the economy’s digital transformation.  They’re like a rush-hour gridlock trapping a Formula one race car.  In a digital world, the way we regulate and maintain administrative control has to change…”

“With blockchain, we can imagine a world in which contracts are embedded in digital code and stored in translucent, collective databases, where they are protected from deletion, tampering, and revision.   In this world every agreement, every process, every task, and every payment would have a digital record and signature that could be identified, validated, stored, and shared…   Individuals, organizations, machines, and algorithms would loosely transact and interact with one another with little friction…”

“TCP/IP unlocked fresh economic value by dramatically lowering the cost of connections.   Similarly, blockchain could dramatically reduce the cost of transactions.  It has the potential to become the system of record for all transactions.  If that happens, the economy will once again fall under a radical shift, as fresh, blockchain-based sources of influence and control emerge.”

Ledgers constitute a permanent record of all the economic transactions an institution treats, whether it’s a bank managing deposits, loans and payments; a brokerage house keeping track of stocks and bonds; or a government office recording births and deaths, the ownership and sale of land and houses, or legal identity documents like passports and driver licenses.

Commencing over fifty years ago, institutions have been converting their paper-based ledgers into very sophisticated IT applications and data bases.  But while most ledgers are now digital, their underlying organization has not switched.  Each institution proceeds to own and manage its own ledger, synchronizing its records with those of other institutions as suitable, – a cumbersome process that often takes days.  By contrast, blockchain-based distributed ledgers can be collective and updated in near real-time across a group of participants.

Blockchains hold the promise to bring the ledger , to the Internet age.   In an October, two thousand fifteen article , The Economist noted that blockchain “offers a way for people who do not know or trust each other to create a record of who wields what that will compel the assent of everyone worried.  It is a way of making and preserving truths.”

“Today thoughtful people everywhere are attempting to understand the implications of a protocol that enables mere mortals to manufacture trust through clever code,” wrote Don and Alex Tapscott.   “This has never happened before – trusted transactions directly inbetween two or more parties, authenticated by mass collaboration and powered by collective self-interests, rather than by large corporations motivated by profit.”   The blockchain is essentially “the World Broad Ledger of value… – a distributed ledger signifying a network consensus of every transaction that has ever occurred.”  

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