Blockchain Revolution

ALSOBY

DonTapscott

ParadigmShift:TheNewPromiseofInformationTechnology(1993)

Coauthor,ArtCaston

TheDigitalEconomy:PromiseandPerilintheAgeofNetworkedIntelligence(1995)

GrowingUpDigital:TheRiseoftheNetGeneration(1997)

WhoKnows:SafeguardingYourPrivacyinaNetworkedWorld(1997)

Coauthor,AnnCavoukian

DigitalCapital:HarnessingthePowerofBusinessWebs(2000)

Coauthors,DavidTicollandAlexLowy

TheNakedCorporation:HowtheAgeofTransparencyWillRevolutionizeBusiness

(2003)

Coauthor,DavidTicoll

Wikinomics:HowMassCollaborationChangesEverything(2006)

Coauthor,AnthonyD.Williams

GrownUpDigital:HowtheNetGenerationIsChangingtheWorld(2008)

Macrowikinomics:NewSolutionsforaConnectedPlanet(2010)

Coauthor,AnthonyD.Williams

AnimprintofPenguinRandomHouseLLC

375HudsonStreet

NewYork,NewYork10014

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andcreatesavibrantculture.Thankyouforbuyinganauthorizededitionofthisbookandforcomplying

withcopyrightlawsbynotreproducing,scanning,ordistributinganypartofitinanyformwithout

permission.YouaresupportingwritersandallowingPenguintocontinuetopublishbooksforeveryreader.

ISBN:9781101980132

InternationaleditionISBN:9780399564062

ISBN:9781101980156(ebook)

Whiletheauthorhasmadeeveryefforttoprovideaccuratetelephonenumbers,Internetaddresses,and

othercontactinformationatthetimeofpublication,neitherthepublishernortheauthorassumesany

responsibilityforerrorsorforchangesthatoccurafterpublication.Further,thepublisherdoesnothaveany

controloveranddoesnotassumeanyresponsibilityforauthororthird-partyWebsitesortheircontent.

Version_1

ToAnaLopesandAmyWelsmanforenablingthisbook,andforunderstanding

that“it’sallabouttheblockchain.”

“Amasterpiece.Gracefullydissectsthepotentialofblockchaintechnologytotakeontoday’smostpressingglobal

challenges.”

—HernandoDeSoto,EconomistandPresident,InstituteforLibertyandDemocracy,Peru

“TheblockchainistotrustastheInternetistoinformation.LiketheoriginalInternet,blockchainhaspotentialto

transformeverything.Readthisbookandyouwillunderstand.”

—JoichiIto,Director,MITMediaLab

“Inthisextraordinaryjourneytothefrontiersoffinance,theTapscottsshednewlightontheblockchain

phenomenonandmakeacompellingcaseforwhyweallneedtobetterunderstanditspowerandpotential.”

—DaveMcKay,PresidentandCEO,RoyalBankofCanada

“Deconstructsthepromiseandperiloftheblockchaininawaythatisatonceaccessibleanderudite.Blockchain

Revolutiongivesreadersaprivilegedsneakpeakatthefuture.”

—AlecRoss,author,TheIndustriesoftheFuture

“Ifevertherewasatopicfordemystification,blockchainisit.Together,theTapscottshaveachievedthis

comprehensivelyandindoingsohavecapturedtheexcitement,thepotential,andtheimportanceofthistopicto

everyone.”

—BlytheMasters,CEO,DigitalAssetHoldings

“ThisisabookwiththepredictivequalityofOrwell’s1984andthevisionofElonMusk.Readitorbecome

extinct.”

—TimDraper,Founder,DraperAssociates,DFJ,andDraperUniversity

“Blockchainisaradicaltechnologicalwaveand,ashehasdonesooften,Tapscottisoutthere,nowwithsonAlex,

surfingatdawn.It’squitearide.”

—YochaiBenkler,BerkmanProfessorofEntrepreneurialLegalStudies,HarvardLawSchool

“Ifyouworkinbusinessorgovernment,youneedtounderstandtheblockchainrevolution.Noonehaswrittena

morethoroughlyresearchedorengagingbookonthistopicthanTapscottandTapscott.”

—ErikBrynjolfsson,ProfessoratMIT;coauthorofTheSecondMachineAge

“Anindispensableandup-to-the-minuteaccountofhowthetechnologyunderlyingbitcoincould—andshould—

unleashthetruepotentialofadigitaleconomyfordistributedprosperity.”

—DouglasRushkoff,authorofPresentShockandThrowingRocksattheGoogleBus

“Technologicalchangethatusedtodevelopoveragenerationnowhitsusinarelativeblinkoftheeye,andnoone

tellsthisstorybetterthantheTapscotts.”

—EricSpiegel,PresidentandCEO,SiemensUSA

“FewleaderspushustolookaroundcornersthewayDonTapscottdoes.WithBlockchainRevolutionheandhis

sonAlexteachus,challengeus,andshowusanentirelynewwaytothinkaboutthefuture.”

—BillMcDermott,CEO,SAPSE

“BlockchainRevolutionisabrilliantmixofhistory,technology,andsociologythatcoversallaspectsofthe

blockchainprotocol—aninventionthatintimemayproveasmomentousastheinventionofprinting.”

—JamesRickards,authorofCurrencyWarsandTheDeathofMoney

“BlockchainRevolutionservesasanatlastotheworldofdigitalmoney,masterfullyexplainingthecurrent

landscapewhilesimultaneouslyilluminatingapathforwardtowardamoreequitable,efficient,andconnected

globalfinancialsystem.”

—JimBreyer,CEO,BreyerCapital

“BlockchainRevolutionistheindispensableanddefinitiveguidetothisworld-changingtechnology.”

—JerryBrito,ExecutiveDirector,CoinCenter

“Incredible.Reallyincredible.TheTapscotts’examinationoftheblockchainasamodelforinclusioninan

increasinglycentralizedworldisbothnuancedandextraordinary.”

—SteveLuczo,ChairmanandCEO,SeagateTechnology

“Makesapowerfulcaseforblockchain’sabilitytoincreasetransparencybutalsoensureprivacy.Intheauthors’

words,‘TheInternetofThingsneedsaLedgerofThings.’”

—ChandraChandrasekaran,CEOandManagingDirector,TataConsultancyServices

“Theepicenteroftrustisabouttodiffuse!Thedefinitivenarrativeontherevolutionarypossibilitiesofa

decentralizedtrustsystem.”

—FrankD’Souza,CEO,Cognizant

“Identifiesaprofoundnewtechnologymovementandconnectsittothedeepestofhumanneeds:trust.Thoroughly

researchedandprovocativelywritten.EveryseriousbusinesspersonandpolicymakerneedstoreadBlockchain

Revolution.”

—BrianFetherstonhaugh,ChairmanandCEO,OgilvyOneWorldwide

“BlockchainRevolutionsetsthetableforawaveoftechnologicaladvancementthatisonlyjustbeginning.”

—FrankBrown,ManagingDirectorandChiefOperatingOffice,GeneralAtlantic

“Amustread.You’llgainadeepunderstandingofwhytheblockchainisquicklybecomingoneofthemost

importantemergingtechnologiessincetheInternet.”

—BrianForde,DirectorofDigitalCurrencyInitiative,MITMediaLab

“Blockchaintechnologyhasthepotentialtorevolutionizeindustry,finance,andgovernment—amustreadfor

anyoneinterestedinthefutureofmoneyandhumanity.”

—PerianneBoring,FounderandPresident,ChamberofDigitalCommerce

“Whengenerationaltechnologychangestheworldinwhichwelive,wearetrulyfortunatetohavecartographers

likeDonTapscott,andnowhissonAlex,toexplainwherewe’regoing.”

—RayLane,ManagingPartner,GreatPointVentures;PartnerEmeritus,KleinerPerkins

“DonandAlexhavewrittenthedefinitiveguidebookforthosetryingtonavigatethisnewandpromisingfrontier.”

—BenjaminLawsky,FormerSuperintendentofFinancialServices,StateofNewYork;CEOofThe

LawskyGroup

“BlockchainRevolutionisanilluminating,criticallyimportantmanifestoforthenextdigitalage.”

—DanPontefract,authorofThePurposeEffect;ChiefEnvisioner,TELUS

“Themostwell-researched,thorough,andinsightfulbookonthemostexcitingnewtechnologysincetheInternet.

Aworkofexceptionalclarityandastonishinglybroadanddeepinsight.”

—AndreasAntonopoulos,authorofMasteringBitcoin

“BlockchainRevolutionbeautifullycapturesandilluminatesthebravenewworldofdecentralized,trustless

money.”

—TylerWinklevoss,Cofounder,GeminiandWinklevossCapital

“Afascinating—andreassuring—insightintoatechnologywiththepowertoremaketheglobaleconomy.Whata

prize.Whatabook!”

—PaulPolman,CEO,Unilever

CONTENTS
AlsobyDonTapscott
TitlePage
Copyright
Dedication
PraiseforDonTapscottandAlexTapscott
Acknowledgments
PARTI:SayYouWantaRevolution
CHAPTER1:TheTrustProtocol
InSearchoftheTrustProtocol
HowThisWorldwideLedgerWorks
ARationalExuberancefortheBlockchain
AchievingTrustintheDigitalAge
ReturnoftheInternet
YourPersonalAvatarandtheBlackBoxofIdentity
APlanforProsperity
PromiseandPeriloftheNewPlatform
CHAPTER2:BootstrappingtheFuture:SevenDesignPrinciplesofthe
BlockchainEconomy
TheSevenDesignPrinciples
1.NetworkedIntegrity
2.DistributedPower
3.ValueasIncentive
4.Security
5.Privacy

6.RightsPreserved
7.Inclusion
DesigningtheFuture
PARTII:Transformations
CHAPTER3:ReinventingFinancialServices
ANewLookfortheWorld’sSecond-OldestProfession
TheGoldenEight:HowtheFinancialServicesSectorWillChange
FromStockExchangestoBlockExchanges
Dr.Faust’sBlockchainBargain
TheBankApp:WhoWillWininRetailBanking
GoogleTranslateforBusiness:NewFrameworksforAccountingandCorporate
Governance
Reputation:YouAreYourCreditScore
TheBlockchainIPO
TheMarketforPredictionMarkets
RoadMapfortheGoldenEight
CHAPTER4:Re-architectingtheFirm:TheCoreandtheEdges
BuildingConsenSys
ChangingtheBoundariesoftheFirm
DeterminingCorporateBoundaries
CHAPTER5:NewBusinessModels:MakingItRainontheBlockchain
bAirbnbVersusAirbnb
GlobalComputing:TheRiseofDistributedApplications
TheDAppKings:DistributedBusinessEntities
AutonomousAgents
DistributedAutonomousEnterprises
TheBigSeven:OpenNetworkedEnterpriseBusinessModels
HackingYourFuture:BusinessModelInnovation

CHAPTER6:TheLedgerofThings:AnimatingthePhysicalWorld
PowertothePeople
TheEvolutionofComputing:FromMainframestoSmartPills
TheInternetofThingsNeedsaLedgerofThings
TheTwelveDisruptions:AnimatingThings
TheEconomicPayoff
TheFuture:FromUbertoSUber
HackingYourFutureforaWorldofSmartThings
CHAPTER7:SolvingtheProsperityParadox:EconomicInclusionand
Entrepreneurship
APigIsNotaPiggyBank
TheNewProsperityParadox
RoadMaptoProsperity
Remittances:TheStoryofAnalieDomingo
BlockchainHumanitarianAid
SafeasHouses?TheRoadtoAssetOwnership
ImplementationChallengesandLeadershipOpportunities
CHAPTER8:RebuildingGovernmentandDemocracy
SomethingIsRottenintheState
High-PerformanceGovernmentServicesandOperations
EmpoweringPeopletoServeSelvesandOthers
TheSecondEraofDemocracy
BlockchainVoting
AlternativeModelsofPoliticsandJustice
EngagingCitizenstoSolveBigProblems
WieldingToolsofTwenty-first-CenturyDemocracy
CHAPTER9:FreeingCultureontheBlockchain:MusictoOurEars
FairTradeMusic:FromStreamingMusictoMeteringRights
ArtleryforArtLovers:ConnectingArtistsandPatrons
Privacy,FreeSpeech,andFreePressontheBlockchain

GettingtheWordOut:TheCriticalRoleofEducation
CultureontheBlockchainandYou
PARTIII:PromiseandPeril
CHAPTER10:OvercomingShowstoppers:TenImplementation
Challenges
1.TheTechnologyIsNotReadyforPrimeTime
2.TheEnergyConsumedIsUnsustainable
3.GovernmentsWillStifleorTwistIt
4.PowerfulIncumbentsoftheOldParadigmWillUsurpIt
5.TheIncentivesAreInadequateforDistributedMassCollaboration
6.TheBlockchainIsaJobKiller
7.GoverningtheProtocolsIsLikeHerdingCats
8.DistributedAutonomousAgentsWillFormSkynet
9.BigBrotherIs(Still)WatchingYou
10.CriminalsWillUseIt
ReasonsBlockchainWillFailorImplementationChallenges?
CHAPTER11:LeadershipfortheNextEra
WhoWillLeadaRevolution?
TheBlockchainEcosystem:YouCan’tTellthePlayersWithoutaRoster
ACautionaryTaleofBlockchainRegulation
TheSenatorWhoWouldChangetheWorld
CentralBanksinaDecentralizedEconomy
RegulationVersusGovernance
ANewFrameworkforBlockchainGovernance
ANewAgendafortheNextDigitalAge
TheTrustProtocolandYou
Notes
Index

ACKNOWLEDGMENTS

Thisbookcamefromthemeetingoftwomindsandtwolifetrajectories.Donhad

beenleadinga$4millionsyndicatedresearchprogramcalledGlobalSolution

Networks(GSN)attheRotmanSchoolofManagement,UniversityofToronto.The

initiativewasinvestigatingnew,networkedmodelsofglobalproblemsolvingand

governance.HeresearchedhowtheInternetwasgovernedbyamultistakeholder

ecosystemandbecameinterestedindigitalcurrenciesandtheirgovernance.

Meanwhile,AlexwasanexecutivewiththeinvestmentbankCanaccordGenuity.He

noticedthegrowingenthusiasmforearly-stagebitcoinandblockchaincompaniesin

2013andbeganleadinghisfirm’seffortsinthespace.Duringafather-sonskitripto

Mont-Tremblantinearly2014,webrainstormedoverdinneraboutcollaboratingon

thistopic,andAlexagreedtoleadaresearchprojectonthegovernanceofdigital

currencies,culminatinginhiswhitepaper,titledABitcoinGovernanceNetwork.The

morewedugintotheissues,themoreweconcludedthatthiscouldbethenextbig

thing.

Meanwhileouragent,WesNeffattheLeighBureau,alongwithDon’spublisher

AdrianZackheimatPortfolio/Penguin(Wikinomics,Macrowikinomics),was

encouragingDontoformulateanewbookconcept.WhenAlex’spaperbecame

widelyrecognizedasleadingthinkinginthisarea,DonapproachedAlextobehis

coauthor.Adrian,tohiscredit,madeusanofferwecouldn’trefuseandthebook

neverwenttoauction,asisnormallythecase.

Wethenmadewhatinhindsightwasasmartdecision.Weapproachedthebest

bookeditorweknew,KirstenSandberg,formerlyofHarvardBusinessSchoolPress,

andaskedhertoeditourbookproposal.Shedidaspectacularjobandour

collaborationwassoeffortlessthatweaskedhertobeafull-timememberofthebook

researchteam.Kirstenparticipatedwithusinmorethanonehundredinterviewsand

collaboratedinrealtimeaswetriedtounderstandthemyriadissuesonthetableand

develophelpfulformulationstoexplainthisextraordinarysetofdevelopmentstoa

nontechnicalaudience.Shehelpedusbringthestorytolife.Inthatsense,shewasour

coauthorandthisbookwouldnothaveappeared,atleastinitscurrentcomprehensible

form,withouther.Forthat,andforallthestimulationandlaughlines,wearevery

grateful.

Ourheartfeltthankstothepeoplebelowwhogenerouslysharedtheirtimeand

insightswithusandwithoutwhomthisbookwouldnotbepossible.Inalphabetical

order:

JeremyAllaire,Founder,Chairman,andCEO,Circle

MarcAndreessen,Cofounder,AndreessenHorowitz

GavinAndresen,ChiefScientist,BitcoinFoundation

DinoAngaritis,CEO,Smartwallet

AndreasAntonopoulos,Author,MasteringBitcoin

FedericoAst,CrowdJury

SusanAthey,EconomicsofTechnologyProfessor,StanfordGraduateSchoolof

Business

AdamBack,CofounderandPresident,Blockstream

BillBarhydt,CEO,Abra

ChristopherBavitz,ManagingDirector,CyberlawClinic,HarvardLawSchool

GeoffBeattie,Chairman,RelayVentures

SteveBeauregard,CEOandFounder,GoCoin

MarianoBelinky,ManagingPartner,SantanderInnoVentures

YochaiBenkler,BerkmanProfessorofEntrepreneurialStudies,HarvardLawSchool

JakeBenson,CEOandFounder,LibraTax

TimBerners-Lee,Inventor,WorldWideWeb

DougBlack,Senator,CanadianSenate,GovernmentofCanada

PerrianeBoring,FounderandPresident,ChamberofDigitalCommerce

DavidBray,2015EisenhowerFellowandHarvardVisitingExecutiveinResidence

JerryBrito,ExecutiveDirector,CoinCenter

PaulBrody,AmericasStrategyLeader,TechnologyGroup,EY(formerlyIoTatIBM)

RichardG.Brown,CTO,R3CEV(formerExecutiveArchitectforIndustry

InnovationandBusinessDevelopment,IBM)

VitalikButerin,Founder,Ethereum

PatrickByrne,CEO,Overstock

BruceCahan,VisitingScholar,StanfordEngineering;StanfordSustainableBanking

Initiative

JamesCarlyle,ChiefEngineer,MD,R3CEV

NicolasCary,Cofounder,BlockchainLtd.

ToniLaneCasserly,CEO,CoinTelegraph

ChristianCatalini,AssistantProfessor,MITSloanSchoolofManagement

AnnCavoukian,ExecutiveDirector,PrivacyandBigDataInstitute,Ryerson

University

VintCerf,Co-creatoroftheInternetandChiefInternetEvangelist,Google

BenChan,SeniorSoftwareEngineer,BitGo

RobinChase,CofounderandFormerCEO,Zipcar

FadiChehadi,CEO,ICANN

ConstanceChoi,Principal,SevenAdvisory

JohnH.Clippinger,CEO,ID3,ResearchScientist,MITMediaLab

BramCohen,Creator,BitTorrent

AmyCortese,Journalist,Founder,Locavest

J-FCourville,ChiefOperatingOfficer,RBCWealthManagement

PatrickDeegan,CTO,PersonalBlackBox

PrimaveraDeFilippi,PermanentResearcher,CNRSandFacultyAssociateatthe

BerkmanCenterforInternetandSocietyatHarvardLawSchool

HernandodeSoto,President,InstituteforLibertyandDemocracy

PeronetDespeignes,SpecialOps,Augur

JacobDienelt,BlockchainArchitectandCFO,itBitandFactom

JoelDietz,SwarmCorp

HelenDisney,(formerly)BitcoinFoundation

AdamDraper,CEOandFounder,BoostVC

TimothyCookDraper,VentureCapitalist;Founder,DraperFisherJurvetson

AndrewDudley,FounderandCEO,EarthObservation

JoshuaFairfield,ProfessorofLaw,WashingtonandLeeUniversity

GrantFondo,Partner,SecuritiesLitigationandWhiteCollarDefenseGroup,Privacy

andDataSecurityPractice,GoodwinProcterLLP

BrianForde,FormerSeniorAdviser,TheWhiteHouse;Director,DigitalCurrency,

MITMediaLab

MikeGault,CEO,Guardtime

GeorgeGilder,FounderandPartner,GilderTechnologyFund

GeoffGordon,CEO,Vogogo

VinayGupta,ReleaseCoordinator,Ethereum

JamesHazard,Founder,CommonAccord

ImogenHeap,Grammy-WinningMusicianandSongwriter

MikeHearn,FormerGoogleEngineer,Vinumeris/Lighthouse

AustinHill,CofounderandChiefInstigator,Blockstream

ToomasHendrikIlves,PresidentofEstonia

JoichiIto,Director,MITMediaLab

EricJennings,CofounderandCEO,Filament

IzabellaKaminska,FinancialReporter,FinancialTimes

PaulKemp-Robertson,CofounderandEditorialDirector,Contagious

Communications

AndrewKeys,ConsensusSystems

JoyceKim,ExecutiveDirector,StellarDevelopmentFoundation

PeterKirby,CEOandCofounder,Factom

JoeyKrug,CoreDeveloper,Augur

HalukKulin,CEO,PersonalBlackBox

ChrisLarsen,CEO,RippleLabs

BenjaminLawsky,FormerSuperintendentofFinancialServicesfortheStateofNew

York;CEO,TheLawskyGroup

CharlieLee,Creator,CTO;FormerEngineeringManager,Litecoin

MatthewLeibowitz,Partner,PlazaVentures

VinnyLingham,CEO,Gyft

JuanLlanos,EVPofStrategicPartnershipsandChiefTransparencyOfficer,

Bitreserve.org

JosephLubin,CEO,ConsensusSystems

AdamLudwin,Founder,Chain.com

ChristianLundkvist,Balanc3

DavidMcKay,PresidentandChiefExecutiveOfficer,RBC

JannaMcManus,GlobalPRDirector,BitFury

MickeyMcManus,MayaInstitute

JesseMcWaters,FinancialInnovationSpecialist,WorldEconomicForum

BlytheMasters,CEO,DigitalAssetHoldings

AlistairMitchell,ManagingPartner,GenerationVentures

CarlosMoreira,Founder,Chairman,andCEO,WISeKey

TomMornini,FounderandCustomerAdvocate,Subledger

EthanNadelmann,ExecutiveDirector,DrugPolicyAlliance

AdamNanjee,HeadofFintechCluster,MaRS

DanielNeis,CEOandCofounder,KOINA

KellyOlson,NewBusinessInitiative,Intel

SteveOmohundro,President,Self-AwareSystems

JimOrlando,ManagingDirector,OMERSVentures

LawrenceOrsini,CofounderandPrincipal,LO3Energy

PaulPacifico,CEO,FeaturedArtistsCoalition

JosePagliery,StaffReporter,CNNMoney

StephenPair,CofounderandCEO,BitPayInc.

VikramPandit,FormerCEO,Citigroup;CoinbaseInvestor,PortlandSquareCapital

JackPeterson,CoreDeveloper,Augur

EricPiscini,Principal,Banking/Technology,DeloitteConsulting

KausikRajgopal,SiliconValleyOfficeLeader,McKinseyandCompany

SureshRamamurthi,ChairmanandCTO,CBWBank

SunnyRay,CEO,Unocoin.com

CaterinaRindi,CommunityManager,SwarmCorp

EduardoRoblesElvira,CTO,AgoraVoting

KeonneRodriguez,ProductLead,BlockchainLtd.

MatthewRoszak,FounderandCEO,TallyCapital

ColinRule,ChairmanandCEO,Modria.com

MarcoSantori,Counsel,PillsburyWinthropShawPittmanLLP

FrankSchuil,CEO,Safello

BarrySilbert,FounderandCEO,DigitalCurrencyGroup

ThomasSpaas,Director,BelgiumBitcoinAssociation

BalajiSrinivasan,CEO,21;Partner,AndreessenHorowitz

LynnSt.Amour,FormerPresident,TheInternetSociety

BrettStapper,FounderandCEO,FalconGlobalCapitalLLC

ElizabethStark,VisitingFellow,YaleLawSchool

JuttaSteiner,Ethereum/Provenance

MelanieSwan,Founder,InstituteforBlockchainStudies

NickSzabo,GWULaw

AshleyTaylor,ConensysSystems

SimonTaylor,VPEntrepreneurialPartnerships,Barclays

DavidThomson,Founder,Artlery

MichelleTinsley,Director,MobilityandPaymentSecurity,Intel

PeterTodd,ChiefNaysayer,CoinKite

JasonTyra,CoinDesk

ValeryVavilov,CEO,BitFury

AnnLouiseVehovec,SeniorVicePresident,StrategicProjects,RBCFinancialGroup

RogerVer,“TheBitcoinJesus,”MemorydealersKK

AkseliVirtanen,HedgeFundManager,RobinHoodAssetManagement

ErikVoorhees,CEOandFounder,ShapeShift

JoeWeinberg,CofounderandCEO,Paycase

DerekWhite,ChiefDesignandDigitalOfficer,BarclaysBank

TedWhitehead,SeniorManagingDirector,ManulifeAssetManagement

ZookoWilcox-O’Hearn,CEO,LeastAuthorityEnterprises

CarolynWilkins,SeniorDeputyGovernor,BankofCanada

RobertWilkins,CEO,myVBO

CameronWinklevoss,Founder,WinklevossCapital

TylerWinklevoss,Founder,WinklevossCapital

PindarWong,InternetPioneer,ChairmanofVeriFi

GabrielWoo,VicePresidentofInnovation,RBCFinancialGroup

GavinWood,CTO,EthereumFoundation

AaronWright,Professor,CardozoLawSchool,YeshivaUniversity

JonathanZittrain,HarvardLawSchool

Alsospecialthankstoafewpeoplewhoreallyrolleduptheirsleevestohelp.

AnthonyWilliamsandJoanBighamoftheGSNprojectworkedcloselywithAlexon

theoriginaldigitalcurrenciesgovernancepaper.FormerCiscoexecutiveJoan

McCalladiddeepresearchforthechaptersontheInternetofThingsandalso

GovernmentandDemocracy.Wereceivedalotoffamilialsupport.ITexecutiveBob

Tapscottspentmanydaysdownloadingandgettingunderthehoodoftheentire

bitcoinblockchaintogiveusfirsthandinsightsonsomeofthetechnicalissues.

TechnologyentrepreneurBillTapscottcameupwiththerevolutionaryideaofa

blockchain-basedpersonalcarboncredittradingsystem,andtechnologyexecutive

NikiTapscottandherhusband,financialanalystJamesLeo,havebeengreatsounding

boardsthroughout.KatherineMacLellanoftheTapscottGroup(convenientlya

lawyer)tackledsomeofthetougherissuesaroundsmartcontractsaswellas

managingtheinterviewprocess.PhilCourneyeurwasonthelookoutdailyforjuicy

material,andDavidTicollprovidedhelpfulinsightsaboutthestateofthedigitalage

sofar.WesNeffandBillLeighoftheLeighBureauhelpeduscraftthebookconcept

(howmanybooksisthis,guys?).Asalways(nowmorethantwentyyears),Jody

Stevensflawlesslymanagedtheadministrationfortheentireprojectincluding

databases,finances,anddocumentmanagement,aswellastheproofreadingand

productionprocess—afull-timejob,inadditiontoherotherfull-timejobsatthe

TapscottGroup.

SpecialthankstoDinoMarkAngaritis,theCEOofblockchaincompany

Smartwallet;JosephLubin,CEOoftheEthereumdevelopmentstudioConsensus

Systems;andCarlosMoreiraoffast-growingsecuritycompanyWISeKey—whoeach

spentconsiderabletimewithusbrainstormingideas.Theyareeachbrilliantandso

kindtohelpusout.Nowwegettoenjoywitnessingthesuccessofeachoftheir

businessesinthisspace.AlsobigthankstothegreatteamatPenguinRandomHouse

ledbyoureditorJesseMaeshiroandoverseenbyAdrianZackheim.

Mostimportant,we’dliketogiveourheartfeltthankstoourwives,AnaLopes

(Don)andAmyWelsman(Alex),whomorethantoleratedourobsessionwith

crackingthisbignutoverthebetterpartofayear.Wearebothveryfortunatetohave

suchwonderfullifepartners.

Writingthisbookhasbeenajoyousexperienceforbothofusandit’sfairtosay

thatwelovedeveryminuteofit.Assomeonefamousoncesaid,“Iftwopeopleagree

oneverything,oneofthemisunnecessary.”Wechallengedeachotherdailytotestour

beliefsandassumptions,andthisbookislivingproofofthathealthyandvigorous

collaboration.Mindyou,collaboratingdoesseemeffortlesswhenyousharesomuch

DNAandhaveasharedthirty-yearhistoryofexploringtheworldtogether.Wedo

hopeyoufindtheproductofthiscollaborationimportantandhelpful.

DonTapscottandAlexTapscott,January2016

PARTI

SAYYOUWANTAREVOLUTION

CHAPTER1



THETRUSTPROTOCOL

tappearsthatonceagain,thetechnologicalgeniehasbeenunleashed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atthecan—

totransformtheeconomicpowergridandtheoldorderofhumanaffairsforthe

better.Ifwewillit.

Letusexplain.

ThefirstfourdecadesoftheInternetbroughtuse-mail,theWorldWideWeb,dot-

coms,socialmedia,themobileWeb,bigdata,cloudcomputing,andtheearlydaysof

theInternetofThings.Ithasbeengreatforreducingthecostsofsearching,

collaborating,andexchanginginformation.Ithasloweredthebarrierstoentryfor

newmediaandentertainment,newformsofretailingandorganizingwork,and

unprecedenteddigitalventures.Throughsensortechnology,ithasinfusedintelligence

intoourwallets,ourclothing,ourautomobiles,ourbuildings,ourcities,andevenour

biology.Itissaturatingourenvironmentsocompletelythatsoonwewillnolonger

“logon”butrathergoaboutourbusinessandourlivesimmersedinpervasive

technology.

Overall,theInternethasenabledmanypositivechanges—forthosewithaccessto

it—butithasseriouslimitationsforbusinessandeconomicactivity.TheNewYorker

couldrerunPeterSteiner’s1993cartoonofonedogtalkingtoanotherwithout

revision:“OntheInternet,nobodyknowsyou’readog.”Online,westillcan’treliably

establishoneanother’sidentitiesortrustoneanothertotransactandexchangemoney

withoutvalidationfromathirdpartylikeabankoragovernment.Thesesame

intermediariescollectourdataandinvadeourprivacyforcommercialgainand

nationalsecurity.EvenwiththeInternet,theircoststructureexcludessome2.5billion

peoplefromtheglobalfinancialsystem.Despitethepromiseofapeer-to-peer

empoweredworld,theeconomicandpoliticalbenefitshaveproventobe

asymmetrical—withpowerandprosperitychanneledtothosewhoalreadyhaveit,

evenifthey’renolongerearningit.Moneyismakingmoremoneythanmanypeople

do.

Technologydoesn’tcreateprosperityanymorethanitdestroysprivacy.However,

inthisdigitalage,technologyisattheheartofjustabouteverything—goodandbad.

Itenableshumanstovalueandtoviolateoneanother’srightsinprofoundnewways.

Theexplosioninonlinecommunicationandcommerceiscreatingmoreopportunities

forcybercrime.Moore’slawoftheannualdoublingofprocessingpowerdoublesthe

poweroffraudstersandthieves—“Moore’sOutlaws”

—nottomentionspammers,

identitythieves,phishers,spies,zombiefarmers,hackers,cyberbullies,and

datanappers—criminalswhounleashransomwaretoholddatahostage—thelistgoes

on.

INSEARCHOFTHETRUSTPROTOCOL

Asearlyas1981,inventorswereattemptingtosolvetheInternet’sproblemsof

privacy,security,andinclusionwithcryptography.Nomatterhowtheyreengineered

theprocess,therewerealwaysleaksbecausethirdpartieswereinvolved.Payingwith

creditcardsovertheInternetwasinsecurebecauseusershadtodivulgetoomuch

personaldata,andthetransactionfeesweretoohighforsmallpayments.

In1993,abrilliantmathematiciannamedDavidChaumcameupwitheCash,a

digitalpaymentsystemthatwas“atechnicallyperfectproductwhichmadeitpossible

tosafelyandanonymouslypayovertheInternet....Itwasperfectlysuitedtosending

electronicpennies,nickels,anddimesovertheInternet.”

Itwassoperfectthat

MicrosoftandotherswereinterestedinincludingeCashasafeatureintheir

software.

Thetroublewas,onlineshoppersdidn’tcareaboutprivacyandsecurity

onlinethen.Chaum’sDutchcompanyDigiCashwentbankruptin1998.

Aroundthattime,oneofChaum’sassociates,NickSzabo,wroteashortpaper

entitled“TheGodProtocol,”atwistonNobellaureateLeonLederman’sphrase“the

Godparticle,”referringtotheimportanceoftheHiggsbosontomodernphysics.In

hispaper,Szabomusedaboutthecreationofabe-allend-alltechnologyprotocol,one

thatdesignatedGodthetrustedthirdpartyinthemiddleofalltransactions:“Allthe

partieswouldsendtheirinputstoGod.Godwouldreliablydeterminetheresultsand

returntheoutputs.Godbeingtheultimateinconfessionaldiscretion,nopartywould

learnanythingmoreabouttheotherparties’inputsthantheycouldlearnfromtheir

owninputsandtheoutput.”

Hispointwaspowerful:DoingbusinessontheInternet

requiresaleapoffaith.Becausetheinfrastructurelacksthemuch-neededsecurity,we

oftenhavelittlechoicebuttotreatthemiddlemenasiftheyweredeities.

Adecadelaterin2008,theglobalfinancialindustrycrashed.Perhapspropitiously,

apseudonymouspersonorpersonsnamedSatoshiNakamotooutlinedanewprotocol

forapeer-to-peerelectroniccashsystemusingacryptocurrencycalledbitcoin.

Cryptocurrencies(digitalcurrencies)aredifferentfromtraditionalfiatcurrencies

becausetheyarenotcreatedorcontrolledbycountries.Thisprotocolestablishedaset

ofrules—intheformofdistributedcomputations—thatensuredtheintegrityofthe

dataexchangedamongthesebillionsofdeviceswithoutgoingthroughatrustedthird

party.Thisseeminglysubtleactsetoffasparkthathasexcited,terrified,orotherwise

capturedtheimaginationofthecomputingworldandhasspreadlikewildfireto

businesses,governments,privacyadvocates,socialdevelopmentactivists,media

theorists,andjournalists,tonameafew,everywhere.

“They’relike,‘Ohmygod,thisisit.Thisisthebigbreakthrough.Thisisthe

thingwe’vebeenwaitingfor,’”saidMarcAndreessen,thecocreatorofthefirst

commercialWebbrowser,Netscape,andabiginvestorintechnologyventures.“‘He

solvedalltheproblems.WhoeverheisshouldgettheNobelPrize—he’sagenius.’

Thisisthething!ThisisthedistributedtrustnetworkthattheInternetalwaysneeded

andneverhad.”

Todaythoughtfulpeopleeverywherearetryingtounderstandtheimplicationsofa

protocolthatenablesmeremortalstomanufacturetrustthroughclevercode.Thishas

neverhappenedbefore—trustedtransactionsdirectlybetweentwoormoreparties,

authenticatedbymasscollaborationandpoweredbycollectiveself-interests,rather

thanbylargecorporationsmotivatedbyprofit.

ItmaynotbetheAlmighty,butatrustworthyglobalplatformforourtransactions

issomethingverybig.We’recallingittheTrustProtocol.

Thisprotocolisthefoundationofagrowingnumberofglobaldistributedledgers

calledblockchains—ofwhichthebitcoinblockchainisthelargest.Whilethe

technologyiscomplicatedandthewordblockchainisn’texactlysonorous,themain

ideaissimple.Blockchainsenableustosendmoneydirectlyandsafelyfrommeto

you,withoutgoingthroughabank,acreditcardcompany,orPayPal.

RatherthantheInternetofInformation,it’stheInternetofValueorofMoney.It’s

alsoaplatformforeveryonetoknowwhatistrue—atleastwithregardtostructured

recordedinformation.Atitsmostbasic,itisanopensourcecode:anyonecan

downloaditforfree,runit,anduseittodevelopnewtoolsformanagingtransactions

online.Assuch,itholdsthepotentialforunleashingcountlessnewapplicationsand

asyetunrealizedcapabilitiesthathavethepotentialtotransformmanythings.

HOWTHISWORLDWIDELEDGERWORKS

Bigbanksandsomegovernmentsareimplementingblockchainsasdistributedledgers

torevolutionizethewayinformationisstoredandtransactionsoccur.Theirgoalsare

laudable—speed,lowercost,security,fewererrors,andtheeliminationofcentral

pointsofattackandfailure.Thesemodelsdon’tnecessarilyinvolveacryptocurrency

forpayments.

However,themostimportantandfar-reachingblockchainsarebasedonSatoshi’s

bitcoinmodel.Here’showtheywork.

Bitcoinorotherdigitalcurrencyisn’tsavedinafilesomewhere;it’srepresented

bytransactionsrecordedinablockchain—kindoflikeaglobalspreadsheetorledger,

whichleveragestheresourcesofalargepeer-to-peerbitcoinnetworktoverifyand

approveeachbitcointransaction.Eachblockchain,liketheonethatusesbitcoin,is

distributed:itrunsoncomputersprovidedbyvolunteersaroundtheworld;thereisno

centraldatabasetohack.Theblockchainispublic:anyonecanviewitatanytime

becauseitresidesonthenetwork,notwithinasingleinstitutionchargedwithauditing

transactionsandkeepingrecords.Andtheblockchainisencrypted:itusesheavy-duty

encryptioninvolvingpublicandprivatekeys(ratherlikethetwo-keysystemtoaccess

asafetydepositbox)tomaintainvirtualsecurity.Youneedn’tworryabouttheweak

firewallsofTargetorHomeDepotorathievingstafferofMorganStanleyortheU.S.

federalgovernment.

Everytenminutes,liketheheartbeatofthebitcoinnetwork,allthetransactions

conductedareverified,cleared,andstoredinablockwhichislinkedtothepreceding

block,therebycreatingachain.Eachblockmustrefertotheprecedingblocktobe

valid.Thisstructurepermanentlytime-stampsandstoresexchangesofvalue,

preventinganyonefromalteringtheledger.Ifyouwantedtostealabitcoin,you’d

havetorewritethecoin’sentirehistoryontheblockchaininbroaddaylight.That’s

practicallyimpossible.Sotheblockchainisadistributedledgerrepresentinga

networkconsensusofeverytransactionthathaseveroccurred.LiketheWorldWide

Webofinformation,it’stheWorldWideLedgerofvalue—adistributedledgerthat

everyonecandownloadandrunontheirpersonalcomputer.

Somescholarshavearguedthattheinventionofdouble-entrybookkeeping

enabledtheriseofcapitalismandthenation-state.Thisnewdigitalledgerof

economictransactionscanbeprogrammedtorecordvirtuallyeverythingofvalueand

importancetohumankind:birthanddeathcertificates,marriagelicenses,deedsand

titlesofownership,educationaldegrees,financialaccounts,medicalprocedures,

insuranceclaims,votes,provenanceoffood,andanythingelsethatcanbeexpressed

incode.

Thenewplatformenablesareconciliationofdigitalrecordsregardingjustabout

everythinginrealtime.Infact,soonbillionsofsmartthingsinthephysicalworldwill

besensing,responding,communicating,buyingtheirownelectricityandsharing

importantdata,doingeverythingfromprotectingourenvironmenttomanagingour

health.ThisInternetofEverythingneedsaLedgerofEverything.Business,

commerce,andtheeconomyneedaDigitalReckoning.

Sowhyshouldyoucare?Webelievethetruthcansetusfreeanddistributedtrust

willprofoundlyaffectpeopleinallwalksoflife.Maybeyou’reamusicloverwho

wantsartiststomakealivingofftheirart.Oraconsumerwhowantstoknowwhere

thathamburgermeatreallycamefrom.Perhapsyou’reanimmigrantwho’ssickof

payingbigfeestosendmoneyhometolovedonesinyourancestralland.OraSaudi

womanwhowantstopublishherownfashionmagazine.Maybeyou’reanaidworker

whoneedstoidentifylandtitlesoflandownerssoyoucanrebuildtheirhomesafteran

earthquake.Oracitizenfedupwiththelackoftransparencyandaccountabilityof

politicalleaders.Orauserofsocialmediawhovaluesyourprivacyandthinksallthe

datayougeneratemightbeworthsomething—toyou.Evenaswewrite,innovators

arebuildingblockchain-basedapplicationsthatservetheseends.Andtheyarejustthe

beginning.

ARATIONALEXUBERANCEFORTHEBLOCKCHAIN

Forsure,blockchaintechnologyhasprofoundimplicationsformanyinstitutions.

Whichhelpsexplainalltheexcitementfrommanysmartandinfluentialpeople.Ben

LawskyquithisjobasthesuperintendentoffinancialservicesforNewYorkStateto

buildanadvisorycompanyinthisspace.Hetoldus,“Infivetotenyears,thefinancial

systemmaybeunrecognizable...andIwanttobepartofthechange.”

Blythe

Masters,formerlychieffinancialofficerandheadofGlobalCommoditiesatJP

Morgan’sinvestmentbank,launchedablockchain-focusedtechnologystart-upto

transformtheindustry.ThecoveroftheOctober2015BloombergMarketsfeatured

Masterswiththeheadline“It’sAllAbouttheBlockchain.”Likewise,TheEconomist

rananOctober2015coverstory,“TheTrustMachine,”whicharguedthat“the

technologybehindbitcoincouldchangehowtheeconomyworks.”

ToThe

Economist,blockchaintechnologyis“thegreatchainofbeingsureaboutthings.”

Bankseverywherearescramblingtop-levelteamstoinvestigateopportunities,some

ofthesewithdozensofcrackerjacktechnologists.Bankerslovetheideaofsecure,

frictionless,andinstanttransactions,butsomeflinchattheideaofopenness,

decentralization,andnewformsofcurrency.Thefinancialservicesindustryhas

alreadyrebrandedandprivatizedblockchaintechnology,referringtoitasdistributed

ledgertechnology,inanattempttoreconcilethebestofbitcoin—security,speed,and

cost—withanentirelyclosedsystemthatrequiresabankorfinancialinstitution’s

permissiontouse.Tothem,blockchainsaremorereliabledatabasesthanwhatthey

alreadyhave,databasesthatenablekeystakeholders—buyers,sellers,custodians,and

regulators—tokeepshared,indeliblerecords,therebyreducingcost,mitigating

settlementrisk,andeliminatingcentralpointsoffailure.

Investinginblockchainstart-upsistakingoff,asdidinvestingindot-comsinthe

1990s.Venturecapitalistsareshowingenthusiasmatalevelthatwouldmakea1990s

dot-cominvestorblush.In2014and2015alone,morethan$1billionofventure

capitalfloodedintotheemergingblockchainecosystem,andtherateofinvestmentis

almostdoublingannually.

“We’requiteconfident,”saidMarcAndreesseninan

interviewwithTheWashingtonPost,“thatwhenwe’resittingherein20years,we’ll

betalkingabout[blockchaintechnology]thewaywetalkabouttheInternettoday.”

Regulatorshavealsosnappedtoattention,establishingtaskforcestoexplorewhat

kindoflegislation,ifany,makessense.AuthoritariangovernmentslikeRussia’shave

bannedorseverelylimitedtheuseofbitcoin,ashavedemocraticstatesthatshould

knowbetter,likeArgentina,givenitshistoryofcurrencycrises.Morethoughtful

governmentsintheWestareinvestingconsiderablyinunderstandinghowthenew

technologycouldtransformnotonlycentralbankingandthenatureofmoney,butalso

governmentoperationsandthenatureofdemocracy.CarolynWilkins,thesenior

deputygovernoroftheBankofCanada,believesit’stimeforcentralbanks

everywheretoseriouslystudytheimplicationsofmovingentirenationalcurrency

systemstodigitalmoney.TheBankofEngland’stopeconomist,AndrewHaldane,

hasproposedanationaldigitalcurrencyfortheUnitedKingdom.

Theseareheadytimes.Tobesure,thegrowingthrongofenthusiastshasitsshare

ofopportunists,speculators,andcriminals.Thefirsttalemostpeoplehearabout

digitalcurrenciesisthebankruptcyoftheMt.GoxexchangeortheconvictionofRoss

WilliamUlbricht,founderoftheSilkRoaddarknetmarketseizedbytheFederal

BureauofInvestigationfortraffickingillegaldrugs,childpornography,andweapons

usingthebitcoinblockchainasapaymentsystem.Bitcoin’spricehasfluctuated

drastically,andtheownershipofbitcoinsisstillconcentrated.A2013studyshowed

that937peopleownedhalfofallbitcoin,althoughthatischangingtoday.

HowdowegetfrompornandPonzischemestoprosperity?Tobegin,it’snot

bitcoin,thestillspeculativeasset,thatshouldinterestyou,unlessyou’reatrader.This

bookisaboutsomethingbiggerthantheasset.It’saboutthepowerandpotentialof

theunderlyingtechnologicalplatform.

Thisisnottosaythatbitcoinorcryptocurrenciesperseareunimportant,assome

peoplehavesuggestedastheyscrambletodisassociatetheirprojectsfromthe

scandalousventuresofthepast.Thesecurrenciesarecriticaltotheblockchain

revolution,whichisfirstandforemostaboutthepeer-to-peerexchangeofvalue,

especiallymoney.

ACHIEVINGTRUSTINTHEDIGITALAGE

Trustinbusinessistheexpectationthattheotherpartywillbehaveaccordingtothe

fourprinciplesofintegrity:honesty,consideration,accountability,andtransparency.

Honestyisnotjustanethicalissue;ithasbecomeaneconomicone.Toestablish

trustingrelationshipswithemployees,partners,customers,shareholders,andthe

public,organizationsmustbetruthful,accurate,andcompleteincommunications.No

lyingthroughomission,noobfuscationthroughcomplexity.

Considerationinbusinessoftenmeansafairexchangeofbenefitsordetriments

thatpartieswilloperateingoodfaith.Buttrustrequiresagenuinerespectforthe

interests,desires,orfeelingsofothers,andthatpartiescanoperatewithgoodwill

towardoneanother.

Accountabilitymeansmakingclearcommitmentstostakeholdersandabidingby

them.Individualsandinstitutionsalikemustdemonstratethattheyhavehonoredtheir

commitmentsandownedtheirbrokenpromises,preferablywiththeverificationofthe

stakeholdersthemselvesorindependentoutsideexperts.Nopassingthebuck,no

playingtheblamegame.

Transparencymeansoperatingoutintheopen,inthelightofday.“Whatare

theyhiding?”isasignofpoortransparencythatleadstodistrust.Ofcourse,

companieshavelegitimaterightstotradesecretsandotherkindsofproprietary

information.Butwhenitcomestopertinentinformationforcustomers,shareholders,

employees,andotherstakeholders,activeopennessiscentraltoearningtrust.Rather

thandressingforsuccess,corporationscanundressforsuccess.

Trustinbusinessandotherinstitutionsismostlyatanall-timelow.Thepublic

relationscompanyEdelman’s2015“TrustBarometer”indicatesthattrustin

institutions,especiallycorporations,hasfallenbacktolevelsfromthedismallylow

periodofthe2008greatrecession.Edelmannotedthateventheonceimpregnable

technologyindustry,stillthemosttrustedbusinesssector,sawdeclinesinthemajority

ofcountriesforthefirsttime.Globally,CEOsandgovernmentofficialscontinuetobe

theleastcredibleinformationsources,laggingfarbehindacademicorindustry

experts.

Similarly,Gallupreportedinits2015surveyofAmericanconfidencein

institutionsthat“business”rankedsecondlowestamongthefifteeninstitutions

measured;fewerthan20percentofrespondentsindicatedtheyhadconsiderableor

highlevelsoftrust.OnlytheU.S.Congresshadalowerscore.

Inthepreblockchainworld,trustintransactionsderivedfromindividuals,

intermediaries,orotherorganizationsactingwithintegrity.Becauseweoftencan’t

knowourcounterparties,letalonewhethertheyhaveintegrity,we’vecometorelyon

thirdpartiesnotonlytovouchforstrangers,butalsotomaintaintransactionrecords

andperformthebusinesslogicandtransactionlogicthatpowerscommerceonline.

Thesepowerfulintermediaries—banks,governments,PayPal,Visa,Uber,Apple,

Google,andotherdigitalconglomerates—harvestmuchofthevalue.

Intheemergingblockchainworld,trustderivesfromthenetworkandevenfrom

objectsonthenetwork.CarlosMoreiraofthecryptographicsecuritycompany

WISeKeysaidthatthenewtechnologieseffectivelydelegatetrust—eventophysical

things.“Ifanobject,whetheritbeasensoronacommunicationstower,alightbulb,

oraheartmonitor,isnottrustedtoperformwellorpayforservicesitwillberejected

bytheotherobjectsautomatically.”

Theledgeritselfisthefoundationoftrust.

Tobeclear,“trust”referstobuyingandsellinggoodsandservicesandtothe

integrityandprotectionofinformation,nottrustinallbusinessaffairs.However,you

willreadthroughoutthisbookhowagloballedgeroftruthfulinformationcanhelp

buildintegrityintoallourinstitutionsandcreateamoresecureandtrustworthyworld.

Inourview,companiesthatconductsomeoralloftheirtransactionsonthe

blockchainwillenjoyatrustbumpinshareprice.Shareholdersandcitizenswillcome

toexpectallpubliclytradedfirmsandtaxpayer-fundedorganizationstoruntheir

treasuries,atminimum,ontheblockchain.Becauseofincreasedtransparency,

investorswillbeabletoseewhetheraCEOreallydeservedthatfatbonus.Smart

contractsenabledbyblockchainswillrequirecounterpartiestoabidebytheir

commitmentsandvoterswillbeabletoseewhethertheirrepresentativesarebeing

honestoractingwithfiscalintegrity.

RETURNOFTHEINTERNET

ThefirsteraoftheInternetstartedwiththeenergyandspiritofayoungLuke

Skywalker—withthebeliefthatanykidfromaharshdesertplanetcouldbringdown

anevilempireandstartanewcivilizationbylaunchingadot-com.Naïvetobesure,

butmanypeople,presentcompanyincluded,hopedtheInternet,asembodiedinthe

WorldWideWeb,woulddisrupttheindustrialworldwherepowerwasgrippedbythe

fewandpowerstructureswerehardtoclimbandhardertotopple.Unliketheold

mediathatwerecentralizedandcontrolledbypowerfulforces,andwheretheusers

wereinert,thenewmediaweredistributedandneutral,andeveryonewasanactive

participantratherthanapassiverecipient.Lowcostandmassivepeer-to-peer

communicationontheInternetwouldhelpunderminetraditionalhierarchiesandhelp

withtheinclusionofdevelopingworldcitizensintheglobaleconomy.Valueand

reputationwouldderivefromqualityofcontribution,notstatus.Ifyouweresmartand

hardworkinginIndia,yourmeritwouldbringyoureputation.Theworldwouldbe

flatter,moremeritocratic,moreflexible,andmorefluid.Mostimportant,technology

wouldcontributetoprosperityforeveryone,notjustwealthforthefew.

Someofthishascometopass.Therehavebeenmasscollaborationslike

Wikipedia,Linux,andGalaxyZoo.Outsourcingandnetworkedbusinessmodelshave

enabledpeopleinthedevelopingworldtoparticipateintheglobaleconomybetter.

Todaytwobillionpeoplecollaborateaspeerssocially.Weallhaveaccessto

informationinunprecedentedways.

However,theEmpirestruckback.Ithasbecomeclearthatconcentratedpowersin

businessandgovernmenthavebenttheoriginaldemocraticarchitectureofthe

Internettotheirwill.

Hugeinstitutionsnowcontrolandownthisnewmeansofproductionandsocial

interaction—itsunderlyinginfrastructure;massiveandgrowingtreasuretrovesof

data;thealgorithmsthatincreasinglygovernbusinessanddailylife;theworldof

apps;andextraordinaryemergingcapabilities,machinelearning,andautonomous

vehicles.FromSiliconValleyandWallStreettoShanghaiandSeoul,thisnew

aristocracyusesitsinsideradvantagetoexploitthemostextraordinarytechnology

everdevisedtoempowerpeopleaseconomicactors,tobuildspectacularfortunesand

strengthenitspowerandinfluenceovereconomiesandsocieties.

Manyofthedarksideconcernsraisedbyearlydigitalpioneershaveprettymuch

materialized.

Wehavegrowthingrossdomesticproductbutnotcommensuratejob

growthinmostdevelopedcountries.Wehavegrowingwealthcreationandgrowing

socialinequality.Powerfultechnologycompanieshaveshiftedmuchactivityfromthe

open,distributed,egalitarian,andempoweringWebtoclosedonlinewalledgardens

orproprietary,read-onlyapplicationsthatamongotherthingskilltheconversation.

Corporateforceshavecapturedmanyofthesewonderfulpeer-to-peer,democratic,

andopentechnologiesandareusingthemtoextractaninordinateshareofvalue.

Theupshotisthat,ifanything,economicpowerhasgottenspikier,more

concentrated,andmoreentrenched.Ratherthandatabeingmorewidelyand

democraticallydistributed,itisbeinghoardedandexploitedbyfewerentitiesthat

oftenuseittocontrolmoreandacquiremorepower.Ifyouaccumulatedataandthe

powerthatcomeswithit,youcanfurtherfortifyyourpositionbyproducing

proprietaryknowledge.Thisprivilegetrumpsmerit,regardlessofitsorigin.

Further,powerful“digitalconglomerates”suchasAmazon,Google,Apple,and

Facebook—allInternetstart-upsatonetime—arecapturingthetreasuretrovesofdata

thatcitizensandinstitutionsgenerateofteninprivatedatasilosratherthanonthe

Web.Whiletheycreategreatvalueforconsumers,oneupshotisthatdataisbecoming

anewassetclass—onethatmaytrumppreviousassetclasses.Anotheristhe

underminingofourtraditionalconceptsofprivacyandtheautonomyofthe

individual.

GovernmentsofallkindsusetheInternettoimproveoperationsandservices,but

theynowalsodeploytechnologytomonitorandevenmanipulatecitizens.Inmany

democraticcountries,governmentsuseinformationandcommunicationstechnologies

tospyoncitizens,changepublicopinion,furthertheirparochialinterests,undermine

rightsandfreedoms,andoveralltostayinpower.Repressivegovernmentslikethose

ofChinaandIranenclosetheInternet,exploitingittocrackdownondissentand

mobilizecitizensaroundtheirobjectives.

ThisisnottosaythattheWebisdead,assomehavesuggested.TheWebis

criticaltothefutureofthedigitalworldandallofusshouldsupporteffortsunderway

todefendit,suchasthoseoftheWorldWideWebFoundation,whoarefightingto

keepitopen,neutral,andconstantlyevolving.

Now,withblockchaintechnology,aworldofnewpossibilitieshasopenedupto

reverseallthesetrends.Wenowhaveatruepeer-to-peerplatformthatenablesthe

manyexcitingthingswe’vediscussedinthisbook.Wecaneachownouridentities

andourpersonaldata.Wecandotransactions,creatingandexchangingvaluewithout

powerfulintermediariesactingasthearbitersofmoneyandinformation.Billionsof

excludedpeoplecansoonentertheglobaleconomy.Wecanprotectourprivacyand

monetizeourowninformation.Wecanensurethatcreatorsarecompensatedfortheir

intellectualproperty.Ratherthantryingtosolvetheproblemofgrowingsocial

inequalitythroughtheredistributionofwealthonly,wecanstarttochangetheway

wealthisdistributed—howitiscreatedinthefirstplace,aspeopleeverywherefrom

farmerstomusicianscansharemorefully,apriori,inthewealththeycreate.Thesky

doesseemtobethelimit.

It’smoreYodathanGod.Butthisnewprotocol,ifnotdivine,doesenabletrusted

collaborationtooccurinaworldthatneedsit,andthat’salot.Excited,weare.

YOURPERSONALAVATARANDTHEBLACKBOXOFIDENTITY

Throughouthistory,eachnewformofmediahasenabledmankindtotranscendtime,

space,andmortality.That—darewesay—divineabilityinevitablyraisesanewthe

existentialquestionofidentity:Whoarewe?Whatdoesitmeantobehuman?How

doweconceptualizeourselves?AsMarshallMcLuhanobserved,themedium

becomesthemessageovertime.Peopleshapeandareshapedbymedia.Ourbrains

adapt.Ourinstitutionsadapt.Societyadapts.

“Todayyouneedanorganizationwithendowedrightstoprovideyouwithan

identity,likeabankcard,afrequentflyercard,oracreditcard,”

saidCarlos

MoreiraofWISeKey.Yourparentsgaveyouaname,thestate-licensedobstetricianor

midwifewhodeliveredyoutookyourfootprintandvouchedforyourweightand

length,andbothpartiesattestedtothetime,date,andplaceofyourarrivalbysigning

yourbirthcertificate.Nowtheycanrecordthiscertificateontheblockchainandlink

birthannouncementsandacollegefundtoit.Friendsandfamilycancontribute

bitcointoyourhighereducation.There,yourdataflowbegins.

IntheearlydaysoftheInternet,TomPeterswrote,“Youareyourprojects.”

He

meantthatourcorporateaffiliationsandjobtitlesnolongerdefinedus.Whatis

equallytruenow:“Youareyourdata.”Troubleis,Moreirasaid,“Thatidentityisnow

yours,butthedatathatcomesfromitsinteractionintheworldisownedbysomeone

else.”

That’showmostcorporationsandinstitutionsviewyou,byyourdatacontrail

acrosstheInternet.Theyaggregateyourdataintoavirtualrepresentationofyou,and

theyprovidethis“virtualyou”withextraordinarynewbenefitsbeyondyourparents’

happiestdreams.

Butconveniencecomeswithaprice:privacy.Thosewhosay

“privacyisdead—getoverit”arewrong.

Privacyisthefoundationoffreesocieties.

“Peoplehaveaverysimplisticviewofidentity,”

saidblockchaintheorist

AndreasAntonopoulos.Weusethewordidentitytodescribetheself,theprojectionof

thatselftotheworld,andalltheseattributesthatweassociatewiththatselforoneof

itsprojections.Thesemaycomefromnature,fromthestate,fromprivate

organizations.Wemayhaveoneormorerolesandaseriesofmetricsattachedto

thoseroles,andtherolesmaychange.Consideryourlastjob.Didyourrolechange

organicallybecauseofchangesintheworkthatneededtobedoneorbecauseof

revisionstoyourjobdescription?

Whatif“thevirtualyou”wasinfactownedbyyou—yourpersonalavatar—and

“lived”intheblackboxofyouridentitysothatyoucouldmonetizeyourdatastream

andrevealonlywhatyouneededto,whenassertingaparticularright.Whydoesyour

driver’slicensecontainmoreinformationthanthefactthatyouhavepassedyour

drivingtestanddemonstratedyourabilitytodrive?ImagineaneweraoftheInternet

whereyourpersonalavatarmanagesandprotectsthecontentsofyourblackbox.This

trustysoftwareservantcouldreleaseonlytherequireddetailoramountforeach

situationandatthesametimewhiskupyourdatacrumbsasyounavigatethedigital

world.

ThismaysoundlikethestuffofsciencefictionasportrayedinfilmslikeThe

MatrixorAvatar.Buttodayblockchaintechnologiesmakeitpossible.JoeLubin,

CEOofConsensusSystems,referstothisconceptasa“persistentdigitalIDand

persona”onablockchain.“Ishowadifferentaspectofmyselftomycollegefriends

comparedtowhenIamspeakingattheChicagoFed,”hesaid.“Intheonlinedigital

economy,Iwillrepresentmyvariousaspectsandinteractinthatworldfromthe

platformofdifferentpersonas.”Lubinexpectstohavea“canonicalpersona,”the

versionofhimthatpaystaxes,obtainsloans,andgetsinsurance.“Iwillhaveperhaps

abusinesspersonaandafamilypersonatoseparatetheconcernsthatIchoosetolink

tomycanonicalpersona.ImayhaveagamerpersonathatIdon’twantlinkedtomy

businesspersona.Imightevenhaveadarkwebpersonathatisneverlinkabletothe

others.”

Yourblackboxmayincludeinformationsuchasagovernment-issuedID,Social

Securitynumber,medicalinformation,serviceaccounts,financialaccounts,diplomas,

practicelicenses,birthcertificate,variousothercredentials,andinformationso

personalyoudon’twanttorevealitbutdowanttomonetizeitsvalue,suchassexual

preferenceormedicalcondition,forapolloraresearchstudy.Youcouldlicensethese

dataforspecificpurposestospecificentitiesforspecificperiodsoftime.Youcould

sendasubsetofyourattributestoyoureyedoctorandadifferentsubsettothehedge

fundthatyouwouldliketoinvestin.Youravatarcouldansweryes-noquestions

withoutdisclosingwhoyouare:“Areyoutwenty-oneyearsorolder?Didyouearn

morethan$100,000ineachofthelastthreeyears?Doyouhaveabodymassindexin

thenormalrange?”

Inthephysicalworld,yourreputationislocal—yourlocalshopkeeper,your

employer,yourfriendsatadinnerpartyallhaveacertainopinionaboutyou.Inthe

digitaleconomy,thereputationsofvariouspersonasinyouravatarwillbeportable.

Portabilitywillhelpbringpeopleeverywhereintothedigitaleconomy.Peoplewitha

digitalwalletandavatarinAfricacouldestablishthereputationrequiredto,say,

borrowmoneytostartabusiness.“See,allthesepeopleknowmeandhavevouched

forme.Iamfinanciallytrustworthy.Iamanenfranchisedcitizenoftheglobaldigital

economy.”

Identityisonlyasmallpartofit.Therestisacloud—anidentitycloud—of

particulateslooselyortightlylinkedtoyouridentity.Ifwetrytorecordalltheseinto

theblockchain,animmutableledger,welosenotonlythenuanceofsocialinteraction

butalsothegiftofforgetting.Peopleoughtneverbedefinedbytheirworstday.

APLANFORPROSPERITY

Inthisbook,you’llreaddozensofstoriesaboutinitiativesenabledbythistrust

protocolthatcreatenewopportunitiesforamoreprosperousworld.Prosperityfirst

andforemostisaboutone’sstandardofliving.Toachieveit,peoplemusthavethe

means,tools,andopportunitiestocreatematerialwealthandthriveeconomically.But

forusitincludesmore—securityoftheperson,safety,health,education,

environmentalsustainability,opportunitiestoshapeandcontrolone’sdestinyandto

participateinaneconomyandsociety.Inordertoachieveprosperity,anindividual

mustpossess,atminimum,accesstosomeformofbasicfinancialservicestoreliably

storeandmovevalue,communication,andtransactionaltoolstoconnecttotheglobal

economy,andsecurity,protection,andenforcementofthetitletolandandotherassets

theypossesslegally.

Thisandmoreisthepromiseoftheblockchain.Thestories

youwillreadshouldgiveyouasenseofafuturewherethereisprosperityfor

everyone,notjustmorewealthandpowerforthewealthyandpowerful.Perhapseven

aworldwhereweownourdataandcanprotectourprivacyandpersonalsecurity.An

openworldwhereeveryonecancontributetoourtechnologyinfrastructure,rather

thanaworldofwalledgardenswherebigcompaniesofferproprietaryapps.Aworld

wherebillionsofexcludedpeoplecannowparticipateintheglobaleconomyand

shareinitslargesse.Here’sapreview.

CreatingaTruePeer-to-PeerSharingEconomy

PunditsoftenrefertoAirbnb,Uber,Lyft,TaskRabbit,andothersasplatformsforthe

“sharingeconomy.”It’sanicenotion—thatpeerscreateandshareinvalue.Butthese

businesseshavelittletodowithsharing.Infact,theyaresuccessfulpreciselybecause

theydonotshare—theyaggregate.Itisanaggregatingeconomy.Uberisa$65billion

corporationthataggregatesdrivingservices.Airbnb,the$25billionSiliconValley

darling,aggregatesvacantrooms.Othersaggregateequipmentandhandymenthrough

theircentralized,proprietaryplatformsandthenresellthem.Intheprocess,they

collectdataforcommercialexploitation.Noneofthesecompaniesexistedadecade

agobecausethetechnologicalpreconditionswerenotthere:ubiquitoussmartphones,

fullGPS,andsophisticatedpaymentsystems.Nowwithblockchains,thetechnology

existstoreinventtheseindustriesagain.Today’sbigdisruptersareabouttoget

disrupted.

ImagineinsteadofthecentralizedcompanyAirbnb,adistributedapplication—

callitblockchainAirbnborbAirbnb—essentiallyacooperativeownedbyits

members.Whenarenterwantstofindalisting,thebAirbnbsoftwarescansthe

blockchainforallthelistingsandfiltersanddisplaysthosethatmeethercriteria.

Becausethenetworkcreatesarecordofthetransactionontheblockchain,apositive

userreviewimprovestheirrespectivereputationsandestablishestheiridentities—

nowwithoutanintermediary.SaysVitalikButerin,founderoftheEthereum

blockchain:“Whereasmosttechnologiestendtoautomateworkersontheperiphery

doingmenialtasks,blockchainsautomateawaythecenter.Insteadofputtingthetaxi

driveroutofajob,blockchainputsUberoutofajobandletsthetaxidriverswork

withthecustomerdirectly.”

RewiringtheFinancialSystemforSpeedandInclusion

Thefinancialservicesindustrymakesourglobaleconomyhum,butthesystemtoday

isfraughtwithproblems.Forone,itisarguablythemostcentralizedindustryinthe

worldandthelastindustrytofeelthetransformationaleffectofthetechnological

revolution.Bastionsoftheoldfinancialordersuchasbanksgotogreatlengthsto

defendmonopoliesandoftenstymiedisruptiveinnovation.Thefinancialsystemalso

runsonoutmodedtechnologyandisgovernedbyregulationsdatingbacktothe

nineteenthcentury.Itisrifewithcontradictionsandunevendevelopments,makingit

sometimesslow,oftentimesinsecure,andlargelyopaquetomanystakeholders.

Distributedledgertechnologycanliberatemanyfinancialservicesfromthe

confinesofoldinstitutions,fosteringcompetitionandinnovation.That’sgoodforthe

enduser.EvenwhenconnectedtotheoldInternet,billionsofpeopleareexcluded

fromtheeconomyforthesimplereasonthatfinancialinstitutionsdon’tprovide

serviceslikebankingtothembecausetheywouldbeunprofitableandrisky

customers.Withtheblockchainthesepeoplecannotonlybecomeconnected,but

moreimportantbecomeincludedinfinancialactivity,abletopurchase,borrow,sell,

andotherwisehaveachanceatbuildingaprosperouslife.

Similarlyincumbentinstitutionscantransformthemselvesaroundblockchain

technology,iftheycanfindtheleadershiptodoit.Thetechnologyholdsgreat

promisetorevolutionizetheindustryforthegood—frombankstostockexchanges,

insurancecompaniestoaccountingfirms,brokerages,microlenders,creditcard

networks,realestateagents,andeverythinginbetween.Wheneveryonesharesthe

samedistributedledger,settlementsdon’ttakedays,theyoccurinstantlyforalltosee.

Billionswillbenefit,andthisshiftcouldliberateandempowerentrepreneurs

everywhere.

ProtectingEconomicRightsGlobally

Propertyrightsaresoinexorablytiedtooursystemofcapitalistdemocracythat

Jefferson’sfirstdraftoftheDeclarationofIndependencelistedtheinalienablerights

ofmanaslife,liberty,andthepursuitofproperty,nothappiness.

Whilethose

aspirationaltenetslaidthegroundworkforthemoderneconomyandsocietyweenjoy

inmuchofthedevelopedworld,tothisdaymuchoftheworld’spopulationdoesnot

reaptheirbenefits.Eventhoughsomeprogresshasbeenmadeinthedepartmentsof

lifeandliberty,amajorityoftheworld’spropertyholderscanhavetheirhomesor

theirbitoflandseizedarbitrarilybycorruptgovernmentfunctionaries,withtheflick

ofasoftwareswitchintheircentralizedgovernmentpropertydatabase.Withoutproof

ofpropertyownership,landownerscan’tsecurealoan,getabuildingpermit,orsell

thepropertyandtheycanbeexpropriated—allseriousimpedimentstoprosperity.

PeruvianeconomistandpresidentoftheInstituteforLibertyandDemocracy

HernandodeSoto,oneoftheworld’sforemosteconomicminds,suggeststhatas

manyasfivebillionpeopleintheworldarebarredfromparticipatingfullyinthe

valuecreatedthroughglobalizationbecausetheyhaveatenuousrighttotheirland.

Blockchain,heargues,couldchangeallthat.“Thecentralideatoblockchainisthat

therightstogoodscanbetransacted,whethertheybefinancial,hardassetsorideas.

Thegoalisnotmerelytorecordtheplotoflandbutrathertorecordtherights

involvedsothattherightsholdercannotbeviolated.”

Universalpropertyrights

couldlaythegroundworkforanewagendaofglobaljustice,economicgrowth,

prosperity,andpeace.Inthisnewparadigm,rightsareprotected,notbygunsor

militiasorminutemen,butbytechnology.“Blockchainisforaworldthat’sgoverned

byrealthingsinsteadoffictitiousthings.AndIthinkthat’sgood,”

saiddeSoto.

Andit’sdecentralized.Nocentralauthoritycontrolsit,everybodyknowswhat’s

happening,anditremembersforever.

EndingtheRemittanceRip-off

Justabouteveryreport,article,orbookreviewingthebenefitsofcryptocurrencies

discussestheopportunityofremittances.Andforgoodreason.Thelargestflowof

fundsintothedevelopingworldisnotforeignaidordirectforeigninvestment.Rather,

itisremittancemoneyrepatriatedtopoorcountriesfromtheirdiasporaslivingabroad.

Theprocesstakestime,patience,andsometimescouragetotraveleachweektothe

samewiretransferoffice’sseedyneighborhood,filloutthesamepaperworkeach

time,andpaythesame7percentfee.Thereisabetterway.

Abraandothercompaniesarebuildingpaymentnetworksusingtheblockchain.

Abra’sgoalistoturneveryoneofitsusersintoateller.Thewholeprocess—fromthe

fundsleavingonecountrytotheirarrivinginanother—takesanhourratherthana

weekandcosts2percentversus7percentorhigher.Abrawantsitspaymentnetwork

tooutnumberallphysicalATMsintheworld.IttookWesternUnion150yearstoget

to500,000agentsworldwide.Abrawillhavethatmanytellersinitsfirstyear.

CuttingOutBureaucracyandCorruptioninForeignAid

Couldblockchainsolveproblemswithforeignaid?The2010Haitiearthquakewas

oneofthedeadliestnaturaldisastersinrecordedhistory.Somewherebetween100,000

and300,000peopleperished.ThegovernmentinHaitiproveditselfaliabilityinthe

aftermath.Theglobalcommunitydonatedmorethan$500milliontotheRedCross,a

knownbrand.Anafter-actioninvestigationrevealedthatfundsweremisspentorwent

missingaltogether.

Theblockchaincanimprovethedeliveryofforeignaidbyeliminatingthe

middlemenwhotaketheaidbeforeitreachesitsdestination.Second,asanimmutable

ledgeroftheflowoffunds,blockchainholdsinstitutionsmoreaccountablefortheir

actions.ImagineifyoucouldtrackeachdollaryougavetotheRedCrossfromits

startingpointonyoursmartphonetothepersonitbenefited.Youcouldparkyour

fundsinescrow,releasingamountsaftertheRedCrossreachedeachmilestone.

FeedingtheCreatorsofValueFirst

UnderthefirstgenerationoftheInternet,manycreatorsofintellectualpropertydid

notreceivepropercompensationforit.ExhibitAwasmusiciansandcomposerswho

hadsignedwithrecordlabelswhoseleadersfailedtoimaginehowtheInternetwould

affecttheirindustry.Theyfailedtoembracethedigitalageandreinventtheirown

businessmodels,slowlycedingcontroltoinnovativeonlinedistributors.

Considerthemajorlabels’reactiontoNapster,thepeer-to-peermusicfile-sharing

platformlaunchedin1999.Incumbentsinthemusicindustryteameduptosuethe

newventure,itsfounders,andeighteenthousandofitsusers,dismantlingthe

platformbyJuly2001.AlexWinter,directorofadocumentaryonNapster,toldThe

Guardian,“Ihaveaproblemwithblack-and-whitethinkingwhenitcomestobig

culturalchanges....WithNapster,therewasanenormousamountofgrey”between

the‘IcanshareeverythingI’vepaidfor’positionandthe‘You’reacriminalevenif

youshareonlyoneofthefilesyou’vepurchased’pointofview.”

Weagree.Cocreatingwithconsumersisusuallyamoresustainablebusiness

modelthansuingthem.Thewholeincidentturnedahugehotspotlightonthemusic

industry,exposingitsoutdatedmarketingpractices,grossdistributioninefficiencies,

andwhatsomeinterpretedasantimusicianpolicies.

Verylittlehaschangedsincethen.Untilnow.Welookatthenewmusic

ecosystememergingontheblockchain,ledbyBritishsinger-songwriterImogen

Heap,cellistZoëKeating,andblockchaindevelopersandentrepreneurs.Every

culturalindustryisupfordisruption,andthepromiseisthatcreatorsgetfully

compensatedforthevaluetheycreate.

ReconfiguringtheCorporationastheEngineofCapitalism

Withtheriseofaglobalpeer-to-peerplatformforidentity,trust,reputation,and

transactions,wewillfinallybeabletore-architectthedeepstructuresofthefirmfor

innovation,shared-valuecreation,andperhapsevenprosperityforthemany,rather

thanjustwealthforthefew.Thisdoesn’tmeansmallerfirmsintermsofrevenueor

impact.Tothecontrary,we’retalkingaboutbuildingtwenty-first-centurycompanies,

somethatmaybemassivewealthcreatorsandpowerfulintheirrespectivemarkets.

Wedothinkenterpriseswilllookmorelikenetworksratherthanthevertically

integratedhierarchiesoftheindustrialage.Assuchthereisanopportunityto

distribute(notredistribute)wealthmoredemocratically.

We’llalsotakeyouonastrollthroughthemind-bogglingworldofsmart

contracts,newautonomouseconomicagents,andwhatwecalldistributed

autonomousenterpriseswhereintelligentsoftwaretakesoverthemanagementand

organizationofmanyresourcesandcapabilities,perhapsdisplacingcorporations.

Smartcontractsenablethecreationofwhatwecallopennetworkedenterprisesbased

onanewsetofbusinessmodels,oroldbusinessmodelswithablockchaintwist.

AnimatingObjectsandPuttingThemtoWork

Technologistsandsciencefictionwritershavelongenvisionedaworldwherea

seamlessglobalnetworkofInternet-connectedsensorscouldcaptureeveryevent,

action,andchangeonearth.Blockchaintechnologywillenablethingstocollaborate,

exchangeunitsofvalue—energy,time,andmoney—andreconfiguresupplychains

andproductionprocessesaccordingtosharedinformationondemandandcapacity.

Wecanattachmetadatatosmartdevicesandprogramthemtorecognizeotherobjects

bytheirmetadataandtoactorreacttodefinedcircumstanceswithoutriskoferroror

tampering.

Asthephysicalworldcomestolife,everyonecanprosper—fromsmallfarmersin

theAustralianoutbackwhoneedelectricalpowerfortheirbusinessestohomeowners

everywherewhocanbecomepartofadistributedblockchainpowergrid.

CultivatingtheBlockchainEntrepreneur

Entrepreneurshipisessentialtoathrivingeconomyandaprosperoussociety.The

Internetwassupposedtoliberateentrepreneurs,givingthemthetoolsandcapabilities

ofbigcompanieswithoutmanyoftheliabilities,suchaslegacyculture,ossified

processes,anddeadweight.However,thehigh-flyingsuccessofdot-combillionaires

obfuscatesanunsettlingtruth:entrepreneurshipandnewbusinessstartshavebeen

steadilydecliningforthirtyyearsinmanydevelopedeconomies.

Inthedeveloping

world,theInternethasdonelittletolowerthebarriersofwould-beentrepreneurswho

mustsufferdeadeninggovernmentbureaucracies.TheInternethasalsonotliberated

thefinancialtoolsessentialtostartingabusinessavailabletobillionsofpeople.Not

everyoneisdestinedtobeanentrepreneur,ofcourse,butevenfortheaverageperson

tryingtoearnadecentwage,thelackoffinancialtoolsandtheprevalenceof

governmentredtapemakedoingsochallenging.

Thisisacomplexissue,butblockchaincanhelpsuperchargeentrepreneurship

andthereforeprosperityinmanyimportantways.Fortheaveragepersonlivinginthe

developingworldtohaveareliablestoreofvalueandawaytoconductbusiness

beyondhiscommunity,allheneedsnowisanInternet-enableddevice.Accesstothe

globaleconomymeansgreateraccesstonewsourcesofcredit,funding,suppliers,

partners,andinvestmentopportunities.Notalentorresourceistoosmalltomonetize

ontheblockchain.

RealizingGovernmentsbythePeopleforthePeople

Buckleupforbigchangesingovernmentandgovernancetoo.Blockchaintechnology

isalreadyrevolutionizingthemachineryofgovernmentandhowwecanmakeithigh

performance—betterandcheaper.It’salsocreatingnewopportunitiestochange

democracyitself—howgovernmentscanbemoreopenandfreefromlobbyistcontrol,

andbehavewiththefourvaluesofintegrity.Welookathowblockchaintechnologies

canchangewhatitmeanstobeacitizenandparticipateinthepoliticalprocess,from

votingandaccessingsocialservicestosolvingsomeofsociety’sbighairyproblems

andholdingelectedrepresentativesaccountableforthepromisesthatgotthem

elected.

PROMISEANDPERILOFTHENEWPLATFORM

Iftherearesixmillionpeopleinthenakedcity,

thentherearesixmillionobstacles

tothistechnologyfulfillingitspotential.Further,therearesomeworrisome

downsides.Somesaythetechnologyisnotreadyforprimetime;thatit’sstillhardto

use,andthatthekillerapplicationsarenascent.Othercriticspointtothemassive

amountofenergyconsumedtoreachconsensusinjustthebitcoinnetwork:What

happenswhenthousandsorperhapsmillionsofinterconnectedblockchainsareeach

processingbillionsoftransactionsaday?Aretheincentivesgreatenoughforpeople

toparticipateandbehavesafelyovertime,andnottrytooverpowerthenetwork?Is

blockchaintechnologytheworstjobkillerever?

Thesearequestionsofleadershipandgovernance,notoftechnology.Thefirstera

oftheInternettookoffbecauseofthevisionandcommoninterestsofitskey

stakeholders—governments,civilsocietyorganizations,developers,andeveryday

peoplelikeyou.Blockchainrequiressimilarleadership.Wediscussatgreaterlength

inthebookwhyleadersofthisnewdistributedparadigmwillneedtostaketheir

claimandunleashawaveofeconomicandinstitutionalinnovation,toensurethistime

thatthepromiseisfulfilled.Weinviteyoutobeoneofthese.

Thisbookgrewoutofthe$4millionGlobalSolutionNetworksprogramatthe

RotmanSchoolofManagementattheUniversityofToronto.Fundedprimarilyby

largetechnologycorporationsalongwiththeRockefellerandSkollfoundations,the

U.S.StateDepartment,andIndustryCanada,theinitiativeexplorednewapproaches

toglobalproblemsolvingandgovernance.Wewerebothinvolvedinrunningthe

program.(Donfoundedit;Alexledtheprojectoncryptocurrencies.)In2014,we

launchedaone-yearinitiativeontheblockchainrevolutionanditsimplicationsfor

businessandsociety,culminatinginthisbook.Init,wehaveattemptedtoputthe

promiseandtheperilofthenewplatformintoperspective.

Ifbusiness,government,andcivilsocietyinnovatorsgetthisright,wewillmove

fromanInternetdrivenprimarilybythefallingcostsofsearch,coordination,data

collection,anddecisionmaking—wherethenameofthegamewasmonitoring,

mediating,andmonetizinginformationandtransactionsontheWeb—toonedriven

bythefallingcostsofbargaining,policing,andenforcingsocialandcommercial

agreements,wherethenameofthegamewillbeintegrity,security,collaboration,the

privacyofalltransactions,andthecreationanddistributionofvalue.That’sa180-

degreeturninstrategy.Theresultcanbeaneconomyofpeerswithinstitutionsthat

aretrulydistributed,inclusive,andempowering—andtherebylegitimate.By

fundamentallychangingwhatwecandoonline,howwedoit,andwhocan

participate,thenewplatformmayevencreatethetechnologicalpreconditionsto

reconcilingsomeofourmostvexingsocialandeconomicchallenges.

Ifwegetthiswrong,blockchaintechnology,whichholdssomuchpromise,will

beconstrainedorevencrushed.Worse,itcouldbecomeatoolpowerfulinstitutions

usetoentrenchtheirwealthor,ifhackedbygovernments,aplatformforsomekindof

newsurveillancesociety.Thetightlyrelatedtechnologiesofdistributedsoftware,

cryptography,autonomousagents,andevenartificialintelligencecouldgetoutof

controlandturnagainsttheirhumanprogenitors.

Itispossiblethatthisnewtechnologymaybedelayed,stalled,underutilized,or

worse.Theblockchainandcryptocurrencies,particularlybitcoin,alreadyhave

massivemomentum,butwe’renotpredictingwhetherornotallthiswillsucceed,and

ifitdoes,howfastitwilloccur.

Predictionisalwaysariskybusiness.Says

technologytheoristDavidTicoll:“Manyofusdidabadjobofpredictingthefull

impactoftheInternet.ISIStypebadphenomenaareamongwhatwemissed,and

somebigoptimisticpredictionsturnedoutwrong.”Hesays,“Iftheblockchainisas

biganduniversalastheNet,wearelikelytodoacomparablybadjobofpredicting

bothitsupsidesanddownsides.”

Soratherthanpredictingablockchainfuture,we’readvocatingforit.We’re

arguingthatitshouldsucceed,becauseitcouldhelpususherinaneweraof

prosperity.Webelievethattheeconomyworksbestwhenitworksforeveryone,and

thisnewplatformisanengineofinclusion.Itdrasticallylowersthecostof

transmittingsuchfundsasremittances.Itsignificantlylowersthebarriertohavinga

bankaccount,obtainingcredit,andinvesting.Anditsupportsentrepreneurshipand

participationinglobaltrade.Itcatalyzesdistributedcapitalism,notjustaredistributed

capitalism.

Everyoneshouldstopfightingitandtaketherightstepstogetonboard.Let’s

harnessthisforcenotfortheimmediatebenefitofthefewbutforthelastingbenefit

ofthemany.

Today,bothofusareexcitedaboutthepotentialofthisnextroundoftheInternet.

We’reenthusiasticaboutthemassivewaveofinnovationthatisbeingunleashedand

itspotentialforprosperityandabetterworld.Thisbookisourcasetoyoutobecome

interested,understandthisnextwave,andtakeactiontoensurethatthepromiseis

fulfilled.

Sohangontoyourseatandreadon!We’reatoneofthosecriticaljuncturesin

humanhistory.

CHAPTER2



BOOTSTRAPPINGTHEFUTURE:

SEVENDESIGNPRINCIPLESOFTHEBLOCKCHAIN

ECONOMY

reedomispredicatedonprivacy,”saidAnnCavoukian,executivedirectorofthe

PrivacyandBigDataInstituteatRyersonUniversity.“Ifirstlearnedthatthirty

yearsagowhenIstartedgoingtoconferencesinGermany.Itisnoaccidentthat

Germanyistheleadingprivacyanddataprotectioncountryintheworld.Theyhadto

enduretheabusesoftheThirdReichandthecompletecessationofalloftheir

freedoms,whichstartedwiththecompleteremovaloftheirprivacy.Whenthatended,

theysaid,‘Neveragain.’”

Andsoitisironic—ortotallyfitting—thatoneofthefirstdecentralizedpeer-to-

peercomputationalplatformstoguaranteeuserprivacyiscalledEnigma,alsothe

namegiventothemachinedevelopedbyGermanengineerArthurScherbiusto

transcribecodedinformation.ScherbiusdesignedEnigmaforcommercialuse:

throughhisdevice,globalcompaniescouldquicklyandsafelycommunicatetheir

tradesecrets,stocktips,andotherinsiderinformation.Withinafewyears,Germany’s

militaryforcesweremanufacturingtheirownversionsofEnigmatobroadcastcoded

messagesoverradiototroops.Duringthewar,theNazisusedEnigmatodisseminate

strategicplans,detailsoftargets,andthetimingofattacks.Itwasatoolofsuffering

andoppression.

OurcontemporaryEnigmaisatooloffreedomandprosperity.DesignedatMIT

MediaLabbyGuyZyskindandOzNathan,thenewEnigmacombinesthevirtuesof

blockchain’spublicledger,thetransparencyofwhich“providesstrongincentivesfor

honestbehavior,”withsomethingknownashomomorphicencryptionandsecure

multipartycomputation.

Moresimplyput,“Enigmatakesyourinformation—any

information—breaksitup,andencryptsitintopiecesofdatathatarerandomly

distributedtonodesinthenetwork.Itdoesn’texistinonespot,”saidCavoukian.

“Enigmausesblockchaintechnologytoembedthedataandtrackallthepiecesof

information.”

Youcanshareitwiththirdpartiesandthosepartiescanuseitin

computationswithouteverdecryptingit.

Ifitworks,itcouldreshapehowwe

approachourownidentityonline.Imaginehavingablackboxofyourpersonal

informationthatyoualonecontrolandcanaccess.

Nomatterhowcoolitmaysound,therearereasonstotreadcautiouslyonthe

cryptographicfrontier.First,itneedstobootstrapalargenetworkofparticipants.

Second,“cryptographyisanareawhereyouneverwanttobeusingthenewestand

greatest,becausethereisanentirehistoryofanalgorithmthateveryonebelievesis

secure,that’soutthereforfourorfiveyears,andsomeveryinspiredscientistwill

comeoutandsay,there’saflaw,andtheentirethingtumbles,”saidAustinHillof

Blockstream.“That’swhywegenerallypreferconservative,verywell-established,

long-standingalgorithms.Thisstuffisvery,verywellfuture-proofed,andbitcoinwas

designedwiththatinmind.”

Still,theconceptisworthtakingveryseriously,asithasprofoundimplications

forprivacy,security,andsustainability.“Enigmaisofferingwhattheysayguarantees

privacy,”Cavoukiansaid.“Thatisabigclaim,butthat’sthekindofthingwe

increasinglyneedinthisconnected,interconnectedworld.”

Inourresearch,wecameacrossanumberofprojectsinitiatedonblockchain

technologieswhosedevelopershadsimilaraspirationsforenablingbasichuman

rights—notonlytherightstoprivacyandsecurity,butalsotherightstoproperty,

recognitionasapersonunderthelaw,andparticipationingovernment,culture,and

theeconomy.Imagineatechnologythatcouldpreserveourfreedomtochoosefor

ourselvesandourfamilies,toexpressthesechoicesintheworld,andtocontrolour

owndestiny,nomatterwherewelivedorwereborn.Whatnewtoolsandnewjobs

couldwecreatewiththosecapabilities?Whatnewbusinessesandservices?How

shouldwethinkabouttheopportunities?Theanswerswererightinfrontofus,

complimentsofSatoshiNakamoto.

THESEVENDESIGNPRINCIPLES

WebelievethatthisnexteracouldbeinspiredbySatoshiNakamoto’svision,

designedaroundasetofimplicitprinciples,andrealizedbythecollaborativespiritof

manypassionateandequallytalentedleadersinthecommunity.

Hisgrandvisionwaslimitedtomoney,nottosomegreatergoalofcreatinga

secondgenerationoftheInternet.Therewasnodiscussionofreinventingthefirm,

changingourinstitutions,ortransformingcivilizationforthebetter.Still,Satoshi’s

visionwasstunninginitssimplicity,originality,andinsightintohumankind.It

becamecleartothosewhoreadthe2008paperthataneweraofthedigitaleconomy

wasabouttobegin.Wherethefirsteraofthedigitaleconomywassparkedbya

convergenceofcomputingandcommunicationstechnologies,thisseconderawould

bepoweredbyaclevercombinationofcomputerengineering,mathematics,

cryptography,andbehavioraleconomics.

FolksingerGordonLightfootcrooned,“Ifyoucouldreadmymind,love,whata

talemythoughtscouldtell.”Satoshihasbeenincommunicadosince2011(thoughthe

namepopsupondiscussionboardsfromtimetotime),butwethinkthetrustprotocol

hebootstrappedlendsitselftoprinciplesforreconfiguringourinstitutionsand

economy.

Everyonewetalkedtohasbeeneagertoshareinsightsintoblockchaintechnology

withus.Eachconversation,eachwhitepaper,eachforumthreadhassurfaceda

numberofthemesthatwe’vereverse-engineeredintodesignprinciples—principles

forcreatingsoftware,services,businessmodels,markets,organizations,andeven

governmentsontheblockchain.Satoshineverwroteabouttheseprinciples,butthey

areimplicitinthetechnologyplatformheunleashed.Weseethemasprinciplesfor

shapingthenexteraofthedigitaleconomy,andaneraofrenewedtrust.

Ifyou’renewtothisspace,wehopetheseprincipleswillhelpyouunderstandthe

basicsoftheblockchainrevolution.Ifyou’readie-hardskepticofthebitcoin

blockchain,theyshouldstillserveyouasyoucontemplateyourfutureasan

entrepreneur,inventor,engineer,orartistwhoseekscreativecollaborationswithlike-

mindedpeople;asanownerorinvestorinassetsofallkinds;orasamanagerwho

wantstoreimagineyourroleinthisnascentblockchaineconomy.

1.NetworkedIntegrity

Principle:Trustisintrinsic,notextrinsic.Integrityisencodedineverystepofthe

processanddistributed,notvestedinanysinglemember.Participantscanexchange

valuedirectlywiththeexpectationthattheotherpartywillactwithintegrity.That

meansthatthevaluesofintegrity—honestyinone’swordsanddeeds,consideration

forothers’interests,accountabilityfortheconsequencesofone’sdecisionsand

actions,andtransparencyindecisionmakingandactiontaking—arecodedindecision

rights,incentivestructures,andoperationssothatactingwithoutintegrityeitheris

impossibleorcostsalotmoretime,money,energy,andreputation.

ProblemtoBeSolved:OntheInternet,peoplehaven’tbeenabletotransactordo

businessdirectlyforthesimplereasonthatmoneyisn’tlikeotherinformationgoods

andintellectualpropertyperse.Youcansendthesameselfietoallyourfriends,but

yououghtnotgiveyourfriendadollarthatyou’vealreadygiventosomeoneelse.

Themoneymustleaveyouraccountandgointoyourfriend’s.Itcan’texistinboth

places,letalonemultipleplaces.Andsothere’sariskofyourspendingaunitof

digitalcurrencyintwoplacesandhavingoneofthembouncelikeabadcheck.That’s

calledthedouble-spendproblem.That’sgoodforfraudsterswhowanttospendtheir

moneytwice.It’sbadfortherecipientofthebouncedamountandbadforyour

reputationonline.Traditionally,whenmakingonlinepayments,wesolvethedouble-

spendproblembyclearingeverytransactionthroughthecentraldatabasesofoneor

manythirdparties,suchasamoneytransferservice(likeWesternUnion),a

commercialbank(Citicorp),agovernmentbody(CommonwealthBankofAustralia),

acreditcardcompany(Visa),oranonlinepaymentplatform(PayPal).Settlementcan

takedaysorevenweeksinsomepartsoftheworld.

Breakthrough:Satoshileveragedanexistingdistributedpeer-to-peernetwork

andabitofclevercryptographytocreateaconsensusmechanismthatcouldsolvethe

double-spendproblemaswellas,ifnotbetterthan,atrustedthirdparty.Onthe

bitcoinblockchain,thenetworktime-stampsthefirsttransactionwheretheowner

spendsaparticularcoinandrejectssubsequentspendsofthecoin,thuseliminatinga

doublespend.Networkparticipantswhorunfullyoperatingbitcoinnodes—called

miners—gatheruprecenttransactions,settlethemintheformofablockofdata,and

repeattheprocesseverytenminutes.Eachblockmustrefertotheprecedingblockto

bevalid.Theprotocolsalsoincludeamethodforreclaimingdiskspacesothatall

nodescanefficientlystorethefullblockchain.Finally,theblockchainispublic.

Anyonecanseetransactionstakingplace.Noonecanhideatransaction,andthat

makesbitcoinmoretraceablethancash.

Satoshisoughtnotonlytodisintermediatethecentralbankingpowersbutalsoto

eliminatetheambiguityandconflictinginterpretationsofwhathappened.Letthecode

speakforitself.Letthenetworkreachconsensusalgorithmicallyonwhathappened

andrecorditcryptographicallyontheblockchain.Themechanismforreaching

consensusiscritical.“Consensusisasocialprocess,”bloggedVitalikButerin,pioneer

oftheEthereumblockchain.“Humanbeingsarefairlygoodatengagingin

consensus...withoutanyhelpfromalgorithms.”Heexplainedthat,onceasystem

scalesbeyondanindividual’sabilitytodothemath,peopleturntosoftwareagents.In

peer-to-peernetworks,theconsensusalgorithmdivviesuptherighttoupdatethe

statusofthenetwork,thatis,tovoteonthetruth.Thealgorithmdolesoutthisrightto

agroupofpeerswhoconstituteaneconomicset,asetthathasskininthegame,soto

speak.AccordingtoButerin,what’simportantaboutthiseconomicsetisthatits

membersaresecurelydistributed:nosinglememberorcartelshouldbeableto

overtakeamajority,eveniftheyhadthemeansandincentivetodoso.

Toachieveconsensus,thebitcoinnetworkuseswhat’scalledaproofofwork

(PoW)mechanism.Thismaysoundcomplicatedbuttheideaisasimpleone.Because

wecan’trelyontheidentityoftheminerstoselectwhocreatesthenextblock,we

insteadcreateapuzzlethatishardtosolve(i.e.,ittakesalotofwork),buteasyto

verify(i.e.,everyoneelsecanchecktheanswerveryquickly).Participantsagreethat

whoeversolvestheproblemfirstgetstocreatethenextblock.Minershavetoexpend

resources(computinghardwareandelectricity)tosolvethepuzzlebyfindingtheright

hash,akindofuniquefingerprintforatextoradatafile.Foreachblocktheyfind,

minersreceivebitcoinasareward.Thepuzzleismathematicallysetuptomakeit

impossibletofindashortcuttosolveit.That’swhy,whentherestofthenetworksees

theanswer,everyonetruststhatalotofworkwentintoproducingit.Also,thispuzzle

solvingiscontinuous“tothetuneof500,000trillionhashespersecond,”accordingto

DinoMarkAngaritis.Minersare“lookingforahashthatmeetsthetarget.Itis

statisticallyboundtooccureverytenminutes.It’saPoissonprocess,sothat

sometimesittakesoneminuteandsometimesonehour,butonaverage,it’sten

minutes.”Angaritisexplainedhowitworks:“Minersgatherallthepending

transactionsthattheyfindonthenetworkandrunthedatathroughacryptographic

digestfunctioncalledthesecurehashalgorithm(SHA-256),whichoutputsa32-byte

hashvalue.Ifthehashvalueisbelowacertaintarget(setbythenetworkandadjusted

every2,016blocks),thentheminerhasfoundtheanswertothepuzzleandhas

‘solved’theblock.Unfortunatelyfortheminer,findingtherighthashvalueisvery

difficult.Ifthehashvalueiswrong,themineradjuststheinputdataslightlyandtries

again.Eachattemptresultsinanentirelydifferenthashvalue.Minershavetotry

manytimestofindtherightanswer.AsofNovember2015,thenumberofhash

attemptsisonaverage350milliontrillion.That’salotofwork!”

Youmayhearaboutotherconsensusmechanisms.Thefirstversionofthe

Ethereumblockchain—Frontier—alsousesproofofwork,butthedevelopersof

Ethereum1.1expecttoreplaceitwithaproofofstakemechanism.Proofofstake

requiresminerstoinvestinandhangontosomestoreofvalue(i.e.,thenativetoken

oftheblockchainsuchasPeercoin,NXT,etc.).Theyneedn’tspendenergytovote.

Otherblockchains,suchasRippleandStellar,relyonsocialnetworksforconsensus

andmayrecommendthatnewparticipants(i.e.,newnodes)generateauniquenode

listofatleastonehundrednodestheycantrustinvotingonthestateofaffairs.This

typeofproofisbiased:newcomersneedsocialintelligenceandreputationto

participate.Proofofactivityisanothermechanism;itcombinesproofofworkand

proofofstake,wherearandomnumberofminersmustsignoffontheblockusinga

cryptokeybeforetheblockbecomesofficial.

Proofofcapacityrequiresminersto

allotasizablevolumeoftheirharddrivetomining.Asimilarconcept,proofof

storage,requiresminerstoallocateandsharediskspaceinadistributedcloud.

Storagedoesmatter.DataonblockchainsaredifferentfromdataontheInternetin

oneimportantway.OntheInternet,mostoftheinformationismalleableandfleeting,

andtheexactdateandtimeofitspublicationisn’tcriticaltopastorfuture

information.Ontheblockchain,bitcoinmovementacrossthenetworkispermanently

stamped,fromthemomentofitscoinage.Forabitcointobevalid,itmustreference

itsownhistoryaswellasthehistoryoftheblockchain.Therefore,theblockchain

mustbepreservedinitsentirety.

Soimportantaretheprocessesofmining—assemblingablockoftransactions,

spendingsomeresource,solvingtheproblem,reachingconsensus,maintainingacopy

ofthefullledger—thatsomehavecalledthebitcoinblockchainapublicutilitylike

theInternet,autilitythatrequirespublicsupport.PaulBrodyofErnst&Youngthinks

thatallourappliancesshoulddonatetheirprocessingpowertotheupkeepofa

blockchain:“YourlawnmowerordishwasherisgoingtocomewithaCPUthatis

probablyathousandtimesmorepowerfulthanitactuallyneeds,andsowhynothave

itmine?Notforthepurposeofmakingyoumoney,buttomaintainyourshareofthe

blockchain,”

hesaid.Regardlessoftheconsensusmechanism,theblockchain

ensuresintegritythroughclevercoderatherthanthroughhumanbeingswhochooseto

dotherightthing.

ImplicationsfortheBlockchainEconomy:Ratherthantrustingbigcompanies

andgovernmentstoverifypeople’sidentitiesandvouchfortheirreputations,wecan

trustthenetwork.Forthefirsttimeever,wehaveaplatformthatensurestrustin

transactionsandmuchrecordedinformationnomatterhowtheotherpartyacts.

Theimplicationsformostsocial,political,andeconomicactivityarestaggering.

It’snotjustaboutwhomarriedwhom,whovotedforwhom,whopaidwhom,it’s

aboutanyendeavorthatrequirestrustedrecordsandassuredtransactions.Whoowns

what?Whoholdswhichrightstothisintellectualproperty?Whograduatedfrom

medicalschool?Whoboughtguns?WhomadetheseNikeshoes,thisAppledevice,

orthisbabyformula?Wheredidthesediamondscomefrom?Trustisthesinequanon

ofthedigitaleconomy,andaplatformforsecureandreliablemasscollaboration

holdsmanypossibilitiesforanewkindoforganizationandsociety.

2.DistributedPower

Principle:Thesystemdistributespoweracrossapeer-to-peernetworkwithnosingle

pointofcontrol.Nosinglepartycanshutthesystemdown.Ifacentralauthority

managestoblackoutorcutoffanindividualorgroup,thesystemwillstillsurvive.If

overhalfthenetworkattemptstooverwhelmthewhole,everyonewillseewhat’s

happening.

ProblemtoBeSolved:InthefirsteraoftheInternet,anylargeinstitutionwitha

largeestablishedbaseofusers,betheyemployees,citizens,customers,orother

organizations,thoughtlittleoftheirsocialcontract.Timeandtimeagain,central

powershaveproventhatthey’rewillingandabletooverrideusers,warehouseand

analyzeuserdata,respondtogovernmentrequestsfordatawithoutusers’knowledge,

andimplementlarge-scalechangeswithoutusers’consent.

Breakthrough:Theenergycostsofoverpoweringthebitcoinblockchainwould

outweighthefinancialbenefits.Satoshideployedaproof-of-workmethodthat

requiresuserstoexpendalotofcomputingpower(whichrequiresalotofelectricity)

todefendthenetworkandmintnewcoins.HewasinspiredbycryptographerAdam

Back’ssolution,Hashcash,tomitigatespamanddenial-of-serviceattacks.Back’s

methodrequirede-mailerstoprovideproofofworkwhensendingthemessage.Itin

effectstamped“specialdelivery”onane-mailtosignalthemessage’simportanceto

itssender.“ThismessageissocriticalthatI’vespentallthisenergyinsendingitto

you.”Itincreasesthecostsofsendingspam,malware,andransomware.

Anyonecandownloadthebitcoinprotocolforfreeandmaintainacopyofthe

blockchain.Itleveragesbootstrapping,atechniqueforuploadingtheprogramontoa

volunteer’scomputerormobiledevicethroughafewsimpleinstructionsthatsetthe

restoftheprograminmotion.It’sfullydistributedacrossavolunteernetworklike

BitTorrent,ashareddatabaseofintellectualpropertythatresidesontensofthousands

ofcomputersworldwide.

Tobesure,thisshieldsthenetworkfromthehandsofthestate,whichcouldbe

goodorbaddependingonthesituation—sayadissidentinatotalitariancountry

fightingforwomen’srightsversusacriminalinademocraticcountryconducting

extortion.Totalitarianregimescouldnotfreezebankaccountsorseizefundsof

politicalactivists.Statescouldnotarbitrarilyseizeassetsontheblockchainas

FranklinDelanoRoosevelt’sadministrationdidthroughFDR’sExecutiveOrder6102,

whichrequiredcitizenstoturntheir“goldcoin,goldbullion,andgoldcertificates”

overtothegovernmentorriskfinesorimprisonment.

JoshFairfieldofWashington

andLeeUniversityputitbluntly:“There’snomiddlemantogoafteranymore.”

The

blockchainresideseverywhere.Volunteersmaintainitbykeepingtheircopyofthe

blockchainuptodateandlendingtheirsparecomputerprocessingunitsformining.

Nobackdoordealing.Everyactionortransactionisbroadcastacrossthenetworkfor

subsequentverificationandvalidation.Nothingpassesthroughacentralthirdparty;

nothingisstoredonacentralserver.

Satoshialsodistributedthemintbylinkingtheissuanceofbitcoinstothecreation

ofanewblockintheledger,puttingthepowertomintintoallthehandsofthepeer

network.Whicheverminersolvedthepuzzleandsubmittedproofofworkfirstcould

receiveanumberofnewbitcoins.ThereisnoFederalReserve,centralbank,or

treasurywithcontroloverthemoneysupply.Moreover,eachbitcoincontainsdirect

linkstoitsgenesisblockandallsubsequenttransactions.

Sonointermediariesarerequired.Thefunctioningoftheblockchainismass

collaborationatitsbest.Youhavepoweroveryourdata,yourproperty,andyourlevel

ofparticipation.It’sdistributedcomputingpowerenablingdistributedandcollective

humanpower.

ImplicationsfortheBlockchainEconomy:Perhapssuchaplatformcould

enablenewdistributedmodelsofwealthcreation.Perhapsnewkindsofpeer-to-peer

collaborationscouldtargethumanity’smostvexingsocialproblems.Perhapswe

couldsolvethecrisisofconfidenceandevenlegitimacyintoday’sinstitutionsby

shiftingrealpowertowardcitizens,equippingthemwithrealopportunitiesfor

prosperityandparticipationinsociety,ratherthanthroughPRtrickery.

3.ValueasIncentive

Principle:Thesystemalignstheincentivesofallstakeholders.Bitcoinorsometoken

ofvalueisintegraltothisalignmentandcorrelativeofreputation.Satoshi

programmedthesoftwaretorewardthosewhoworkonitandbelongtothosewho

holdanduseitstokens,sothattheyalltakecareofit.Sortoftheultimate

Tamagotchi,theblockchainisagloballydistributednestegg.

ProblemtoBeSolved:InthefirsteraoftheInternet,theconcentrationofpower

incorporations,combinedwiththeirsheersize,complexity,andopacity,enabledthem

toextractdisproportionatevaluefromtheverynetworksthatendowedthemwith

rights.Largebanksexploitedthefinancialsystemtoitsbreakingpointbecause

“incentivestructuresformostofthetopexecutivesandmanyofthelendingofficers

ofthesebanks[were]designedtoencourageshort-sightedbehaviorandexcessive

risk-taking,”accordingtoeconomistJosephStiglitz.Thatincluded“preyingonthe

poorestAmericans.”Hesummeduptheproblem:“Ifyougivepeoplebadincentives,

theybehavebadly,andtheybehavedjustasonewouldhaveexpected.”

Largedot-comsdangledfreeservicesinretail,search,andsocialmediain

exchangeforuserdata.AccordingtoanErnst&Youngsurvey,nearlytwothirdsof

managerspolledsaidtheycollectedconsumerdatatodrivebusiness,andnearly80

percentclaimedtohaveincreasedrevenuesfromthisdatamining.Butwhenthese

firmsgethacked,it’stheconsumerswhohavetocleanupthemessofstolencredit

cardandbankaccountinformation.It’snotsurprisingthat,inthesamesurvey,nearly

halfofconsumerssaidthey’dbecuttingoffaccesstotheirdatainthenextfiveyears,

andoverhalfsaidtheywerealreadyprovidinglessdata,includingcensoring

themselvesonsocialmedia,thaninthepreviousfiveyears.

Breakthrough:Satoshiexpectedparticipantstoactintheirownself-interests.He

understoodgametheory.Heknewthatnetworkswithoutgatekeepershavebeen

vulnerabletoSybilattacks,wherenodesforgemultipleidentities,diluterights,and

depreciatethevalueofreputation.

Theintegrityofthepeer-to-peernetworkandthe

reputationofitspeersbothdiminishifyoudon’tknowwhetheryou’redealingwith

threepartiesoronepartyusingthreeidentities.SoSatoshiprogrammedthesource

codesothat,nomatterhowselfishlypeopleacted,theiractionswouldbenefitthe

systemoverallandaccruetotheirreputations,howevertheychosetoidentify

themselves.Theresourcerequirementsoftheconsensusmechanism,combinedwith

bitcoinsasreward,couldcompelparticipantstodotherightthing,makingthem

trustworthyinthesensethattheywerepredictable.Sybilattackswouldbe

economicallyunviable.

Satoshiwrote,“Byconvention,thefirsttransactioninablockisaspecial

transactionthatstartsanewcoinownedbythecreatoroftheblock.Thisaddsan

incentivefornodestosupportthenetwork.”

Bitcoinisanincentiveforminersto

participateincreatingablockandlinkingittothepreviousblock.Thosewho

completeablockfirstgetaquantityofbitcoinsfortheirefforts.Satoshi’sprotocol

rewardedearlyadoptershandsomelywithbitcoin:forthefirstfouryears,miners

received50bitcoins(BTC)foreachblock.Everyfouryears,therewardperblock

wouldhalve:25BTC,12.5BTC,andsoon.Becausetheynowownbitcoin,theyhave

anincentivetoensuretheplatform’slong-termsuccess,buyingthebestequipmentto

runminingoperations,spendingenergyasefficientlyaspossible,andmaintainingthe

ledger.Bitcoinisalsoaclaimontheblockchain,notjustasanincentivetoparticipate

inminingandtransactingwithothersbutthroughownershipintheplatformitself.

Distributeduseraccountsarethemostbasicelementofthecryptographicnetwork

infrastructure.Byowningandusingbitcoin,oneisfinancingtheblockchain’s

development.

Satoshichoseastheeconomicsettheownersofcomputingpower.Thisrequires

theseminerstoconsumearesourceexternaltothenetwork,namelyelectricity,ifthey

wanttoparticipateintherewardsystem.Everysooften,differentminersfindtwo

equallyvalidblocksofequalheight,andtherestoftheminersmustchoosewhich

blocktobuildonnext.Theygenerallypickwhichevertheythinkwillwinratherthan

buildingonboth,becausethey’dotherwisehavetosplittheirprocessingpower

betweentheforks,andthat’sastrategyforlosingvalue.Thelongestchainrepresents

thegreatestamountofworkandthereforeparticipantschooseitasthecanonicalstate

oftheblockchain.Incontrast,Ethereumchoseownersofcoinasitseconomicset.

RippleandStellarchosethesocialnetwork.

Theparadoxoftheseconsensusschemesisthatbyactinginone’sself-interest,

oneisservingthepeer-to-peer(P2P)network,andthatinturnaffectsone’sreputation

asamemberoftheeconomicset.Beforeblockchaintechnologies,peoplecouldn’t

easilyleveragethevalueoftheirreputationonline.Itwasn’tonlybecauseofSybil

attacks,whereacomputercouldinhabitmultipleroles.Identityismultifaceted,

nuanced,andtransient.Fewpeopleseeallsides,letalonethesubtletiesandthearcof

ouridentity.Fordifferentcontexts,wehavetoproducesomedocumentorotherto

attesttosomedetailofouridentity.People“withoutpapers”areconfinedto

collaboratingwiththeirsocialcircle.OnblockchainslikeStellar,that’sanexcellent

start,ameansofcreatingapersistentdigitalpresenceandestablishingreputationthat

isportablewellbeyondone’sgeographiccommunity.

Anotherbreakthroughtopreservevalueisthemonetarypolicyprogrammedinto

thesoftware.“Allmoneymankindhaseverusedhasbeeninsecureinonewayor

another,”saidNickSzabo.“Thisinsecurityhasbeenmanifestedinawidevarietyof

ways,fromcounterfeitingtotheft,butthemostperniciousofwhichhasprobably

beeninflation.”

Satoshicappedthesupplyofbitcoinsat21milliontobeissuedover

timetopreventarbitraryinflation.Giventhehalvingeveryfouryearsofbitcoins

minedinablockandthecurrentrateofmining—sixblocksperhour—those21

millionBTCshouldbeincirculationaroundtheyear2140.Nohyperinflationor

currencydevaluationcausedbyincompetentorcorruptbureaucracies.

Currenciesarenottheonlyassetsthatwecantradeontheblockchain.“We’ve

onlybeguntoscratchthesurfaceonwhat’spossible,”saidHillofBlockstream.

“We’restillatthat1994pointintermsofapplicationsandprotocolsthatreallytake

advantageofthenetworkandshowtheworld,‘Here’swhatyoucandothatistotally

groundbreaking.’”

Hillexpectstoseedifferentfinancialinstruments,fromproof-of-

assetauthenticitytoproof-of-propertyownership.Healsoexpectstoseebitcoin

applicationsintheMetaverse(avirtualworld)whereyoucanconvertbitcoininto

KongbucksandhireHiroProtagonisttohackyousomedata.

Orjackyourselfinto

theOASIS(aworldofmultiplevirtualutopias)whereyouactuallydodiscoverthe

Easteregg,winHalliday’sestate,licenseOASIS’svirtualpositioningrightsto

Google,andbuyaself-drivingcartonavigateToronto.

And,ofcourse,there’stheInternetofThings,whereweregisterourdevices,

assignthemanidentity(Intelisalreadydoingthis),andcoordinatepaymentamong

themusingbitcoinratherthanmultiplefiatcurrencies.“Youcandefineallthesenew

businesscasesthatyouwanttodo,andhaveitinteroperatewithinthenetwork,and

usethenetworkinfrastructurewithouthavingtobootstrapanewblockchain,justfor

yourself,”saidHill.

Unlikefiatcurrency,eachbitcoinisdivisibletoeightdecimalplaces.Itenables

userstocombineandsplitvalueovertimeinasingletransaction,meaningthatan

inputcanhavemultipleoutputsovermultipleperiodsoftime,whichisfarmore

efficientthanaseriesoftransactions.Userscansetupsmartcontractstometerusage

ofaserviceandmaketinyfractionsofpaymentsatregularintervals.

ImplicationsfortheBlockchainEconomy:ThefirsteraoftheInternetmissed

allthis.Nowwehaveaplatformwherepeopleandeventhingshaveproperfinancial

incentivestocollaborateeffectivelyandcreatejustaboutanything.Imagineonline

discussiongroupswhereparticipantshavereputationsworthenhancing,inpart

becausebadbehaviorwillcostthemfinancially.Trollsneednotapply.Imaginea

peer-to-peernetworkofsolarpanelswherehomeownersreceivereal-time

compensationontheblockchainforgeneratingsustainableenergy.Imagineanopen

sourcesoftwareprojectwhereacommunityofdeveloperscompensates

supercontributorsforacceptablecode.Imaginethere’snocountries.Itisn’thardto

do.

4.Security

Principle:Safetymeasuresareembeddedinthenetworkwithnosinglepointof

failure,andtheyprovidenotonlyconfidentiality,butalsoauthenticityand

nonrepudiationtoallactivity.Anyonewhowantstoparticipatemustusecryptography

—optingoutisnotanoption—andtheconsequencesofrecklessbehaviorareisolated

tothepersonwhobehavedrecklessly.

ProblemtoBeSolved:Hacking,identitytheft,fraud,cyberbullying,phishing,

spam,malware,ransomware—alloftheseunderminethesecurityoftheindividualin

society.ThefirsteraoftheInternet,ratherthanbringingtransparencyandimpairing

violations,seemstohavedonelittletoincreasesecurityofpersons,institutions,and

economicactivity.TheaverageInternetuseroftenhastorelyonflimsypasswordsto

protecte-mailandonlineaccountsbecauseserviceprovidersoremployersinsiston

nothingstronger.Considerthetypicalfinancialintermediary:itdoesn’tspecializein

developingsecuretechnology;itspecializesinfinancialinnovation.Intheyearthat

Satoshipublishedhiswhitepaper,databreachesatsuchfinancialfirmsasBNY

Mellon,Countrywide,andGEMoneyaccountedforover50percentofallidentity

theftsreportedthatyear,accordingtotheIdentityTheftResourceCenter.

By2014,

thatfigurehadfallento5.5percentforthefinancialsector,butbreachesinmedical

andhealthcarejumpedto42percentoftheyear’stotal.IBMreportedthattheaverage

costofadatabreachis$3.8million,whichmeansthatdatabreacheshavecostatleast

$1.5billionoverthelasttwoyears.

Theaveragecosttoanindividualofmedical

identityfraudiscloseto$13,500,andoffensesareontherise.Consumersdon’tknow

whichaspectoftheirlifewillbehackednext.

Ifthenextstageofthedigital

revolutioninvolvescommunicatingmoneydirectlybetweenparties,then

communicationneedstobehackproof.

Breakthrough:Satoshirequiredparticipantstousepublickeyinfrastructure

(PKI)forestablishingasecureplatform.PKIisanadvancedformof“asymmetric”

cryptography,whereusersgettwokeysthatdon’tperformthesamefunction:oneis

forencryptionandonefordecryption.Hence,theyareasymmetric.Thebitcoin

blockchainisnowthelargestciviliandeploymentofPKIintheworld,andsecond

overalltotheU.S.DepartmentofDefensecommonaccesssystem.

Pioneeredinthe1970s,

asymmetriccryptographygainedsometractioninthe

1990sintheformofe-mailencryptionfreewaresuchasPrettyGoodPrivacy.PGPis

prettysecure,andprettymuchahassletousebecauseeveryoneinyournetwork

needstobeusingit,andyouhavetokeeptrackofyourtwokeysandeveryone’s

publickeys.There’snopassword-resetfunction.Ifyouforgetyours,youhavetostart

allover.AccordingtotheVirtruCorporation,“theuseofemailencryptionisonthe

rise.Still,only50percentofemailsareencryptedintransit,andend-to-endemail

encryptionisrarerstill.”

Somepeopleusedigitalcertificates,piecesofcodethat

protectmessageswithouttheencrypt-decryptoperations,butusersmustapply(and

payanannualfee)fortheirindividualcertificates,andthemostcommone-mail

services—Google,Outlook,andYahoo!—don’tsupportthem.

“Pastschemesfailedbecausetheylackedincentive,andpeopleneverappreciated

privacyasincentiveenoughtosecurethosesystems,”

AndreasAntonopoulossaid.

Thebitcoinblockchainsolvesnearlyalltheseproblemsbyprovidingtheincentivefor

wideadoptionofPKIforalltransactionsofvalue,notonlythroughtheuseofbitcoin

butalsointhesharedbitcoinprotocols.Weneedn’tworryaboutweakfirewalls,

thievingemployees,orinsurancehackers.Ifwe’rebothusingbitcoin,ifwecanstore

andexchangebitcoinsecurely,thenwecanstoreandexchangehighlyconfidential

informationanddigitalassetssecurelyontheblockchain.

Here’showitworks.Digitalcurrencyisn’tstoredinafileperse.It’srepresented

bytransactionsindicatedbyacryptographichash.Usersholdthecryptokeystotheir

ownmoneyandtransactdirectlywithoneanother.Withthissecuritycomesthe

responsibilityofkeepingone’sprivatekeysprivate.

Securitystandardsmatter.Thebitcoinblockchainrunsontheverywell-known

andestablishedSHA-256publishedbytheU.S.NationalInstituteofStandardsand

TechnologyandacceptedasaU.S.FederalInformationProcessingStandard.The

difficultyofthemanyrepetitionsofthismathematicalcalculationrequiredtofinda

blocksolutionforcesthecomputationaldevicetoconsumesubstantialelectricityin

ordertosolveapuzzleandearnnewbitcoin.Otheralgorithmssuchasproofofstake

burnmuchlessenergy.

RememberwhatAustinHillsaidatthestartofthischapteraboutneverusingthe

newestandgreatestinalgorithms.Hill,whoworkswithcryptographerAdamBackat

Blockstream,expressedconcernovercryptocurrenciesthatdon’tuseproofofwork.“I

don’tthinkproofofstakeultimatelyworks.Tome,it’sasystemwheretherichget

richer,wherepeoplewhohavetokensgettodecidewhattheconsensusis,whereas

proofofworkultimatelyisasystemrootedinphysics.Ireallylikethatbecauseit’s

verysimilartothesystemforgold.”

Finally,thelongestchainisgenerallythesafestchain.ThesecurityofSatoshi’s

blockchainbenefitsgreatlyfromitsrelativematurityanditsestablishedbaseof

bitcoinusersandminers.Hackingitwouldrequiremorecomputingpowerthan

attackingshortchains.Hillsaid,“Wheneveroneofthesenewnetworksstartupwith

anallnewchain,there’sabunchofpeoplewhodirecttheirlatentcomputerpower,all

thecomputersandCPUsthattheytookofflinefromminingbitcoin,theypointat

thesenewnetworkstomanipulatethemandtoessentiallyattackthenetworks.”

ImplicationsfortheBlockchainEconomy:Inthedigitalage,technological

securityisobviouslythepreconditiontosecurityofapersoninsociety.Todaybitscan

passthroughourfirewallsandwallets.Thievescanpickourpocketsorhijackourcars

fromtheothersideoftheworld.Aseachofusreliesmoreondigitaltoolsand

platforms,suchthreatshavemultipliedinwaysthatmostofusdonotunderstand.

Withthebitcoinblockchain,withitsmoresecuredesignanditstransparency,wecan

maketransactionsofvalueandprotectwhathappenstoourdata.

5.Privacy

Principle:Peopleshouldcontroltheirowndata.Period.Peopleoughttohavethe

righttodecidewhat,when,how,andhowmuchabouttheiridentitiestosharewith

anybodyelse.Respectingone’srighttoprivacyisnotthesameasactuallyrespecting

one’sprivacy.Weneedtodoboth.Byeliminatingtheneedtotrustothers,Satoshi

eliminatedtheneedtoknowthetrueidentitiesofthoseothersinordertointeractwith

them.“I’vespokentomanyengineersandcomputerscientists,andtheyalltellme—

everysingleone—‘Ofcourse,wecanembedprivacyintodataarchitecture,intothe

designoftheprograms.Ofcoursewecan,’”

saidAnnCavoukian.

ProblemtoBeSolved:Privacyisabasichumanrightandthefoundationoffree

societies.InthelasttwentyyearsoftheInternet,centraldatabasesinbothpublicand

privatesectorshaveaccumulatedallsortsofconfidentialinformationabout

individualsandinstitutions,sometimeswithouttheirknowledge.Everywherepeople

worrythatcorporationsarecreatingwhatwecouldcallcyberclonesofthemby

frackingthedigitalworldfortheirdata.Evendemocraticgovernmentsarecreating

surveillancenations,evidencedbytherecentU.S.NationalSecurityAgency’s

overextendingitssurveillancerightsbyconductingwarrantlessspyingoverthe

Internet.Thesearedoubleprivacyoffenses,firstcollectingandusingourdatawithout

ourunderstandingorourpermission,thennotprotectingthehoneypotfromhackers.

“It’sallaboutabandoningzero-sumpursuits,either-orpropositions,win-lose,youcan

haveoneinterestortheother.That,tome,issodated,soyesterday,andso

counterproductive,”saidCavoukian.“Wesubstituteapositive-summodelwhichis,

essentially,youcanhaveprivacyand—fillintheblank.”

Breakthrough:Satoshiinstallednoidentityrequirementforthenetworklayer

itself,meaningthatnoonehadtoprovideaname,e-mailaddress,oranyother

personaldatainordertodownloadandusethebitcoinsoftware.Theblockchain

doesn’tneedtoknowwhoanybodyis.(AndSatoshididn’tneedtocaptureanybody’s

datatomarketotherproducts.Hisopensourcesoftwarewastheultimateinthought

leadershipmarketing.)That’showtheSocietyforWorldwideInterbankFinancial

Telecommunicationworks—ifyoupayincash,thenSWIFTdoesn’tgenerallyaskfor

identification—butwe’reguessingthatmanySWIFTofficeshavecameras,and

financialinstitutionsmustcomplywithanti–moneylaundering/knowyourcustomer

(AML/KYC)requirementstojoinanduseSWIFT.

Additionally,theidentificationandverificationlayersareseparatefromthe

transactionlayer,meaningthatPartyAbroadcaststhetransferofbitcoinsfromParty

A’saddresstoPartyB’saddress.There’snoreferencetoanyone’sidentityinthat

transaction.ThenthenetworkconfirmsthatPartyAnotonlycontrolledtheamountof

bitcoinspecifiedbutalsoauthorizedthetransactionbeforerecognizingPartyA’s

messageas“unspenttransactionoutput”associatedwithPartyB’saddress.Only

whenPartyBgoestospendthatamountdoesthenetworkverifythatPartyBnow

controlsthatbitcoin.

Comparethatwithusingcreditcards,averyidentity-centricmodel.That’swhy

millionsofpeople’saddressesandphonenumbersarestoleneverytimeadatabase

getsbreached.Considerthenumberofrecordsattachedtoafewofthemorerecent

databreaches:T-Mobile,15millionrecords;JPMorganChase,76million;Anthem

BlueCrossBlueShield,80million;eBay,145million;OfficeofPersonnel

Management,37million;HomeDepot,56million;Target,70million;andSony,77

million;andthereweresmallerbreachesofairlines,universities,gasandelectric

utilities,andhospitalfacilities,someofourmostpreciousinfrastructureassets.

Ontheblockchain,participantscanchoosetomaintainadegreeofpersonal

anonymityinthesensethattheyneedn’tattachanyotherdetailstotheiridentityor

storethosedetailsinacentraldatabase.Wecan’tunderscorehowhugethisis.There

arenohoneypotsofpersonaldataontheblockchain.Theblockchainprotocolsallow

ustochoosethelevelofprivacywe’recomfortablewithinanygiventransactionor

environment.Ithelpsustobettermanageouridentitiesandourinteractionwiththe

world.

Astart-upcalledPersonalBlackBoxCompany,LLC,isaimingtohelplarge

corporationstransformtheirrelationshiptoconsumerdata.PBB’schiefmarketing

officer,HalukKulin,toldus,“CompaniessuchasUnileverorPrudentialarecoming

tousandsaying,‘We’reveryinterestedinbuildingbetterdatarelationships.Canwe

leverageyourplatform?We’reveryinterestedinreducingourdataliability.’They’re

seeingthatdataisincreasinglyatoxicassetinsideofcorporations.”

Itsplatform

givesclientsaccesstoanonymousdata—muchlikeaclinicaltrial,where

pharmaceuticalsknowonlytherelevantaspectsofpatients’health—withouttakingon

anydatasecurityrisk.Someconsumersmaygiveawaymoreinformationinexchange

forbitcoinsorothercorporatebenefits.Onthebackend,PBB’splatformdeploysPKI

sothatonlyconsumershaveaccesstotheirdatathroughtheirprivatekeys.Noteven

PBBhasaccesstoconsumerdata.

Theblockchainoffersaplatformfordoingsomeveryflexibleformsofselective

andanonymousattestation.AustinHilllikenedittotheInternet.“ATCP/IPaddressis

notidentifiedtoapublicID.Thenetworklayeritselfdoesn’tknow.Anyonecanjoin

theInternet,getanIPaddress,andstartsendingandreceivingpacketsfreelyaround

theworld.Asasociety,we’veseenanincrediblebenefitallowingthatlevelof

pseudonymity....Bitcoinoperatesalmostexactlylikethis.Thenetworkitselfdoes

notenforceidentity.That’sagoodthingforsocietyandforpropernetworkdesign.”

Sowhiletheblockchainispublic—anyonecanviewitatanytimebecauseit

residesonthenetwork,notwithinacentralizedinstitutionchargedwithauditing

transactionsandkeepingrecords—users’identitiesarepseudonymous.Thismeans

thatyouhavetodoaconsiderableamountoftriangulatingofdatatofigureoutwhoor

whatownsaparticularpublickey.Thesendercanprovideonlythemetadatathatthe

recipientneedstoknow.Moreover,anyonecanownmultiplepublic/privatekeysets,

justasanyonecanhavemultipledevicesoraccesspointstotheInternetandmultiple

e-mailaddressesundervariouspseudonyms.

Thatsaid,InternetserviceproviderslikeTimeWarnerthatassignIPaddressesdo

keeprecordslinkingidentitiestoaccounts.Likewise,ifyougetabitcoinwalletfrom

alicensedonlineexchangesuchasCoinbase,thatexchangeisrequiredtodoitsdue

diligenceunderAML/KYCrequirements.Forexample,hereisCoinbase’sprivacy

policy:“Wecollectinformationsenttousthroughyourcomputer,mobilephone,or

otheraccessdevice.ThisinformationmayincludeyourIPaddress,device

informationincluding,butnotlimitedto,identifier,devicenameandtype,operating

system,location,mobilenetworkinformationandstandardwebloginformation,such

asyourbrowsertype,traffictoandfromoursiteandthepagesyouaccessedonour

website.”

SogovernmentscansubpoenaISPsandexchangesforthistypeofuser

data.Buttheycan’tsubpoenatheblockchain.

It’salsoimportanttoknowthatwecandesignhigherlevelsoftransparencyinto

anysetoftransactions,application,orbusinessmodel,shouldallthestakeholders

agreetodoso.Invaryingsituationswewillseenewcapabilitieswhereradical

transparencymakesalotofsense.Whencompaniestellthetruthtocustomers,

shareholders,orbusinesspartners,theybuildtrust.

Thatis,privacyforindividuals,

transparencyfororganizations,institutions,andpublicofficials.

ImplicationsfortheBlockchainEconomy:Tobesure,theblockchainprovides

opportunitiestostopthestampedetoasurveillancesociety.Nowthinkaboutthe

problemofcorporatebigdataforeachofus.Whatdoesitmeanforacorporationto

haveperfectinformationaboutyou?Wearesometwentyyearsintotheglobal

Internetera,andonlyatthebeginningofcorporateaccesstothemostintimatedetails

ofourpersonallives.Comingupfastarepersonalhealthandfitnessdata,ourdaily

comingsandgoings,theinnerlivesofourhomes,and,well,younameit.Many

peoplearesimplyunawareofthemanymicro-Faustiandealstheymakeonlineevery

day.BysimplyusingWebsites,consumersauthorizetheirownerstoconverttrailsof

digitalcrumbsintodetailedroadmapsforprivatecommercialbenefit.

Unlessweshifttothenewparadigm,it’snotsciencefictiontoforeseehundreds

ofmillionsofavatarshummingawayintomorrow’sdatacenters.Withblockchain

technology,youcouldownyourpersonalavatarsasyoudointheSecondLifevirtual

world,butwithreal-worldimplications.TheVirtualYoucouldprotectyourpersonal

information,givingawayonlytheinformationrequiredinanysocialoreconomic

exchangeworkunderyourcommandandmakesureyoureceivecompensationfor

anyofyourdatathathasvaluetoanotherparty.It’sashiftfrombigdatatoprivate

data.Callit“littledata.”

6.RightsPreserved

Principle:Ownershiprightsaretransparentandenforceable.Individualfreedomsare

recognizedandrespected.Weholdthistruthtobeself-evident—thatallofusareborn

withcertaininalienablerightsthatshouldandcanbeprotected.

ProblemtoBeSolved:Thefirsteraofthedigitaleconomywasaboutfinding

waystoexercisetheserightsmoreefficiently.TheInternetbecameamediumfornew

formsofart,news,andentertainment,forestablishingcopyrightofpoems,songs,

stories,photographs,andaudioandvideorecordings.WecouldapplytheUniform

CommercialCodefurthertodoonlinewhatthecodehadalreadyexpeditedin

physicalspace,whichwastoeliminatetheneedtonegotiateandcreatecontractsfor

everysingleitem,likeatubeoftoothpaste,nomatterhowsmallitsprice.Evenso,we

hadtotrustmiddlementomanagetransactions,andtheyhadthepowertodenythe

transaction,delayit,andholdthemoneyintheirownaccount(bankerscallthis

“float”),orclearitonlytoreverseitlater.Theyexpectedapercentageofpeopleto

cheatandacceptedacertainleveloffraudasunavoidable.

Inthisgreatburstofefficiency,legitimaterightsgottrampled,therightsnotonly

toprivacyandsecuritybutalsofreespeech,reputation,andequalparticipation.

Peoplecouldanonymouslycensorus,defameus,andblockusatlittlecostorriskto

themselves.Filmmakerswhodependedonrevenuesfromsyndication,videoon

demand,enhancedDVDsales,andcablerightstofilmsreleaseddecadesearlierfound

theirrevenuestreamdryinguptoatrickleastheirfansuploadeddigitalfilesfor

otherstodownloadforfree.

Breakthrough:Theproofofworkrequiredtomintcoinsalsotime-stamps

transactions,sothatonlythefirstspendofacoinwouldclearandsettle.Combined

withPKI,theblockchainnotonlypreventsadoublespendbutalsoconfirms

ownershipofeverycoinincirculation,andeachtransactionisimmutableand

irrevocable.Inotherwords,wecan’ttradewhatisn’toursontheblockchain,whether

it’srealproperty,intellectualproperty,orrightsofpersonhood.Norcanwetradewhat

wearen’tauthorizedtotradeonsomebodyelse’sbehalfinanagencyrole,perhapsas

alawyeroracompanymanager.Andwecan’tstiflepeople’sfreedomofexpression,

assembly,andreligion.

HalukKulinofPersonalBlackBoxsaiditbest:“Inthethousandsofyearsof

humansocialinteraction,everytimewe’vetakentherightofparticipationfromthe

people,theyhavecomebackandbrokenthesystem.We’rediscoveringthat,evenin

digital,stealingtheirconsentisnotsustainable.”

AstheLedgerofEverything,the

blockchaincanserveasapublicregistrythroughsuchtoolsasProofofExistence

(PoE),asitethatcreatesandregisterscryptographicdigestsofdeeds,titles,receipts,

orlicensesontheblockchain.ProofofExistencedoesn’tmaintainacopyofany

originaldocument;thehashofthedocumentiscalculatedontheuser’smachine,not

onthePoEsite,thusensuringconfidentialityofcontent.Evenifacentralauthority

shutsdownProofofExistence,theproofremainsontheblockchain.

Sothe

blockchainprovidesmeansofprovingownershipandpreservingrecordswithout

censorship.

OntheInternet,wecouldn’tnecessarilyenforcecontractualrightsoroversee

implementation.Andso,formorecomplextransactionsinvolvingbundlesofrights

andmultipleparties,wenowhavethesmartcontract,apieceofspecialpurposecode

thatexecutesacomplexsetofinstructionsontheblockchain.“Thatintersectionof

legaldescriptionsandsoftwareisfundamental,andthesmartcontractsarethefirst

stepinthatdirection,”saidSteveOmohundro,presidentofthinktankSelf-Aware

Systems.“Oncetheprinciplesofhowyoucodifylawdigitallybecomemore

understood,thenIthinkeverycountrywillstartdoingit....Eachjurisdictionwould

encodeitslaws,preciselyanddigitally,andtherewouldbetranslationprograms

betweenthem....Gettingridofthefrictionofalllegalstuffisgoingtobeahuge

economicgain.”

Asmartcontractprovidesameansforassigningusagerightstoanotherparty,asa

composermightassignacompletedsongtoamusicpublisher.Thecodeofthe

contractcouldincludethetermordurationoftheassignment,themagnitudeof

royaltiesthatwouldflowfromthepublisher’stothecomposer’sbitcoinaccount

duringtheterm,andsometriggersforterminatingthecontract.Forexample,ifthe

composer’saccountreceivedlessthanaquarterofabitcoininaconsecutivethirty-

dayperiod,thenallrightswouldautomaticallyreverttothecomposer,andthe

publisherwouldnolongerhaveaccesstothecomposer’sworkregisteredonthe

blockchain.Tosetthissmartcontractinmotion,boththecomposerandthepublisher

—andperhapsrepresentativesofthepublisher’sfinanceandlegalteams—wouldsign

usingtheirprivatekeys.

Asmartcontractalsoprovidesameansforownersofassetstopooltheir

resourcesandcreateacorporationontheblockchain,wherethearticlesof

incorporationarecodedintothecontract,clearlyspellingoutandenforcingtherights

ofthoseowners.Associatedagency-employmentcontractscoulddefinethedecision

rightsofmanagersbycodingwhattheycouldandcouldn’tdowithcorporate

resourceswithoutownershippermission.

Smartcontractsareunprecedentedmethodsofensuringcontractualcompliance,

includingsocialcontracts.“Ifyouhaveabigtransactionwithaspecificcontrol

structure,youcanpredicttheoutcomeatanyperiodintime,”saidAntonopoulos.“IfI

haveafullyverifiedsignedtransactionwithanumberofsignaturesina

multisignatureaccount,Icanpredictwhetherthattransactionwillbeverifiablebythe

network.Andifitisverifiablebythenetwork,thenthattransactioncanberedeemed

andirrevocablyso.Nocentralauthorityorthirdpartycanrevokeit,noonecan

overridetheconsensusofthenetwork.That’sanewconceptinbothlawandfinance.

Thebitcoinsystemprovidesaveryhighdegreeofcertaintyastotheoutcomeofa

contract.”

Thecontractcouldn’tbeseized,stopped,orredirectedtoadifferentbitcoin

address.Youneedonlytotransmitthesignedtransactiontoanyofthebitcoin

networknodesfromanywhereusinganymedium.SaidAntonopoulos,“Peoplecould

shutdowntheInternet,andIcouldstilltransmitthattransactionovershortwaveradio

withMorsecode.Agovernmentagencycouldtrytocensormycommunication,andI

couldstilltransmitthattransactionasaseriesofsmileyemoticonsoverSkype.As

longassomeoneontheotherendcoulddecodethetransactionandrecorditinthe

blockchain,Icouldeffectthe[smartcontract].Sowe’veconvertedsomethingthat,in

law,isalmostimpossibletoguaranteeintosomethingthathasverifiablemathematical

certainty.”

Considerpropertyrights,bothrealandintellectual:“Ownershipisjusta

recognitionbyagovernmentoranagencythatyouownsomethingandtheywill

defendyourclaimsonthatownership,”saidStephenPair,CEOofBitPay.“That’sjust

acontractthatcanbesignedbywhateverauthoritythatwilldefendyourrightsfor

youandtheysignitovertoyouridentity,andthenonceyouhavethat,andthat

ownershipisrecorded,youthencantransferittootherpeople.That’svery

straightforward.”

Communitieswithsharedresourcescouldconsideraspectrumof

rights,borrowingfromNobelPrize–winningeconomistElinorOstrom’spyramidof

rights,apeckingorderofsorts.Atthelowestlevel,thereareauthorizeduserswho

mayonlyaccessandwithdrawresources;claimantswhohavethoserightsbutcan

alsoexcludeothersfromaccess;proprietorswhoholdmanagementrightsbeyond

accessandexclusion;andownerswhocanaccess,use,excludeothers,manage,and

selltheresource(i.e.,rightofalienation).

Nowconsidertherightstoprivacyandpublicity:“Ourmodelisreallyrights

appliedtothemarket,”saidKulinofPersonalBlackBox.Hiscompanyuses

blockchaintechnologytorepresentandenforcetherightsofindividualstoextract

valuefromtheirpersonaldata.“Theblockchainprovidesusawholegroupofpeople

whoarebothmission-alignedandtechnology-alignedtocreatedifferentwaysthat

enterprisescanleveragetheseuniquedatasetsratherthanprotecttheirdatasilos.”

Simplyput,peoplecreatebetterdatathanwhatacompanycanfrackfromthem,and

consumersaremuchbetteratemotionallyaligningwithbrandsandinfluencingtheir

peersthancompaniesare.

ImplicationsfortheBlockchainEconomy:Asaneconomicdesignprinciple,

enforcingrightsmuststartwithclarifyingrights.Inthefieldofmanagementscience,

theholacracymovementisaninteresting,ifnotcontroversial,exampleofhow

membersoforganizationsaredefiningtheworkthatneedstobedoneandthen

assigningrightsandtheresponsibilitytodothisworkaspartofawhole.

Whodid

weagreeshouldhavethissetofdecisionsandactivitiesatourcompany?Theanswer

tothatquestioncanbecodifiedinasmartcontractandplacedontheblockchainso

thatthedecisions,progresstowardthegoal,andincentivesarealltransparentand

reachedbyconsensus.

Tobesure,thisisnotsimplyabouttechnology.It’smuchbiggerthanphysical

assets,intellectualproperty,orPersonalBlackBox’sprivacytoolwithapublicity

rightsmodulefortheKardashians.Weneedgreatereducationaboutrightsandthe

developmentofnewunderstandingsaboutrightsmanagementsystems.We’llhave

votingrightsmanagementsystemsandpropertyrightsmanagementsystems.Some

start-upwillcreatearightsdashboardthatwillindicateaperson’slevelofcivic

engagement,wherevotingisbutoneofseveralmeasures,likedonatingskills,

reputation,time,andbitcoinorprovidingfreeaccesstoone’sphysicalorintellectual

property.Buckleup.

7.Inclusion

Principle:Theeconomyworksbestwhenitworksforeveryone.Thatmeans

loweringthebarrierstoparticipation.Itmeanscreatingplatformsfordistributed

capitalism,notjustaredistributedcapitalism.

ProblemtoBeSolved:ThefirsteraoftheInternetcreatedmanywondersfor

manypeople.Butaswehavepointedout,amajorityoftheworld’spopulationisstill

excluded—notjustfromaccesstotechnologybutalsofromaccesstothefinancial

systemandeconomicopportunity.Moreover,thepromisethatthisnew

communicationsmediumwouldbringprosperitytoallhasrunghollow.Yes,ithelped

companiesinthedevelopedworldprovidejobsformillionsintheemerging

economies.Itloweredthebarrierstoentryforentrepreneursandgavethe

disadvantagedaccesstoopportunitiesandbasicinformation.

That’snotenough.Therearestilltwobillion

peoplewithoutabankaccount,

andinthedevelopedworld,prosperityisactuallydecliningassocialinequality

continuestogrow.Indevelopingeconomies,mobileisoftentheonlyaffordable

meansofconnecting.Mostfinancialinstitutionshavemobilepaymentappsthat

combinecamerasandQRcodes.However,thefeesneededtosupportthese

intermediariesmakemicropaymentsimpractical.Consumersatthebottomofthe

pyramidstillcan’taffordtheminimumaccountbalances,minimumpayment

amounts,ortransactionfeestousethesystem.Itsinfrastructurecostsmake

micropaymentsandmicroaccountsunfeasible.

Breakthrough:SatoshidesignedthesystemtoworkontopoftheInternetstack

(TCP/IP),butitcouldrunwithouttheInternetifnecessary.Satoshiimaginedthatthe

typicalpersonwouldbeinteractingwiththeblockchainthroughwhathecalled

“simplifiedpaymentverification”(SPV)modethatcanworkoncellphonesto

mobilizetheblockchain.Nowanyonewithaflipphonecanparticipateinthe

economy,orinamarket,asaproducerorconsumer.Nobankaccountrequired,no

proofofcitizenshiprequired,nobirthcertificaterequired,nohomeaddressrequired,

nostablelocalcurrencyrequiredtousetheblockchaintechnologies.Theblockchain

drasticallylowersthecostoftransmittingsuchfundsasremittances.Itsignificantly

lowersthebarriertohavingabankaccount,obtainingcredit,andinvesting.Andit

supportsentrepreneurshipandparticipationinglobaltrade.

ThatwaspartofSatoshi’svision.Heunderstoodthat,forpeopleindeveloping

economies,thesituationwasworse.Whencorruptorincompetentbureaucratsin

failedstatesneedfundingtorunthegovernment,theircentralbanksandtreasuries

simplyprintmorecurrencyandthenprofitfromthedifferencebetweenthecostof

manufacturingandthefacevalueofthecurrency.That’sseigniorage.Theincreasein

themoneysupplydebasesthecurrency.Ifthelocaleconomyreallytanked—asitdid

inArgentinaandUruguay,andmorerecentlyinCyprusandGreece—thesecentral

bodiescouldfreezethebankassetsofwhoevercouldn’taffordabribe.Givensucha

possibility,thewealthycouldstoretheirassetsinmoretrustworthyjurisdictionsand

morestablecurrencies.

Butnotthepoor.Whatevermoneytheyhavebecomesworthless.Officialscould

siphonoffinflowsofforeignaidandribbontheirborderswithredtape,adding

frictiontoeveryattemptathelpingtheirpeople,frommothersandchildrenneeding

foodandmedicinetovictimsofwar,prolongeddrought,andothernaturaldisasters.

TheAustraliamicropaymentservicemHITs(shortforMobileHandsetInitiated

Transactions)haslaunchedanewservice,BitMoby,thatenablesconsumersinmore

thanonehundredcountriestotopuptheirmobilephonecreditbytextingmHITsan

amountofbitcoin.

AccordingtobitcoincoredeveloperGavinAndresen,“Youdon’t

seeeverytransaction;youseeonlythetransactionsyoucareabout.You’renot

trustingpeerswithyourmoney,you’rejusttrustingthemtogiveyoutheinformation

touringacrossthenetwork.”

“Thepotentialofusingtheblockchainforpropertyrecordsintheemergingworld,

wherethat’sahugeissuerelatedtopoverty,”issignificant,saidAustinHill.“There

isn’tatrustedentitythathasgovernanceoverlandtitle,andsoallowingpeopleto

actuallysay,‘Iownthisproperty,’andthenusethatforcollateraltoimprovethemand

theirfamilysituationisafascinatingusecase.”

Onatechnicalnote,AndresencalledonNielsen’slawofInternetbandwidth,

wherehigh-enduserbandwidthincreasesby50percenteachyear,whereasthe

bandwidthofthemassestendstolagbytwoorthreeyears.Bandwidthlagsbehind

computerprocessingpower,whichincreasesbyabout60percentannually(Moore’s

law).Sobandwidthisthegatingfactor,accordingtoJakobNielsen.

Mostdesigns—

interfaces,Websites,digitalproducts,services,organizations,andsoforth—willneed

toaccommodatethetechnologyofthemassestoleveragenetworkeffects.So

inclusionmeansconsideringthefullspectrumofusage—notjustthestateofthe

scienceofhigh-endusers,buttheslowtechandsporadicpoweroutagesofusersin

remoteregionsoftheworld’spoorestcountries.

ImplicationsfortheBlockchainEconomy:Laterinthebook,wetacklethe

issueoftheprosperityparadox—howthefirsteraoftheInternetbenefitedmany,but

overallprosperityintheWesternworldformostpeopleisnolongerimproving.The

foundationforprosperityisinclusion,andblockchainscanhelp.Let’sbeclearthat

inclusionhasmultipledimensions.Itmeansanendtosocial,economic,andracial

hegemony,anendtodiscriminationbasedonhealth,gender,sexualidentification,or

sexualpreference.Itmeansendingbarrierstoaccessbecauseofwhereapersonlives,

whetherapersonspentanightinjail,orhowapersonvoted,butalsoanendtoglass

ceilings,andgoodol’boys’clubsofcountlessvarieties.

DESIGNINGTHEFUTURE

OurconversationwithAnnCavoukianinspiredustofollowuponGermany’s“Never

again”promise.WecameacrossthewordsofGermanfederalpresidentJoachim

GauckontheDayofRemembranceoftheVictimsofNationalSocialism,victimsof

Hitler’sregime.“Ourmoralobligationscannotbefulfilledsolelyatthelevelof

remembrance.Therealsoexistswithinusadeepandabidingcertaintythat

remembrancebestowsamissiononus.Thatmissiontellsustoprotectandpreserve

humanity.Ittellsustoprotectandpreservetherightsofeveryhumanbeing.”

Was

healludingtogenocideinSyria,Iraq,Darfur,Srebrenica,Rwanda,andCambodia,

aftertheGermanpeoplehadvowed,“Neveragain”?

Webelievethatblockchaintechnologycouldbeanimportanttoolforprotecting

andpreservinghumanityandtherightsofeveryhumanbeing,ameansof

communicatingthetruth,distributingprosperity,and—asthenetworkrejectsthe

fraudulenttransactions—ofrejectingthoseearlycancerouscellsfromasocietythat

cangrowintotheunthinkable.

Admittedly,aboldstatement.Readonandjudgeforyourself.

Fromamoreparochialandpracticalperspective,thesesevenprinciplescanserve

asaguidetodesigningthenextgenerationofhigh-performanceandinnovative

companies,organizations,andinstitutions.Ifwedesignforintegrity,power,value,

privacy,security,rights,andinclusion,thenwewillberedesigningoureconomyand

socialinstitutionstobeworthyoftrust.Wenowturnourattentiontohowthiscould

rolloutandwhatyoushouldconsiderdoing.

PARTII

TRANSFORMATIONS

CHAPTER3



REINVENTINGFINANCIALSERVICES

heglobalfinancialsystemmovestrillionsofdollarsdaily,servesbillionsof

people,andsupportsaglobaleconomyworthmorethan$100trillion.

It’sthe

world’smostpowerfulindustry,thefoundationofglobalcapitalism,anditsleaders

areknownastheMastersoftheUniverse.Closerup,it’saRubeGoldbergcontraption

ofunevendevelopmentsandbizarrecontradictions.First,themachinehasn’thadan

upgradeinawhile.Newtechnologyhasbeenweldedontoaginginfrastructurehelter-

skelter.ConsiderthebankofferingInternetbankingbutstillissuingpaperchecksand

runningmainframecomputersfromthe1970s.Whenoneofitscustomerstapsher

creditcardonastate-of-the-artcardreadertobuyaStarbucksgrandelatte,hermoney

passesthroughnofewerthanfivedifferentintermediariesbeforereachingStarbucks’s

bankaccount.Thetransactiontakessecondstoclearbutdaystosettle.

ThentherearethelargemultinationalslikeAppleorGEthathavetomaintain

hundredsofbankaccountsinlocalcurrenciesaroundtheworldjusttofacilitatetheir

operations.

Whensuchacorporationneedstomovemoneybetweentwosubsidiaries

intwodifferentcountries,themanagerofonesubsidiarysendsabankwirefromhis

operation’sbankaccounttotheothersubsidiary’sbankaccount.Thesetransfersare

needlesslycomplicatedandtakedays,sometimesweekstosettle.Duringthattime,

neithersubsidiarycanusethemoneytofundoperationsorinvestment,butthe

intermediariescanearninterestonthefloat.“Theadventoftechnologyessentially

tookpaper-basedprocessesandturnedthemintosemiautomated,semielectronic

processesbutthelogicwasstillpaperbased,”saidVikramPandit,formerCEOof

Citigroup.

Aroundeverycorner,anotherbizarreparadox:Tradersbuyandsellsecuritieson

theworld’sstockexchangesinnanoseconds;theirtradesclearinstantlybuttakethree

fulldaystosettle.Localgovernmentsusenofewerthantendifferentagents—

advisers,lawyers,insurers,bankers,andmore—tofacilitatetheissuanceofa

municipalbond.

AdaylaborerinLosAngelescasheshispaycheckatamoneymart

fora4percentfee,andthenwalkshisfistfulofdollarsovertoaconveniencestoreto

wireithometohisfamilyinGuatemala,wherehegetsdingedagainonflatfees,

exchangerates,andotherhiddencosts.Oncehisfamilyhasdivviedupthesum

amongitsmanymembers,nobodyhasenoughtoopenabankaccountorgetcredit.

Theyareamongthe2.2billionpeoplewholiveonlessthantwodollarsaday.

The

paymentstheyneedtomakearetiny,toosmallforconventionalpaymentnetworks

suchasdebitandcreditcards,whereminimumfeesmakeso-calledmicropayments

impossible.Bankssimplydon’tviewservingthesepeopleasa“profitable

proposition,”accordingtoarecentHarvardBusinessSchoolstudy.

Andsothe

moneymachineisn’ttrulyglobalinscaleandscope.

Monetarypolicymakersandfinancialregulatorsoftenfindthemselveslackingall

thefacts,thankstotheplannedopacityofmanylargefinancialoperationsandthe

compartmentalizationofoversight.Theglobalfinancialcrisisof2008wasacasein

point.Excessleverage,alackoftransparency,andasenseofcomplacencydrivenby

skewedincentivespreventedanyonefromidentifyingtheproblemuntilitwasnearly

toolate.“Howcanyouhaveanythingwork,fromthepoliceforcetoamonetary

system,ifyoudon’thavenumbersandlocations?”ponderedHernandodeSoto.

Regulatorsarestilltryingtomanagethismachinewithrulesdevisedfortheindustrial

age.InNewYorkState,moneytransmissionlawsdatebacktotheCivilWarwhenthe

primarymeansofmovingmoneyaroundwashorseandbuggy.

It’sFranken-finance,fullofabsurdcontradictions,incongruities,hotpipes,and

pressurepots.Why,forexample,doesWesternUnionneed500,000pointsofsale

aroundtheworld,whenmorethanhalftheworld’spopulationhasasmartphone?

ErikVoorhees,anearlybitcoinpioneerandoutspokencriticofthebankingsystem,

toldus,“ItisfastertomailananviltoChinathanitistosendmoneythroughthe

bankingsystemtoChina.That’scrazy!Moneyisalreadydigital,it’snotlikethey’re

shippingpalletsofcashwhenyoudoawire!”

Whyisitsoinefficient?AccordingtoPaulDavid,theeconomistwhocoinedthe

termproductivityparadox,layingnewtechnologiesoverexistinginfrastructureis

“notunusualduringhistoricaltransitionsfromonetechnologicalparadigmtothe

next.”

Forexample,manufacturersneededfortyyearstoembracecommercial

electrificationoversteampower,andoftenthetwoworkedsidebysidebefore

manufacturersfinallyswitchedoverforgood.Duringthatperiodofretrofitting,

productivityactuallydecreased.Inthefinancialsystem,however,theproblemis

compoundedbecausetherehasbeennocleantransitionfromonetechnologytothe

next;therearemultiplelegacytechnologies,somehundredsofyearsold,neverquite

livinguptotheirfullpotential.

Why?Inpart,becausefinanceisamonopolybusiness.Inhisassessmentofthe

financialcrisis,NobellaureateJosephStiglitzwrotethatbanks“weredoing

everythingtheycouldtoincreasetransactioncostsineverywaypossible.”Heargued

that,evenattheretaillevel,paymentsforbasicgoodsandservices“shouldcosta

fractionofapenny.”“Yethowmuchdotheycharge?”hewondered.“One,two,or

threepercentofthevalueofwhatissoldormore.Capitalandsheerscale,combined

witharegulatoryandsociallicensetooperateallowsbankstoextractasmuchasthey

can,incountryaftercountry,especiallyintheUnitedStates,makingbillionsof

dollarsofprofits.”

Historically,theopportunityforlargecentralizedintermediaries

hasbeenenormous.Notonlytraditionalbanks(e.g.,BankofAmerica),butalso

chargecardcompanies(Visa),investmentbanks(GoldmanSachs),stockexchanges

(NYSE),clearinghouses(CME),wire/remittanceservices(WesternUnion),insurers

(Lloyd’s),securitieslawfirms(Skadden,Arps),centralbanks(FederalReserve),asset

managers(BlackRock),accountancies(Deloitte),consultancies(Accenture),and

commoditiestraders(VitolGroup)makeupthisexpansiveleviathan.Thegearsofthe

financialsystem—powerfulintermediariesthatconsolidatecapitalandinfluenceand

oftenimposemonopolyeconomics—makethesystemwork,butalsoslowitdown,

addcost,andgenerateoutsizedbenefitsforthemselves.Becauseoftheirmonopoly

position,manyincumbentshavenoincentivetoimproveproducts,increaseefficiency,

improvetheconsumerexperience,orappealtothenextgeneration.

ANEWLOOKFORTHEWORLD’SSECOND-OLDESTPROFESSION

ThedaysofFranken-financearenumberedasblockchaintechnologypromisesto

makethenextdecadeoneofgreatupheavalanddislocationbutalsoimmense

opportunityforthosewhoseizeit.Theglobalfinancialservicesindustrytodayis

fraughtwithproblems:Itisantiquated,builtondecades-oldtechnologythatisatodds

withourrapidlyadvancingdigitalworld,makingitoftentimesslowandunreliable.It

isexclusive,leavingbillionsofpeoplewithnoaccesstobasicfinancialtools.Itis

centralized,exposingittodatabreaches,otherattacks,oroutrightfailure.Anditis

monopolistic,reinforcingthestatusquoandstiflinginnovation.Blockchainpromises

tosolvetheseproblemsandmanymoreasinnovatorsandentrepreneursdevisenew

waystocreatevalueonthispowerfulplatform.

Therearesixkeyreasonswhyblockchaintechnologywillbringaboutprofound

changestothisindustry,bustingthefinancemonopoly,andofferingindividualsand

institutionsalikerealchoiceinhowtheycreateandmanagevalue.Industry

participantstheworldovershouldtakenotice.

Attestation:Forthefirsttimeinhistory,twopartieswhoneitherknownor

trusteachothercantransactanddobusiness.Verifyingidentityand

establishingtrustisnolongertherightandprivilegeofthefinancial

intermediary.Moreover,inthecontextoffinancialservices,thetrustprotocol

takesonadoublemeaning.Theblockchaincanalsoestablishtrustwhentrust

isneededbyverifyingtheidentityandcapacityofanycounterpartythrougha

combinationofpasttransactionhistory(ontheblockchain),reputationscores

basedonaggregatereviews,andothersocialandeconomicindicators.

Cost:Ontheblockchain,thenetworkbothclearsandsettlespeer-to-peer

valuetransfers,anditdoessocontinuallysothatitsledgerisalwaysupto

date.Forstarters,ifbanksharnessedthatcapability,theycouldeliminatean

estimated$20billioninback-officeexpenseswithoutchangingtheir

underlyingbusinessmodel,accordingtotheSpanishbankSantander,though

theactualnumberissurelymuchgreater.

Withradicallylowercosts,banks

couldofferindividualsandbusinessesgreateraccesstofinancialservices,

markets,andcapitalinunderservedcommunities.Thiscanbeaboonnotonly

toincumbentsbutalsotoscrappyupstartsandentrepreneurseverywhere.

Anyone,anywhere,withasmartphoneandanInternetconnectioncouldtap

intothevastarteriesofglobalfinance.

Speed:Today,remittancestakethreetosevendaystosettle.Stocktradestake

twotothreedays,whereasbankloantradestakeonaverageastaggering

twenty-threedaystosettle.

TheSWIFTnetworkhandlesfifteenmillion

paymentordersadaybetweententhousandfinancialinstitutionsgloballybut

takesdaystoclearandsettlethem.

ThesameistrueoftheAutomated

ClearingHouse(ACH)system,whichhandlestrillionsofdollarsofU.S.

paymentsannually.Thebitcoinnetworktakesanaverageoftenminutesto

clearandsettlealltransactionsconductedduringthatperiod.Other

blockchainnetworksareevenfaster,andnewinnovations,suchastheBitcoin

LightningNetwork,aimtodramaticallyscalethecapacityofthebitcoin

blockchainwhiledroppingsettlementandclearingtimestoafractionofa

second.

“Inthecorrespondingbankingworld,whereyouhaveasenderin

onenetworkandareceiverinanother,youhavetogothroughmultiple

ledgers,multipleintermediaries,multiplehops.Thingscanliterallyfailinthe

middle.There’sallkindsofcapitalrequirementsforthat,”saidRippleLabs

CEOChrisLarsen.

Indeed,theshifttoinstantandfrictionlessvaluetransfer

wouldfreeupcapitalotherwisetrappedintransit,badnewsforanyone

profitingfromthefloat.

RiskManagement:Blockchaintechnologypromisestomitigateseveral

formsoffinancialrisk.Thefirstissettlementrisk,theriskthatyourtradewill

bouncebackbecauseofsomeglitchinthesettlementprocess.Thesecondis

counterpartyrisk,theriskthatyourcounterpartywilldefaultbeforesettlinga

trade.Themostsignificantissystemicrisk,thetotalsumofalloutstanding

counterpartyriskinthesystem.VikramPanditcalledthisHerstattrisk,

namedafteraGermanbankthatcouldn’tmeetitsliabilitiesandsubsequently

wentunder:“Wefoundthroughthefinancialcrisisoneoftheriskswas,ifI’m

tradingwithsomebody,howdoIknowthey’regoingtosettleontheother

side?”AccordingtoPandit,instantsettlementontheblockchaincould

eliminatethatriskcompletely.Accountantscouldlookintotheinner

workingsofacompanyatanypointintimeandseewhichtransactionswere

occurringandhowthenetworkwasrecordingthem.Irrevocabilityofa

transactionandinstantreconciliationoffinancialreportingwouldeliminate

oneaspectofagencyrisk—theriskthatunscrupulousmanagerswillexploit

thecumbersomepapertrailandsignificanttimedelaytoconcealwrongdoing.

ValueInnovation:Thebitcoinblockchainwasdesignedformovingbitcoins,

notforhandlingotherfinancialassets.However,thetechnologyisopen

source,invitingexperimentation.Someinnovatorsaredevelopingseparate

blockchains,knownasaltcoins,builtforsomethingotherthanbitcoin

payments.Othersarelookingtoleveragethebitcoinblockchain’ssizeand

liquiditytocreate“spin-off”coinsonso-calledsidechainsthatcanbe

“colored”torepresentanyassetorliability,physicalordigital—acorporate

stockorbond,abarrelofoil,abarofgold,acar,acarpayment,areceivable

orapayable,orofcourseacurrency.Sidechainsareblockchainsthathave

differentfeaturesandfunctionsfromthebitcoinblockchainbutthatleverage

bitcoin’sestablishednetworkandhardwareinfrastructurewithoutdiminishing

itssecurityfeatures.Sidechainsinteroperatewiththeblockchainthrougha

two-waypeg,acryptographicmeansoftransferringassetsofftheblockchain

andbackagainwithoutathirdpartyexchange.Othersstillaretryingto

removethecoinortokenaltogether,buildingtradingplatformsonprivate

blockchains.Financialinstitutionsarealreadyusingblockchaintechnologyto

record,exchange,andtradeassetsandliabilities,andcouldeventuallyuseit

toreplacetraditionalexchangesandcentralizedmarkets,upendinghowwe

defineandtradevalue.

OpenSource:Thefinancialservicesindustryisatechnologystackoflegacy

systemsstandingtwentymileshighandonthevergeofteeteringover.

Changesaredifficulttomakebecauseeachimprovementmustbebackward

compatible.Asopensourcetechnology,blockchaincanconstantlyinnovate,

iterate,andimprove,basedonconsensusinthenetwork.

Thesebenefits—attestation,dramaticallylowercosts,lightningspeed,lowerrisks,

greatinnovationofvalue,adaptability—havethepotentialtotransformnotonly

payments,butalsothesecuritiesindustry,investmentbanking,accountingandaudit,

venturecapital,insurance,enterpriseriskmanagement,retailbanking,andother

pillarsoftheindustry.Readon.

THEGOLDENEIGHT:HOWTHEFINANCIALSERVICESSECTORWILL

CHANGE

Herearewhatwebelievetobetheeightcorefunctionsripefordisruption.Theyare

alsosummarizedinthetablehere.

1.AuthenticatingIdentityandValue:Todaywerelyonpowerful

intermediariestoestablishtrustandverifyidentityinafinancialtransaction.

Theseintermediariesaretheultimatearbitersforaccesstobasicfinancial

services,suchasbankaccountsandloans.Blockchainlowersandsometimes

eliminatestrustaltogetherincertaintransactions.Thetechnologywillalso

enablepeerstoestablishidentitythatisverifiable,robust,and

cryptographicallysecureandtoestablishtrustwhentrustisneeded.

2.MovingValue:Daily,thefinancialsystemmovesmoneyaroundtheworld,

makingsurethatnodollarisspenttwice:fromtheninety-nine-centpurchase

ofasongoniTunestothetransferofbillionsofdollarstosettlean

intracompanyfundtransfer,purchaseanasset,oracquireacompany.

Blockchaincanbecomethecommonstandardforthemovementofanything

ofvalue—currencies,stocks,bonds,andtitles—inbatchesbigandsmall,to

distancesnearandfar,andtocounterpartiesknownandunknown.Thus,

blockchaincandoforthemovementofvaluewhatthestandardshipping

containerdidforthemovementofgoods:dramaticallylowercost,improve

speed,reducefriction,andboosteconomicgrowthandprosperity.

3.StoringValue:Financialinstitutionsaretherepositoriesofvaluefor

people,institutions,andgovernments.FortheaverageJoe,abankstores

valueinasafetydepositbox,asavingsaccount,oracheckingaccount.For

largeinstitutionsthatwantreadyliquiditywiththeguaranteeofasmallreturn

ontheircashequivalents,so-calledrisk-freeinvestmentssuchasmoney

marketfundsorTreasurybillswilldothetrick.Individualsneednotrelyon

banksastheprimarystoresofvalueorasprovidersofsavingsandchecking

accounts,andinstitutionswillhaveamoreefficientmechanismtobuyand

holdrisk-freefinancialassets.

4.LendingValue:FromhouseholdmortgagestoT-bills,financialinstitutions

facilitatetheissuanceofcreditsuchascreditcarddebt,mortgages,corporate

bonds,municipalbonds,governmentbonds,andasset-backedsecurities.The

lendingbusinesshasspawnedanumberofancillaryindustriesthatperform

creditchecks,creditscores,andcreditratings.Fortheindividual,it’sacredit

score.Foraninstitution,it’sacreditrating—frominvestmentgradetojunk.

Ontheblockchain,anyonewillbeabletoissue,trade,andsettletraditional

debtinstrumentsdirectly,therebyreducingfrictionandriskbyincreasing

speedandtransparency.Consumerswillbeabletoaccessloansfrompeers.

Thisisparticularlysignificantfortheworld’sunbankedandforentrepreneurs

everywhere.

5.ExchangingValue:Daily,marketsgloballyfacilitatetheexchangeof

trillionsofdollarsoffinancialassets.Tradingisthebuyingandsellingof

assetsandfinancialinstrumentsforthepurposeofinvesting,speculating,

hedging,andarbitragingandincludestheposttradelifecycleofclearing,

settling,andstoringvalue.Blockchaincutssettlementtimesonall

transactionsfromdaysandweekstominutesandseconds.Thisspeedand

efficiencycreatesopportunitiesforunbankedandunderbankedpeopleto

participateinwealthcreation.

6.FundingandInvesting:Investinginanasset,company,ornewenterprise

givesanindividualtheopportunitytoearnareturn,intheformofcapital

appreciation,dividends,interest,rents,orsomecombination.Theindustry

makesmarkets:matchinginvestorswithentrepreneursandbusinessownersat

everystageofgrowth—fromangelstoIPOsandbeyond.Raisingmoney

normallyrequiresintermediaries—investmentbankers,venturecapitalists,

andlawyerstonameafew.Theblockchainautomatesmanyofthese

functions,enablesnewmodelsforpeer-to-peerfinancing,andcouldalso

makerecordingdividendsandpayingcouponsmoreefficient,transparent,

andsecure.

7.InsuringValueandManagingRisk:Riskmanagement,ofwhich

insuranceisasubset,isintendedtoprotectindividualsandcompaniesfrom

uncertainlossorcatastrophe.Morebroadly,riskmanagementinfinancial

marketshasspawnedmyriadderivativeproductsandotherfinancial

instrumentsmeanttohedgeagainstunpredictableoruncontrollableevents.At

lastcountthenotionalvalueofalloutstandingover-the-counterderivativesis

$600trillion.Blockchainsupportsdecentralizedmodelsforinsurance,

makingtheuseofderivativesforriskmanagementfarmoretransparent.

Usingreputationalsystemsbasedonaperson’ssocialandeconomiccapital,

theiractions,andotherreputationalattributes,insurerswillhaveamuch

clearerpictureoftheactuarialriskandcanmakemoreinformeddecisions.

8.AccountingforValue:Accountingisthemeasurement,processing,and

communicationoffinancialinformationabouteconomicentities.Itisa

multibillion-dollarindustrycontrolledbyfourmassiveauditfirms—Deloitte

ToucheTohmatsu,PricewaterhouseCoopers,Ernst&Young,andKPMG.

Traditionalaccountingpracticeswillnotsurvivethevelocityandcomplexity

ofmodernfinance.Newaccountingmethodsusingblockchain’sdistributed

ledgerwillmakeauditandfinancialreportingtransparentandoccurinreal

time.Itwillalsodramaticallyimprovethecapacityforregulatorsandother

stakeholderstoscrutinizefinancialactionswithinacorporation.

FROMSTOCKEXCHANGESTOBLOCKEXCHANGES

“WallStreethaswokenupinabigway,”

saidAustinHillofBlockstream.Hewas

speakingofthefinancialindustry’sdeepinterestinblockchaintechnologies.Consider

BlytheMasters,oneofthemostpowerfulpeopleonWallStreet.ShebuiltJPMorgan’s

derivativesandcommoditiesdeskintoaglobaljuggernautandpioneeredthe

derivativesmarket.Afterabriefpseudoretirement,shejoinedaNewYork–based

start-up,DigitalAssetHoldings,asCEO.Thedecisionsurprisedmany.She

understoodthatthe

THEGOLDENEIGHT

BlockchainTransformationsofFinancialServices

FUNCTION BLOCKCHAINIMPACT STAKEHOLDER

1.AuthenticatingIdentityandValue Verifiableandrobustidentities,

cryptographicallysecured

Ratingagencies,consumerdataanalytics,

marketing,retailbanking,wholesale

banking,paymentcardnetworks,

regulators

2.MovingValue—makeapayment,

transfermoney,andpurchasegoods

Transferofvalueinverylargeandverysmall

incrementswithoutintermediarywill

Retailbanking,wholesalebanking,

paymentcardnetworks,moneytransfer

andservices dramaticallyreducecostandspeedofpayments services,telecommunications,regulators

3.StoringValue—currencies,

commodities,andfinancialassets

arestoresofvalue.Safetydeposit

box,asavingsaccount,ora

checkingaccount.Moneymarket

fundsorTreasurybills

Paymentmechanismcombinedwithareliable

andsafestoreofvaluereducesneedfortypical

financialservices;banksavingsandchecking

accountswillbecomeobsolete

Retailbanking,brokerages,investment

banking,assetmanagement,

telecommunications,regulators

4.LendingValue—creditcarddebt,

mortgages,corporatebonds,

municipalbonds,government

bonds,asset-backedsecurities,and

otherformsofcredit

Debtcanbeissued,traded,andsettledonthe

blockchain;increasesefficiency,reduces

friction,improvessystemicrisk.Consumers

canusereputationtoaccessloansfrompeers;

significantfortheworld’sunbankedandfor

entrepreneurs

Wholesale,commercial,andretail

banking,publicfinance(i.e.,government

finance),microlending,crowdfunding,

regulators,creditratingagencies,credit

scoresoftwarecompanies

5.ExchangingValue—speculating,

hedging,andarbitraging.Matching

orders,clearingtrades,collateral

managementandvaluation,

settlementandcustody

Blockchaintakessettlementtimesonall

transactionsfromdaysandweekstominutes

andseconds.Thisspeedandefficiencyalso

createsopportunitiesforunbankedand

underbankedtoparticipateinwealthcreation

Investment,wholesalebanking,foreign

exchangetraders,hedgefunds,pension

funds,retailbrokerage,clearinghouses,

stock,futures,commoditiesexchanges;

commoditiesbrokerages,centralbanks,

regulators

6.FundingandInvestinginan

Asset,Company,Start-up—capital

appreciation,dividends,interest,

rents,orsomecombination

Newmodelsforpeer-to-peerfinancing,

recordingofcorporateactionssuchas

dividendspaidautomaticallythroughsmart

contracts.Titlesregistrytoautomateclaimsto

rentalincomeandotherformsofyield

Investmentbanking,venturecapital,legal,

audit,propertymanagement,stock

exchanges,crowdfunding,regulators

7.InsuringValueandManaging

Risk—protectassets,homes,lives,

health,businessproperty,and

businesspractices,derivative

products

Usingreputationalsystems,insurerswillbetter

estimateactuarialrisk,creatingdecentralized

marketsforinsurance.Moretransparent

derivatives

Insurance,riskmanagement,wholesale

banking,brokerage,clearinghouses,

regulators

8.AccountingforValue—new

corporategovernance

Distributedledgerwillmakeauditandfinancial

reportingrealtime,responsive,andtransparent,

willdramaticallyimprovecapacityof

regulatorstoscrutinizefinancialactionswithin

acorporation

Audit,assetmanagement,shareholder

watchdogs,regulators

blockchainwouldtransformherbusinessastheInternettransformedotherindustries:

“Iwouldtakeitaboutasseriouslyasyoushouldhavetakentheconceptofthe

Internetinthe1990s.It’sabigdealanditisgoingtochangethewayourfinancial

worldoperates.”

Mastershaddismissedmanyoftheearlytalesofbitcoin,exploitedbydrug

dealers,harnessedbygamblers,andhailedbylibertariansascreatinganewworld

order.Thatchangedinlate2014.Masterstoldus,“Ihadan‘ahamoment’whereI

begantoappreciatethepotentialimplicationsofthetechnologyfortheworldthatI

knewwell.Whilstthecryptocurrencyapplicationofthedistributedledgers

technologywasinterestingandhadimplicationsforpayments,theunderlying

databasetechnologyitselfhadfarbroaderimplications.”

AccordingtoMasters,

blockchaincouldreduceinefficienciesandcosts“byallowingmultiplepartiestorely

onthesameinformationratherthanduplicatingandreplicatingitandhavingto

reconcileit.”Asamechanismforshared,decentralized,replicatedtransaction

records,blockchainisthe“goldensource,”shesays.

“Bearinmindthatfinancialservicesinfrastructureshavenotevolvedindecades.

Thefrontendhasevolvedbutnotthebackend,”saysMasters.“It’sbeenanarmsrace

intechnologyinvestmentorientedtowardspeedinguptransactionexecutionsothat,

nowadays,competitiveadvantagesaremeasuredinfractionsofnanoseconds.The

ironyisthattheposttradeinfrastructurehasn’treallyevolvedatall.”Itstilltakes

“daysandinsomecasesweeksofdelaytodotheposttradeprocessingthatgoesinto

actuallysettlingfinancialtransactionsandkeepingrecordofthem.”

Mastersisnotaloneinherenthusiasmforblockchaintechnology.NASDAQCEO

BobGreifeldsaid,“Iamabigbelieverintheabilityofblockchaintechnologyto

effectfundamentalchangeintheinfrastructureofthefinancialserviceindustry.”

Greifeldisintegratingblockchain’sdistributedledgertechnologyintoNASDAQ’s

privatemarketsplatformthroughaplatformcalledNASDAQLinq.Exchangesare

centralizedmarketplacesforsecuritiesandtheyarealsoripefordisruption.On

January1,2016,NASDAQLinqcompleteditsfirsttradeonblockchain.Accordingto

Blockstream’sHill,oneofthelargestassetmanagersintheworld“hasmorepeople

dedicatedtoitsblockchaininnovationgroupthanwehaveinourentirecompany.”

Hill’scompanyhasraisedover$75millionandemploysmorethantwentypeople.

“Theseguysareseriousaboutmakingsurethattheyunderstandhowtheycanusethe

technologytochangehowtheydobusiness.”

TheNYSE,GoldmanSachs,

Santander,Deloitte,RBC,Barclays,UBS,andvirtuallyeverymajorfinancialfirm

globallyhavetakenasimilarseriousinterest.In2015,WallStreet’sopinionof

blockchaintechnologybecameuniversallypositive:inonestudy,94percentof

respondentssaidblockchaincouldplayanimportantroleinfinance.

AlthoughmanyotherapplicationspiquetheinterestofWallStreet,whatinterests

financialexecutiveseverywhereisthenotionofusingtheblockchaintoprocessany

tradesecurelyfrombeginningtoend,whichcoulddramaticallylowercosts,increase

speedandefficiency,andmitigateriskintheirbusinesses.Masterssaid,“Theentire

lifecycleofatradeincludingitsexecution,thenettingofmultipletradesagainsteach

other,thereconciliationofwhodidwhatwithwhomandwhethertheyagree,can

occuratthetradeentrylevel,muchearlierinthestackofprocess,thanoccursinthe

mainstreamfinancialmarket.”

Greifeldputitthisway:“Wecurrentlysettletrades

‘T+3’(thatis,threedays).Whynotsettleinfivetotenminutes?”

WallStreettradesinrisk,andthistechnologycanmateriallyreducecounterparty

risk,settlementrisk,andthussystemicriskacrossthesystem.JesseMcWaters,

financialinnovationleadattheWorldEconomicForum,toldus,“Themostexciting

thingaboutdistributedledgertechnologyishowtraceabilitycanimprovesystemic

stability.”Hebelievesthese“newtoolsallowregulatorstousealightertouch.”

The

blockchain’spublicnature—itstransparency,itssearchability—plusitsautomated

settlementandimmutabletimestamps,allowregulatorstoseewhat’shappening,even

setupalertssothattheydon’tmissanything.

DR.FAUST’SBLOCKCHAINBARGAIN

Banksandtransparencyrarelygohandinhand.Mostfinancialactorsgain

competitiveadvantagefrominformationasymmetriesandgreaterknow-howthan

theircounterparties.However,thebitcoinblockchainasconstructedisaradically

transparentsystem.Forbanks,thismeansopeningthekimono,sotospeak.Sohow

dowereconcileanopenplatformwiththeclosed-doorpolicyofbanks?

AustinHillcalleditWallStreet’s“Faustianbargain,”anoneroustrade-off.

“Peoplelovetheideaofnothavingtowaitthreedaystosettletransactionsbuthaving

themclearedwithinminutesandknowingthatthey’refinalandthatthey’retrue,”said

Hill.“Thecounterparttothatisalltransactionsonthe[bitcoin]blockchainare

completelypublic.ThatterrifiesanumberofpeopleonWallStreet.”Thesolution?

Confidentialtransactionsonso-calledpermissionedblockchains,alsoknownas

privateblockchains.Whereasthebitcoinblockchainisentirelyopenand

permissionless—thatis,anyonecanaccessitandinteractwithit—permissioned

blockchainsrequireuserstohavecertaincredentials,givingthemalicensetooperate

onthatparticularblockchain.Hillhasdevelopedthetechnologywherebyonlyafew

stakeholdersseethevariouscomponentsofatransactionandcanensureitsintegrity.

Atfirstblush,privateandpermissionedblockchainswouldappeartohaveafew

clearadvantages.Forone,itsmemberscaneasilychangetherulesoftheblockchainif

theysodesire.Costscanbekeptdownastransactionsneedonlyvalidationfromthe

membersthemselves,removingtheneedforanonymousminerswhouselotsof

electricity.Also,becauseallpartiesaretrusted,a51percentattackisunlikely.Nodes

canbetrustedtobewellconnected,asinmostusecasestheyarelargefinancial

institutions.Furthermore,theyareeasierforregulatorstomonitor.However,these

advantagesalsocreateweaknesses.Theeasieritistochangetherules,themorelikely

amemberistofloutthem.Privateblockchainsalsopreventthenetworkeffectsthat

enableatechnologytoscalerapidly.Intentionallylimitingcertainfreedomsby

creatingnewrulescaninhibitneutrality.Finally,withnoopenvalueinnovation,the

technologyismorelikelytostagnateandbecomevulnerable.

Thisisnottosay

privateblockchainswon’tflourish,butfinancialservicesstakeholdersmuststilltake

theseconcernsseriously.

RippleLabs,whichhasgainedtractionwithinbankingcircles,isdevelopingother

cleverwaystorelieveFaust.“RippleLabsisaimedatwholesalebanking,andweuse

aconsensusmethod,ratherthanaproof-of-worksystem,”saidCEOChrisLarsen,

meaningnominersandnoanonymousnodesarevalidatingtransactions.

The

companyChainhasitsownstrategy.With$30millioninfundingfromVisa,

NASDAQ,Citi,CapitalOne,Fiserv,andOrange,Chainplansonbuildingenterprise-

focusedblockchainsolutions,targetingthefinancialservicesindustryfirst,whereit

alreadyhasadealwithNASDAQ.“Allassetsinthefuturewillbedigitalbearer

instrumentsrunningonmultipleblockchains,”arguedChainCEOAdamLudwin.But

thiswon’tbethesiloedworldWallStreetisaccustomedto,“becauseeveryoneis

buildingonthesameopenspecs.”

WallStreetersmightwanttocapturethis

technology,buttheywillhavetocontendwiththevalueinnovationitenables,

somethingtheycan’tcontrolorpredict.

Mastersalsoseesthevirtuesofpermissionedblockchains.Forher,onlyasmall

coterieoftradingpartners,somevendorsandothercounterparties,andregulators

needhaveaccess.Thoseselectfewchosenwillbegrantedblockchaincredentials.To

Masters,“permissionedledgershavetheadvantageofneverexposingaregulated

financialinstitutiontotheriskofeithertransactingwithanunknownparty,an

unacceptableactivityfromaregulatorypointofview,orcreatingadependencyupon

anunknownserviceprovidersuchasatransactionprocessor,alsounacceptablefrom

aregulatorypointofview.”

Thesepermissionedblockchains,orprivatechains,

appealtotraditionalfinancialinstitutionswaryofbitcoinandeverythingassociated

withit.

WhileBlytheMastersistheCEOofastart-up,herkeeninterestrepresents

broaderinvolvementoftraditionalfinancialactorsinthissector.Thisembraceofnew

technologyreflectsagrowingconcernthattechstart-upscanalsoupendhighfinance.

ForEricPisciniofDeloitte,whoseclientshaveundergoneagreatawakeningoverthe

pastyear,the“suddeninterestintechwasnotsomethingthatanyonewas

expecting.”

Theenthusiasmisspreadinglikeacontagionintosomeofthelargest

andoldestfinancialinstitutionsintheworld.

Barclaysisoneofdozensoffinancialinstitutionsexploringopportunitiesin

blockchaintechnology.AccordingtoDerekWhite,Barclays’schiefdesignanddigital

officer,“technologiesliketheblockchainaregoingtoreshapeourindustry.”Whiteis

buildinganopeninnovationplatformthatwillallowthebanktoengageawidearray

ofbuildersandthinkersinthisindustry.“We’rekeentobeshapers.Butwe’realso

keentoconnectwiththeshapersofthetechnologiesandthetranslatorsofthose

technologies,”hesaid.

Barclaysisputtingitsmoneywhereitsmouthis,cuttingtens

ofthousandsofjobsintraditionalareasanddoublingdownontechnology,notablyby

launchingtheBarclaysAccelerator.AccordingtoWhite,“threeoutoftheten

companiesinourlastcohortwereblockchainorbitcoincompanies.Blockchainisthe

greatestevidenceoftheworldmovingfromclosedsystemstoopensystemsandhas

hugepotentialimpactonthefutureofnotjustfinancialservicesbutmany

industries.”

Bankstalkingaboutopensystems—monDieu!

TheFinancialUtility

Intheautumnof2015,nineoftheworld’slargestbanks—Barclays,JPMorgan,Credit

Suisse,GoldmanSachs,StateStreet,UBS,RoyalBankofScotland,BBVA,and

CommonwealthBankofAustralia—announcedaplantocollaborateoncommon

standardsforblockchaintechnology,dubbedtheR3Consortium.Thirty-twomore

havesincejoinedtheeffortandeveryfewweeksanewbatchoftheindustry’sWho’s

Whosignsup.

Questionsremainabouthowseriouslythesebanksaretakingthe

initiative.Afterall,thebarriertojoiningthegroupisacommitmentofonly$250,000,

yetR3’sformationmarksaclearleapforwardfortheindustry.Settingstandardsis

criticaltoaccelerateadoptionandusageofanewtechnologyandsoweareoptimistic

abouttheinitiative.R3haspoachedsomeoftheleadingvisionariesandtechnical

practitionersinthesectortomovetheballforward.MikeHearnjoinedinNovember,

addingtoateamthatincludesRichardGendalBrown,formerlytheexecutive

architectforbankinginnovationatIBM,andJamesCarlyle,nowchiefengineerofR3

andex–chiefengineeratBarclays.

InDecember2015,theLinuxFoundation,incollaborationwithahugegroupof

yetmoreblue-chipcorporatepartners,launchedanotherblockchaininitiative,dubbed

theHyperledgerProject.ThisisnotacompetitortoR3;indeed,HyperledgerProject

countsR3asafoundingmember,alongwithAccenture,Cisco,CLS,DeutscheBörse,

DigitalAssetHoldings,DTCC,FujitsuLimited,IC3,IBM,Intel,JPMorgan,the

LondonStockExchangeGroup,MitsubishiUFJFinancialGroup(MUFG),State

Street,SWIFT,VMware,andWellsFargo.

Still,itdemonstrateshowseriouslythe

industryistakingthistechnologyandalsohowreluctantitistoembracefullyopen,

decentralizedblockchainslikebitcoin.UnlikeR3,HyperledgerProjectisanopen

sourceprojectthathastaskedacommunitytodevelopa“blockchainforbusiness.”

Thisiscertainlylaudableandmayverywellwork.Butdon’tbemistaken:Thisisan

opensourceprojectdesignedtobuildgatedtechnologiesby,forexample,limitingthe

numberofnodesinanetworkorrequiringcredentials.AswithR3,oneof

Hyperledger’sprioritiesisstandardsetting.DavidTreatofAccenture,afounding

memberofthegroup,said,“Keytothisjourneyistohavestandardsandshared

platformsthatareutilizedacrossindustryparticipants.”

Blockchainhasalsoopenedupabroaderdiscussionabouttheroleof

governmentsinoverseeingthefinancialservicesindustry.A“utility”conjuresimages

ofnaturalmonopolies,highlyregulatedbythestate.However,becauseblockchain

technologypromisestoreducerisksandincreasetransparencyandresponsiveness,

someindustryplayerssuggestthatthetechnologyitselffunctionslikearegulation.

Ifregulatorscanpeerintotheinnerworkingsofbanksandmarkets,thensurelywe

cansimplifysomelawsandrepealothers,right?Thisisatrickyquestiontoanswer.

Ontheonehand,regulatorswillhavetorethinktheiroversightrole,giventhe

breakneckpaceofinnovation.Ontheotherhand,bankshaveatrackrecordofacting

withoutintegritywhengovernmentstepsaway.

Willthebigbanksreignsupremebydeployingtheblockchainwithoutbitcoin,

cherry-pickingelementsofdistributedledgertechnologyandweldingthemtoexisting

businessmodels?R3isonlyoneofmanysignsbanksaremovinginthisdirection.On

November19,2015,GoldmanSachsfiledapatentfor“methodsforsettlingsecurities

infinancialmarketsusingdistributed,peer-to-peerandcryptographictechniques,”

usingaproprietarycoincalledSETLcoin.

Theironyofabankpatentinga

technologyoriginallyintendedasanopensourcegifttotheworldisnotlostonus,

norshoulditbeonyou.PerhapsthisiswhatAndreasAntonopolousfearedwhenhe

warnedanaudiencethatbankswouldturnbitcoinfrom“punkrocktosmoothjazz”?

Orperhapsbankswillhavetocompetewithbest-in-classproductsandservicesamid

radicallydifferenttypesoforganizationswhoseleadersopposeeverythingthese

companiesrepresent.

Thefinancialutilityofthefuturecouldbeawalledandwell-groomedgarden,

harvestedbyacabalofinfluentialstakeholders,oritcouldbeanorganicandspacious

ecosystem,wherepeople’seconomicfortunesgrowwhereverthereislight.The

debaterageson,butiftheexperienceofthefirstgenerationoftheInternethastaught

usanything,it’sthatopensystemsscalemoreeasilythanclosedones.

THEBANKAPP:WHOWILLWININRETAILBANKING

TheGoogleofCapital—that’swhatJeremyAllaireisbuilding,“aconsumerfinance

companyprovidingproductstoconsumerstoholdmoney,sendmoney,sendand

receivepayments;thefundamentalutilitiesthatpeopleexpectoutofretailbanking.”

Heseesitasapowerful,instant,andfreeutilityforanyonewithaccesstoanInternet-

enableddevice.Hiscompany,CircleInternetFinancial,isoneofthelargestandbest-

fundedventuresinthespace.

CallCirclewhatyoulike,justdon’tcallitabitcoincompany.“Amazonwasnot

anHTTPcompanyandGooglewasnotanSMTPcompany.Circleisnotabitcoin

company,”saidAllaire.“Welookatbitcoinasanextgenerationoffundamental

Internetprotocolsthatareusedinsocietyandtheeconomy.”

Allaireseesfinancialservicesasthelastholdouts,andperhapsthelargestprize,

tobefundamentallytransformedbytechnology.“Ifyoulookatretailbanking,there

arethreeorfourthingsthatretailbanksdo.Oneisthattheyprovideaplacetostore

value.Asecondisthattheyprovidesomekindofpaymentutility.Beyondthat,they

extendcreditandprovideaplaceforyoutostorewealthandgeneratepotential

income.”

Hisvision:“Withinthreetofiveyears,apersonshouldbeableto

downloadanapp,storevaluedigitallyinwhatevercurrencytheywant—dollars,euro,

yen,renminbi,aswellasdigitalcurrency—andbeabletomakepaymentsinstantlyor

nearlyinstantlywithglobalinteroperability,withaveryhighlevelofsecurityand

withoutprivacyleakage.Mostimportantly,itwillbefree.”

AstheInternet

transformedinformationservices,theblockchainwilltransformfinancialservices,

instigatingunimaginednewcategoriesofcapability.

AccordingtoAllaire,thebenefitsofblockchaintechnology—instantsettlement,

globalinteroperability,highlevelsofsecurity,andnearlyno-costtransactions—

benefiteveryonewhetheryou’reapersonorabusiness.Andwhatofhisplantomake

itallfree?Heresy!saytheworld’sbankers.Surely,GoldmanSachsandtheChinese

venturefirmIDGdidnotcommit$50milliontocreateanonprofitorpublicbenefit

company!

“Ifwe’resuccessfulinbuildingoutaglobalfranchisewithtensof

millionsofusersandwe’resittingatthecenteroftransactionbehaviorofusers,then

wearesittingonsomepowerfulassets.”AllaireexpectsCircletohave“the

underlyingcapabilitiestodeliverotherfinancialproducts.”Thoughhewouldn’tspeak

toitspecifically,thefinancialdataofmillionsofcustomerscouldbecomemore

valuabletothecompanythantheirfinancialassets.“Wewanttoreinventthe

consumers’experienceandtheirrelationshiptomoneyandgivethemthechoiceof

howtheirmoneyisusedandappliedandhowtheycangeneratemoneyfromtheir

money.”

Leadersoftheoldparadigm,takenotice.

CompanieslikeCircleareunburdenedbylegacyandculture.Theirfresh

approachcanbeabigadvantage.Manyofthegreatinnovatorsofthepastwere

consummateoutsiders.Netflixwasn’tinventedbyBlockbuster.iTuneswasn’t

inventedbyTowerRecords.Amazonwasn’tinventedbyBarnes&Noble—youget

theidea.

StephenPair,CEOofBitPay,anearlymoverintheindustry,believesnewcomers

haveadistinctadvantage.“Issuingfungibleassetslikeequities,bonds,andcurrencies

ontheblockchainandbuildingthenecessaryinfrastructuretoscaleitandmakeit

commercialdon’trequireabanker’sCV,”hesaid.Forone,“Youdon’trequireallthe

legacyinfrastructureorinstitutionsthatmakeupWallStreettoday....Notonlycan

youissuetheseassetsontheblockchain,butyoucancreatesystemswhereIcanhave

aninstantaneousatomictransactionwhereImighthaveApplestockinmywalletand

Iwanttobuysomethingfromyou.Butyouwantdollars.WiththisplatformIcan

enterasingleatomictransaction(i.e.,allornone)andusemyApplestocktosendyou

dollars.”

Isitreallythateasy?Thebattletoreinventthefinancialservicesindustrydiffers

fromthebattlefore-commerceintheearlydaysoftheWeb.Forbusinesseslike

Allaire’stoscale,theymustfacilitateoneofthelargestvaluetransfersinhuman

history,movingtrillionsofdollarsfrommillionsoftraditionalbankaccountsto

millionsofCirclewallets.Notsoeasy.Banks,despitetheirenthusiasmfor

blockchain,havebeenwaryofthesecompanies,arguingblockchainbusinessesare

“high-risk”merchants.Perhapstheirreluctancestemsfromthefearofhasteningtheir

owndemise.Intermediarieshavesprungupbetweentheoldandnewworlds.Vogogo,

aCanadiancompany,isalreadyworkingwithCoinbase,Kraken,BitPay,Bitstamp,

andotherstoopenbankaccounts,meetcompliancestandards,andenablecustomers

tomovemoneyintobitcoinwalletsthroughtraditionalpaymentmethods.

Oh,the

irony.WhereasAmazoncouldleapfrogincumbentretailerswithease,theleadersof

thisnewparadigmmustplaynicewiththeleadersoftheold.

PerhapsweneedabankerwithSiliconValley’swillingnesstoexperiment.Suresh

Ramamurthifitsthatbill.TheIndian-bornformerGoogleexecutiveandsoftware

engineersurprisedmanywhenhedecidedtobuyCBWBankinWier,Kansas,

population650.Forhim,thissmalllocalbankwasalaboratoryforusingthe

blockchainprotocolandbitcoin-basedpaymentrailsforfreecross-borderremittance

payments.Inhisview,would-beblockchainentrepreneurswhodon’tunderstandthe

nuancesoffinancialservicesaredoomedtofail.Hesaid,“Theyaredrawinga

windowonthebuilding.Makingitlookniceandcolorful.Butyoucan’tassessthe

problemfromtheoutside.Youneedtotalktosomeonefrominsidethebuilding,who

knowstheplumbing.”

Inthepastfiveyears,Sureshhasservedasthebank’sCEO,

CIO,chiefcomplianceofficer,teller,janitor,and,yes,plumber.Sureshnowknowsthe

plumbingofbanking.

ManyWallStreetveteransdon’tseeabattlebetweenoldandnew.BlytheMasters

believesthereare“atleastasmanywaysforbankstoimprovetheefficiencyand

operationsofWallStreetasthereareopportunitiesfordisruptionfromnew

entrants.”

Wecan’thelpfeelingthetidesturningtowardtheradicallynew.That’s

whytheBigThreeTVnetworksdidn’tcomeupwithYouTube,whytheBigThree

automakersdidn’tcomeupwithUber,whytheBigThreehotelchainsdidn’tcomeup

withAirbnb.BythetimetheC-suitesoftheFortune1000decidetopursueanew

avenueofgrowth,anewentranthasbroadsidedthemwithspeed,agility,anda

superioroffering.Regardlessofwholandsontop,thecollisionbetweenthe

unstoppableforceoftechnologicalchangeandtheimmovableobjectoffinancial

services,themostentrenchedindustryintheworld,promisestobeanintenseone.

GOOGLETRANSLATEFORBUSINESS:NEWFRAMEWORKSFOR

ACCOUNTINGANDCORPORATEGOVERNANCE

“Accountantsarelikemushrooms—they’rekeptinthedarkandfedshit,”

saidTom

Mornini,CEOofSubledger,astart-uptargetingtheaccountingindustry.Accounting

hasbecomeknownasthelanguageoffinance,unintelligibletoallbutafewdisciples.

Ifeverytransactionisavailableonashared,globallydistributedledger,thenwhy

wouldweneedpublicaccountanciestotranslateforus?

ModernaccountingsprangfromthecuriousmindofLucaPacioliinItalyduring

thefifteenthcentury.Hisdeceptivelysimpleinventionwasaformulaknownas

double-entryaccounting,whereeverytransactionhastwoeffectsoneachparticipant,

thatis,eachmustenterbothadebitandacreditontothebalancesheet,theledgerof

corporateassetsandliabilities.Bycodifyingtheserules,Pacioliprovidedordertoan

otherwiseadhocpracticethatpreventedenterprisesfromscaling.

RonaldCoasethoughtaccountingwascultlike.WhileastudentattheLondon

SchoolofEconomics,Coasesaw“aspectsofareligion”inthepractice.“Thebooks

entrustedtotheaccountants’keepingwereapparentlysacredbooks.”Accounting

studentsdeemedhischallenges“sacrilegious.”

Howdarehequestiontheir“many

methodsofcalculatingdepreciation,valuinginventories,allocatingon-costs,andso

on,allofwhichgavedifferentresultsbutallofwhichwereperfectlyacceptable

accountingpractices,”andothernearlyidenticalpracticesthatwerenonetheless

deemedentirely“unrespectable.”SoTomMorniniisbynomeansthefirsttocriticize

theprofession.

Weseefourproblemswithmodernaccounting.First,thecurrentregimerelies

uponmanagerstoswearthattheirbooksareinorder.Dozensofhigh-profilecases—

Enron,AIG,LehmanBrothers,WorldCom,Tyco,andToshiba—showthat

managementdoesn’talwaysactwithintegrity.Greedtoooftengetsthebestofpeople.

Cronyism,corruption,andfalsereportingprecipitatebankruptcies,joblosses,and

marketcrashes,butalsohighcostsofcapitalandtighterreinsonequity.

Second,humanerrorisaleadingcauseofaccountingmistakes,accordingto

AccountingWEB.OftentheproblemsbeginwhenRandyinfinancefat-fingersa

numberintoaspreadsheetand,likeabutterflyflappingitswings,thesmallmistake

becomesabigproblemasitfactorsintocalculationsacrossfinancialstatements.

Nearly28percentofprofessionalsreportedthatpeoplepluggedincorrectdatainto

theirfirm’senterprisesystem.

Third,newrulessuchasSarbanes-Oxleyhavedonelittletocurbaccounting

fraud.Ifanything,thegrowingcomplexityofcompanies,moremultifaceted

transactions,andthespeedofmoderncommercecreatenewwaystohide

wrongdoing.

Fourth,traditionalaccountingmethodscannotreconcilenewbusinessmodels.

Takemicrotransactions.Mostauditsoftwareallowsfortwodecimalplaces(i.e.,one

penny),uselessformicrotransactionsofanykind.

Accounting—themeasurement,processing,andcommunicationoffinancial

information—isnottheproblem.Itperformsacriticalfunctionintoday’seconomy.

However,theimplementationofaccountingmethodsmustcatchupwiththemodern

era.ConsiderthatinPacioli’sday,auditsweredonedaily.Todaytheyhappenwiththe

cyclesofthemoonandtheseasons.Nameanotherindustrywherefivehundredyears

oftechnologicaladvancementhaveincreasedthetimeittakestocompleteataskby

9,000percent.

TheWorldWideLedger

Today,companiesrecordadebitandcreditwitheachtransaction—twoentries,hence

double-entryaccounting.TheycouldeasilyaddathirdentrytotheWorldWide

Ledger,instantlyaccessibletothosewhoneedtoseeit—thecompany’sshareholders,

auditors,orregulators.ImaginethatwhenamassivecompanylikeApplesells

products,buysrawmaterials,paysitsemployees,oraccountsforassetsandliabilities

onitsbalancesheet,theWorldWideLedgerrecordedthetransactionandpublisheda

time-stampedreceipttoablockchain.Thefinancialreportsforacompanywould

becomealivingledger—auditable,searchable,andverifiable.Generatinganyup-to-

the-minutefinancialstatementshouldbeassimpleasaspreadsheetfunction,where

theclickofabuttongivesyouanimmutable,complete,andsearchablefinancial

statement,freeoferror.Companiesmightnotwanteveryoneseeingthesenumbers,

andsoexecutivesmightgiveonlyregulators,managers,andotherkeystakeholders

permissionedaccess.

ManyintheindustryseetheinherentimplicationsofthisWorldWideLedgerfor

accounting.AccordingtoSimonTaylorofBarclays,suchaledgercouldstreamline

bankcompliancewithregulatorsandreducerisk.“Wedoalotofregulatoryreporting

wherewe’rebasicallysaying,here’severythingwe’vedone,becausewhatwe’ve

donesitsinsideasystemthatnobodyelsecansee.”

AWorldWideLedgeranda

transparentrecordofeverything“meansthataregulatorwouldhaveaccesstothe

samebaselayerofdata.Thatwouldmeanlesswork,lesscost,andwecouldbeheld

toaccountinnearrealtime.That’sreallypowerful.”

ForJeremyAllaireofCircle,

regulatorsbenefitthemost.“Bankexaminershavehadtorelyuponopaque,privately

controlled,proprietaryledgersandfinancialaccountingsystemstodotheirwork—the

‘booksandrecords,’”saidAllaire.“Withasharedpublicledger,auditorsandbank

examinerscouldhaveautomatedformsofexaminationtolookattheunderlying

healthofabalancesheetandthestrengthofacorporation—apowerfulinnovation

thatcouldautomatemeaningfulpartsofregulationaswellasauditandaccounting.”

Itbakesintegrityintothesystem.“Allfraudwouldbemuchharder.Youhaveto

dofraudonanongoingbasisandatnopointcanyougobackandchangeyour

records,”saidChristianLundkvist,ofBalanc3,anEthereum-basedtriple-entry

accountingstart-up.

AustinHillargued,“Apublicledgerthatisconstantlyaudited

andverifiedmeansyoudon’thavetotrustthebooksofyourpartner;thereisintegrity

inthestatementsorthetransactionlogs,becausethenetworkitselfisverifyingit.It’s

likeacontinuousaprioriauditthatisdonecryptographically.You’renotrelyingon

PricewaterhouseCoopersorDeloitte.Thereisnocounterpartyrisk.Iftheledgersays

thisistrue,thenit’strue.”

Deloitte,oneoftheworld’sBigFouraccountingfirms,hasbeentryingto

understandtheimpactofblockchain.EricPiscini,whoheadsuptheDeloitte

cryptocurrencycenter,tellsclientsthattheblockchainis“abigriskforyourown

businessmodelbecausenowthebusinessofbankingistomanagerisk.Iftomorrow

thatriskdisappears,whatareyougoingtodo?”

Overripefordisruptionistheaudit

business,andauditisathirdofDeloitte’srevenue.

Piscinisaid,“That’sadisruption

toourownbusinessmodel,right?Todaywespendalotoftimeauditingcompanies,

andwechargefeesaccordingly.Tomorrow,ifthatprocessiscompletelystreamlined

becausethereisatimestampintheblockchain,thatchangesthewayweaudit

companies.”

Orperhapseliminatestheauditfirmaltogether?

DeloittehasdevelopedasolutioncalledPermaRec(forPermanentRecord)

whereby“Deloittewouldrecordthosetransactionsintotheblockchainandwould

thenbeabletoauditoneofthetwopartners,orbothofthem,veryquickly,because

thattransactionisrecorded.”

Butifthethirdentryontheblockchain—time-stamped

andreadyforalltosee—happensautomatically,anyone,anywhere,coulddetermine

whetherthebooksbalanced.Conversely,thefastestareaofgrowthforDeloitteand

theotherbigthreeauditfirmsisconsultingservices.Manyclientsarealready

scratchingtheirheadsovertheblockchain.Thisbewildermentprovidesopportunities

formigrationuptheadvisoryvaluechain.

Mornini,apluckyentrepreneurandself-described“eternaloptimist,”likened

periodicaccountingto“watchingapersonstandupanddanceinfrontofastrobe

light.Youknowthey’redancing,butyoucan’tquitefigureoutwhat’sgoingon.And

itlooksinteresting,butit’shardtofigureoutallthestepsinbetween.”

Periodic

accountinggivesasnapshot.Auditis,bydefinition,abackward-lookingprocess.

Creatingacompletepictureofacompany’sfinancialhealthbylookingatperiodic

financialstatementsisliketurningahamburgerintoacow.

AccordingtoMornini,mostlargecorporationswouldneverwantacompletely

transparentaccountingrecordinthepublicdomainorevenreadilyaccessibleby

peoplewithspecialprivileges,suchasauditorsorregulators.Acompany’sfinancials

areoneofitsmostguardedsecrets.Furthermore,manycompanieswanttoensurethat

managementhasacertaindegreeofflexibilityinhowitaccountsforcertainitems,

suchashowtorecognizerevenue,depreciateanasset,oraccountforagoodwill

charge.

ButMorninibelievesthatcompanieswouldbenefitfromgreatertransparency—

notonlyintermsofstreamliningtheirfinancedepartmentorloweringthecostof

audit,butinhowthemarketvaluestheircompany.Hesaid,“Thefirstpubliccompany

withthissysteminplacewillseeasignificantpricepershareadvantage,orpriceto

earningsratioadvantage,overothercompanieswhereinvestorshavetoanxiously

awaitthedribbleoffinancialinformationthattheyareprovidedquarterly.”Afterall,

heargues,“Whoisgoingtoinvestinacompanythatshowsyouwhat’sgoingon

quarterly,comparedtoonethatshowsyouwhat’sgoingonallthetime?”

Willinvestorsdemandtriple-entryaccountingtomeetcorporategovernance

standards?It’snotafar-fetchedquestion.Manyinstitutionalinvestors,suchasthe

CaliforniaPublicEmployees’RetirementSystem,havedevelopedstrictcorporate

governancestandards,andwillnotinvestinacompanyunlessthosestandardsare

met.

Triple-entryaccountingcouldbenext.

Triple-EntryAccounting:PrivacyIsforIndividuals,NotCorporations

Triple-entryaccountingisnotwithoutskeptics.IzabellaKaminska,aFinancialTimes

reporter,believesmandatingtriple-entryaccountingwillleadtoanincreasingnumber

oftransactionsmovingoffbalancesheets.“Therewillalwaysbethosewhorefuseto

followtheprotocol,whoabscondandhidesecretvalueinparalleloff-gridnetworks,

whatwecalltheblackmarket,offbalancesheet,shadowbanking.”

Howdoesonereconcilenon-transaction-basedaccountingmeasures,particularly

therecognitionofintangibleassets?Howarewegoingtotrackintellectualproperty

rights,brandvalue,orevencelebritystatus—thinkTomHanks?Howmanybadfilms

mustthisOscarwinnermakebeforetheblockchainimpairstheHanksbrandvalue?

Theargumentfortriple-entryaccountingisnotagainsttraditionalaccounting.

Therewillalwaysbeareaswherewewillneedcompetentauditors.Butiftriple-entry

accountingcanvastlyincreasetransparencyandresponsivenessthroughreal-time

accruals,verifiabletransactionrecords,andinstantaudit,thentheblockchaincould

solvemanyofaccounting’sbiggestproblems.Deloittewillneedsomeonetoassessin

realtimethevalueofintangiblesandperformtheotheraccountingfunctionsthatthe

blockchaincannot,ratherthanalargetaskforceofauditors.

Finally,isanimmutablerecordofeverythingtrulydesirable?InEurope,courts

areupholdingthe“righttobeforgotten,”enforcingpeople’spetitionstoremovetheir

historyfromtheInternet.Shouldn’tthesameprincipleapplytocorporations?No.

WhydoUberdriversgetratedoncustomersatisfactionbutcorporateexecutivesgeta

pass?Imagineamechanism—let’scallitatrustapp—torecordfeedbackinapublic

ledgerandmaintainanindependent,searchablescoreforcorporateintegrity.Inside

theblackboxofcorporations,sunshineisthebestdisinfectant.

Triple-entryaccountingisthefirstofmanyblockchaininnovationsincorporate

governance.Likemanyinstitutionsinsociety,ourcorporationsaresufferingfroma

crisisoflegitimacy.ShareholderactivistRobertMonkswrote,“Capitalismhas

becomeakleptocracy,runbyandfortheenrichmentofCEOs,orwhatIterm

manager-kings.”

Theblockchainreturnspowertoshareholders.Imaginethatatokenrepresentinga

claimonanasset,a“bitshare,”couldcomewithavoteormanyvotes,eachcoloredto

aparticularcorporatedecision.Peoplecouldvotetheirproxiesinstantlyfrom

anywhere,therebymakingthevotingprocessformajorcorporateactionsmore

responsive,moreinclusive,andlesssubjecttomanipulation.Decisionswithin

companieswouldrequirerealconsensus,multiplesignaturesonanindustrialscale,

whereeachshareholderheldakeytothecompany’sfuture.Oncethevotesarein,the

decisionaswellastheboardmeetingminuteswouldbetime-stampedandrecordedin

animmutableledger.

Shouldn’tcorporationshavearighttochangetheirhistory,tobeforgotten?

No.

Asartifactsofsociety,companieshaveresponsibilitiesthataccompanytheirlicenseto

operate.Indeed,corporationshaveanobligationtosocietytopublishanyandall

informationabouttheirdealings.Sure,corporationshavearightandobligationto

protecttradesecretsandtheprivacyoftheiremployees,staff,andotherstakeholders.

Butthat’sdifferentfromprivacy.Increasingtransparencyisahugeopportunityfor

managerseverywhere:upholdthehigheststandardsofcorporategovernance,seize

themantleoftrustascorporateleaders,anddoitbyembracingtheblockchain.

REPUTATION:YOUAREYOURCREDITSCORE

Whetheryou’reapplyingforyourfirstcreditcardorseekingaloan,thebankwill

valueonenumberaboveallelse:yourcreditscore.Thisnumberismeanttoreflect

yourcreditworthinessandthereforeyourriskofdefault.Itistheamalgamationofa

numberofinputs,fromhowlongyou’veborrowedtoyourpaymenttrackrecord.

Mostretailcreditdependsonit.Butthecalculationisdeeplyflawed.First,itis

incrediblynarrow.Ayoungpersonwithnocredithistorymighthaveasterling

reputation,atrackrecordoffulfillingcommitments,orarichaunt.Nonefactorsintoa

creditscore.Second,thescorecreatesperverseincentivesforindividuals.

Increasingly,peopleusedebitcards,thatis,thecashintheiraccount.Becausethey

havenocreditscore,theygetpenalized.Yetcreditcardfirmsencourageindividuals

withoutresourcestoapplyforcreditcardsanyway.Third,scoresareverylaggy:data

inputscanbeoutdatedandhavelittlerelevance.Alatepaymentattheageoftwenty

haslittlebearingonone’screditriskatfifty.

FICO,anAmericancompanyoriginallycalledFair,IsaacandCompany,

dominatestheU.S.marketforcreditscores,yetitdoesn’tfactormostrelevant

informationintoitsanalysis.MarcAndreessensaid,“PayPalcandoareal-timecredit

scoreinmilliseconds,basedonyoureBaypurchasehistory—anditturnsoutthat’sa

bettersourceofinformationthanthestuffusedtogenerateyourFICOscore.”

These

factors,combinedwithtransactionandbusinessdataandotherattributesgeneratedby

blockchaintechnology,canenableafarmorerobustalgorithmforissuingcreditand

managingrisk.

What’syourreputation?Weallhaveatleastone.Reputationiscriticaltotrustin

businessandineverydaylife.Todate,financialintermediarieshavenotused

reputationasthebasisforestablishingtrustbetweenindividualsandbanks.Consider

asmallbusinessownerwhowantstogetaloan.Moreoftenthannot,theloanofficer

willbasethedecisionontheperson’sdocumentation,aone-pointperspectiveof

identity,andtheircreditscore.Ofcourse,ahumanbeingismorethanthesumofa

SocialSecuritynumber,placeofbirth,primaryresidence,andcredithistory.

However,thebankdoesnotknow,anddoesnotcare,whetheryou’reareliable

employee,anactivevolunteer,anengagedcitizen,orthecoachofyourkid’ssoccer

team.Theloanofficermightappreciateyouractingwithintegrity,butthebank’s

scoringsystemdoesnot.Thesecomponentsofreputationaresimplydifficultto

formulate,document,anduseassocialandeconomicsystemsarecurrently

constructed.Mostoftheseareetherealandephemeral.

Sowhatdothebillionsofpeopledowhohavenoreputationbeyondtheir

immediatesocialcircle?Wherefinancialservicesareavailabletotheglobalpoor,

manycan’tmeettherequisiteidentitythresholds,suchasIDcards,proofofresidence,

orfinancialhistory.Thisisaprobleminthedevelopedworldtoo.InDecember2015,

manylargeU.S.banksrejectedthenewlyformedNewYorkIDcardsasavalid

credentialtoopenabankaccount,despitethefactthatmorethan670,000people

signedupforthemandthebanks’federalregulatorshadapprovedtheiruse.

Blockchaincouldsolvethisproblembyempoweringpeopletoformuniqueidentities

withavarietyofattributes,previoustransactionhistoryamongthem,andgivethem

newalternativesbeyondthetraditionalbankingsystem.

Therearestillmanyusecases—particularlyincredit—wheretheblockchain

establishestrustbetweenpartieswhentrustisneeded.Blockchaintechnologynotonly

workstoensurethatloanfundsmovetotheborrower,butalsoassuresthatthe

borrowerrepayswithinterest.Itempowersbothpartieswiththeirowndata,

strengthenstheirprivacy,andgeneratesanewkindofpersistenteconomicidentity

basedonfactorssuchasone’spasteconomichistoryontheblockchainandone’s

socialcapital.PatrickDeegan,CTOatidentitystart-upPersonalBlackBox,saidthat

individualswillsomeday“deployandmanagetheirownidentity,andformtrusted

connectionswithotherpeersandnodes,”thankstoblockchaintechnology.

Because

theblockchainrecordsandstoresalltransactionsinanimmutablerecord,every

transactioncancountincrementallytowardreputationandcreditworthiness.Further,

individualscandecidewhichpersonainteractswithwhichinstitution.Deegansaid,“I

cancreatedifferentpersonasthatrepresentdifferentsidesofmyself,andIchoosethe

personathatinteractswiththecompany.”

Banksandothercompaniesonthe

blockchainoughtnotaskforandaggregatemoreinformationthantheyneedto

provideservice.

Thismodelhasproventowork.BTCjamisapeer-to-peerlendingplatformthat

usesreputationasthebasisforextendingcredit.Userscanlinktheirprofileon

BTCjamtoFacebook,LinkedIn,eBay,orCoinbasetoaddmoredepthandtexture.

FriendscanvolunteerrecommendationsfromFacebook.Youcanevensubmityour

actualcreditscoreasoneofmanyattributes.Noneofthisprivateinformationis

released.Usersstartontheplatformwithalowcreditscore.Butyoucanquickly

buildareputationbyshowingyouareareliableborrower.Thebeststrategyistostart

witha“reputationloan”toproveyou’rereliable.Asauser,youwillhavetorespond

toinvestorquestionsduringthefundingprocess.Ignoringthesequestionsisared

flag;thecommunitywillhesitatetofundyou.Withyourfirstloan,startwitha

manageableamount,andpayitbackontime.Onceyouhave,yourquantitativescore

willimprove,andothermembersinthecommunitymightgiveyouapositivereview.

AsofSeptember2015,BTCjamhadfundedeighteenthousandloansinexcessof$14

million.

EntrepreneurErikVoorheescalledforcommonsense:“Withareputation-based

system,peoplewhoaremorelikelytobeabletoaffordahouseshouldbeableto

purchaseonemoreeasily.Thosewhoarelesslikelyshouldhaveahardertimegetting

aloan.”Tohim,thismethod“willdrivedowncostsforgoodactorsanddriveupcosts

forourbadactors,whichistheproperincentive.”

Inreputationsystems,your

creditworthinessisderivednotfromaFICOscore,butfromanamalgamationof

attributesthatformyouridentityandinformyourabilitytorepayaloan.Credit

ratingsforcompanieswillalsochangetoreflectnewinformationandinsightmade

possiblebyblockchain.Imaginetoolsthatcanaggregatereputationandtrackdifferent

reputationalaspects,suchasfinancialtrustworthiness,vocationalcompetence,and

socialconsciousness.Imaginegettingcreditbasedonsharedvalues,wherethepeople

loaningyoumoneyappreciateyourroleinthecommunityandyourgoals.

THEBLOCKCHAINIPO

TheweekofAugust17,2015,wasanuglyone:TheChinesestockmarketcrashed,

theS&P500haditsworstperformanceinfouryears,andfinancialpundits

everywhereweretalkingaboutanotherglobaleconomicslowdownandpossible

crisis.TraditionalIPOswerepulledfromthemarket,mergerswerestalled,and

SiliconValleywasgettingantsyabouttheoverinflatedvaluationofitscherished

unicorns,privatecompaniesvaluedatmorethan$1billion.

Amidthecarnage,anenterprisecalledAugurlaunchedoneofthemostsuccessful

crowdfundingcampaignsinhistory.Inthefirstweek,morethan3,500peoplefrom

theUnitedStates,China,Japan,France,Germany,Spain,theUnitedKingdom,Korea,

Brazil,SouthAfrica,Kenya,andUgandacontributedatotalof$4million.Therewas

nobrokerage,noinvestmentbank,nostockexchange,nomandatoryfilings,no

regulator,andnolawyers.Therewasn’tevenaKickstarterorIndiegogo.Ladiesand

gentlemen,welcometotheblockchainIPO.

Matchinginvestorswithentrepreneursisoneoftheeightfunctionsofthe

financialservicesindustrymostlikelytobedisrupted.Theprocessofraisingequity

capital—throughprivateplacements,initialpublicofferings,secondaryofferings,and

privateinvestmentsinpublicequities(PIPEs)—hasnotchangedsignificantlysince

the1930s.

Thankstonewcrowdfundingplatforms,smallcompaniescanaccesscapitalusing

theInternet.TheOculusRiftandthePebbleWatchwereearlysuccessesofthis

model.Still,participantscouldn’tbuyequitydirectly.Today,theU.S.JumpstartOur

BusinessStartupsActallowssmallinvestorstomakedirectinvestmentsin

crowdfundingcampaigns,butinvestorsandentrepreneursstillneedintermediaries

suchasKickstarterorIndiegogo,andaconventionalpaymentmethod,typicallycredit

cardsandPayPal,toparticipate.Theintermediaryistheultimatearbiterof

everything,includingwhoownswhat.

TheblockchainIPOtakestheconceptfurther.Now,companiescanraisefunds

“ontheblockchain”byissuingtokens,orcryptosecurities,ofsomevalueinthe

company.Theycanrepresentequity,bonds,or,inthecaseofAugur,market-maker

seatsontheplatform,grantingownerstherighttodecidewhichpredictionmarkets

thecompanywillopen.EthereumwasanevengreatersuccessthanAugur,funding

thedevelopmentofawholenewblockchainthroughacrowdsaleofitsnativetoken,

ether.TodayEthereumisthesecond-longestandfastest-growingpublicblockchain.

TheaverageinvestmentintheAugurcrowdfundingwas$750,butonecaneasily

imagineminimumsubscriptionsofadollaroreventencents.Anyoneintheworld—

eventhepoorestandmostremotepeople—couldbecomestockmarketinvestors.

Overstock,thee-retailer,islaunchingperhapsthemostambitiouscryptosecurity

initiativeyet.Overstock’sforward-thinkingfounder,PatrickByrne,believes

blockchain“candoforthecapitalmarketswhattheInternethasdoneforconsumers.”

Theproject,dubbedMedici,enablescompaniestoissuesecuritiesontheblockchain

andrecentlyreceivedthesupportoftheSecuritiesandExchangeCommission.

The

companybeganissuingitsfirstblockchain-basedsecurities,suchasthe$5million

cryptobondforanaffiliateofFNYCapital,in2015.

Overstockclaimsmany

financialservicesfirmsandothercompaniesarelininguptousetheplatform.Surely,

thetacitapprovaloftheSECwillgiveOverstockaheadstartonwhatissuretobea

longjourney.

ShouldblockchainIPOscontinuetogaintraction,theywillultimatelydisrupt

manyoftherolesintheglobalfinancialsystem—brokers,investmentbankers,and

securitieslawyers—andchangethenatureofinvestment.Byintegratingblockchain

IPOswithnewplatformsforvalueexchangesuchasCircle,Coinbase(themostwell-

fundedbitcoinexchangestart-up),Smartwallet(aglobalassetexchangeforallforms

ofvalue),andotheremergingcompanies,weexpectadistributedvirtualexchangeto

emerge.Theoldguardistakingnotice.TheNYSEinvestedinCoinbaseand

NASDAQisintegratingblockchaintechnologyintoitsprivatemarket.BobGreifeld,

CEOofNASDAQ,isstartingsmall,usingblockchainto“streamlinefinancialrecord

keepingwhilemakingitcheaperandmoreaccurate,”

butevidentlyNASDAQand

otherincumbentshavebiggerplans.

THEMARKETFORPREDICTIONMARKETS

Augurisbuildingadecentralizedpredictionmarketplatformthatrewardsusersfor

correctlypredictingfutureevents—sportingevents,electionresults,newproduct

launches,thegendersofcelebritybabies.Howdoesitwork?Auguruserscan

purchaseorsellsharesintheoutcomeofafutureevent,thevalueofwhichisan

estimateoftheprobabilityofaneventhappening.Soifthereareevenodds(i.e.,

50/50),thecostofbuyingasharewouldbefiftycents.

Augurrelieson“thewisdomofthecrowd,”thescientificprinciplethatalarge

groupofpeoplecanoftenpredicttheoutcomeofafutureeventwithfargreater

accuracythanoneormoreexperts.

Inotherwords,Augurbringsthespiritofthe

markettobearontheaccuracyofpredictions.Therehavebeenafewattemptsat

centralizedpredictionmarkets,suchastheHollywoodStockExchange,Intrade,and

HedgeStreet(nowNadex),butmosthavebeenshutdownorfailedtolaunchover

regulatoryandlegalconcerns.Thinkassassinationcontractsandterrorismfutures.

Usingblockchaintechnologymakesthesystemmoreresilienttofailure,more

accurate,andmoreresistanttocrackdowns,error,coercion,liquidityconcerns,and

whattheAugurteamcallseuphemistically“datedjurisdictionalregulation.”The

arbitersontheAugurplatformareknownasrefereesandtheirlegitimacyderives

fromtheirreputationpoints.Fordoingtherightthing—thatis,correctlystatingthat

aneventhappened,whowonasportingmatch,orwhowonanelection—theyreceive

morereputationpoints.Maintainingtheintegrityofthesystemhasothermonetary

benefits:themorereputationpointsyouhave,themoremarketsyoucanmake,and

thusthemorefeesyoucancharge.InAugur’swords,“ourpredictionmarkets

eliminatecounterpartyrisks,centralizedservers,andcreateaglobalmarketby

employingcryptocurrenciesincludingbitcoin,ether,andstablecryptocurrencies.All

fundsarestoredinsmartcontracts,andnoonecanstealthemoney.”

Augurresolves

theissueofunethicalcontractsbyhavingazero-tolerancepolicyforcrime.

ToAugur’sleadershipteam,humanimaginationistheonlypracticallimittothe

utilityofpredictionmarkets.OnAugur,anyonecanpostaclearlydefinedprediction

aboutanythingwithaclearenddate—fromthetrivial,“WillBradPittandAngelina

Joliedivorce?”tothevital,“WilltheEuropeanUniondissolvebyJune1,2017?”The

implicationsforthefinancialservicesindustry,forinvestors,economicactors,and

entiremarkets,arehuge.ConsiderthefarmerinNicaraguaorKenyawhohasno

robusttoolstohedgeagainstcurrencyrisk,politicalrisk,orchangestotheweather

andclimate.Accessingpredictionmarketswouldallowthatpersontomitigatethe

riskofdroughtordisaster.Forexample,hecouldbuyapredictioncontractthatpays

outifacropyieldisbelowacertainlevel,orifthecountrygetslessthana

predeterminedamountofrain.

Predictionmarketsareusefulforinvestorswhowanttoplacebetsontheoutcome

ofspecificeventssuchas“WillIBMbeatitsearningsbyatleasttencentsthis

quarter?”Todaythereported“estimate”forcorporateearningsisnothingmorethan

themeanormedianofafewso-calledexpertanalysts.Byharnessingthewisdomof

thecrowds,wecanformmorerealisticpredictionsofthefuture,leadingtomore

efficientmarkets.Predictionmarketscanserveasahedgeagainstglobaluncertainty

and“blackswan”events:“WillGreece’seconomyshrinkbymorethan15percent

thisyear?”

Today,werelyonafewtalkingheadstosoundthealarms;aprediction

marketwouldactmoreimpartiallyasanearlywarningsystemforinvestorsglobally.

Predictionmarketscouldcomplementandultimatelytransformmanyaspectsof

thefinancialsystem.Considerpredictionmarketsontheoutcomesofcorporate

actions—earningsreports,mergers,acquisitions,andchangesinmanagement.

Predictionmarketswouldinformtheinsuranceofvalueandthehedgingofrisk,

potentiallyevendisplacingesotericfinancialinstrumentslikeoptions,interestrate

swapsandcreditdefaultswaps.

Ofcourse,noteverythingneedsapredictionmarket.Enoughpeopleneedtocare

tomakeitliquidenoughtoattractattention.Still,thepotentialisvast,theopportunity

significant,andaccessavailabletoall.

ROADMAPFORTHEGOLDENEIGHT

Blockchaintechnologieswillimpacteveryformandfunctionofthefinancialservices

industry—fromretailbankingandcapitalmarketstoaccountingandregulation.They

willalsoforceustorethinktheroleofbanksandfinancialinstitutionsinsociety.

“Bitcoincannothavebail-ins,bankholidays,currencycontrols,balancefreezes,

withdrawallimits,bankinghours,”

saidAndreasAntonopoulos.

Whereastheoldworldwashierarchical,slow-moving,reluctanttochange,closed

andopaque,andcontrolledbypowerfulintermediaries,theneworderwillbeflatter,

offeringapeer-to-peersolution;moreprivateandsecure;transparent,inclusive,and

innovative.Tobesure,therewillbedislocationanddisruption,butthereisalsoa

remarkableopportunityfortheindustry’sleaderstodosomethingaboutittoday.The

financialservicesindustrywillbothshrinkandgrowoverthecomingyears;fewer

intermediarieswillbeabletooffermoreproductsandservicesatamuchlowercostto

amuchlargerpopulation.That’sagoodthing.Whetherpermissionedandclosed

blockchainswillfindaplaceinadecentralizedworldisupfordebate.BarrySilbert,

whofoundedSecondMarketandisnowCEOoftheDigitalCurrencyGroup,said,“I

haveaverycynicalviewoftheobjectivitiesputforwardbylargefinancial

incumbents.Whenallyouhaveisahammer,everythinglookslikeanail.”

We

believethattheunstoppableforceofblockchaintechnologyisbarrelingdownonthe

entrenched,regulated,andossifiedinfrastructureofmodernfinance.

Theircollision

willreshapethelandscapeoffinancefordecadestocome.Wewouldlikeittofinally

transformfromanindustrialagemoneymachineintoaprosperityplatform.

CHAPTER4



RE-ARCHITECTINGTHEFIRM:

THECOREANDTHEEDGES

BUILDINGCONSENSYS

uly30,2015,wasabigdayforaglobalgroupofcoders,investors,entrepreneurs,

andcorporatestrategistswhothinkthatEthereumisthenextbigthing—notjustfor

business,butpossiblyforcivilization.Ethereum,theblockchainplatformeighteen

monthsinthemaking,wentlive.

WewitnessedthelaunchfirsthandintheBrooklynofficeofConsensusSystems

(ConsenSys),oneofthefirstEthereumsoftwaredevelopmentcompanies.Around

11:45a.m.,therewerehighfivesallaroundastheEthereumnetworkcreatedits

“genesisblock,”afterwhichafrenzyofminersracedtowinthefirstblockofether,

Ethereum’scurrency.Thedaywaseerilysuspenseful.Amassivethunderstormbroke

overtheEastRiver,triggeringloudandrandomemergencyfloodwarningson

everyone’ssmartphones.

AccordingtoitsWebsite,Ethereumisaplatformthatrunsdecentralized

applications,namelysmartcontracts,“exactlyasprogrammedwithoutanypossibility

ofdowntime,censorship,fraud,orthirdpartyinterference.”Ethereumislikebitcoin

inthatitsethermotivatesanetworkofpeerstovalidatetransactions,securethe

network,andachieveconsensusaboutwhatexistsandwhathasoccurred.Butunlike

bitcoinitcontainssomepowerfultoolstohelpdevelopersandotherscreatesoftware

servicesrangingfromdecentralizedgamestostockexchanges.

Ethereumwasconceivedin2013bythen-nineteen-year-oldVitalikButerin,a

CanadianofRussiandescent.Hehadarguedtothebitcoincoredevelopersthatthe

platformneededamorerobustscriptinglanguagefordevelopingapplications.When

theyrejectedhim,hedecidedtocrafthisownplatform.ConsenSyswasfirstoffthe

block,sotospeak,launchedtocreateEthereum-basedapps.Flash-forwardacouple

ofyearsandtheanalogyisclear:LinusTorvaldsistoLinuxwhatVitalikButerinisto

Ethereum.

WhendiscussingtheriseofblockchainandEthereumtechnology,JosephLubin,

ConsenSys’scofounder,said,“Itbecamecleartomethatinsteadofpeoplewasting

theirtimewalkingdownthestreetwithpostersonsticks,wecouldallworktogether

tojustbuildthenewsolutionstothisbrokeneconomyandsociety.”

Don’toccupy

WallStreet.Inventourownstreet.

Likemanyentrepreneurs,Lubinhasaboldmission,notjusttobuildagreat

companybuttosolveimportantproblemsintheworld.Hedeadpansthatthecompany

isa“blockchainventureproductionstudio,buildingdecentralizedapplications,

mostlyonEthereum.”Prettylow-key.But,ifimplemented,theapplicationsthat

ConsenSysisbuildingwouldshakethewindowsandrattlethewallsofadozen

industries.Projectsincludeadistributedtriple-entryaccountingsystem;a

decentralizedversionofthemassivelypopularRedditdiscussionforum,plaguedof

latebycontroversyoveritscentralizedcontrol;adocumentformationand

managementsystemforself-enforcingcontracts(akasmartcontracts);prediction

marketsforbusiness,sports,andentertainment;anopenenergymarket;adistributed

musicmodeltocompetewithAppleandSpotify,thoughthosetwofirmscoulduseit

too;

andasuiteofbusinesstoolsformasscollaboration,masscreation,andmass

managementofamanagement-lesscompany.

OurstoryofConsenSysisnotsomuchaboutitsambitiousblockchain-based

productsorservices.It’saboutitseffortstocultivateacompanyofitsown,

pioneeringimportantnewgroundinmanagementsciencealongthelinesofholacracy,

acollaborativeratherthanhierarchicalprocessfordefiningandaligningtheworkto

bedone.“WhileIdon’twantustoimplementholacracyasis—itfeelswaytoorigid

andstructuredtome—weareworkingtoincorporatemanyofitsphilosophiesinour

structureandprocesses,”saidLubin.Amongthoseholacratictenetsare“dynamic

rolesratherthantraditionaljobdescriptions;distributed,notdelegatedauthority;

transparentrulesratherthanofficepolitics;andrapidreiterationsratherthanbig

reorganizations,”allofwhichdescribehowblockchaintechnologieswork.How

ConsenSysisstructured,howitcreatesvalue,andhowitmanagesitselfdiffersnot

onlyfromtheindustrialcorporationbutalsofromthetypicaldot-com.

JoeLubinisnotanideologue,andcertainlynotananarchistorlibertarianassome

inthecryptocurrencymovementare.Buthedoesthinkthatweneedtochange

capitalismifwewantittosurvive,specificallytomoveawayfromthecommand-and-

controlhierarchiesinappropriateforanetworkedworld.Henotesthattoday,even

thoughvastnetworksenmeshtheworldandenableusalltocommunicate

inexpensively,richly,andimmediately,hierarchiesprevail.Blockchaintechnologyis

thecountervalence:“Globalhumansocietycannowagreeonthetruthandmake

decisionsintenminutes,ortenseconds.Thissurelycreatesanopportunitytohavea

moreenfranchisedsociety,”hesaid.Thegreatertheengagement,thegreaterthe

prosperity.

TheEndofManagers.LongLiveManagement

ConsenSysoperatesaccordingtoaplanthatallemployees(“members”)developed,

modified,votedon,andadopted.JoeLubindescribesitsstructureasa“hub”rather

thanahierarchy,andeachofitsprojectsisa“spoke”inwhichmajorcontributorshold

equity.

Forthemostpart,membersofConsenSyschoosewhattheyworkon.Notop-

downassignments.Lubinsaid,“Weshareasmuchaspossible,includingshared

softwarecomponents.Webuildsmallagileteamsbutthereiscollaborationamong

them.Wehavetonsofimmediate,open,richcommunication.”Memberschooseto

workontwotofiveprojects.Whensomeoneseesapieceofworkthatneedstoget

done,heorshejumpsinandpushesitalittleoralotfartherinavaluabledirection,as

appropriateforherrole.“Wetalkaboutthingsquiteabitsopeopleareawareofthe

manythingsthatcouldbepushedforward,”hesaid.Butthesemanythingscananddo

changeconstantly.“Partofbeingagilemeansthatprioritiesaredynamic.”

Lubinisnottheboss.Hismainoperationalroleisadvisory:“Inmanycases,

individualsaskmeorotherswhatwouldbegoodtoworkon,”hesaid.Through

Slack

andGitHub,

hesuggestsdirectionstheymightpursue“tobuildallthe

servicesandplatformsthatwewanttobuild,andmanythatwewanttobuildbut

don’tknowityet.”

Memberownershipexplicitlyincentivizesthisbehavior.Everyoneownsapiece

ofeveryprojectdirectlyorindirectly:theEthereumplatformissuestokensthat

memberscanexchangeforetherandthenconvertintoanyothercurrency.“Ourgoal

istoachieveanicebalancebetweenindependenceandinterdependence,”Lubinsaid.

“Weviewourselvesasacollectiveofcloselycollaboratingentrepreneurlikeagents.

Atsomepoint,itmayprovenecessarytosuggestthatacertainthingreallyneedsto

getdoneandifnobodystepsup,tohiresomeoneinitiallyforthatroleorincentivize

internalpeopletodoit,”saidLubin.But,overall,“everyoneisaself-managedadult.

DidImentionwecommunicatealot?Thenweallmakeourowndecisions.”

Thewatchwordsareagility,openness,andconsensus:identifytheworktobe

done,distributetheloadamongthepeopleeagerandabletodoit,agreeontheirroles,

responsibilities,andcompensation,andthencodifytheserightsin“explicit,detailed,

unambiguous,self-enforcingagreementsthatcanserveasthegluetoholdallofthe

businessaspectsofourrelationshipstogether,”hesaid.Someagreementspayfor

performance,othersmeteoutannualsalaryinether,andstillothersaremorelike

“requestsforparticipation”withbountiesattachedtotaskcompletionsuchaswriting

alineofcode.Ifthecodepassesthetest,thenthebountyisautomaticallyreleased.

“Everythingcanbesurfacedandappropriatelytransparent.Incentivesareexplicitand

granular,”hesaid.“Thisleavesusfreetocommunicate,becreative,andadaptbased

ontheseexpectations.”

Darewecointheneologismblockcom,acompanyformedandfunctioningon

blockchaintechnologies?That’sthegoal,torunasmuchofConsenSysaspossibleon

Ethereum,fromgovernanceandday-to-dayoperationstoprojectmanagement,

softwaredevelopmentandtesting,hiringandoutsourcing,compensation,and

funding.Theblockchainalsoenablesreputationsystemswherememberscanrateone

another’sperformanceascollaborators,therebysyndicatingtrustinthecommunity.

Lubinsaid,“Persistentdigitalidentityorpersonaandreputationsystemswillkeepus

morehonestandwellbehavedtowardoneanother.”

Thesecapabilitiesblurtheboundariesofacompany.Therearenodefaultsettings

forincorporation.MembersoftheConsenSysecosystemcanformspokesbyreaching

consensusonstrategy,architecture,capital,performance,andgovernance.Theymay

decidetolaunchacompanythatcompeteswithinanexistingmarketorprovidesan

infrastructureforanewmarket.Onceitislaunched,theycanadjustthosesettings.

DecentralizingtheEnterprise

Theblockchainwillreducefrictionforcompanieseverywhere.“Lowerfrictionmeans

lowercostsasthepriceofvaluableintermediationisdeterminedviathemostefficient

pricediscoverymechanism:decentralizedfreemarkets.Nolongerwillincumbentsbe

abletoleveragelegal,regulatory,informational,andpowerasymmetriestoextractfar

morevaluefromatransactionintheirroleasintermediarythantheyaddtoit,”Lubin

said.

CouldConsenSysbuildsomekindoftrulydecentralizedautonomous

organizationownedandcontrolledbyitsnonhumanvaluecreators,governedthrough

smartcontractsratherthanhumanagency?“Alltheway!”saidLubin.“Massive

intelligenceonadecentralizedglobalcomputationalsubstrate,anunderlyinglayer,

shouldchangethearchitectureofthefirmfromalargecollectionofspecialized

departmentsrunbyhumanstosoftwareagentsthatcancooperateandcompeteinfree

markets.”Someagentswillorganizeforlongerperiodsoftimetoserveongoing

customerneeds,suchasutilityandmaintenance.Otherswillswarmaroundashort-

termproblem,solveit,anddissolvejustasquickly,havingservedtheirpurpose.

Isthereariskthatradicaldecentralizationandautomationremoveshumanagency

indecisionmaking(e.g.,theriskofroguealgorithms)?“Iamnotconcernedabout

machineintelligence.Wewillevolvewithitandforalongtimeitwillbeinthe

serviceof,oranaspectof,Homosapienscybernetica.Itmayevolvebeyondusbut

thatisfine,”Lubinsaid.“Ifso,itwilloccupyadifferentecologicalniche.Itwill

operateatdifferentspeedsanddifferentrelevanttimescales.Inthatcontext,artificial

intelligencewillnotdistinguishbetweenhumans,arock,orageologicalprocess.We

evolvedpastlotsofspecies,manyofwhicharedoingfine(intheirpresentforms).”

ConsenSysisstillatinycompany.Itsgrandexperimentmayormaynotsucceed.

Butitsstoryprovidesaglimpseintoradicalchangesincorporatearchitecturethat

mayhelpunleashinnovationandharnessthepowerofhumancapitalfornotjust

wealthcreationbutprosperity.Blockchaintechnologyisenablingnewformsof

economicorganizationandnewportfoliosofvalue.Therearedistributedmodelsof

thefirmemerging—ownership,structure,operations,rewards,andgovernance—that

gofarbeyondenhancinginnovation,employeemotivation,andcollectiveaction.

Theymaybethelong-awaitedpreconditionforamoreprosperousandinclusive

economy.

Businessleadershaveanotheropportunitytorethinkhowtheyorganizevalue

creation.Theycouldnegotiate,contract,andenforcetheiragreementsonthe

blockchain;dealseamlesslywithsuppliers,customers,employees,contractors,and

autonomousagents;andmaintainafleetoftheseagentsforotherstouse,andthese

agentscouldrentoutorlicenseanyexcesscapacityintheirvaluechain.

CHANGINGTHEBOUNDARIESOFTHEFIRM

ThroughoutthefirsteraoftheInternet,managementthinkers(Donincluded)talked

upthenetworkedenterprise,theflatcorporation,openinnovation,andbusiness

ecosystemsassuccessorstothehierarchiesofindustrialpower.However,the

architectureoftheearly-twentieth-centurycorporationremainsprettymuchintact.

Eventhebigdot-comsadoptedatop-downstructurewithsuchdecisionmakersas

JeffBezos,MarissaMayer,andMarkZuckerberg.Sowhywouldanyestablishedfirm

—particularlyonesthatmaketheirmoneyoffotherpeople’sdata,operatelargely

behindcloseddoors,andsuffersurprisinglylittleindatabreachafterdatabreach—

wanttoleverageblockchaintechnologiestodistributepower,increasetransparency,

respectuserprivacyandanonymity,andincludefarmorepeoplewhocanaffordfar

lessthanthosealreadyserved?

TransactionCostsandtheStructureoftheFirm

Let’sstartwithalittleeconomics.In1995,DonusedNobelPrize–winningeconomist

RonaldCoase’stheoryofthefirmtoexplainhowtheInternetwouldaffectthe

architectureofthecorporation.Inhis1937paper“TheNatureoftheFirm,”Coase

identifiedthreetypesofcostsintheeconomy:thecostsofsearch(findingalltheright

information,people,resourcestocreatesomething);coordination(gettingallthese

peopletoworktogetherefficiently);andcontracting(negotiatingthecostsforlabor

andmaterialsforeveryactivityinproduction,keepingtradesecrets,andpolicingand

enforcingtheseagreements).Hepositedthatafirmwouldexpanduntilthecostof

performingatransactioninsidethefirmexceededthecostofperformingthe

transactionoutsidethefirm.

DonarguedthattheInternetwouldreduceafirm’sinternaltransactioncosts

somewhat;butwethought,becauseofitsglobalaccessibility,itwouldreducecostsin

theoveralleconomyevenmore,inturnloweringbarrierstoentryformorepeople.

Yes,itdiddropsearchcosts,throughbrowsersandtheWorldWideWeb.Italso

droppedcoordinationcoststhroughe-mail,dataprocessingapplicationslikeERP,

socialnetworks,andcloudcomputing.Manycompaniesbenefitedfromoutsourcing

suchunitsascustomerserviceandaccounting.Marketersengagedcustomersdirectly,

eventurningconsumersintoproducers(prosumers).Productplannerscrowdsourced

innovations.Manufacturersleveragedvastsupplynetworks.

However,thesurprisingrealityisthattheInternethashadperipheralimpacton

corporatearchitecture.Theindustrial-agehierarchyisprettymuchintactasthe

recognizablefoundationofcapitalism.Sure,thenetworkshaveenabledcompaniesto

outsourcetolow-costgeographies.ButtheInternetdroppedtransactioncostsinside

thefirmaswell.

FromHierarchytoMonopoly

Socompaniestodayremainhierarchies,andmostactivitiesoccurwithincorporate

boundaries.Managersstillviewthemasabettermodelfororganizingtalentand

intangibleassetssuchasbrands,intellectualproperty,knowledge,andculture,aswell

asformotivatingpeople.CorporateboardsstillcompensateexecutivesandCEOsfar

beyondanyreasonablemeasureofthevaluetheycreate.Notincidentally,the

industrialcomplexcontinuestogeneratewealth,butnotprosperity.Infact,aswe

havepointedout,thereisstrongevidenceofagrowingconcentrationofpowerand

wealthinconglomeratesandevenmonopolies.

AnotherNobellaureate,OliverWilliamson,predictedasmuch,

andpointedout

thenegativeeffectsonproductivity:“Sufficeittoobserveherethatthemovefrom

autonomoussupply(bythecollectionofsmallfirms)tounifiedownership(inone

largefirm)isunavoidablyattendedbychangesinbothincentiveintensity(incentives

areweakerintheintegratedfirm)andadministrativecontrols(controlsaremore

extensive).”

PeterThiel,cofounderofPayPal,wroteinpraiseofmonopoliesinhis

enormouslyreadableandequallycontroversialbook,ZerotoOne.ARandPaul

supporter,Thielsaid,“Competitionisforlosers....Creativemonopoliesaren’tjust

goodfortherestofsociety;they’repowerfulenginesformakingitbetter.”

WhileThielmightberightaboutstrivingtodominateone’sindustryormarket,he

providednorealevidencethatmonopoliesaregoodforconsumersorsocietyasa

whole.Tothecontrary,theentirebodyofcompetitionlawinmostdemocratic

capitalistcountriesderivesfromacontrarynotion.Theideaoffaircompetitiondates

backtoRomantimes,withthedeathpenaltyforsomeviolations.

Whenfirmshave

norealcompetition,theycangrowasinefficientastheywant,raisingpricesinand

outsidethefirm.Lookatgovernments.Eveninthetechnologyindustry,manyargue

thatmonopoliesmayhelpwithinnovationintheshorttermbutmayharmsocietyin

thelongterm.Companiesmayamassmonopolypowerthroughcoolproductsand

servicesthatcustomerslove,butthehoneymooneventuallyends.It’snotsomuch

thattheirinnovationsnolongerdelight;it’sthatthecompaniesthemselvesbeginto

ossify.

Mostthinkersunderstandthatinnovationtypicallycomesfromtheedgeofthe

firm,notfromitscore.HarvardUniversitylawprofessorYochaiBenkleragrees:

“MonopoliesmayhavelotsofmoneytoinvestinR&Dbuttypicallynottheinternal

cultureofpureandopenexplorationthatisrequiredforinnovation.TheWebdidn’t

comefrommonopolies;itcamefromtheedge.GoogledidnotcomefromMicrosoft.

TwitterdidnotcomefromAT&T,orforthatmatterevenfromFacebook.”

In

monopolies,layersofbureaucracydistancetheexecutivesatthetopfrommarket

signalsandemergenttechnologyattheedges,wherecompaniesbumpupagainstone

anotherandothermarkets,otherindustries,othergeographies,otherintellectual

disciplines,othergenerations.AccordingtoJohnHagelandJohnSeelyBrown,“The

peripheryoftoday’sglobalbusinessenvironmentiswhereinnovationpotentialisthe

highest.Ignoreitatyourperil.”

Executivesshouldbeexcitedaboutblockchaintechnology,becausethewaveof

innovationcomingfromtheedgemaywellbeunprecedented.Fromthemajor

cryptocurrencies—Bitcoin,BlackCoin,Dash,Nxt,andRipple—tothemajor

blockchainplatforms—Lighthouseforpeer-to-peercrowdfunding,Factomasa

distributedregistry,Gemsfordecentralizedmessaging,MaidSafefordecentralized

applications,Storjforadistributedcloud,andTezosfordecentralizedvotingtoname

afew—thenexteraoftheInternethasrealvalueattachedtoitandrealincentivesto

participate.Theseplatformsholdpromiseforprotectinguseridentity,respectinguser

privacyandotherrights,ensuringnetworksecurity,anddroppingtransactioncostsso

thateventheunbankedcantakepart.

Unlikeincumbentfirms,theydon’tneedabrandtoconveythetrustworthinessof

theirtransactions.Bygivingawaytheirsourcecodeforfree,sharingpowerwith

everyoneonthenetwork,usingconsensusmechanismstoensureintegrity,and

conductingtheirbusinessopenlyontheblockchain,theyaremagnetsofhopeforthe

manydisillusionedanddisenfranchised.Assuch,blockchaintechnologyoffersa

credibleandeffectivemeansnotonlyofcuttingoutintermediaries,butalsoof

radicallyloweringtransactioncosts,turningfirmsintonetworks,distributing

economicpower,andenablingbothwealthcreationandamoreprosperousfuture.

1.SearchCosts—HowDoWeFindNewTalentandNewCustomers?

Howdowefindthepeopleandinformationweneed?Howdowedetermineiftheir

services,goods,andcapabilitiesarebestforusasweseektobringthetonicofthe

markettobearonourinternaloperations?

Althoughthearchitectureofthefirmisbasicallyintact,thefirsteraoftheInternet

droppedsuchcostssignificantlyandenabledimportantchanges.Outsourcingwas

reallyjustthebeginning.Tappingintoideagoras(openmarketsforbrainpower),

companieslikeProcter&Gamblearefindinguniquelyqualifiedmindstoinnovatea

newproductorprocess.Infact,60percentofP&G’sinnovationscomefromoutside

thecompany,bybuildingorharnessingideagoraslikeInnoCentiveorinno360.Other

firmslikeGoldcorphavecreatedglobalchallengestosearchforthebestmindsto

solvetheirtoughestproblems.Goldcorp,whichpublisheditsgeologicaldataand

talentoutsideitsboundaries,discovered$3.4billionworthofgold,resultingina

hundredfoldincreaseinthecompany’smarketvalue.

NowimaginetheopportunitiesthatarisefromtheabilitytosearchtheWorld

WideLedger,adecentralizeddatabaseofmuchoftheworld’sstructuredinformation.

Whosoldwhichdiscoverytowhom?Atwhatprice?Whoownsthisintellectual

property?Whoisqualifiedtohandlethisproject?Whatmedicalskillsdoesour

hospitalhaveonstaff?Whoperformedwhattypeofsurgerywithwhatoutcomes?

Howmanycarboncreditshasthiscompanysaved?Whichsuppliershaveexperience

inChina?Whatsubcontractorsdeliveredontimeandonbudgetaccordingtotheir

smartcontracts?Theresultsofthesequerieswon’tberésumés,advertisinglinks,or

otherpushedcontent;they’llbetransactionhistories,proventrackrecordsof

individualsandenterprises,rankedperhapsbyreputationscore.Getthepicture?Said

VitalikButerin,founderoftheEthereumblockchain,“Blockchainswilldropsearch

costs,causingakindofdecompositionthatallowsyoutohavemarketsofentitiesthat

arehorizontallysegregatedandverticallysegregated.Thatneverreallyexistedbefore.

Insteadyouhadkindofmonolithsthatdoeverything.”

Severalcompaniesareworkingonsearchenginesforblockchains,giventhe

potentialbonanza.Google’smissionistoorganizetheworld’sinformation,soit

wouldmakesenseforittoassignconsiderablemanpowertoinvestigatethis.

TherearethreekeydistinctionsbetweenInternetsearchandblockchainsearch.

Firstisuserprivacy.Whiletransactionsaretransparent,peopleowntheirpersonal

dataandcandecidewhattodowithit.Theycanparticipateanonymouslyoratleast

pseudonymously(anonymitythroughafalsename)orquasinymously(partial

anonymity).Interestedpartieswillbeabletosearchforinformationthatusershave

madeopen.AndreasAntonopoulossaid,“Transactionsareanonymousifyouwant

themtobeanonymous....buttheblockchainenablesradicaltransparencyalot

easierthanitenablesradicalanonymity.”

Manyfirmswillneedtorethinkandredesigntherecruitingprocess.Forexample,

humanresourcesorpersonnelstaffwillneedtolearnhowtoquerytheblockchain

withyes/noquestions:Areyouahumanbeing?HaveyouearnedaPhDinapplied

mathematics?CanyoucodeinScrypt,Python,Java,C++?Areyouavailabletowork

fulltimefromJanuarythroughJunenextyear?Andotherqualifications.These

querieswillscurryabouttheblackboxesofpeopleonthejobmarketandyieldalist

ofpeoplewhomeetthesequalifications.Theycouldalsopayprospectivetalentto

placepertinentprofessionalinformationonablockchainplatformwheretheycansort

throughit.HRstaffmustmastertheuseofreputationsystems,movingforwardwith

candidateswithoutknowinganythingirrelevanttothejob,suchasage,gender,race,

countryoforigin.Theyalsoneedsearchenginesthatcannavigatevariousdegreesof

openness,fromfullyprivatetofullypublicinformation.Theupsideisanendto

subconsciousoreveninstitutionalbiasandheadhunterorexecutiverecruitingfees.

Thedownsideisthatprecisequeriesleadtopreciseresults.Thereislesspossibilityof

serendipity,thediscoveryofacandidatewholacksthequalificationsbuthasgreat

capacitytolearnandtomaketherandomcreativeconnectionsthatafirmdesperately

needs.

Dittoformarketing.Firmsmayhavetopayjusttoqueryaprospectivecustomer’s

blackbox,toseewhetherthatcustomermeetsafirm’stargetaudience.Thatcustomer

maydecidegloballytowithholdcertaindatasuchasgender,becauseanoansweris

stillvaluable.Butinsodoing,thefirmwilllearnnothingmoreabouttheprospect

beyondtheyes/noresultsofthequery.Chiefmarketingofficersandmarketing

agencieswillneedtorethinkanystrategybasedone-mail,socialmedia,andmobile

marketing:wheretheinfrastructuremaylowercommunicationscoststozero,

customerswillraisecoststoafigurethatmakesreadingafirm’smessageworththeir

while.Inotherwords,you’llbepayingcustomerstolistentoyourelevatorpitch,but

youwillhavetailoredyourquerytopitchonlytoasharplydefinedaudiencesothat

youwillbereachingexactlythepeopleyouwanttoreachwithoutinvadingtheir

privacy.Youcantestdifferentqueriestolearnaboutdifferentmicronichesatevery

stageofnewproductdevelopment.Let’scallitblackboxmarketing.

Theseconddistinctionisthatsearchcanbemultidimensional.Whenyousearch

theWorldWideWebtoday,yousearchasnapshotintime,asindexedoverthelast

severalweeks.

ComputertheoristAntonopouloscalledthistwo-dimensionalsearch:

horizontal,awidesearchacrosstheWeb,andvertical,adeepsearchofaparticular

Website.Thethirddimensionissequence,toseetheseintheorderofuploadingover

time.“Theblockchaincanaddtheadditionaldimensionoftime,”hesaid.The

opportunitytosearchacompleterecordofeverythingthateverhappenedinthree

dimensionsisprofound.Tomakehispoint,Antonopoulossearchedthebitcoin

blockchaintofinditsfamousfirstcommercialtransaction,thepurchaseoftwopizzas

donebysomeonenamed“Laslo”for10,000bitcoins.“Theblockchainprovidesan

almostarchaeologicalrecord,adeepfind,preservinginformationforever.”(Tosave

youfromdoingthemath,ifthepizzacosts$5when$1wasequalto2,500bitcoins,

thatwouldbeworth$3.5millionasofthewritingofthisbook...butwedigress.)

Forfirms,thismeansaneedforbetterjudgment:managersneedtohirepeople

whohavedemonstratedgoodjudgment,becausethere’snowalkingbackpoor

decisions,nospinningtheorderofevents,nodenyinganexecutive’sdisreputable

behavior.Forreallyimportantdecisions,firmscouldimplementinternalconsensus

mechanismswherebyallstakeholdersvoteonmission-criticaldecisionstoendthe

chorusofignoranceanddenialofpriorknowledge.Orusepredictionmarketstotest

scenarios.Ifyou’reanexecutiveofafutureEnron,noscapegoating.AsforNew

JerseygovernorChrisChristie,goodlucktellingaprosecutorthatyouknewnothing

ofplanstoclosetheGeorgeWashingtonBridge.

Thethirddistinctionisvalue:whereinformationontheInternetisabundant,

unreliable,andperishable,itisscarce,tamperproof,andpermanentontheblockchain.

Tothislastcharacteristic,Antonopoulosnotes:“Ifthereisenoughfinancialincentive

topreservethisblockchainintothefuture,thepossibilityofitexistingfortens,

hundreds,oreventhousandsofyearscannotbediscounted.”

Whatanamazingconcept.Theblockchainaspartofthearchaeologicalrecord,

liketheoriginalstonetabletsofMesopotamia.Paperrecordsareephemeraland

temporary,whereas(ironically)theoldestformofrecordinginformation,tablets,is

themostpermanent.Theimplicationsforcorporatearchitectureareconsiderable.

Imagineapermanent,searchablerecordofimportanthistoricalinformation,likethe

historyoffinance.Corporatestaffresponsiblefordevelopingfinancialstatements,

annualreports,reportstogovernmentsordonors,marketingmaterialsforprospective

employees,clients,andconsumers—willstartwiththispublic,indisputableviewof

theirfirm,maybeevencreatingafilterthatenablesstakeholderstoseewhattheysee

atthepressofabutton.Companiescouldhavetransactiontickertapesand

dashboards,someforinternalmanagerialuseandsomepublic.Restassured:Allyour

competitorswillconstructsuchfeedsanddashboardsofyourfirmaspartoftheir

competitiveintelligenceprograms.SowhynotputthoseonyourWebsiteanddraw

everyonetoyou?

Thisprovidesenormousincentiveforfirmstolookforresourcesoutsidetheir

boundaries,astheyhavealmostinfinitelybetterinformationaboutthequalitiesand

recordofcandidates,betheyindividualsorcompanies.

CompanieslikeConsenSysaredevelopingidentitysystemswherejobprospects

orprospectivecontractorswillprogramtheirownpersonalavatarstodisclose

pertinentinformationtoemployers.Theycan’tbehackedlikeacentralizeddatabase

can.Usersaremotivatedtocontributeinformationtotheirownavatarsbecausethey

ownandcontrolthem,theirprivacyiscompletelyconfigurable,andtheycan

monetizetheirowndata.Thisisverydifferentfrom,say,LinkedIn,acentraldatabase

owned,monetized,andyetnotentirelysecuredbyapowerfulcorporation.

CouldCoaseandWilliamsonhaveimaginedaplatformthatcoulddropsearch

costssothatfirmscouldfindcapabilityoutsidetheirboundariesthatcostlessand

couldperformbetter?

2.ContractingCosts—WhatDoWeAgreetoDo,Anyway?

Howdowecometotermswithotherpartiesorenterintoanagreement?It’sonething

tolowerthecostsoffindingpeopleandresourcesthatcandothejob.Butthat’snot

enoughtoshrinkafirmsignificantly.Allpartiesmustagreetoworktogether.The

secondreasonwhywehavefirmsiscontractualcosts,suchasnegotiatingtheprice,

establishingcapacity,andspellingouttheconditionsofasupplier’sgoodsorservices;

policingthemandenforcingtheterms;andhandlingremediesifpartiesdon’tdeliver

aspromised.

We’vealwayshadsocialcontracts,understandingsofrelationshipsinthe

specializationofroleswheresomepeopleinthetribehuntedandprotectedthetribe,

andothersgatheredandshelteredthetribe.Peoplehavetradedphysicalobjectsinreal

timesincethedawnofmodernman.Contractsareamorerecentphenomenon,aswe

begantradingpromises,notproperty.Oralagreementsprovedeasilymanipulatedor

misremembered,andeyewitnesseswereunreliable.Doubtanddistrusttempered

collaborationwithstrangers.Contractshadtobefulfilledimmediately,andtherewere

noformalmechanismsforenforcementofthetermsbeyondwhatyoucouldtakeby

force.Thewrittencontractwasawayofcodifyinganobligation,ofestablishingtrust

andsettingexpectations.Writtencontractsprovidedguidancewhensomeonedidnot

holduphisendofthebargain,orsomethingunexpectedhappened.Buttheycouldn’t

existinavacuum;therehadtobesomelegalframeworkthatrecognizedcontractsand

enforcedeachparty’srights.

Todaycontractsarestillmadeofatoms(paper),notbits(software).Assuchthey

havehugelimitations,servingtosimplydocumentanagreement.Asweshallsee,if

contractsweresoftware—smartanddistributedontheblockchain—theycouldopena

worldofpossibilities,nottheleastofwhichistomakeiteasierforcompaniesto

collaboratewithexternalresources.AndjustimaginehowtheUniformCommercial

Codemightlookontheblockchain.

Coaseandhissuccessorsarguedthatcontractingcostsarelowerinsidethe

boundariesoffirmsratherthanoutsideinthemarket—thatafirmisessentiallya

vehicleforcreatinglong-termcontractswhenshort-termcontractsaretoomuch

effort.

Williamsonadvancedthisideabyarguingthatfirmsexisttoresolveconflicts,

largelythroughmakingcontractswithvariouspartiesinsidethefirm.Intheopen

market,theonlydisputemechanismisthecourt—costly,timely,andoften

unsatisfactory.Further,hearguedthatinsomecaseslikefraud,otherillegalacts,or

conflictofinterest,thereisnomarketdisputemechanismatall.“Ineffect,the

contractlawofinternalorganizationisthatofforbearance,accordingtowhichafirm

becomesitsowncourtofultimateappeal.Firms,forthisreason,areabletoexercise

fiatthatthemarketscannot.”

Williamsonconceivedofthefirmas“agovernance

structure”forcontractualarrangements.Hesaidthatorganizationalstructurematters

inreducingthecostsofmanagingtransactionsandthat“recoursetothelensof

contract,asagainstthelensofchoice,frequentlydeepensourunderstandingof

complexeconomicorganization.”

Thisisarecurringthemeinmanagementtheory,

perhapsmostpowerfullyexplainedbyeconomistsMichaelJensenandWilliam

Meckling.Theyarguedthatentitiesarenothingmorethanacollectionofcontracts

andrelationships.

Today,someeruditeblockchainthinkershavepickeduponthisview.Ethereum

inventorVitalikButerinarguesthatcorporateagents(i.e.,executives)coulduse

corporateassetsonlyforcertainpurposesapprovedby,say,aboardofdirectors,who

inturnaresubjecttoshareholderapproval.“Ifacorporationdoessomething,it’s

becauseitsboardofdirectorshasagreedthatitshouldbedone.Ifacorporationhires

employees,itmeansthattheemployeesareagreeingtoprovideservicestothe

corporation’scustomersunderaparticularsetofrules,particularlyinvolving

payment,”Buterinwrote.“Whenacorporationhaslimitedliability,itmeansthat

specificpeoplehavebeengrantedextraprivilegestoactwithreducedfearoflegal

prosecutionbythegovernment—agroupofpeoplewithmorerightsthanordinary

peopleactingalone,butultimatelypeoplenonetheless.Inanycase,it’snothingmore

thanpeopleandcontractsallthewaydown.”

That’swhytheblockchain,byreducingcontractingcosts,enablesfirmstoopen

upanddevelopnewrelationshipsoutsidetheirboundaries.ConsenSys,forexample,

canarchitectcomplexrelationshipswithadiversesetofmembers,someinsideits

boundaries,someoutside,andsomestraddlingwalls,becausesmartcontractsgovern

theserelationshipsratherthantraditionalmanagers.Membersself-assigntoprojects,

defineagreed-upondeliverables,andgetpaidwhentheydeliver—allonthe

blockchain.

SmartContracts

Therateofchangeisincreasinglysettingthestageforsmartcontracts.Morepeople

aredevelopingnotonlycomputerliteracy,butalsofluency.Asfarasevidencing

transactionsgoes,thisnewdigitalmediumhassignificantlydifferentpropertiesfrom

itspaperpredecessors.AscryptographerNickSzabohighlighted,notonlycanthey

captureagreaterarrayofinformation(suchasnonlinguisticsensorydata)buttheyare

dynamic:theycantransmitinformationandexecutecertainkindsofdecisions.In

Szabo’swords,“Digitalmediacanperformcalculations,directlyoperatemachinery,

andworkthroughsomekindsofreasoningmuchmoreefficientlythanhumans.”

Forthepurposesofthisdiscussion,smartcontractsarecomputerprogramsthat

secure,enforce,andexecutesettlementofrecordedagreementsbetweenpeopleand

organizations.Assuch,theyassistinnegotiatinganddefiningtheseagreements.

Szabocoinedthephrasein1994,thesameyearthatNetscape,thefirstWebbrowser,

hitthemarket:

Asmartcontractisacomputerizedtransactionprotocolthatexecutesthe

termsofacontract.Thegeneralobjectivesofsmartcontractdesignareto

satisfycommoncontractualconditions(suchaspaymentterms,liens,

confidentiality,andevenenforcement),minimizeexceptionsbothmalicious

andaccidental,andminimizetheneedfortrustedintermediaries.Related

economicgoalsincludeloweringfraudloss,arbitrationandenforcement

costs,andothertransactioncosts.

Backthen,smartcontractswereanideaalldressedupwithnowheretogo,asno

availabletechnologycoulddeploythemasSzabodescribed.Therewerecomputer

systemssuchaselectronicdatainterchange(EDI)thatprovidedstandardsforthe

communicationofstructureddatabetweenthecomputersofbuyersandsellers,butno

technologythatcouldactuallytriggerpaymentsandcausemoneytobeexchanged.

Bitcoinandtheblockchainchangedallthat.Nowpartiescanmakeagreements

andautomaticallyexchangebitcoinwhentheymeetthetermsoftheagreement.Most

simply,yourbrother-in-lawcan’tweaseloutofahockeybet.Lesssimply,whenyou

purchaseastock,thetradesettlesinstantlyandthesharesareimmediatelytransferred

toyou.Evenlesssimple,whencontractorsdeliverthesoftwarecodethatmeetsthe

necessaryspecifications,theygetpaid.

Thetechnologicalmeansofexecutinglimitedsmartcontractshasexistedfor

sometime.Acontractisabargained-forexchangeenforceablebeforetheexchange.

AndreasAntonopoulosexplainedwithasimpleexample:“SoifyouandIwereto

agreerightnowthatIwouldpayyoufiftydollarsforthepenonyourdesk,that’sa

perfectlyenforceablecontract.Wecanjustsay,‘Ipromisetopayyoufiftydollarsfor

thepenonyourdesk,’andyouwouldrespond,‘Yes,Iwouldlikethat.’Thatturnsout

tobe‘offeracceptanceandconsideration.’We’vegotadeal,anditcanbeenforcedin

acourt.Thathasnothingtodowiththetechnologicalmeansofimplementationofthe

promisesthatwehavemade.”

WhatinterestsAndreasabouttheblockchainisthatwecanexecutethisfinancial

obligationinadecentralizedtechnologicalenvironmentwithabuilt-insettlement

system.“That’sreallycool,”hesaid,“becauseIcouldactuallypayyouforthepen

rightnow,youwouldseethemoneyinstantly,youwouldputthepeninthemail,and

Icouldgetaverificationofthat.It’smuchmorelikelythatwecandobusiness.”

Thelawprofessionisslowlypluggingintothisopportunity.Likeeveryoneinthe

middle,lawyersmaybecomesubjecttodisintermediationandwilleventuallyneedto

adapt.Expertiseinsmartcontractscouldbeabigopportunityforlawfirmsthatwant

toleadinnovationincontractlaw.However,theprofessionisn’tknownforbreaking

newground.LegalexpertAaronWright,coauthorofanewbookaboutthe

blockchain,toldus,“Lawyersarelaggards.”

Multisignature:SmartComplexContracts

But,yousay,wouldn’tthecostsofcomplexandtime-consumingnegotiationsof

smartcontractsoutweighthebenefitsofopenboundaries?Theansweratthispoint

appearstobeno.Ifpartnersspendmoretimeupfrontdeterminingthetermsofan

agreement,themonitoring,enforcement,andsettlementcostsdropsignificantly,

perhapstozero.Further,settlementcanoccurinrealtime,possiblyinmicroseconds

throughoutthedaydependingonthedeal.Mostimportant,bypartneringwith

superiortalent,companiescanachievebetterinnovationandbecomemore

competitive.

Let’sconsidertheuseofindependentcontractors.Intheearlydaysofdigital

trade,theblockchainaccommodatedonlythesimplesttwo-partytransactions.For

instance,ifAliceneededsomeonetocompleteapieceofcodequickly,shewouldpost

ananonymous“coderneeded”requestonanappropriatediscussionboard.Bobwould

seeit.

Ifthepriceandtimingwereright,hewouldsendworksamples.Ifhis

samplesmetAlice’sneeds,thenshemadeBobanoffer.Theyagreedonterms:Alice

wouldsendhalfthefeeimmediatelyandhalfuponreceiptofcompletionand

successfultestofthecode.

Theircontractwasstraightforward—anoffertohireandanacceptancetodothe

job,anditneedn’thavebeeninwriting,thoughtheirinteractionsontheblockchain

madeitso.Theirownershipofbitcoinswasassociatedwithdigitaladdresses(long

stringsofnumbers)thathadtwocomponents:apublickeythatservedasanaddress,

andaprivatekeythatgaveitsownerexclusiveaccesstoanycoinsassociatedwith

thataddress.BobsentAlicehispublickey,andshedirectedthefirstpaymentthere.

ThenetworkrecordedthetransferandassociatedthosebitcoinstoBob’spublickey

wallet.

Whatif,atthispoint,Bobdecidedthathedidn’twanttodotheproject?Inthis

two-partytransaction,Alicewouldhavelittlerecourse.Shecouldn’tgotohercredit

cardcompanytoreversethetransaction.Shecouldn’t(yet)gotocivilcourtandsue

Bobforbreachofcontract.Beyondarandomlygeneratedalphanumericcodeandan

onlineadvertisement,shewouldhavenowayofidentifyingBobunlesshe’dposted

hisadonacentralizedplatformthatcouldtrackBobdown,orthey’dexchangede-

mailsthroughacentralizedservice.Shecould,however,indicatethathispublickey

wasnottobetrusted,thusloweringhisreputationscoreasacoder.

Withoutassurancesoftheotherparty’strustworthinessinfulfillingoff-chain

actions,thedealwasaprisoner’sdilemmaofsorts:itstillrequiredsometrust.

Reputationsystemscouldmitigatethisuncertaintytosomeextent.Butweneededto

introducetrustandsecurityintothisanonymousandopensystem.

In2012,“coredeveloper”GavinAndresenintroducedanewtypeofbitcoin

addresstothebitcoinprotocolscalled“paytoscripthash”(P2SH).Itspurposewasto

allowoneparty“tofundanyarbitrarytransaction,nomatterhowcomplicated.”

Partiesusemultipleauthenticatingsignaturesorkeysratherthanasingleprivatekey

tocompleteatransaction.Thecommunityusuallyreferstothismultiple-signature

featureassimply“multisig.”

Inamultisigtransaction,partiesagreeonthetotalnumberofkeysgenerated(N)

andhowmanywillberequiredtocompleteatransaction(M).ThisiscalledanM-of-

Nsignatureschemeorsecurityprotocol.Thinkofalockboxrequiringmultiple

physicalkeystoopen.Withthisfeature,BobandAlicewouldagreeinadvanceto

employaneutral,disinterestedthird-partyarbitratortohelpthemcompletetheir

transaction.Eachofthethreepartieswouldholdoneofthreeprivatekeys,twoof

whichareneededtoaccessthetransferredfunds.Alicewouldsendherbitcointoa

publicaddress.Atthispoint,thosefundscanbeviewedbyanyone,butaccessedby

noone.OnceBobseesthefundshavebeenposted,hefulfillshisendofthebargain.

If,uponreceiptofBob’sgoodorservice,Aliceisunsatisfiedandfeelscheated,she

couldrefusetoprovideBobwiththesecondkey.Thetwopartieswouldthenlookto

thearbitrator,holderofthethirdkey,tohelpthemresolvetheirdisagreement.The

interventionofsucharbitratorsiscalledforonlyincasesofdisputeslikethese,andat

nopointdotheythemselveshaveaccesstothefunds—amechanismenablingtherise

of“smartcontracts.”

Tocontractremotely,letaloneautomatically,youneedacertaindegreeoftrust

thatthesystemwillenforceyourrightsunderthedeal.Ifyoucan’ttrusttheother

party,youhavetotrustthedisputeresolutionmechanismsand/orlegalsystembehind

it.Multisigtechnologyallowsthesedeliberatelydisinterestedthirdpartiestobring

securityandtrusttoanonymoustransactions.

Multisigauthenticationisgrowinginpopularity.Astart-upcalledHedgyisusing

multisigtechnologytocreatefuturescontracts:partiesagreeonapriceofbitcointhat

willbetradedinthefuture,onlyeverexchangingthepricedifference.Hedgynever

holdscollateral.Thepartiesplaceitinamultisigwalletuntiltheexecutiondate.

Hedgy’sgoalistousemultisigasafoundationforsmartcontractsthatarecompletely

self-executableandfullyevidencedontheblockchain.

Thinkoftheblockchainasa

dialecticbetweenanonymityandopenness,wherethemultisigfeaturereconcilesthe

twowithoutlossofeither.

Amongotherthings,thesmartcontractchangestheroleofthosewithinfirmswho

areinthebusinessoffindingandcontractingfortalent.HRdepartmentsneedto

understandthattalentisoutsidetheirboundaries,notjustinside.Theyneedtostepup

tothechallengesofusingsmartcontractstolowerthecostsofbuildingrelationships

withexternalresources.

3.CoordinationCosts—HowShouldWeAllWorkTogether?

Sowe’vefoundtherightpeopleandyou’vecontractedwiththem.Howdoyou

managethem?Throughouthiswritings,Coasediscussedcostsofcoordinating,

meshing,orotherwiseorchestratingthedifferentpeople,products,andprocessesinto

anenterprisethatcaneffectivelycreatevalue.Againsttraditionaleconomistswho

arguedthattherewereinternalmarketswithinfirms,Coasesaidthatwhen“a

workmanmovesfromdepartmentYtodepartmentX,hedoesnotgobecauseofa

changeinrelativeprices,butbecauseheisorderedtodoso.”

Inotherwords,

marketsallocateresourcesviathepricemechanism,butfirmsallocateresourcesvia

authoritativedirection.

Williamsonwentontoexplainthattherearetwosignificantcoordinatingsystems.

Firstisthepricesystemfordecentralizedresourceallocationneedsandopportunities

(themarket).Butsecond,(traditional)“firmsemployadifferentorganizingprinciple

—thatofhierarchy—whereuponauthorityisusedtoaffectresourceallocation.”Over

thelastfewdecades,hierarchieshavecomeunderscrutinyasstructuresforkilling

creativity,undermininginitiative,disempoweringhumancapital,andscapegoating

responsibilitythroughopacity.Tobesure,manymanagementhierarchieshave

becomeunproductivebureaucracies.However,hierarchyasaconcepthasgottena

badrap,ashasitsmosteloquentdefender,Canadian-bornpsychologistElliotJaques.

Inaclassic1990HarvardBusinessReviewarticle,Jaquesargued,“35yearsof

researchhaveconvincedmethatmanagerialhierarchyisthemostefficient,the

hardiest,andinfactthemostnaturalstructureeverdevisedforlargeorganizations.

Properlystructured,hierarchycanreleaseenergyandcreativity,rationalize

productivity,andactuallyimprovemorale.”

Thetroubleisthat,inrecentbusinesshistory,manyhierarchieshavenotbeen

effective,tothepointofridicule.ExhibitAisTheDilbertPrinciple,mostlikelyone

ofthebest-sellingmanagementbooksofalltime,byScottAdams.Here’sDilberton

blockchaintechnologyfromarecentcartoon:

Manager:Ithinkweshouldbuildablockchain.

Dilbert:Uh-oh.Doesheunderstandwhathesaidorisitsomethinghesawin

atrademagazinead?

Dilbert:Whatcolordoyouwantyourblockchain?

Manager:IthinkmauvehasthemostRAM.

Inthecartoon,Adamscapturesoneofthemarksofhierarchiesgonewrong—that

managersoftenrisetoalevelofpowerwheretheylacktheknowledgerequiredfor

effectiveleadership.

Combinedwithprogressivemanagementthinkingabouthowtobuildeffective,

innovativeorganizations,thefirstgenerationoftheInternetenabledprogressive

thinkingmanagerstochangethetop-downassignmentofworkandappropriationof

credit,recognition,andpromotion.

Forbetterorforworse,centralizedhierarchiesarethenorm.Decentralization,

networking,andempowermenthavebeensensiblesincetheearlydaysoftheInternet.

Teamsandprojectshavebecomethefoundationofinternalorganization.E-mail

enabledpeopletocollaborateacrossorganizationalsilos.Socialmediadroppedsome

collaborationcostsinternallyanddroppedtransactioncostsandmadetheboundaries

ofcorporationsmoreporousascompaniescouldlinkupwithsuppliers,customers,

andpartnersmoreeasily.

However,today’scommercialsocialmediatoolsarehelpingmanyfirmsachieve

newlevelsofinternalcollaboration.Empowerment,therealdecentralizationof

power,isanimportantfocusinbusiness;andcompanieshaveexperimentedor

implementednewconceptsrangingfrommatrixmanagementtoholacracy—with

varyingdegreesofsuccess.

Infact,thereiswidespreadagreementthatwhenfirmsdistributeresponsibility,

authority,andpower,theresultwilltypicallybepositive:betterbusinessfunction,

customerservice,andinnovation.Butthispracticeiseasiersaidthandone.

TheInternetalsohasn’tdroppedwhateconomistscall“agencycosts”—thecost

ofmakingsurethateverybodyinsidethefirmisactingintheowner’sinterest.Infact,

anotherNobelPrize–winningeconomist(yes,theredoseemtobealotoftheminthis

story),JosephStiglitz,arguedthatthesheersizeandseemingcomplexityofthese

firmshaveincreasedagencycostsevenasafirm’stransactioncostshaveplummeted.

Hence,thehugepaygapbetweenCEOandfrontline.

Sowheredoesblockchaintechnologycomeinandhowcanitchangehowfirms

aremanagedandcoordinatedinternally?Withsmartcontractsandunprecedented

transparency,theblockchainshouldnotonlyreducetransactioncostsinsideand

outsideofthefirm,butitshouldalsodramaticallyreduceagencycostsatalllevelsof

management.Thesechangeswillinturnmakeithardertogamethesystem.Sofirms

couldgobeyondtransactioncosttotackletheelephantintheboardroom—agency

cost.YochaiBenklertoldus,“What’sexcitingtomeaboutblockchaintechnologyis

thatitcanenablepeopletofunctiontogetherwiththepersistenceandstabilityofan

organization,butwithoutthehierarchy.”

Italsosuggeststhatmanagersshouldbracethemselvesforradicaltransparencyin

howtheydocoordinateandconductthemselvesbecauseshareholderswillnowbe

abletoseetheinefficiencies,theunnecessarycomplexity,andthehugegapbetween

executivepayandthevalueexecutivesactuallycontribute.Remember,managers

aren’tagentsofowners;they’reintermediaries.

4.Costsof(Re-)BuildingTrust—WhyShouldWeTrustOneAnother?

Aswehaveexplained,trustinbusinessandsocietyistheexpectationthatanother

partywillbehonest,considerate,accountable,andtransparent—thatheorshewillact

withintegrity.

It’salotofworktoestablishtrust,andmanyeconomistsandother

academicsarguethatwehaveverticallyintegratedfirmsbecauseestablishingtrustis

easierwithincorporateboundariesthaninanopenmarket.Withtrustatanall-time

low,thechallengeforfirmsisnotsimplyfiguringoutwhomtotrust,buthowtoget

outsidecapabilitytotrustthem.

Indeed,economistMichaelJensenandcolleaguesmadethecasethatintegrityisa

factorofproduction.Notthefirstbutamongthemosteloquentonthetopic,they

explainthattheseeminglynever-endingscandalsintheworldoffinancewiththeir

damagingeffectsonvalueandhumanwelfarearguestronglyfortheadditionof

integritytofinancialoperations.Tothemthisisnotanissueofvirtue,butan

opportunityinfinancialeconomicsto“createsignificantincreasesineconomic

efficiency,productivity,andaggregatehumanwelfare.”Tothem,“Integrity...onthe

partofindividualsororganizationshasenormouseconomicimplications(forvalue,

productivity,qualityoflife,etc.).Indeed,integrityisafactorofproductionas

importantaslabor,capital,andtechnology.”

WallStreetlosttrust(andnearlykilledcapitalism)becauseofasetofintegrity

violations.Buthasitchanged?Andwillitchange?Inthepast,corporatesocial

responsibilityadvocatesarguedthatcompanies“dowellbydoinggood.”Wehaven’t

seentheevidence.Manycompaniesdidwellbydoingbad—byhavingbadlabor

practicesinthedevelopingworld,byexternalizingtheircostsontosocietysuchas

pollution,bybeingmonopoliesandgougingcustomers.Thecollapseof2008taught

usforsurethatcompanies“dobadlybybeingbad.”Themajorbanksfoundthisout

thehardway.Priorto2008manyweremakingupwardsof20percentreturnon

equity.Formanytodayitiswellbelow5percent,withsomenotevenmakingtheir

costofcapital.Fromashareholderperspective,theyshouldnolongerexist.

Whatarethechances,realistically,thatWallStreetwillwakeuptoJensen’s

exhortationsandactwithintegrity?Surely,expedienceandshort-termgainarecoded

intotheDNAoftheWesternfinancialsystem.

Enterblockchaintechnologyanddigitalcurrencies.Whatifpartiesdidn’thaveto

trustoneanother,butcouldstillactwithhonesty,accountability,consideration,and

transparencybecauseitwasthefoundationofthetechnologicalplatformoffinance?

SteveOmohundrogaveusacompellingexample.“IfsomebodyfromNigeria

wantstobuysomethingthatI’mselling,I’mgoingtobeveryskeptical,I’mnotgoing

toacceptacreditcardoracheckfromNigeria.Withthenewplatform,IknowIcan

trustitandIdon’thavetoincurthecostsofestablishingtrust.Soitenables

transactionswhichsimplycouldn’thappenotherwise.”

SoWallStreetbanksdon’thavetospliceintegrityintotheirDNAandbehavior;

thefoundersofblockchainshavecodeditintotheirsoftwareprotocolsanddeployed

itacrossthenetwork—enablinganewutilityforthefinancialservicesindustry.The

goodnewsisthattheindustrycanreestablishtrustandmaintainitinanongoingway.

Withblockchaintechnologycausingthecostsofsearching,contracting,

coordinating,andcreatingtrusttoplummet,itshouldbeeasierforfirmsnotjustto

openup,butalsotoforgetrustingrelationshipswithexternalparties.Actinginone’s

self-interestserveseverybody’sinterests.Cheatingthesystemcostsmorethanusingit

asdesigned.

Thisisnottosaythatcorporatebrandsorforthatmatteractingethicallyis

unimportantornolongerrequired.Blockchainhelpsensureintegrityandtherefore

trustintransactionsbetweenpeers.Italsohelpsachievetransparency—acritical

factorintrust.However,asauthorandtechnologytheoristDavidTicollsays:“Trust

andbrandareaboutmorethanvouchsafingatransaction.Theyarealsoaboutquality,

enjoyment,safetyofadeviceorservice,cachetandcoolness.Intoday’sCOP21

world,thebestbrandstransparentlyandverifiablysignifyoutcomesthatare

environmentally,socially,andeconomicallyresponsible.”

Still,throughsmartcontracts,executivescanbeheldaccountable—theymust

abidebytheircommitmentsasenforcedandsettledbysoftware.Companiescan

programrelationshipswithradicaltransparencysoeveryonehasabetter

understandingaboutwhateachpartyhassigneduptodo.Andoverall,likeitornot,

theymustconductbusinessinawaythatisconsiderateoftheinterestsofother

parties.Theplatformdemandsit.

DETERMININGCORPORATEBOUNDARIES

Overall,theboundariesthatseparateacompanyfromitsvendors,consultants,

customers,externalpeercommunities,andotherswillbecomehardertodefine.

Perhapsasimportant,theywillconstantlychange.

Firmswillstillexist,blockchainnotwithstanding,becausethemechanismsfor

searching,contracting,coordinating,andestablishingtrustwithincorporate

boundarieswillbemorecost-effectivethanthoseintheopenmarket,atleastformany

activities.Theideaoftheso-calledfreeagentnation,whereindividualsexecutework

outsidetheboundariesofcorporations,isillusory.MelanieSwan,whofoundedthe

InstituteforBlockchainStudies,said,“What’stherightsizeofthecorporationfor

optimaltransactibility?Well,it’snotaunitarything,ofpeopleworkingonlyas

individualsore-lancers.”Toher,therewillbenewkindsof“flexiblebusinessentities

ofindividualsandgroupspartneringaroundprojects.”Sheviewsthenewmodelof

thefirmmoreliketheguild,thepreindustrialassociationsofmerchantsortradesmen

whoworkedtogetherinaparticulartown.“Westillneedorganizationsactingas

coordinatingmechanisms.Butthenewmodelsofteamcollaborationarenotyetfully

clear.”

Todayweoftenhearthatfirmsshouldfocusontheircore.Butwhenconsidering

howblockchaintechnologydropstransactioncosts,whatiscore?Andhowdoyou

definethatwhenacompany’scoreisconstantlychanging?

Itseemsthateveryonehasadifferentdefinitionofwhattheoptimalfirmsize

shouldbetomaximizeproductivityandcompetitiveadvantage.Manyfirmswe

examineddidn’thaveaclearview,seemingtochoosetheBobDylanapproachto

determiningwhat’sinandwhatshouldbeout(“Youdon’tneedaweathermanto

knowwhichwaythewindblows”).Back-officeprocessing,forexample,was

describedasano-brainer,withoutanyclearcriteriaastowhy.

Somearemorerigorous.FromthecorecompetenciesviewdevelopedbyGary

HamelandC.K.Prahalad,firmsgaincompetitiveadvantagethroughcompetence

mastery.Thosecompetenciesmasteredarecentraltothefirm,whileotherscanbe

acquiredfromoutside.

However,afirmmayhavemasteryoversomeactivitiesthat

arenotmissioncritical.Shouldtheystillbekeptinside?

StrategistMichaelPorterhasanimplicitviewthatcompetitiveadvantagestems

fromactivities,inparticularfromnetworksofreinforcingactivitiesthatarehardto

replicateintheirtotality.It’snottheindividualpartsofthebusinessthatmatter,but

howtheyarestrungtogetherandbuilttoreinforceoneanotherinauniqueactivity

system.Competitiveadvantagecomesfromtheentiresystemofactivities;whileany

individualactivitywithinthesystemmaybecopied,competitorscannotproducethe

samebenefitunlesstheymanagetoduplicatetheentiresystem.

Othersarguethatcompaniesshouldalwaysretainfunctionsorcapabilitiesthatare

missioncritical—thosethatfirmsmustabsolutelygetrightforsurvivalandsuccess.

Butmakingcomputersismissioncriticalforcomputercompanies;yetDell,HP,and

IBMoutsourcemuchofthisactivitytoelectronicsmanufacturingservicescompanies

likeCelestica,Flextronics,orJabil.Finalassemblyofvehiclesismissioncriticalfor

anautomanufacturer;yetBMWandMercedescontractwithMagnatodothis

activity.

StanfordGraduateSchoolofBusinessprofessorSusanAtheyarguespersuasively:

“Theremaybesomemission-criticalfunctions,likethecollectionandanalysisofbig

data,thatarejusttooriskytomoveoutsidecorporateboundaries,evenifyoudon’t

haveuniqueabilitiesinthatarea.”

True,theremaybesomefunctionslikedata

analyticswheresurvivaldependsonbeinguniquelygood,andtheremaybe

existentialrisksofpartnering.Still,externalresourcescanbedeployedstrategicallyto

buildinternalcapability.

Ourviewisthatthestartingpointforcorporateboundarydecisionsisto

understandyourindustry,competitors,andopportunitiesforprofitablegrowth—and

usethisknowledgeasthebasisfordevelopingabusinessstrategy.Fromthere,the

blockchainopensupnewopportunitiesfornetworkingthateverymanagerand

knowledgeworkerneedstoconsideratalltimes.Boundarychoicesarenotsimplyfor

seniorexecutives,theyareforanyonewhocaresaboutmarshalingthebestcapability

forinnovationandhighperformance.Weshouldadd—andthisisnosmallpoint—

thatyoucan’toutsourceyourcorporateculture.

EntertheMatrix

Takingintoaccounthowblockchaintechnologycanenableaccesstounique

capabilitiesoutsidecorporateboundaries,firmscannowdefinethosebusiness

activitiesorfunctionsthatarefundamentaltocompetitiveness—thatarebothmission

criticalandalsouniqueenoughtoensuredifferentiatedvalue.

However,thisIn-OutMatrixisjustastartingpointfordefiningcorporate

boundariesatanygivenpoint.Whatotherfactorsshouldfirmsconsiderin

determiningwhatisfundamental?Whatextenuatingcircumstancesaretherethat

mightaffectchoicestooutsourceornurtureinternally?

HackingYourFuture:BoundaryDecisions

Whenmakingboundarychoices,firmsshouldstartusingtheblockchaintomarshala

360-degreeviewandreachconsensusonwhatisuniqueandwhatismissioncritical

intheirbusiness.Let’sreturntoJoeLubinandConsenSys,astheyforeshadowthe

modusoperandioftheblockchain-basedenterprise.RememberthatConsenSysisin

itsinfancy,andmuchcangowrongtoundermineitsbusiness.Wecanstilllearnfrom

thiscompany’sexample.

1.Aretherepossiblepartnerswhocoulddotheworkbetter?Inparticular,

couldwebenefitfromharnessingnewpeerproductioncommunities,

ideagoras,openplatforms,andotherblockchainbusinessmodels?The

companyConsenSysisabletoorchestrateextraordinaryexpertisetodoits

work,eventhoughmanyareoutsideitsboundaries.

2.Givenblockchaintechnology,whataretheneweconomicsofcorporate

boundaries—thetransactioncostsofpartnering,versuskeeping/developing

in-house?Canyoudevelopasuiteofsmartcontractswhosecoreelementsare

modularandreusable?ConsenSysusessmartcontractstoreducecoordination

costs.

3.Whatistheextentoftechnologicalinterdependenceversusmodularity?If

youcandefinebusinesscomponentsthataremodular,thenyoucaneasily

reconfigurethemoutsidecorporateboundaries.ConsenSyssetsstandardsfor

softwaredevelopmentandprovidesaccesstovarioussoftwaremodulesthat

itspartnerscanbuildupon.

4.Whatareyourfirm’scompetencieswithregardtothemanagingof

outsourcedwork?Cansmartcontractsenhancethosecompetenciesandlower

costs?Fromtheget-go,ConsenSyswasablockchainbusiness.CEOJoe

Lubinembracesthetechnologyandamodifiedholacracy,andwecanseethe

sevendesignprinciplesatwork.

5.Whataretherisksofopportunismwhereapartnermightencroachon

fundamentalpartsofyourbusiness,assomehavesuggestedFoxconnmaydo

tosmartphonecompanies?ConsenSystriestomitigatethischallengeby

buildingloyaltythroughincentivestructureswherebyitstalentsharesinthe

wealththeycreate.

6.Aretherelegal,regulatory,orpoliticalobstaclestodeepernetworking(and

shrinking)oftheorganization?NotaproblemforConsenSysyet.

7.Speedandpaceofinnovationareimportanttoboundarydecisions.

Sometimesfirmshavenochoicebuttopartnerforastrategicfunction

becausetheycannotdevelopitin-housefastenough.Apartnerarrangement

canbeaplaceholder.Willpartneringhelpusbuildanecosystemthatwill

improveourcompetitiveadvantage?ThisisConsenSys’sstrategy:builda

networkofcollaboratorsaroundtheEthereumplatform,growtheplatform

andecosystem,andincreasetheprobabilityofsuccessforallcomponents.

8.Isthereadangeroflosingcontrolofsomethingfundamental—forexample,

aproductornetworkarchitecture?Firmsmusthaveasenseofwhichpartsof

thevaluechainwillbekeytocreatingandcapturingvalueinthefuture.If

thesearefarmedout,thefirmwilllose.TheEthereumplatformprovidesa

basicarchitectureforConsenSys.

9.Isthereacapability,liketheexploitationofdataassets,thatmustbepart

ofthefabricofyourenterpriseandallitsoperations?Eventhoughyoulack

auniquecapability,youshouldviewpartneringasatransitionaltacticto

developextraordinaryinternalexpertiseandcapacity.Blockchain

technologieswillintroduceanewsetofcapacitiesthatneedtoresideinthe

craniumofeveryemployee.Youcan’tmovecultureoutsideyour

boundaries.

CHAPTER5



NEWBUSINESSMODELS:

MAKINGITRAINONTHEBLOCKCHAIN

oundedamonthbeforethemarketcrashedin2008,Airbnbhasbecomea$25

billionplatform,nowtheworld’slargestsupplierofroomsasmeasuredby

marketvalueandroomsoccupied.Buttheprovidersofroomsreceiveonlypartofthe

valuetheycreate.InternationalpaymentsgothroughWesternUnion,whichtakes$10

ofeverytransactionandbigforeignexchangeoffthetop.Settlementstakealong

time.Airbnbstoresandmonetizesallthedata.Bothrentersandcustomersalikehave

concernsaboutprivacy.

WebrainstormedwithblockchainexpertDinoMarkAngaritistodesignan

Airbnbcompetitorontheblockchain.WedecidedtocallournewbusinessbAirbnb.It

wouldlookmorelikeamember-ownedcooperative.Allrevenues,exceptfor

overhead,wouldgotoitsmembers,whowouldcontroltheplatformandmake

decisions.

BAIRBNBVERSUSAIRBNB

bAirbnbisadistributedapplication(DApp),asetofsmartcontractsthatstoresdata

onahome-listingsblockchain.ThebAirbnbapphasanelegantinterface:ownerscan

uploadinformationandpicturesoftheirproperty.

Theplatformmaintainsreputation

scoresofbothprovidersandrenterstoimproveeveryone’sbusinessdecisions.

Whenyouwanttorent,thebAirbnbsoftwarescansandfilterstheblockchainfor

allthelistingsthatmeetyourcriteria(e.g.,tenmilesfromtheEiffelTower,two

bedrooms,four-plusstarratingsonly).Youruserexperienceisidenticaltothatin

Airbnb,exceptthatyoucommunicatepeertopeeronthenetwork,throughencrypted

andcryptographicallysignedmessagesnotstoredinAirbnb’sdatabase.

Youandthe

roomowneraretheonlytwopeoplewhocanreadthesemessages.Youcanswap

phonenumbers,anexchangethatAirbnbblockstopreservefuturerevenues.On

bAirbnbyouandtheownercouldcommunicateoff-chainandcompletethe

transactionentirelyoff-chain,butyouarebetteroffcompletingthetransactionon-

chainforafewreasons.

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.

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.

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cryptoeconomical

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.”

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.

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.

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.

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.

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.

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.

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.

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.

Theblockchainallowsanyentitytobecomeaweatherproviderorweatherdata

consumer,withverylowbarrierstoentry.JustbuyaweatherNode,putitonyour

roof,andconnectittotheGlobalWeatherDataMarketplaceDAppLP(forlinked

peers)andyou’llstartearningincomerightaway.Andifyoucanrigyourown

rooftopweatherNodethathappenstoprovidemoreaccuratedata,well,goodforyou!

Youinnovatedontheedge,andthemarketrewardsyouforit.Theincentivesfor

innovationonopennetworksarealignedtoincreaseefficiencybetterthanclosed

networks.

DuelingBots

Whataboutconflictsofinterest?IftheweatherNodestartedexpandingitscapability

andenteredthecropinsurancemarketplace,wouldn’tithavecognitivedissonance?

FarmerweatherNodeswanttoemphasizetheimpactofdroughts,andinsurer

weatherNodesclaimdroughtsareminimal.Theownersanddesignersofagentsneed

transparencyofoperations.Ifbotharefilteringsensordatathroughabiasedscreen,

thentheirrespectivereputationswilldrop.

VitalikButerinpointsoutthatautonomousagentsarechallengingtocreate,

becausetosurviveandsucceedtheyneedtobeabletonavigateinacomplicated,

rapidlychanging,orevenhostileenvironment.“IfaWebhostingproviderwantstobe

unscrupulous,theymightspecificallylocateallinstancesoftheservice,andthen

replacethemwithnodesthatcheatinsomefashion;anautonomousagentmustbe

abletodetectsuchcheatingandremoveoratleastneutralizecheatingnodesfromthe

system.”

Notethatautonomousagentsalsoseparatepersonhoodfromassetownershipand

control.Beforeblockchaintechnology,allassets—land,intellectualproperty,money

—requiredapersonorlegalorganizationofpeopletoownit.AccordingtoAndreas

Antonopoulos,cryptocurrenciescompletelyignorepersonhood.“Awalletcouldbe

controlledbyapieceofsoftwarethathasnoownershipandsoyouhavethe

possibilityofcompletelyautonomoussoftwareagentsthatcontroltheirown

money.”

AnautonomousagentcouldpayforitsownWebhostinganduseevolutionary

algorithmstospreadcopiesofitselfbymakingsmallchangesandthenallowingthose

copiestosurvive.Eachcopycouldcontainnewcontentthatitdiscoversoreven

crowdsourcessomewhereontheInternet.Assomeofthesecopiesbecomevery

successful,theagentcouldselladsbacktousers,adrevenuecouldgointoabank

accountorpostedonasecureplaceontheblockchain,andtheagentcouldusethis

growingrevenuetocrowdsourcemoreadcontentandproliferateitself.Theagent

wouldrepeatthecyclesothatappealingcontentpropagatesandhostsitself

successfully,andunsuccessfulcontentbasicallydiesbecauseitrunsoutofmoneyto

hostitself.

DISTRIBUTEDAUTONOMOUSENTERPRISES

WenowsuggestyoubuckleupinyourStarTrekcaptain’sseatforamoment.Imagine

BOB9000—asetofautonomousagentsthatcooperateinacomplexblockchain-

basedecosystemaccordingtoamissionstatementandrules.Togethertheycreatea

suiteofservicesthattheyselltohumansororganizations.Humansanimatethe

agents,endowingthemwithcomputingpowerandcapitaltogoabouttheirwork.

Theybuytheservicestheyneed,hirepeopleorrobots,acquirepartnerresourcessuch

asmanufacturingcapabilityandbrandingandmarketingexpertise,andadaptinreal

time.

Thisorganizationcouldhaveshareholders,possiblymillionsofthemwho

participatedinacrowdfundingcampaign.Theshareholdersprovideamission

statement,say,tomaximizeprofitlawfully,whiletreatingallstakeholderswith

integrity.Shareholderscouldalsovoteasrequiredtogoverntheentity.Asopposedto

traditionalorganizations,wherehumansmakealldecisions,intheultimatedistributed

organizationmuchoftheday-to-daydecisionmakingcanbeprogrammedintoclever

code.Intheory,atleast,theseentitiescanrunwithminimalornotraditional

managementstructure,aseverythingandeveryoneworksaccordingtospecificrules

andprocedurescodedinsmartcontracts.TherewouldbenoovercompensatedCEO,

management,orcorporatebureaucracy,unlesstheentitydecidedtohireandbuild

one.Therewouldbenoofficepolitics,noredtape,noPeterPrincipleofthe

Dilbertianenterpriseatwork,becausetechnologyproviders,opensource

communities,orenterprisefounderswouldsetthesoftware’sagendatoexecute

specificfunctions.

Anyhumanemployeesorpartnerorganizationswouldperformundersmart

contracts.Whentheydothejobasspecified,theyareinstantlypaid—perhapsnot

biweeklybutdaily,hourly,orinmicroseconds.Astheentitywouldn’tnecessarily

haveananthropomorphicbody,employeesmightnotevenknowthatalgorithmsare

managingthem.Buttheywouldknowtherulesandnormsforgoodbehavior.Given

thatthesmartcontractcouldencodethecollectiveknowledgeofmanagementscience

andthattheirassignmentsandperformancemetricswouldbetransparent,people

couldlovetowork.

Customerswouldprovidefeedbackthattheenterprisewouldapply

dispassionatelyandinstantlytocorrectcourse.Shareholderswouldreceivedividends,

perhapsfrequently,asreal-timeaccountingwouldobviatetheneedforyear-end

reports.Theorganizationwouldperformalltheseactivitiesundertheguidanceand

incorruptiblebusinessrulesthatareastransparentastheopensourcesoftwarethatits

foundersusedtosetitinmotion.

Welcometotomorrow’sdistributedautonomousenterprise(DAE),poweredby

blockchaintechnologyandcryptocurrencies,whereautonomousagentscanself-

aggregateintoradicallynewmodelsoftheenterprise.

Beforeyousaythatthisallsoundsimpractical,pointless,orsomethingfromsci-

fi,considerthefollowing.Usingtokens,companiessuchasConsenSyshavealready

issuedsharesintheirfirms,stagingpublicofferingswithoutregulatoryoversight.You

couldlegallyrecordtheownershipofprivatelyheldcorporationsandtransferthose

sharestootherpersonsontheblockchain.Yoursharecertificatescanpaydividends

andconfervotingpower.Thatsaid,yournew“blockcom”isdistributed;itdoesn’t

existwithoutjurisdiction,butyourshareholderscanliveanywhere.Imagineasimilar

mechanismtoissuedebtintheformofbonds,eitherprivatecorporatebondsor

sovereignbonds,essentiallycreatingabondmarket.Thesamelogicappliesto

commodities—notthecommodityitselfbutanotethatcorrespondstothecommodity,

similartohowtheChicagoMercantileExchangeortheglobalgoldmarketwork.

Butdon’tthinkofsecuritiesasyoucurrentlyknowthem.ImagineaglobalIPO

with100millionshareholderseachcontributingafewpennies.It’snotunthinkable

thatmanagementandgovernancecouldoccuronamassivescale,withmillionsof

peoplehavingvotingshares.Atlast,investorsatthebottomofthepyramidcould

participateandownsharesofawealth-creatingventureanywhereintheworld.In

theoryatleast,wecoulddesignacorporationwithoutexecutives,onlyshareholders,

money,andsoftware.Codeandalgorithmscouldreplacealayerofrepresentatives

(i.e.,theexecutiveboard),withshareholdersexertingcontroloverthatcode.The

opportunityforprosperityissignificant,nothinglessthanthedemocratizationof

ownershipofwealth-creatinginstruments.

Notpractical?Perhaps.Butconsiderthatentrepreneursarealreadyusingscripting

languagessuchasEthereumtodesignsuchfunctionsforeventuallyautonomous

models.Alreadyinnovatorsareimplementingcodethatpermitsmultisignaturecontrol

overfunds.Throughcrowdfundingcampaigns,massesofpeoplearepurchasing

equityincompanies.DAppsarealreadygivingwaytoautonomousagents.

Thiscompletelydistributedenterprisecouldhaveawalletthatrequiresthousands

ofsignatoriestoachieveconsensusinordertospendmoneyonanimportant

transaction.Anyshareholdercouldsuggestarecipientforthatmoney,marshaling

consensusaroundthattransaction.Astructurelikethiswouldhaveobvious

challenges.Forexample,mechanismswouldneedtobeinplacetoquicklyachieve

consensus.Orwhoisresponsiblefortheoutcomeofthattransaction?Ifyou’ve

contributedoneten-thousandthofavote,whatisyourlegalresponsibilityand

liability?Couldtherebeself-propagatingcriminalorterroristorganizations?Andreas

Antonopoulosisnotconcerned.Hebelievesthatthenetworkwillmanagesuch

dangers.“Makethistechnologyavailabletosevenandahalfbillionpeople,7.499

billionofthosewilluseitforgoodandthatgoodcandeliverenormousbenefitto

society.”

THEBIGSEVEN:OPENNETWORKEDENTERPRISEBUSINESSMODELS

Therearecountlessopportunitiestoconstructopennetworkedenterprisesthatdisrupt

ordisplacetraditionalcentralizedmodels,potentiallyevolvingintonascentdistributed

autonomousenterprises.Considerhowthedistributedmodelwilldisruptorreplace

theeightfunctionsoffinancialservices—everythingfromretailbankingandstock

marketstoinsurancecompaniesandaccountancies.Incumbentandnewentriesalike

canconstructnewbusinessarchitecturesthatcaninnovatebetter,createbettervalueat

lowercost,andshiftandenableproducerstoshareinthewealththeycreate.

Blockchaintechnologytakessomeofthenewbusinessmodelsdescribedin

Wikinomicstoanewlevel.

Let’slookathowwecanexpandpeerproduction,

ideagoras,prosumers,openplatforms,thenewpowerofthecommons,theglobal

plantfloor,andthewiki(social)workplacebyaddinginnativepaymentsystems,

reputationsystems,uncensorablecontent,trustlesstransactions,smartcontracts,and

autonomousagents—thekeyinnovationsoftheblockchainrevolution.

1.ThePeerProducers

Peerproducersarethethousandsofdispersedvolunteerswhobroughtyouopen

sourcesoftwareandWikipedia,innovativeprojectsthatoutperformthoseofthe

largestandbest-financedenterprises.Communitymembersparticipateforthefunof

it,asahobby,tonetwork,orbecauseoftheirvalues.Now,byenablingreputation

systemsandotherincentives,blockchaintechnologycanimprovetheirefficiencyand

rewardthemforthevaluetheycreate.

Peerproductioncommunitiescanbe“commons-basedpeerproduction,”aphrase

coinedbyHarvardLawprofessorYochaiBenkler.

Sometimescalledsocial

production,alsoBenkler’sterm,thissystemmeansthatgoodsandservicesare

producedoutsidetheboundsoftheprivatesectorandarenot“owned”bya

corporationorindividual.AmongthecountlessexamplesaretheLinuxoperating

system(ownedbynoonebutnowthemostimportantoperatingsystemintheworld),

Wikipedia(ownedbytheWikimediaFoundation),andtheFirefoxWebbrowser

(ownedbytheMozillaFoundation).Peerproductioncanalsorefertoactivitiesinthe

privatesectorwherepeerscollaboratesociallytoproducesomethingbutthegoodis

notsociallyowned.

Peerproductionasabusinessmodelmattersfortworeasons.First,sometimes

peerscollaboratevoluntarilytoproducegoodsandserviceswhereacorporationacts

ascuratorandachievescommercialbenefit.ReaderscreatethecontentontheReddit

discussionplatform,buttheydon’townit.Redditisthetenth-biggestsiteinthe

UnitedStatesintermsoftraffic.Second,companiescantapintovastpoolsofexternal

labor.IBMembracedLinuxanddonatedhundredsofmillionsofdollars’worthof

softwaretotheLinuxcommunity.Indoingso,IBMsaved$900millionayear

developingitsownproprietarysystemsandcreatedaplatformonwhichitbuilta

multibillion-dollarsoftwareandservicesbusiness.

Experienceshowsthatlong-termsustainabilityofvolunteercommunitiescanbe

challenging.Infact,someofthemoresuccessfulcommunitieshavefoundwaysto

compensatemembersfortheirhardwork.AsSteveWozniaksaidtoStewartBrand,

“Informationshouldbefree,butyourtimeshouldnot.”

InthecaseofLinux,mostoftheparticipantsgetpaidbycompanieslikeIBMor

GoogletoensurethatLinuxmeetstheirstrategicneeds.Linuxisstillanexampleof

socialproduction.Benklertoldus,“Thefactthatsomedevelopersarepaidbythird

partiestoparticipatedoesnotchangethegovernancemodelofLinux,orthefactthat

itissociallydeveloped.”Thisismorethanso-calledopeninnovationthatinvolves

cooperationbetweenfirmsandsharingcertainintellectualproperty,hesaid.“Thereis

stillsubstantialsocialmotivationformanycontributorsandassuchit’sahybrid

model.”

Further,manyofthesecommunitiesareplaguedwithbadbehavior,

incompetence,saboteurs,andtrolls—peoplewhosowdiscordbyposting

inflammatory,incorrect,oroff-topicmessagestodisruptthecommunity.Reputation

inthesecommunitiesistypicallyveryinformal,andthereisnoeconomicincentive

forgoodbehavior.

Withblockchaintechnologypeerscandevelopmoreformalreputationsfor

effectivecontributionstothecommunity.Todiscouragebadbehavior,memberscould

anteupasmallamountofmoneythateitherincreasesordecreasesbasedon

contribution.Incorporate-ownedcommunities,peerscouldshareinthevaluethey

createandreceivepaymentfortheircontributionsassmartcontractsdroptransaction

costsandopenupthewallsofthefirm.

ConsiderReddit.Thecommunityhasrevoltedovercentralizedcontrolbutstill

suffersfromflippant,abrasivemembers.Redditcouldbenefitfrommovingtoamore

distributedmodelthatrewardsgreatcontributors.ConsenSysisalreadyworkingona

blockchainalternativetoRedditthatdoesjustthat.Byofferingfinancialincentives,

theConsenSysteamthinksitcanimprovethequalityofRedditlikeconversations,

withoutcentralizedcontrolandcensorship.TheEthereumplatformprovides

incentives,perhapsinrealtime,toproducehigh-qualitycontentandbehavecivilly

whilecontributingtocollectiveunderstanding.

Reddithasasysteminplace,calledReddit“Gold”—atokenthatuserscanbuy

andthenusetorewardpeoplewhosecontributionstheyvalue.Themoneyfrom

tokensgoestositemaintenance.Thegoldhasnointrinsicvaluetousers.Sowitha

real,transferable,blockchain-basedcoinincentive,Redditmemberscouldactually

begintogetpaidformakingthesitemorerobust.

Wikipedia,theflagshipofsocialproduction,couldbenefitaswell.Rightnowall

personswhoeditarticlesdevelopaninformalreputationbasedonhowmanypieces

theyhaveeditedandhoweffectivetheyare,asmeasuredbyhighlysubjectiveterms.

TheWikipediacommunitydebatesconstantlyoverincentivesystems,but

administeringsomekindoffinancialcompensationtoseventythousandvolunteers

hasn’tbeenfeasible.

WhatifWikipediawentontheblockchain—callitBlockapedia.Inadditiontothe

benefitsofentriestime-stampedintoanimmutableledger,therecouldbemoreformal

measuresofone’sreputationthatcouldhelpincentgoodbehaviorandaccurate

contributions.Sponsorscouldfund,oralleditorscouldcontributemoneyto,an

escrowaccount.Eacheditorcouldhaveareputationlinkedtothevalueofher

account.Ifshetriedtocorruptanarticle,statingforexamplethattheHolocaustnever

happened,thevalueofherdepositwoulddecline,andincasesofdefamationor

invasionofprivacy,shewouldloseitandevenfacecivilorcriminalaction.Thetrue

eventsoftheSecondWorldWarcouldbeestablishedinmanyways,forexample,by

accessingunchangeablefactsontheblockchainorthroughalgorithmsthatshow

consensusregardingthetruth.

ThesizeofyourBlockapediasecuritydepositcouldbeproportionaltoyour

previousreputationonWikipediaorsimilarplatforms.Ifyou’reabrand-newuserand

havenoreputation,you’llputupalargersecuritydeposittoparticipate.Ifyou’ve

edited,say,twohundredarticlesonWikipediasuccessfully,yourdepositmightbe

small.

ThisisnotnecessarilyaboutmovingWikipediatoafor-hirecompensationmodel.

“It’ssimplyacaseofprovidingreal-worldeconomicgainorlossdependingonthe

accuracyandveracityoftheinformationyou’reproviding,”

saidDinoMark

Angaritis,CEOoftheblockchain-basedSmartwallet.DefacingBlockapediahurts

yourformalreputationbutyoualsolosemoney.

ButWikipediaworksprettywellrightnow,right?Notquite.AndrewLih,writing

inTheNewYorkTimes,pointedoutthat,in2005,thereweremonthswhenmorethan

sixtyeditorsweremadeadministrator,apositionwithspecialprivilegesineditingthe

English-languageedition.In2015,thesitehasstruggledtopromoteevenoneeditor

permonth.Beingavoluntaryglobalorganization,thereareinternaltensions.Worse,

editingcontentonamobiledeviceisdifficult.“ThepoolofpotentialWikipedia

editorscoulddryupasthenumberofmobileuserskeepsgrowing.”Lihconcludes

thatthedemiseofWikipediawouldbeunfortunate.“Noeffortinhistoryhasgottenso

muchinformationatsolittlecostintothehandsofsomany—afeatmadeallthemore

remarkablebytheabsenceofprofitandowners.InanageofInternetgiants,thismost

selflessofwebsitesisworthsaving.”

Overall,peerproductioncommunitiesareattheheartofnew,networkedmodels

ofvaluecreation.Inmostindustries,innovationincreasinglydependsondense

networksofpublicandprivateparticipantsandlargepoolsoftalentandintellectual

propertythatroutinelycombinetocreateendproducts.AsIBMembracedLinux,

firmscaneventieintoself-organizingnetworksofvaluecreatorsliketheopensource

movementtococreateorpeer-producevalue.

2.TheRightsCreators

DuringthefirstgenerationoftheInternet,manycreatorsofintellectualpropertydid

notreceivepropercompensationforit.Musicians,playwrights,journalists,

photographers,artists,fashiondesigners,scientists,architects,andengineersallwere

beholdentorecordlabels,publishers,galleries,filmstudios,universities,andlarge

corporationsthatinsistedtheseinventorsassigntheirintellectualpropertyrightsto

whatessentiallyarelargerightsmanagementoperationsinexchangeforlessandless

oftheirIP’svalue.

Blockchaintechnologyprovidesanewplatformforcreatorsofintellectual

propertytogetvalueforit.Considerthedigitalregistryofartwork,includingthe

certificatesofauthenticity,condition,andownership.Anewstart-up,Ascribe,enables

artiststhemselvestouploaddigitalart,watermarkitasthedefinitiveversion,and

transferitsothat,likebitcoin,itmovesfromoneperson’scollectiontoanother’s.

That’shuge.Thetechnologysolvestheintellectualpropertyworld’sequivalentofthe

double-spendproblembetterthanexistingdigitalrightsmanagementsystems,and

artistscoulddecidewhether,when,andwheretheywantedtodeployit.

MemeartistRonenVsaid,“Artisacurrency.Theevolutionofartintodigital

currencyis—noquestion—thefuture.Andthisisagoodstep.”

Musicians,

photographers,designers,illustrators,orotherartistswhoseworkcouldbedigitized

andwatermarkedasadefinitivecopycouldusethistechnologytotransformtheir

intellectualpropertyintoatradableasset,alimitededitionperhapscustomizedfora

particularfan.ArtistsandmuseumscanuseAscribe’stechnologytoloanpiecesto

otherindividualsorinstitutions.

Monegraphoffersasimilarservice:itusesdigital

watermarksandthecryptographyintrinsictotheblockchainforauthenticatingpieces.

ArtistssimplyuploadthearttoapageontheInternetandsubmittheURLto

Monegraph.Thefirmissuesasetofpublicandprivatekeys,exceptthatthevalue

associatedwiththepublickeyisadigitaldeedtotheartratherthanbitcoinperse.

Monegraphalsotweetsapublicannouncementofthedeed,noteworthybecausethe

U.S.LibraryofCongressarchivespublicTwitterfeeds.

Someoneelsemighttryto

claimtheURLashisown,buttherewouldalreadybeatleasttwoproofsinthepublic

recordtoverifyownership.

Verisart,aLosAngeles–basedstart-upwithbitcoincoredeveloperPeterToddas

anadviser,hasevengreaterambitions.Certifyingtheauthenticityandtheconditionof

apieceoffineartisbigbusiness,andonethatislargelypaperbasedandcontrolled

byeliteexpertswithaccesstorestricteddatabases.Findingwhoownstheart,where

it’sstored,andinwhatconditionisarealchallenge,evenforthosewhoactuallyknow

whatthey’relookingfor.Verisartiscombiningblockchaintechnologyandstandard

museummetadatatocreateapublicdatabaseofartandcollectibles.Thisworldwide

ledgerwillserveartists,collectors,curators,historians,artappraisers,andinsurers

anywhereintheworld.

Byusingthebitcoinblockchain,Verisartcanconferdigital

provenancetoanyphysicalwork,notjustdigitalart,anduserswillbeabletochecka

work’sauthenticity,condition,andchainoftitlefromtheirmobiledevicebeforethey

participateinanonlineauctionoragreetoasale.“Webelievetechnologycanaid

trustandliquidity,especiallyasmoreofthe$67billionannualartmarketshiftsto

privatesales(peer-to-peer)andonlinetransactions,”founderRobertNortontold

TechCrunch.“Theartworldisnotbroken.Itjustreliestoomuchonmiddlemento

ensuretrustandliquidity.Webelievetheadventofadecentralizedworld-wideledger

coupledwithpowerfulencryptiontomasktheidentitiesofbuyerandsellerwillbe

attractivetotheartworld.”

Theartistbecomeswhatcouldbecalleda“rights

monetizer”withthetechnologymakingdealsandcollectingrevenueinrealtime.

Youcouldapplythissamemodeltootherfieldsaswell.Inscience,aresearcher

couldpublishapapertoalimitedaudienceofpeers,asSatoshiNakamotodid,and

receivereviewsandthecredibilitytopublishtoalargeraudience,ratherthan

assigningallrightstoascientificjournal.Thepapermightevenbeavailableforfree

butotherscientistscouldsubscribetoadeeperanalysisorthreadeddiscussionswith

theauthoraboutit.Shecouldmakeherrawdataavailableorperhapssharedatawith

otherscientistsaspartofasmartcontract.Ifthereisacommercialopportunity

flowingfromthepaper,therightscouldallbeprotectedinadvance.Moreonthisin

chapter9.

3.BlockchainCooperatives

Thetrustprotocolsuperchargescooperatives—autonomousassociationsformedand

controlledbypeoplewhocometogethertomeetcommonneeds.

“It’snonsensetocallUberasharingeconomycompany,”saidHarvardprofessor

Benkler.“Uberhasusedtheavailabilityofmobiletechnologytocreateabusinessthat

lowersthecostoftransportationforconsumers.That’sallithasdone.”

DavidTicoll

said,“IncommonEnglishusage,sharingdenotesfreeexchange—notfinancial

transactions.Asinkids’sharingtoys.It’sashamethatthistermhassomewhatlost

thatmeaning.”Tohim,“sharingisthemainwaythathumansandmembersofother

specieshaveconductedexchangeswithoneanotherformillionsofyears,beginning

withtheactofconceptionitself.WhilesomeInternetcompanieshavefacilitated

genuinesharing,othershaveappropriatedandcommoditizedthesocialrelationships

andvocabularyofsharing.”

Mostso-calledsharingeconomycompaniesarereallyserviceaggregators.They

aggregatethewillingnessofsupplierstoselltheirexcesscapacity(cars,equipment,

vacantrooms,handymanskills)throughacentralizedplatformandthenresellthem,

allwhilecollectingvaluabledataforfurthercommercialexploitation.

CompanieslikeUberhavecrackedthecodeforlarge-scaleserviceaggregation

anddistribution.Airbnbcompeteswithhotelsontravelaccommodations;Lyftand

Uberchallengetaxiandlimousinecompanies;Zipcar,beforeitwaspurchasedby

Avis,challengedtraditionalcarrentalcompanieswithitshipconvenienceand

convenienthourlyrentals.

Manyofthesecompanieshaveglobalizedthemerchandisingoftraditionallocal,

small-scaleservices—likebed-and-breakfasts,taxis,andhandypersons.Theyuse

digitaltechnologiestotapintoso-calledunderutilized,time-basedresourceslikereal

estate(apartmentbedrooms),vehicles(between-calltaxis),andpeople(retireesand

capablepeoplewhocan’tgetfull-timejobs).

Blockchaintechnologyprovidessuppliersoftheseservicesameanstocollaborate

thatdeliversagreatershareofthevaluetothem.ForBenkler,“Blockchainenables

peopletotranslatetheirwillingnesstoworktogetherintoasetofreliableaccounting

—ofrights,assets,deeds,contributions,uses—thatdisplacessomeofwhata

companylikeUberdoes.SothatifdriverswanttosetuptheirownUberandreplace

Uberwithapurecooperative,blockchainenablesthat.”Heemphasizedtheword

enable.Tohim,“There’sadifferencebetweenenablingandmovingtheworldina

newdirection.”Hesaid,“Peoplestillhavetowanttodoit,totaketheriskofdoing

it.”

SogetreadyforblockchainAirbnb,blockchainUber,blockchainLyft,blockchain

TaskRabbit,andblockchaineverythingwhereverthereisanopportunityforreal

sharingandforvaluecreationtoworktogetherinacooperativewayandreceivemost

ofthevaluetheycreate.

4.TheMeteringEconomy

Perhapsblockchaintechnologycantakeusbeyondthesharingeconomyintoa

meteringeconomywherewecanrentoutandmetertheuseofourexcesscapacity.

Oneproblemwiththeactualsharingeconomy,where,forexample,homeowners

agreetosharepowertoolsorsmallfarmingequipment,fishinggear,awoodworking

shop,garageorparking,andmore,wasthatitwasjusttoomuchofahassle.“There

are80millionpowerdrillsinAmericathatareusedanaverageof13minutes,”

AirbnbCEOBrianCheskywroteinTheNewYorkTimes.“Doeseveryonereallyneed

theirowndrill?”

Thetroubleis,mostpeoplefounditeasierandmorecost-effectivetomakeone

triptoHomeDepotandbuyadrillfor$14.95thanrentitfor$10fromsomeonea

mileaway,makingtwotrips.WroteSarahKesslerinFastCompanymagazine:“The

SharingEconomyisdeadandwekilledit.”

Butwithblockchainswecanrentourexcesscapacityforcertaincommoditiesthat

areprettymuchzerohassle—Wi-Fihotspots,computingpowerorstoragecapacity,

theheatgeneratedbyourcomputers,ourextramobileminutes,evenourexpertise—

withoutliftingafinger,letaloneschleppingtoandfromsomestranger’shouseacross

thecity.Whenyoutravel,yourWi-Ficanrentoutitselfinyourabsence,charging

fractionsofpenniesforeverysecondofusage.Yourimagination(andpossiblynew

regulation)isyouronlylimit.Yoursubscriptions,physicalspace,andenergysources

cannowbecomesourcesofincome,meteringtheirusedirectlytoacounterpartyand

chargingthemforitthroughmicropayments.Allyouneedisadecentralizedvalue

transferprotocoltoallowthemtosafelyandsecurelytransactwithoneanother.These

platformsinstillsubsidiaryrightsinallourassets.Youneedtodecidetheextentto

whichyouwanttoassignothersusageandaccessrights—eventherighttoexclude

othersfromusingyourassets—andwhattochargeforthoserights.

Thiscanworkforphysicalassetstoo.Forexample,we’veheardalotabout

autonomousvehicles.Wecanbuildanopentransportationnetworkontheblockchain

whereownerseachhaveaprivateencryptedkey(number)thatletsthemreserveacar.

Usingthepublickeyinfrastructureandexistingblockchaintechnologieslike

EtherLockandAirlock,theycanunlockandusethecarforacertainamountoftime,

asspecifiedbytherulesofthesmartcontract—allthewhilepayingthevehicle(orits

owners)inrealtimeforthetimeandenergythattheyuse—asmeteredona

blockchain.Becauseblockchaintechnologyistransparent,thegroupofownerscan

trackwhoisabidingbytheircommitments.Thosewhoaren’ttakeareputationalhit

andeventuallyloseaccessaltogether.

5.ThePlatformBuilders

Enterprisescreateplatformswhentheyopenuptheirproductsandtechnology

infrastructurestooutsideindividualsorcommunitiesthatcancocreatevalueornew

businesses.Onetypeisprosumers,customerswhoproduce.

Inadynamicworldof

customerinnovation,anewgenerationofproducer-consumersconsidersthe“rightto

hack”itsbirthright.Blockchaintechnologysuperchargesprosumption.Nikerunning

shoescouldgenerateandstoredataonadistributedledgerthat,inturn,Nikeandthe

shoewearercouldmonetizeasagreedintheirsmartcontract.Nikecouldofferatiny

pieceofitsshareswitheverypairitsells,ifthecustomeragreestoactivatethesmarts

intheshoes,orevensynchershoestootherwearables,suchasaheartmonitoror

glucoselevelcalculatororothervaluabledataforNike.

Someplatformsdifferfromprosumercommunitieswhereacompanydecidesto

cocreateproductswithitscustomers.Withopenplatforms,acompanyofferspartners

abroadervenueforstagingnewbusinessesorsimplyaddingvaluetotheplatform.

Nowwithblockchaintechnologycompaniescanquicklycreateplatformsand

partnerwithotherstocreateplatformsorutilitiesforanentireindustry.RobinChase

foundedZipcar(aserviceaggregator)aswellasBuzzcar(userscansharetheircars

withothers),andisnowtheauthorofPeersInc.,alucidbookonthepowerofpeers

workingtogether.Shetoldus,“Leveragingthevaluefoundinexcesscapacity

dependsonhigh-qualityplatformsforparticipation.Theseplatformsdon’tcome

cheap.Theblockchainexcelsinprovidingastandardcommondatabase(openAPIs)

andstandardcommoncontracts.Theblockchaincanmakeplatformbuildingcheaper

andmanageable.”That’sjustthebeginning.“Bestofall,itscommondatabasemakes

fordatatransparencyandportability:consumersandsupplierscanpursuethebest

terms.Theycanalsocooperateaspeersontheblockchaintocreatetheirown

platforms,ratherthanusingthecapabilitiesoftraditionalcompanies.”

Thinkofthecarofthefutureitself.Itwouldexistaspartofablockchain-based

networkwhereeveryonecanshareinformation,andvariouspartsofthevehiclecan

dotransactionsandexchangemoney.Givensuchanopenplatform,thousandsof

programmersandnichebusinessescouldcustomizeapplicationsforyourcar.Soon

suchplatformscouldtransformentireindustriessuchasfinancialservicesbysettling

allkindsoffinancialtransactionsandexchangesofvalue.Aconsortiumofthelargest

banksisalreadyworkingontheidea.Platformsaretherisingtidethatliftsallboats.

Wikinomicsintroducedtheconceptofideagoras—emergingmarketplacesfor

ideas,inventions,anduniquelyqualifiedminds,whichenabledcompanieslikeP&G

totapglobalpoolsofhighlyskilledtalentmorethantentimesthesizeofitsown

workforce.FirmsuseserviceslikeInnoCentiveandInno360tofacilitateholding

“Challenges,”“DigitalBrainstorms,”andothertechniquestofindtherighttemporary

talentoutsidetheirboundariestoaddresscriticalbusinesschallenges.It’saboutusing

datatofindtherighttalenttohackyourbusinessforthebetter.

Talent—theuniquelyqualifiedmindstosolveproblems—canposttheir

availabilitytotheledgersothatfirmscanfindthem.RatherthanInnoCentive,think

bInnoCentive.Individualscancultivatenotonlyaportableidentity,butalsoa

portablerésumé(anextendedversionoftheiridentity)thatcanprovideappropriate

informationaboutthemtopotentialcontractors.Thinkadistributedskillsinventory

ownedbynooneoreveryone.

Aseverybusinessbecomesadigitalbusiness,thehackathonisanimportantform

ofideagora.Nowwithblockchaintechnologyandopensourcecoderepositories,

everycompanycouldprovidevenuestogeeksandotherbusinessbuildersforproblem

solving,innovating,andcreationofnewbusinessvalue.

Blockchainsandblockchain-basedsoftwarerepositorieswillfuelsuchactivity.

CompaniescannowusepowerfulnewprogramminglanguagesliketheEthereum

blockchainwithbuilt-inpaymentsystems.AnexcerptfromaconversationonHacker

News:“ImaginehowcoolitwouldbeifIcouldshareaguidformyrepo—andthen

yourbitclient(let’scallitgitcoin,ormaybejustbit)canfetchnewcommitsfroma

distributedblockchain(essentiallythegitlog).Githubisnolongeranintermediaryor

asinglepointoffailure.Privaterepo?Don’tsharetheguid.”

Howcoolindeed!(Well,maybeyoudidn’tunderstandoneiotaofthatlittlepiece

ofcoolness,butyouprobablygettheidea.)

6.BlockchainMakers

Manufacturing-intensiveindustriescangiverisetoplanetaryecosystemsforsourcing,

designing,andbuildingphysicalgoods,markinganewphaseofpeerproduction.It’s

aboutmakingitontheblockchain.Justasamodernaircrafthasbeendescribedas“a

bunchofpartsflyinginformation,”companiesinmostindustriesaretendingto

disaggregateintonetworksofsuppliersandpartners.Three-dimensionalprintingwill

movemanufacturingclosertotheuser,bringingnewlifetomasscustomization.

Soon,dataandrightsholderscanstoremetadataaboutanysubstancefromhuman

cellstopoweredaluminumontheblockchain,inturnopeningupthelimitsof

corporatemanufacturing.

Thistechnologyisalsoapowerfulmonitoroftheprovenanceofgoodsandtheir

movementthroughoutasupplynetwork.Consideranindustryclosetoallourhearts

(andotherbodyparts)—thefoodindustry.Todayyourlocalgrocerystoremayclaim

—andtrulybelieve—thatitsbeefissafe,raisedhumanely,fedqualityingredients,

andgivennounnecessarydrugs.Butitcan’tguaranteeit.Noonekeepshistoriesof

singlecows;badthingshappentogoodbovines.Wetrustourhamburgerwithno

meanstoverify.Usuallyitmakesnodifference;billionsandbillionskeepgetting

served.Butonceinawhile,wegetaglimpseofmadcowdisease.

Thefoodindustrycouldstoreontheblockchainnotjustthenumberofevery

steer,butofeverycutofmeat,potentiallylinkedtoitsDNA.Three-dimensional

searchabilitiescouldenablecomprehensivetrackingoflivestockandpoultrysothat

userscouldlinkananimal’sidentitytoitshistory.Usingsophisticated(butrelatively

simpletouse)DNA-basedtechnologiesandsmartdatabasemanagement,eventhe

largestmeatproducerscouldguaranteequalityandsafety.Imaginehowthesedata

mightexpeditelabtestsandacommunityhealthresponsetoacrisis.

Knowinghowourfoodwasraisedorgrownisnotaradicalidea.Ourancestors

boughtsuppliesatlocalmarketsorfromretailerswhosourcedproductslocally.If

theydidn’tlikehowalocalranchertreatedhiscattle,theydidn’tbuyhisbeef.But

transportationandrefrigerationhaveestrangedusfromourfoodstuffs.We’velostthe

valuesoftheoldfoodchain.

Wecouldrestorethesevalues.Wecouldleadtheworldindevelopingamodern,

industrialized,openfoodsystemwithdown-to-earthfamilyfarmvalues.

Transparencyletscompanieswithsuperiorpracticesdifferentiatethemselves.The

brandcouldevolvefromthemarketingnotionofatrustmark—somethingthat

customersbelieveinbecauseit’sfamiliar—intoarelationshipbasedontransparency.

Surelyfoodproducershaveanappetiteforthat.

7.TheEnterpriseCollaborators

YochaiBenklerspokeabouthowblockchaintechnologycouldfacilitatepeer-to-peer

collaborationwithinfirms,andbetweenfirmsandpeersofallsorts.“I’mexcited

abouttheideathatyouhaveafullydistributedmechanismforaccounting,foractions,

andfordigitalresourcesacrossanything;whetherit’scurrency,whetherit’ssocial

relationsandexchange,orwhetheritsanorganization.”

Today,commercialcollaborationtoolsarebeginningtochangethenatureof

knowledgeworkandmanagementinsideorganizations.

ProductslikeJive,IBM

Connections,SalesforceChatter,CiscoQuad,MicrosoftYammer,GoogleAppsfor

Work,andFacebookatWorkarebeingusedtoimproveperformanceandfoster

innovation.Socialsoftwarewillbecomeavitaltoolfortransformingvirtuallyevery

partofbusinessoperations,fromproductdevelopmenttohumanresources,

marketing,customerservice,andsales—inasensethenewoperatingsystemforthe

twenty-first-centuryorganization.

Butthereareclearlimitationstotoday’ssuitesoftools,andtheblockchaintakes

thesetechnologiestothenextlevel.Existingvendorswilleitherfacedisruptionor

embraceblockchaintechnologiestodelivermuchdeepercapabilitytotheir

customers.

Whatwouldablockchainsocialnetworkforthefirmlooklike?ThinkFacebook

forthecorporation(orsimplyanalternativetoFacebookforyou).Becauseseveral

companiesareworkingonthis,wecanflash-forwardayearortwoandhere’swhat

weget:

Everyuserhasamultifacetedwallet,asortofportalintothedecentralizedonline

world.Thinkaportablepersonalprofile,apersonaoridentitythatyouown.Unlike

yourFacebookprofile,thewallethasdiversefunctionsandstoresmanykindsof

personalandprofessionaldataandvaluablesincludingmoney.Itisalsoprivatetoyou

andyoushareonlywhatyouwant.Youhavepairsofpublic-privatekeysthatserveto

anchoryourpersistentdigitalID.Whilemultiplepersonascanbehousedinthewallet

foreachpersonorcompany,let’sassumethatawalletholdsasinglecanonical

personaanchoredinasinglekeypair.Apublishingsystemdeliversastreamof

informationthatyouoryourfirmwillhappilypayfor—acolleague’spatchofnew

code,asummaryofaconversationwithanewclient,or—withtheclient’spermission

—ataperecordingofacall,aTwitterfeedfromaconferencethatyoucouldn’tattend,

livestreamofaclient’suseofyournewproduct,photographsofyourcompetitors’

boothsatanindustryexpo,aPrezipresentationthatseemstobeclosingnewbusiness,

avideohow-toofsomethingacolleaguejustinvented,assistanceincompletinga

patentapplication,oranythingelsethatyouvalue.

Thereisadvertising,perhapsfromthirdpartiesormaybefromtheHRdepartment

aboutopenenrollmentorchangesininsuranceplans,butyou,notFacebook,get

revenueorsomerewardforpayingattention.Thisiscalledan“attentionmarket.”You

couldreceivemicrocompensationforagreeingtovieworinteractwithan

advertisement,orforfeedingbackindetailaboutanewproductpitch,orjustabout

anythingelse,suchastranscribingCAPTCHAs

orscanneddocuments.

Thenewsstream,publishingsystem,andtheattentionmarketalllooksimilar,but

paymentsflowdifferentlyforeach.SaidConsenSys’sJoeLubin,“Youpayfor

publishing.Companiespayforyourattention.Thenewsstreamhasnopaymentflow.

Iamhappytoreadyourstream,becauseIvaluethatsocialconnection,butIamnot

goingtopaytoseeapictureofyouandyourbuddiesdrinkingatabar,ortoreadyour

opinionontheBlueJayspitchingstaff.”

Youalsoparticipateinorcreatetopicaldiscussionchannels,whereyouconfigure

yourprivacy.Privacyisenhancedinothermannerstoo.Forexample,spyagencies

can’tconducttrafficanalysisbecausetheyareunabletodiscernthesourceor

destinationofmessages.

Therewouldalsobeaniftymechanismforfindingpeopleandfeedsthatyou

mightcareabout.Inaddition,distributedtoolsaggregateandpresentinterestingnew

peopleorinformationforyoutofolloworfriend,possiblyusingFacebook’ssocial

graphtohelpout.Lubincallsthis“bootstrappingthedecentralizedWebusingthe

pillarsofthecentralizedWeb.”

Experienceshowsthatvalueultimatelywinsoutinthedigitalage.Thebenefitsof

thisdistributedmodelarehuge—atleasttotheusersandcompanies.Thehuge

resourcesofsocialmediacompaniesnotwithstanding,thereisnoendtotherichness

andfunctionalitythatwecandevelopinsuchanopensourceenvironment.Compare

thepowerandsuccessofLinuxversusproprietaryoperatingsystems.Blockchain

technologiesensuresecurity.Yourprivacyiscompletelyconfigurable.Nosocial

mediacompanycansellorleakyourpersonalinformationtogovernmentagencies

withoutyourpermission.Ifyou’readissidentinatotalitariancountry,noonecan

trackwhatyouhavereadorsaidonline.Becauseyouownyourdata,youcan

monetizeitalongwithyourattentionandefforts.Youshareinthewealthofbigdata.

Companiestooshouldbeenthusiasticabouttheiremployees’usingsuch

platformsforbusiness.Toattracttalent,firmsneedtoshowintegrityandrespecttheir

employees’securityandprivacy.Moreimportant,asanyfirmworkstobecome

networked,approachingtalentoutsideitsboundaries,theycanofferupsuch

interenterprisecollaborativeplatformsthattheirpartnerscantrust.Timewilltell.

Insummary,thesearesevenoftheemergingbusinessmodelswherebyboth

companieslargeandsmallcanmakeit“rainontheblockchain.”Overall,theopen

networkedenterpriseshowsprofound,evenradicalpotentialtosupercharge

innovationandharnessextraordinarycapabilitytocreategoodvalueforshareholders,

customers,andsocietiesasawhole.

HACKINGYOURFUTURE:BUSINESSMODELINNOVATION

Asforacompanymanagedbysoftwareagents,RonaldCoasemustbehigh-fivingup

theresomewhereinEconomists’Heaven(althoughsomemightdisputethatsucha

placeexists).RememberthereverseofCoase’slaw?Acorporationshouldshrinkuntil

thecostsoftransactionsinsidearelessthanthecostsoftransactionsoutsideits

boundaries.Astechnologycontinuestodropcostsinthemarket,it’sconceivablethat

corporationscouldandshouldhaveverylittleinside—exceptsoftwareandcapital.

Thinkaboutit.

Tobegin,thecostof“search”continuestodropasnewagentshavetheabilityto

conductthree-dimensionalsearchesoftheWorldWideLedgerofeverything

commercialthatexistsorhasexisted.Sononeedforacorporatelibrary,information

specialists,HRsearchspecialists,orthemyriadotherprofessionalsinvolvedin

acquiringpertinentinformationtorunabusiness.

Second,smartcontractswouldradicallyreducethecostsofcontracting,policing

contracts,andmakingpayments.Nolongerpaper,theseprogramscouldformulate

theirtermsthroughaseriesoftemplates;bargain,acceptingorrejectingtermsand

conditionsbasedonrulesandextensiveinformationcollectedfromexternalsources;

formulateself-enforcingpolicies;determinewhenperformanceconditionshavebeen

met;andexecutetransactions.

Third,thecostofcoordinationofalltheseresourcesoutsidetheorganization

couldbetrivial—measuredintheenergytopowertheservershostingtheenterprise

software.Asformanaginghumans,organizations,andfactorieshiredbythe

enterprise,theenterprisehasnoneedforbureaucracy.Withthenewplatformwecan

imagineaneworganizationthatrequireslittleornotraditionalmanagementor

hierarchytogeneratecustomervalueandownerwealth.

Finally,thecostsofestablishingtrustwouldapproximatezero.Trustdoesnotrest

withtheorganization,butratherwithinthefunctionality,security,andauditabilityof

theunderlyingcodeandthemasscollaborationofthecountlesspeoplesecuringthe

blockchain.

Howwouldyougoaboutdesigningadistributedautonomousenterprise?Suchan

entitycouldhaverichfunctionality—agentsexecutingrangesoftasksormore

broadlybusinessfunctionsallbasedonapreapprovedcharter.Individuals,

organizations,orcollectivesofpotentialshareholdersoruserswilldesignthemby

definingthefollowing:

1.Conviction:abeliefabouttheworldandwhatneedstobedonetocreate

valueorchangethings.

2.Purpose:itsreasonforexistence.Whyarewecreatingthisenterpriseinthe

firstplace?

3.Constitution:outlinestheoverallobjectivesoftheenterpriseandtherules

bywhichitwillcreatevalue.

4.Modusoperandi:forexample,howitwillgoaboutcreatingthisvalue.

Howitwillfunditself—throughcrowdfunding,traditionalearly-stage

investment,orusingrevenue.Howitwillacquireresources.

5.Divisionoflaborbetweenhumansandtechnology:fortheforeseeable

future,perhapshumansshouldbeincharge.

6.Applicationfunctions:howtheenterprisewillsenseandrespondto

changingconditions.

7.Moralguidelines:Google’spromiseto“DoNoEvil”isnotgoingtobe

goodenough.TheDAEneedssomeclearguidelinesaboutwhatisandisn’t

acceptablebehavior.

Theremaynotbeadistributedautonomousenterpriseinyournearfuture,butthe

thinkingbehindthesenewentitiescaninformyourbusinessstrategizingtoday.With

theriseofaglobalpeer-to-peerplatformforidentity,trust,reputation,and

transactions,wecanfinallyre-architectthedeepstructuresofthefirmforinnovation,

sharedvaluecreation,andperhapsevenprosperityforthemany,ratherthanjust

wealthforthefew.Nowyouhaveatleastsevenemergingbusinessmodelsthatcould

helpyoushakesomewindowsandrattlesomedoorsinyourindustrywhile

distributingwealthmoredemocratically.

Overall,smartcompanieswillworkhardtoparticipatefullyintheblockchain

economyratherthanplayitsvictims.Inthedevelopingworld,thedistributionof

valuecreation(throughentrepreneurship)andvalueparticipation(throughdistributed

ownershipofthefirm)mayholdakeytoreconcilingtheprosperityparadox.Our

storybecomesevenmoreinterestingwhenyouconsiderthatbillionsofagentswillbe

embeddedinthephysicalworld.Whichtakesustothenextchapter.

CHAPTER6



THELEDGEROFTHINGS:

ANIMATINGTHEPHYSICALWORLD

powerpolecollapsesateighto’clockonahotnightintheremoteoutbackof

Australia.ThisisaproblemforWilliamandOliviaMunroe,whoraisesheepand

cattleonehundredmilesoutsidetheoldgoldminingtownofLaverton,ontheedgeof

theGreatVictoriaDesert.

Inthesummer,thetemperaturefrequentlysoarscloseto

120degreesFahrenheit(48.9°C).Theirchildren,PeterandLois,attendschoolvia

satellitelink,thefamily’sonlymeansofaccessinghealthservicesincaseofillnessor

emergency.AlthoughtheMunroeshaveabackupgenerator,itcan’tpowerthewater

pumps,communications,andair-conditioningforlong.Inshort,thelivesofthe

Munroefamilydependentirelyuponreliableenergy.

Atdaybreak,ninehourslater,thepowerutilitysendsoutateamtofindandfix

thedownedpole.Customercomplaintsgivethecompanyanideaofwherethebreak

occurred,buttheteamtakesmorethanadaytoidentify,reach,andfixthepole.

Meanwhile,theMunroesandnearbyresidents,businesses,andinstitutionsgowithout

powerandconnectivityatconsiderableinconvenience,economicimpact,andphysical

risk.Intheoutback,blackoutsarenotjustparalyzing;they’redangerous.Tominimize

thesehazards,atgreatexpensethecompanydeploysteamsofinspectorstocheckthe

extensivenetworkregularlyfordownedordeterioratingpoles.

Imaginehowmuchsafer,easier,andcheaperitwouldbeifeachpowerpolewere

asmartthing.Itcouldreportitsownstatusandtriggeractionsforreplacementor

repair.Ifapolecaughtfireorbegantotiporfallforanyreason,itwouldgeneratean

incidentreportinrealtimeandnotifyarepaircrewtocomewiththeappropriate

equipmenttothepreciselocation.Meanwhile,thepolecouldpotentiallyreassignits

responsibilitiestothenearestworkingpole.Afterall,they’reallonthegrid.The

utilitycouldrestorepowertothecommunitymorequicklywithoutthehugeongoing

costsoffieldinspection.

POWERTOTHEPEOPLE

That’sjustthebeginning.Usingemergingsoftwareandtechnologiesassociatedwith

theInternetofThings,wecaninstillintelligenceintoexistinginfrastructuresuchasa

powergridbyaddingsmartdevicesthatcancommunicatewithoneanother.Imagine

creatinganewflexibleandsecurenetworkquicklyandrelativelyinexpensivelythat

enablesmoreopportunitiesfornewservices,moreparticipants,andgreatereconomic

value.

Thisconfigurationisknownasameshnetwork,thatis,anetworkthatconnects

computersandotherdevicesdirectlytooneanother.Theycanautomatically

reconfigurethemselvesdependinguponavailabilityofbandwidth,storage,orother

capacityandthereforeresistbreakageorotherinterruption.Communitiescanuse

meshnetworksforbasicconnectivitywheretheylackaccessoraffordableservice.

Meshnetworksarealternativestotraditionaltop-downmodelsoforganization,

regulation,andcontrol;theycanprovidegreaterprivacyandsecuritybecausetraffic

doesn’troutethroughacentralorganization.

Organizationsarealreadycombiningmeshnetworkswithblockchaintechnology

tosolvecomplexinfrastructureproblems.Filament,anAmericancompany,is

experimentingwithwhatitcalls“taps”onpowerpolesintheAustralianoutback.

Thesedevicescantalkdirectlytoeachotheratdistancesofupto10miles.Because

thepowerpolesareapproximately200feetapart,amotiondetectoronapolethat’s

fallingwillnotifythenextpole200feetawaythatit’sintrouble.Ifforanyreasonthe

taponthatpoleisn’tavailable,itwillcommunicatewiththenextpole,orthenext

pole(upto10miles)thatwillcommunicatetothecompanythroughtheclosest

Internetbackhaullocation(within120miles).

Withthetap’stwenty-yearbatteryandBluetoothlowenergy(BLE)technology,

customerscanconnecttothedevicesdirectlywiththeirownphone,tablet,or

computer.Thetapcancontainnumeroussensorstodetecttemperature,humidity,

light,andsound,allofwhichcustomerscouldusetomonitorandanalyzeconditions

overtime,maybetodeveloppredictivealgorithmsonthelifecycleorimpending

failureofapowerpole.CustomerscouldbecomeweatherNodesormeterthesedataas

aninformationserviceorlicensethedatasetthroughtheblockchaintoanotheruser,

suchasagovernment,broadcaster,polemanufacturer,orenvironmentalagency.

Filament’sbusinessmodelisaservicemodelinvolvingthreeparties:Filament,its

integrationcustomer,andtheutilitycompany.Filamentownsthehardware;its

devicescontinuallymonitortheconditionofthepowerpolesandreportchanges,

whetherthey’refallen,onfire,orcompromisedbydustaccumulationorbrushfire

smoke.Filamentsellsthesensordatastreamtotheintegrator,andthisintegratorsells

totheutility.

Theutilitypaysmonthlyforamonitoringservice.Theserviceenablesthepower

companytoeliminatetheveryexpensivefieldinspectionofitsoperations.Because

powerpolesrarelyfall,thepowercompanyrarelyusestheactualcommunication

capabilityofthemeshnetwork,andsoFilamentcoulddeploytheexcesscapacityof

thetapsforotheruses.

“SinceFilamentownsthedevices,wecansellextranetworkcapacityontopof

thisnetworkthatspansmostofthecontinent,”saidEricJennings,Filament’s

cofounderandCEO.“FilamentcouldstrikeadealwithFedExtogivetheirsemitrucks

theabilitytosendtelemetrydatatoHQinrealtime,overournetworkinrural

Australia.WeaddFedExtothesmartcontractlist,andnowtheycanpayeachdevice

tosenddataontheirbehalf.”

FedExdriverscouldusethemeshnetworkfor

communicationsandvehicletrackingacrossremoteareastoindicateestimatedarrival

timesandbreakdowns.Thenetworkcouldalertthenearestrepairfacilitytodispatch

thenecessarypartsandequipment.

Blockchaintechnologyiscritical.ThisInternetofThings(IoT)application

dependsonaLedgerofThings.Withtensofthousandsofsmartpolescollectingdata

throughnumeroussensorsandcommunicatingthatdatatoanotherdevice,computer,

orperson,thesystemneedstocontinuallytrackeverything—includingtheabilityto

identifyeachuniquepole—toensureitsreliability.

“Nothingelseworkswithoutidentity,”saidJennings.“Theblockchainforidentity

isthecorefortheInternetofThings.Wecreateauniquepathforeachdevice.That

path,thatidentity,isthenstoredinthebitcoinblockchainassignedtoFilament.Just

likeabitcoin,itcanbesenttoanyaddress.”

Theblockchain(alongwithsmart

contracts)alsoensuresthatthedevicesarepaidforsotheycontinuetowork.The

InternetofThingscannotfunctionwithoutblockchainpaymentnetworks,where

bitcoinistheuniversaltransactionallanguage.

SocialEnergy:PoweringaNeighborhood

Now,insteadofpoles,imaginedigitizingeverynodeinapowersystemtocreate

entirenewpeer-to-peermodelsofpowerproductionanddistribution.Everyonegets

toparticipateinablockchain-enabledpowergrid.UnderaNewYorkState–sponsored

programtoincreaseenergyresiliencyeveninextremeweatherconditions,workis

underwaytocreateacommunitymicrogridintheParkSlopeareaofBrooklyn.Once

built,thismicrogridanditslocallygeneratedpowerwillprovideresiliencyin

emergenciesandreducecoststocustomerswhilepromotingclean,renewable

electricity,energyefficiency,andstorageoptionsinthecommunity.

Whilecampusmicrogridshavebeenaroundforawhile,theyaren’tcommonin

residentialareas.Mosthomeowners,businesses,governments,andother

organizationsinurbanNorthAmericagettheirpowerfromregulatedutilitiesat

regulatedprices.Currently,wehavemorevarietyinlocallygeneratedrenewable

energyfrom,say,solarpanelsonrooftops.Thelocalutilitycapturesexcesspowerin

itssupplyforredistributionatwholesalerates,oftenwithconsiderableleakage.The

consumer,whomaybelocatedacrossthestreetfromalocalpowersource,stillmust

gothroughtheutilityandpayfullretailforrenewableenergygeneratedbytheir

neighbor.It’sridiculous.

“Insteadofthecommand-and-controlsystemtheutilitieshavenowwherea

handfulofpeopleareactuallyrunningautilitygrid,youcandesignthegridsothatit

runsitself,”saidLawrenceOrsini,cofounderandprincipalofLO3Energy.“The

networkbecomesfarmoreresilientbecausealloftheassetsinthegridarehelpingto

maintainandruntheutilitygrid.”

It’sadistributedpeer-to-peerIoTnetworkmodel

withsmartcontractsandothercontrolsdesignedintotheassetsthemselves(i.e.,the

blockchainmodel).

Whenahurricanedestroystransmissiontowersorfirecripplesa

transformersubstation,thegridcanquicklyandautomaticallyreroutepowerto

preventamassiveblackout.

Resiliencyisn’ttheonlybenefit.Locallygeneratedpower,usedlocally,is

significantlymoreefficientthantheutility-scalemodel,whichreliesontransmitting

energyacrossvastdistances,whereenergyislost.LO3Energyisworkingwithlocal

utilities,communityleaders,andtechnologypartnerstocreateamarketwhere

neighborscanbuyandsellthelocalenvironmentalvalueoftheirenergy.“So,instead

ofpayinganenergyservicescompanythat’sbuyingrenewableenergycredits,youget

topaythepeoplewhoareactuallygeneratingtheelectricitythatisservingyour

house,thatislocalandgreen,andthatactuallyhasanenvironmentalimpactinyour

neighborhood.Itseemsalotfairer,right?”saidOrsini.

Right!

Ifyoucanlocateeachoftheassetsandassignlocationalvalueforgenerationand

consumption,thenyoucancreateareal-timemarket.AccordingtoOrsini,youcan

auctionyourexcessenergytoyourneighborswhomightnotbeabletogenerate

renewableenergy.Indoingso,yourcommunitycancreateenergyresiliencythrough

peer-to-peertrading.Communitymemberscanreachconsensusontherulesofthe

real-timemicrogridmarketsuchastime-of-daypricing,floororceilingprices,

prioritygiventoyournearestneighbor,orotherparameterssoastooptimizeprice

andminimizeleakage.Youwillnotbesittingatyourcomputeralldaylongsetting

prices,offeringtobuyorsell.

Futuremicrogridswillharvestheatfromthecomputationalpowerneededto

createandsecurethistransactivegridplatform.Distributingthecomputingpowerto

buildingsinthecommunityandusingthehighertemperaturesgeneratedtopower

heating,hotwater,andair-conditioningsystemsincreasestheproductivityofthesame

energy.“OurfocusisonincreasingExergy,”saysOrsini.

Withincreasinggenerationofrenewablepoweratthelocallevel,theInternetof

Thingsischallengingtheregulatedutilitymodel,andnotamomenttoosoon.We

needtorespondtoclimatechangeandbraceourselvesforincreasinglyextreme

weatherconditions,particularlymeltingicecapsthatdrownislandsinoceans,and

droughtsthatturndrylandintodesert.Currently,we’relosingaboutfifteenmillion

acresperyeartodesertification,theworstlossesinsub-SaharanAfricawhere,unlike

theMunroesoftheoutback,peoplecan’taffordwaterpumps,air-conditioning,or

migration.

Weneedourutilitygridsandourenginesnottoleachenergyandcarbon

intoouratmosphere.WhiletheutilitiesarelookingatIoTbenefitstotheirexisting

infrastructure(“smartgrid”),connectingmicrogridscouldleadtoentirelynewenergy

models.Utilitycompanies,theirunions,regulators,andpolicymakers,aswellas

innovativenewentrantssuchasLO3,areexploringthesenewmodelsforgenerating,

distributing,andusingelectricityfirstattheneighborhoodlevelandthenaroundthe

world.

THEEVOLUTIONOFCOMPUTING:FROMMAINFRAMESTOSMART

PILLS

Unlikeourenergygrid,computingpowerhasevolvedthroughseveralparadigms.In

the1950sand1960s,mainframesruled—InternationalBusinessMachinesandthe

Wild“BUNCH”(Burroughs,Univac,NationalCashRegisterCorp.,ControlData,

andHoneywell).Inthe1970sand1980s,minicomputersexplodedontothescene.

TracyKiddercapturedtheriseofDataGeneralinhis1981bestsellerTheSoulofa

NewMachine.Likemainframecompanies,mostofthesefirmsexitedthebusinessor

disappeared.WhoremembersDigitalEquipmentCorporation,PrimeComputer,

Wang,Datapoint,ortheminicomputersofHewlett-PackardorIBM?In1982,IBM

hardwareandMicrosoftsoftwarebroughtusthedecadeofthePC,withApple’s

Macintoshbarelynippingattheirheels.Howthingschange.

Drivenbythesametechnologicaladvances,communicationsnetworksevolved,

too.Fromtheearly1970s,theInternet(originatingintheU.S.AdvancedResearch

ProjectsAgencyNetwork)wasevolvingintoitspresent-day,worldwide,distributed

networkthatconnectsmorethan3.2

billionpeople,businesses,governments,and

otherinstitutions.Thecomputingandnetworkingtechnologiesthenconvergedin

mobiletabletsandhandhelds.BlackBerrycommercializedthesmartphoneinthe

earlyaughts,andApplepopularizeditintheiPhonein2007.

Whatisrelativelynewandveryexcitingistheabilityofthesedevicestogo

beyondrelativelypassivemonitoring,measuring,andcommunicating(weather

patterns,trafficpatterns)tosensingandresponding;thatis,executingatransactionor

actingaccordingtopredefinedrulesofengagement.Theycansense(falling

temperatures,trafficjams)andrespond(turnonthefurnace,lengthenthegreenlight);

measure(motion,heat)andcommunicate(emergencyservices);locate(burstwater

main)andnotify(repaircrews);monitor(location,proximity)andchange(direction);

identify(yourpresence)andtarget(markettoyou),amongmanyotherpossibilities.

Thedevicescanbestatic(poles,trees,pipelines)ormobile(clothing,helmets,

vehicles,pets,endangeredanimals,pills).Caregiversareusingsmart—oredible—

electronicpills,forexample,toidentifyandrecordwhetherandwhenapatienttakes

hismedication.Askinpatchortattoocapturesthedataandcanmeasureheartrate,

foodconsumption,orotherfactorsandcommunicatethisinformationtoaphysician,

caregiver,orthepatienthimselfthroughanapptoidentifypatternsandgivefeedback.

Themedicalprofessionwillsoonbeusingsimilartechnologyfortargeteddrug

deliverytocertaintypesofcancer,measuringcoretemperatureandother

biomarkers.

Thedevicescancommunicatewithoneanother,withcomputersanddatabases

directlyorthroughthecloud,andwithpeople(sendyouatextmessageorcallyour

mobile).Thesedevices,throughtheirevolvingmachineintelligenceandthedatathey

collect,areputtinganalysisofdata,patternrecognition,andtrendspottinginto

individualhands.

Theindustrytermbigdatahardlydescribesthemyriaddatathat

thephysicalworldwillgenerate.Bythemostconservativeestimate,the10billionor

sodevicesconnectedviatheInternettodaywillgrowtomorethan25billionby

2020.

Callit“infinitedata”frominfinitedevices.

Sowhydon’tweliveinsmarthomesanddrivesmartcarsandpracticesmart

medicine?Weseesixbigobstacles.OneistheRubeGoldbergrolloutofapplications

andservices.Simplyput,fewoftheearlyconsumerIoTdeviceshavedelivered

practicalvalue,unlessyouwantyoursmokedetectortoaskyournightlighttocall

yoursmartphoneandwarnyouofafire.

Anotherisorganizationalinertiaandtheunwillingnessorinabilityofexecutives,

industryassociations,andunionstoenvisionnewstrategies,businessmodels,and

rolesforpeople.Whilesomecreativeentrepreneurshavedevelopednewbusinesses

onsomeoftheseprinciples(i.e.,enablingphysicalassetstobeidentified,searched,

used,andpaidfor)andtherebydisruptedexistingmarkets(e.g.,Uber,Airbnb),the

impactisstillcomparativelyminorandreliantuponacompanyanditsappas

intermediary.

Athirdisfearofmalicioushackersorothersecuritybreachesthatcouldmodify

theinformationandrulesofengagement,overridingdeviceswithpotentially

disastrousconsequences.Afourthisthechallengeof“future-proofing,”criticalfor

capitalthingswithverylonglifespans,longerthanthelifespanofatypical

applicationorevenacompany.Start-upsgobankruptorsellthemselvestolarger

firmsallthetime.

Afifthisscalability;torealizethefullvalueoftheIoT,wemustbeableto

connectmultiplenetworkstogethersothattheyinteroperate.Lastistheoverarching

challengeofcentralizeddatabasetechnology—itcan’thandletrillionsofreal-time

transactionswithouttremendouscosts.

Toovercometheseobstacles,theInternetofEverythingneedstheLedgerof

Everything—machines,people,animals,andplants.

THEINTERNETOFTHINGSNEEDSALEDGEROFTHINGS

WelcometotheInternetofEverythingenabledbytheLedgerofEverything—

distributed,reliable,andsecureinformationsharing,sensing,andautomatingactions

andtransactionsacrosstheInternet,thankstoblockchaintechnology.Technologists

andsciencefictionwritershavelongenvisionedaworldwhereaseamlessglobal

networkofInternet-connectedsensorscouldcaptureeveryevent,action,andchange

onearth.Withubiquitousnetworks,continuedadvancementsofprocessingcapability,

andanincreasingarrayofcheapandtinyconnecteddevices,thatvisionofan

“InternetofThings”isedgingclosertoreality.

Remember,SatoshiNakamotodesignedthebitcoinblockchaintoensurethe

integrityofeachbitcointransactiononlineandthebitcoincurrencyoverall.By

recordingeachtransactionateverynodeandthensharingthatrecordwitheveryother

nodeonthenetwork(i.e.,theblockchain),theblockchainensuresthatwecanverify

thetransactionquicklyandseamlesslyacrossthepeer-to-peernetwork.Wecan

conducttransactionsofvalue—inthiscasefinancial—automatically,securely,and

confidentlywithoutneedingtoknowortrusteachnodeonthenetwork,andwithout

goingthroughanintermediary.TheLedgerofEverythingrequiresminimaltrust.

Blockchaintechnologyenablesustoidentifysmartdeviceswithrelevantcore

informationandprogramthemtoactunderdefinedcircumstanceswithoutriskof

error,tampering,orshuttingdownintheAustralianoutback.Becausetheblockchain

isanincorruptibleledgerofalldataexchangesthatoccurinthenetwork,builtupover

timeandmaintainedbythecollaborationofnodesinthatparticularnetwork,theuser

canbesurethedataareaccurate.

Thereisgrowingagreementamongtechnologycompaniesthattheblockchainis

essentialtounlockingthepotentialoftheInternetofThings.NoneotherthanIBM,

theprogenitoroflarge,centralizedcomputersystems,hascomeonboard.Inareport,

“DeviceDemocracy:SavingtheFutureoftheInternetofThings,”IBMidentifiedthe

valueoftheblockchain:

InourvisionofadecentralizedIoT,theblockchainistheframework

facilitatingtransactionprocessingandcoordinationamonginteracting

devices.Eachmanagesitsownrolesandbehavior,resultinginan“Internet

ofDecentralized,AutonomousThings”—andthusthedemocratizationofthe

digitalworld...devicesareempoweredtoautonomouslyexecutedigital

contractssuchasagreements,paymentsandbarterswithpeerdevicesby

searchingfortheirownsoftwareupdates,verifyingtrustworthinesswith

peers,andpayingforandexchangingresourcesandservices.Thisallows

themtofunctionasself-maintaining,self-servicingdevices....

Therefore,byusingtheblockchain,wholenewbusinessmodelsopenupbecause

eachdeviceornodeonthenetworkcouldfunctionasaself-containedmicrobusiness

(e.g.,sharingpowerorcomputingcapabilityatverylowcost).

“Otherexamplesareamusicservice,oranautonomousvehicle,”notedDino

MarkAngaritis,founderofSmartwallet.“Eachsecondthatthemusicisplayingorthe

carisdrivingit’stakingafractionofapennyoutofmybalance.Idon’thavealarge

paymentupfrontandpayonlyforwhatIuse.Theproviderrunsnoriskof

nonpayment.Youcan’tdothesethingswithtraditionalpaymentnetworksbecausethe

feesaretoohighforsendingfractionsofapennyoffyourcreditcard.”

Sparebedrooms,emptyapartments,orvacantconferenceroomscouldrent

themselvesout.Patentscouldlicensethemselves.Oure-mailcouldchargespammers

foreachitemreceived.Yougettheidea.Withmachinelearning,sensors,and

robotics,autonomousagentscouldmanageourhomesandofficebuildings,

interactivesalesandmarketing,busstopshelters,trafficflowandroadusage,waste

collectionanddisposal(i.e.,wherethebinsspeaktothetrucks),energysystems,

watersystems,healthcaredevicesembeddedorworn,inventories,factories,and

supplychains.

CarlosMoreira,CEOofWISeKey,saidthatthegreatestopportunitieslieinwhat

hecalledtheindustrialblockchain.

WISeKey,aSwiss-basedcompanyworkingin

theareaofidentitymanagement,cybersecurity,andmobilecommunications,provides

securetransactionalcapabilitytowatchesandotherwearabledevicesandisnow

offeringitstrustmodeltomanufacturersandchipmakersforoutfittingaverylarge

numberofotherIoTdevicestobeauthenticatedandtocommunicateacrossthe

Internetorothernetwork.“Wearemovingintoanotherworldwherethetrustis

delegatedattheobjectlevel.Anobjectthatisnottrustedwillberejectedbytheother

objectsautomaticallywithouthavingtocheckwithacentralauthority,”Moreirasaid.

“Thisisahugeparadigmshiftthathastremendousconsequencesinthewaythat

processeswillbeconductedintheyearstocome.”

Inthisemergingworld,usersconnectwithsmartdevicesusingsecure

identificationandauthentication,potentiallypublic/privatekeys,andtheydefinethe

rulesofengagement,suchasprivacy,withotherdevices,ratherthangoingalongwith

therulesofacentralizednodeorintermediary.Manufacturerscantransfer

maintenance,ownership,access,andresponsibilitytoacommunityofself-

maintainingdevices,future-proofingtheIoTandsavinginfrastructurecosts,replacing

eachdeviceexactlywhenithitsobsolescence.

ThustheblockchaincanaddressthesixobstaclestoafunctioningInternetof

Things.Tosumup,thenewLedgerofEverythinghasnineniftynetworkfeatures:

ResilientSelf-corrects;nosinglepointoffailure

RobustCanhandlebillionsofdatapointsandtransactions

Real-timeStayson24/7/365anddataflowsinstantly

ResponsiveReactstochangingconditions

RadicallyopenConstantlyevolvesandchangeswithnewinput

RenewableCanbemultipurpose,reused,andrecycled

ReductiveMinimizescostsandfriction,maximizesprocessefficiency

Revenue-generatingEnablesnewbusinessmodelsandopportunities

ReliableEnsuresintegrityofdata,trustworthinessofparticipants

WhydowebelievetheIoTenabledbytheblockchainhassuchhugepotential?

Theprimarydriveristhatitallowsanimationofthephysicalworld.Oncewebring

theseobjectstolifeontheledger,theycansense,respond,communicate,andtake

action.Assetscansearch,find,use,andcompensateoneanotheraccordingtosmart

contracts,therebyenablinghighlydisruptivenewmarkets,justastheInternethas

previouslydoneforpeopleandallmannerofdigitalcontent.

Thequestionsformanagers,entrepreneurs,andcivicleaders:Howwillyoutake

advantageofthesenewopportunitiestochangeandgrow?Howwillyour

organizationrespondtotheinevitabledisruptiontoyourexistingoperationalmodel?

Howwillyoucompetewiththecreativenewmodelsofstart-upsandcollaborations?

Opportunitiesforgreaterefficiency,improvedservice,reducedcosts,increased

safety,andbetterresultsaboundinourlives,andwecanimproveeachbyapplying

blockchainlogictotheInternetofThings.We’rebeginningthenextmajorphaseof

thedigitalrevolution.MichelleTinsleyofIntelexplainedwhyhercompanyisdeeply

investigatingtheblockchainrevolution:“WhenPCsbecamepervasive,the

productivityrateswentthroughtheroof.WeconnectedthosePCstoaserver,adata

center,orthecloud,makingitreallycheapandeasyforleanstart-upstogetcomputer

powerattheirfingertips,andwe’reagainseeingrapidinnovation,newbusiness

models.”

Intelwantstoacceleratetheprocessofunderstandingwhat’sworking,

what’snotworking,andwheretheopportunitieslie.“Wecouldseethistechnologybe

awholeotherstepfunctionofinnovation,whereitenablesallsortsofnew

companies,newplayers.Tobealeaderinthetechnologyindustry,wecannotbe

absentfromtheconversation,”shesaid.

Justimaginethepotentialofapplyingthese

capabilitiesacrossmanytypesofbusinesses,manyuntouchedbytheInternet

revolution.

THETWELVEDISRUPTIONS:ANIMATINGTHINGS

Whatpossibilitiesarethereforanimatingthephysicalworld?UnlikePinocchio,we

don’thaveaBlueFairy.(AndunlikePinocchio,theblockchaindoesn’tlie.)But

today,rightnow,wehavedistributedledgertechnologythatwillactuallyenablenot

onlyGEto“bringgoodthingstolife.”Evenbetter,Pinocchiocan’tgolong-noseon

theledger.

We’reintheearlydaysofthinkingaboutthepossibilitiesoftheLedgerof

Everything(builtintotheIoT).Whileconsumerdeviceshavereceivedthemost

attentioninthepopularmediatodate,therearepotentialapplicationsacrossvirtually

everysector.Therearemanywaysofclassifyingandgroupingpotentialapplications

becausesomanyapplicationscrossboundariesandcouldfitintomorethanone

category.McKinsey,forexample,usestheconceptofsettingsinitsclassificationof

theIoT.

We’veidentifiedopportunitiesfortheLedgerofEverythingintwelvemajor

functionalareas.Specificbenefits—andthebusinesscase—willbespecifictoeach

application.Thecategoriesbelowillustratethepotentialandthepotentialsignificant

disruptiontoexistingmarkets,players,andbusinessmodels.

1.Transportation

Inthefuture,you’llcallupanautonomousvehicletogetyousafelywhereyouneed

togo.Itwillintuitivelytakethefastestroute,avoidconstruction,handletolls,and

parkallonitsown.Intimesoftrafficcongestion,yourvehiclewillnegotiatea

passingratesothatyouarriveatyourdestinationontime,andfreightmanagerswill

usetheblockchain-enabledIoTonallcargotoclearcustomsorotherrequired

inspectionsquickly.Noredtape.Allianz,amanufacturerofstreetsweepers,could

equipitsmunicipalmachineswithminicamorsensortechnologythatidentifiedcars

whoseownershadn’tmovedthem(iftheycouldn’tmovethemselves)onalternate-

side-of-the-street-parkingdaysinNewYorkCity,feedthatsensordatatothetraffic

police,andsparethephysicalwritingofparkingtickets.Or,thestreetsweeperitself

couldextracttheparkingfineinbitcoinfromthecaritselfasitsweptby—becausethe

NewYorkStateDepartmentofTransportationwouldrequireallcarsregisteredinthe

fiveNewYorkCityboroughstomaintainbitcoinwalletsconnectedtotheirlicense

plates.Autonomousvehicles,ontheotherhand,wouldsensetheoncomingsweeper

andsimplymovethemselvestoletitpass.

2.InfrastructureManagement

Manyprofessionalswillusesmartdevicestomonitorlocation,integrity,age,quality,

andanyotherrelevantfactorsofpavement,raillines,powerpolesandlines,

pipelines,runways,ports,andotherpublicandprivateinfrastructureinorderto

monitorconditions,detectproblems(e.g.,breakageortampering),andinitiatea

responsebothrapidlyandcost-effectively.That’swherecompaniessuchasFilament

willcomein,withnewaffordabletechnologiestoanimateexistinginfrastructure

withoutthehugecapitalrequiredtoreplaceit.EricJenningsofFilamentestimates

that“over90percentofinfrastructureiscurrentlydisconnected,andit’sunfeasibleto

ripitalloutandreplaceitwithbrand-new,wireless,connectedassets.”

3.Energy,Waste,andWaterManagement

“Sendatrucktoemptyme,”saidtheoverflowingwastebin.“Fixme,”saidtheleaky

pipe.TheInternetofThingsshouldinspireahundrednewchildren’sbooks.

Traditionalutilitiesinboththedevelopedanddevelopingworldcanusethe

blockchain-enabledIoTfortrackingproduction,distribution,consumption,and

collection.Aswe’vealreadyseen,newentrantswithoutsignificantembedded

infrastructureareplanningtousethesetechnologiestocreateentirelynewmarkets

andnewmodels(e.g.,communitymicrogrid).

4.ResourceExtractionandFarming

Cowscanbecomeblockchainappliances,enablingfarmerstotrackwhatthecowseat,

whichmedicationsthey’vehad,andtheircompletehealthhistory.Thistechnology

canalsohelptrackexpensiveandhighlyspecializedequipmentandmakeitmore

widelyavailableforjust-in-timeusageandcostrecovery;improveminerand

farmworkersafetythroughtaggingofsafetyequipmentandautomatedchecklists(to

ensurethatequipmentisbeingusedproperly);monitorweather,soil,andcrop

conditionstostartirrigation,automatedharvesting,orotheractions;andcompile

“infinitedata”analyticstoidentifynewresourcesoradviseonagriculturalbest

practicesbasedonpastpatternsandresults.Sensorsinsoilandontreescouldhelp

environmentalprotectionagenciestomonitorfarmersandtheirusageoftheland.

5.EnvironmentalMonitoringandEmergencyServices

RememberautonomousweatheragentBOB?BOBwillliveinaworldofweather

sensorsandmakemoneycollectingandsellingcriticalweatherdata.Exampleshere

includemonitoringairandwaterqualityandissuingalertstoreducepollutantsorstay

indoors;flaggingdangerouschemicalsorradioactivityforemergencyworkers;

monitoringlightningstrikesandforestfires;installingearthquakeandtsunamiearly

warningandalertsystems;and,ofcourse,stormmonitoringandearlywarning.In

additiontoimprovingtheresponsetimeforemergencyservicesandreducingtherisk

oftheseeventstohumanlife,wecouldusethislongitudinaldatatoincreaseour

understandingofunderlyingtrendsandpatterns,identifypreventivemeasuresinsome

cases,andimproveourpredictivecapabilitytoprovideevenearlierwarning.

6.HealthCare

Inthehealthcaresector,professionalsusedigitizationtomanageassetsandmedical

records,keepinventory,andhandleorderingandpaymentsforallequipmentand

pharmaceuticals.Today,hospitalsarefullofsmartdevicesthatoverseetheseservices,

butfewcommunicatewithoneanotherortakeintoaccounttheimportanceofprivacy

protectionandsecurityindirectpatientcare.Blockchain-enabledIoTcanuse

emergingapplicationstolinktheseservices.Applicationsindevelopmentinclude

monitoringanddiseasemanagement(e.g.,smartpills,wearabledevicestotrackvital

signsandprovidefeedback)andimprovedqualitycontrol.Imagineanartificialhipor

kneethatmonitorsitself,sendsanonymizedperformancedatatothemanufacturerfor

designimprovements,andcommunicateswithapatient’sphysician,“Timetoreplace

me.”Technicianswillbeunabletousespecializedequipmentiftheyhaven’ttaken

prerequisitestepstoensuretheirreliabilityandaccuracy.Newsmartdrugscouldtrack

themselvesinclinicaltrialsandpresentevidenceoftheireffectivenessandside

effectswithoutriskofmodifiedresults.

7.FinancialServicesandInsurance

FinancialinstitutionscouldusesmartdevicesandtheIoTtotagtheirclaimson

physicalassets,makingthemtrackableandtraceable.Becausedigitalcurrencies

enablethestorageandtransferofvaluerapidlyandsecurelyforalluserslargeand

small,theyalsoenableriskassessmentandmanagement.Thinkingfurther,couldthe

pooranddisadvantagedearnsmallamountsofcash,orperhapselectricityorother

“credits,”iftheyallowedtheirlimitedassetstobetaggedandsharedasintheearlier

microgridexample?Ownerswillbeabletotagpricelessobjects,antiquities,jewelry,

thestuffofmuseums,anythingeverhandledbySotheby’sandinsuredbyLloyd’s.

Insurerscouldadjustpaymentaccordingtowheretheobjectisanditsenvironment—

ifit’sinNewYork’sMetropolitanMuseumofArtundercontrolledclimate,thena

lowerinsurancerate;iftravelingtoGreece,thenchargeahigherrate.Theobject

couldtellwhetheritwasinavaultoraroundacelebrity’sneck.Insuranceratescould

behigherifthedevicewashangingonLindsayLohan’sneckversus,say,Anne

Hathaway’s.Driverlesscarswouldsurelyhavelowerinsurancerates,anddevices

themselvescouldsettleinsuranceclaimsonthespotbasedonsensordata.

8.DocumentandOtherRecordKeeping

Aswehaveexplained,physicalassetscanbecomedigitalassets.Alldocumentation

relatingtoaparticular“thing”canbedigitizedandcarriedontheblockchain

includingpatents,ownership,warranties,inspectioncertification,provenance,

insurance,replacementdates,approvals,etcetera,significantlyincreasingdata

availabilityandintegrity,reducingpaperworkhandling,storage,andloss,andother

processimprovementsrelatedtothatdocumentation.Forexample,avehiclewillnot

startifitfailedarecentsafetyinspection,ifitsliabilityinsurancehasexpired,ifits

ownerhasfailedtopayparkingticketsormovingviolations,orifthedriver’slicense

ofthepersonattemptingtodriveithasbeensuspended.Itemsontheshelveswill

notifystoremanagerswhenthey’vepassedtheir“sellby”date.Storemanagersmight

evenprogramtheseitemstolowertheirownpriceasthesell-bydateapproaches.

9.BuildingandPropertyManagement

Anestimated65percentofthetwelvebillionsquarefeetofcommercialrealestatein

theUnitedStatesisvacant.

Digitalsensorscancreatemarketplacesofthesereal

estateassetsbyenablingreal-timediscovery,usability,andpayment.Vendorsarenow

enteringthisfieldanddevelopingnewservicemodelstorentthespaceinoffhours.In

theevenings,yourconferenceroomcanmoonlightasaclassroomforneighborhood

youthoranofficeforalocalstart-up.Otherapplicationswillincludesecurityand

accesscontrol,lighting,heating,cooling,andwasteandwatermanagement.The

greenestofbuildingswillrunontheLedgerofThings.Imaginethedataonelevator

usageandflowofpeoplethroughthebuilding,howthesewillinformanarchitect’s

designofpublicandprivatespaces.Spareresidentialspacecanlistitselfand

negotiatethroughtheLedgerofEverythingtohelptourists,students,managersof

homelessshelterprograms,andothersfindspacethatmeetstheirneeds.Theseideas

applytoalltypesofresidential,hotel,office,factory,retail/wholesale,and

institutionalrealestate.

10.IndustrialOperations—TheFactoryofThings

TheglobalplantfloorneedsaglobalLedgerofThings,akatheindustrialblockchain.

Factorymanagerswillusesmartdevicestomonitorproductionlines,warehouse

inventory,distribution,quality,andotherinspections.Entireindustriesmayadoptthe

ledgerapproachtosignificantlyincreaseefficiencyforsuchprocessesassupplychain

management.Largeandcomplexmachines,likeairplanesandlocomotives,consistof

millionsofparts.Eachindividualcomponentofajetengineorrailcarcouldhave

sensorsthatsendoutanalertwhenitneedsfixing.Imagineatrainonitswayfrom

BaltimoretoLongBeachnotifyingthemaintenancecrewinLongBeachthreedays

aheadoftimethatitneededacriticalnewpart.ThesensorcouldevenissueanRFP

andacceptthebestbidanddeliveryforthepart,cuttingtimeandmassivecostoutof

theoperatingefficienciesoflargecorporationslikeGeneralElectric,Norfolk

Southern,andothers.Evenmoresignificant,manufacturersinrealmsfromcarsto

lightbulbstoBand-Aidsareinvestigatinghowtheycanembedsmartchipsintotheir

productsorpartsthereofandmonitor,collect,andanalyzeperformancedata.With

suchdata,theycouldprovideautomaticupgrades,anticipateclientneeds,andoffer

newservices,ineffectchangingfromproductsupplierstoongoingsoftware-based

services.

11.HomeManagement

Feelinglonely?Youcanalwaystalktoyourhouse.Yourownhomeandnumerous

productsandservicesareenteringthemarkettoallowautomatedandremotehome

monitoring.Theseservicesgobeyondthe“nannycam”toincludeaccesscontrols,

temperatureadjustments,lighting,and,eventually,justabouteverythingelseinyour

home.While“smarthomes”havebeenrelativelyslowtotakeoff,companiessuchas

Apple,Samsung,andGoogleareworkingtosimplifyinstallationandoperations.

AccordingtoBCCResearch,“TheU.S.homeautomationmarketisestimatedtogo

fromalmost$6.9billionin2014to$10.3billionin2019...thegrowthwillbesteady

andlong-term.”

12.RetailOperationsandSales

Walkingdownthestreet,yourmobiledeviceadvisesyouthatthedressyouloveis

availableattheGap.Walkintothestoreandthedress,inyoursize,iswaitingforyou.

Aftertryingiton,youscanitandthepaymentiscomplete.Butyou’vegotother

thingstodo,sothedressfindsitswaytoyourhousebeforeyougethome.Inaddition

tooperationalefficienciesandenvironmentalmonitoring,retailerswillbeableto

personalizeproductsandservicestoidentifiablecustomersastheywalkordriveby

basedontheirlocation,demographics,knowninterests,andpurchasinghistory,

providedthatthosecustomersopenedtheirblackboxestoretailersontheblockchain.

THEECONOMICPAYOFF

Throughoutthischapterwe’vereferencednumerouspotentialbenefitsofthe

distributed,blockchain-enabledIoTatmanylevels(individual,organizational,

industrial,societal).Redesigningandautomatingprocessesacrosspeer-to-peer

networks,ratherthanthroughpeopleorcentralizedintermediaryapps,couldbring

numerousbenefitsasalreadyidentifiedincluding:

Speed(end-to-endautomation)

Reducedcosts(associatedwithsendingnearlyinfiniteamountsofdatato

giantcentralprocessingfacilities;eliminationofexpensiveintermediaries)

Increasedrevenue,efficiency,and/orproductivity(freeingupexcesscapacity

forreuse)

Improvedeffectiveness(built-inchecklistsandotherprotocolsreduceimpact

ofhumanerror)

Increasedsecurityandintegrity(person-to-persontrustisnotrequiredas

trustisdesignedintothenetworkarchitecture)

Reducedlikelihoodofsystemfailure(eliminationofbottlenecks,built-in

resiliency)

Reducedenergyconsumption(energyrequiredbythenetworkitselfoffset

byincreasedefficiencyandreducedwastage,dynamicpricing,andfeedback

loops)

Increasedprivacyprotection(intermediarycan’toverrideorignorerules

definedintheblockchain)

Improvedunderstandingofunderlyingpatternsandprocessesand

opportunitiestoimprovethemthroughthecollectionandanalysisof“infinite

data”

Strengthenedpredictivecapabilityofvariouseventswhethernegative

(severeweather,earthquakes,failinghealth)orpositive(besttimetoplant

crops,buyingpatterns).

ThedistributedopenmodelmeansthatIoTnetworkscanbeself-sustainingeven

afteracompanypullsoutoramanufacturerfails.Interoperability,whendesignedinto

thesystem,willenabletheconnectingofdifferentIoTnetworksandwillunleasheven

greatervalue.

Manyofthesebenefitsdependupontheconceptsofdistributed,ordecentralized,

networksandtheeliminationofacentral(e.g.,commandandcontrol)orother

intermediary(e.g.,aclearinghouseormanagementapp).Oncethesenew

intermediariesareinplace,otherswillfeelpressureto“workaround”oreliminate

them.InEricJennings’sview,“Peoplewilldothethingsthey’lldotominimizetheir

owndiscomfort,leadingtosilosandconcentrationandcentralization.What’sashort-

termgainforthoseparticularpeopleisalong-termlossforeveryoneelse.”Hesaid,

“TheInternetofThingsshouldbecompletelydecentralizedwheredevicescanbe

autonomous,discovereachotherdirectly,establishsecurecommunicationwitheach

otherdirectly,andeventuallypayeachotherinvalue,directlybetweenmachines.”

TheIBMInstituteforBusinessValuehasconductedresearchintowhatitcallsthe

fivemajor“vectorsofdisruption”thatwillincreaseourleverageofphysicalassetsas

theresultoftheblockchain-enabledIoT.

WhileIBMclearlyhasabusinessinterest

intheIoT,itsworkonbusinessvalueisnonethelessveryhelpful.

First,theinstitutenotedthatthesenewnetworkswillenableuserstoinstantly

search,access,andpayforavailablephysicalassets,suchasunderutilizedstorageor

computingcapability.Theassetsinsupplycanmatchthemselvestodemand.Because

wecanassessriskandcreditautomaticallyonlineandrepossessvirtually,wecan

repricecreditandrisksignificantlydownward.Automatedusageofsystemsand

devicesimprovesoperationalefficiency.Finally,firmscancrowdsource,collaborate,

andoptimizewithbusinesspartnersinrealtimethroughdigitallyintegratedvalue

chains.

Inshort,youhaveanopportunitytomakeconceptuallysimpler,moreefficient

markets.Youcanaccesspreviouslyinaccessibleassets,determinepriceinrealtime,

andreduceyourrisk.Oncethebasicinfrastructureisinplace,barrierstoentryare

low(e.g.,justdevelopanapp),andtheongoingcostsalsorelativelylow(e.g.,no

morethird-partyservicefees).Itdrasticallylowersthecostoftransmittingfundsand

lowersthebarriertohavingabankaccount,obtainingcredit,andinvesting.Itcould

evensupportmicropaymentchannels,matchingminute-by-minuteserviceusagewith

minute-by-minutepayment.

TheLedgerofThingsenables“distributedcapitalism,”notjustredistributed

capitalism.Farfromafree-for-all,thesemarketscanbeshapedaccordingtoour

values—asindividuals,companies,andsocieties—andthesevaluescodedintothe

blockchain,suchasincentivestouserenewableenergy,useresourcesfromourclosest

neighborsfirst,honorpricecommitments,andprotectprivacy.Inshort,theLedgerof

EverythingontopoftheIoTanimatesandpersonalizesthephysicalworldevenaswe

sharemore.AsIBMstated,“Atamacroeconomiclevel,weareallwinnersintheIoT

future,eventhoughdifferentindustrieswillexperienceamixofdifferenteffects.”

AccordingtotheMcKinseyGlobalInstitute,theeconomicvalueoftheIoThas,if

anything,beenunderestimated;theeconomicimpact—includingconsumersurplus—

couldbeasmuchas$11.1trillionperyearin2025forIoTapplications.

That’sa10

percentliftoncurrentglobalGDPofwellover$100trillion;that’shuge!

Networkedintelligence,aphrasecoinedinTheDigitalEconomy,referredtohow

thenetworkwouldbesmarterthanitssmartestnodeinonedomainafteranother.As

wehaveexplained,thefirstgenerationoftheInternetdroppedtransactioncosts

somewhat.Wehavefastersupplychains,newapproachestomarketing,andpeer-to-

peercollaborationslikeLinuxandWikipediaonamassivescale,withmany

innovativenewbusinessmodels.Blockchaintechnologywillacceleratethisprocess.

AstheInternetofThingstakeshold,thesetrendswillgointohyperdrive.

THEFUTURE:FROMUBERTOSUBER

We’vecoveredalotofgroundinthischapter.Nowlet’spullallthestrandsof

innovationtogetherinjustonescenario.

ConsiderserviceaggregatorslikeUberandLyft.Uberisanapp-basedride-

sharingnetworkofdriverswhoarewillingtogiveotherpeoplealiftforafee.Touse

Uber,youdownloadtheUberapp,createanaccount,andprovideUberwithyour

creditcardinformation.Whenyouusetheapptorequestacar,itasksyoutoselect

thetypeofcaryouwantandmarksyourlocationonamap.Theappwillkeepyou

postedontheavailabilityandwhereaboutsofyourprospectivedriver.Attheendof

theride,Uberautomaticallychargesyourcreditcard.Ifyoudon’twanttogivethe

defaulttip,thenyouneedtochangeyourbillingsettingsonUber’sWebsite.

Uber

Technologies,Inc.,thecompanybehindthedevelopmentandoperationoftheUber

app,retainsashareofthepricepaidforeveryride.

Itsoundsgreat,particularlyincitieswithasmalltaxifleet.ButUber’sservices

comewithanumberofproblemsandredflags.Driveraccountshavebeenhacked,

ridesaresubjecttosurgepricing,andpassengershavebeensubjecttorecklessdriving

andsexualharassmentorassault.

Uberisalsotrackingusers’everymove,releasing

someofthisinformationtocityofficialsfortrafficstudies.Totopitalloff,drivers

createconsiderablevaluebuttheygettokeeponlypartofit.

Nowlet’simaginetheUberexperienceifitwereadistributedapplicationonthe

blockchain.MikeHearn,aformerGoogleemployeewhoquithisjobtoworkfull

timeonbitcoin,laidoutthisalternativeuniversebasedonbitcointechnologyatthe

2013TuringFestival.

Hearncalledthisnetwork“TradeNet”anddescribedhow,

withthehelpofbitcoin,peoplecouldbegintorelyondriverlessvehicles.

Itworkslikethis.Mostpeopledon’towncars,butrathersharevehiclesina

commons.InChicago,MelissarequestsacarthroughSUber(thinkblockchainSuper

Uber).Alltheavailablevehiclesstartautomaticallypostingoffers,whichMelissa’s

noderanksandpresentstoherbasedonherselectioncriteria.Melissafactorsinhow

muchshe’swillingtopayforfasterroutes(e.g.,higher-pricedtolllanes).

MeanwhileJohn,unlikemostusers,isaSUbervehicleownerandashisself-

drivingcaristakinghimtowork,itidentifiesalltheparkingoptions,bothpublicand

privatelyowned,selectsaspace,andreservesandpaysforitthroughanautonomous

parkingmarketplace.BecauseJohn’spredeterminedparametersalwaysinclude

seekingthecheapestavailablespotwithinaten-minutewalkofhisdestination,he

almostalwaysgoeswithhiscar’sfirstchoice.Theunderlyingparkingdatabasethat

supportstheparkingalsocontainsinformationonparkingrulesforspecificstreetson

differentdaysandatdifferenttimesofday,whetherornottheparkingspaceis

coveredorintheopen,orwhethertheownerofthespacehasestablishedaminimum

price.Allthisrunsonadistributedpeer-to-peerplatform—connectingmultipleapps

—sonocentralizedcompanyismediatingtheordersortakingpartofthefee.Thereis

nosurgepricingandnounexpectedfees.

Whatisstrikingaboutthisproposedmodelisnotthedriverlessvehicles,because

self-drivingcarswillbecommonplace—probablysoonerratherthanlater.Rather,the

carscouldbefullyautonomousagentsthatearntheirownfares,payfortheirownfuel

andrepair,gettheirownautoinsurance,negotiateliabilityincollisions,andoperate

(“drive”)withoutoutsidehumancontrol,exceptwhentheyneedtotakesomeentity—

maybeahumanbeing—tocourt.

Asaconditionofoperating,SUberadministratorscouldprogramthevehicles’

protocolsintotheblockchaintoobeyalltrafficrules,takethemostdirect,fastest,or

leastexpensiveroute,andhonortheirbids.Thedrivers’initialentryandregistration

intotheSUbersystemcouldrequirevehiclestoregisternecessarydocumentation

includingownership,safetyinspections,andinsurance,andthesystemwould

permanentlylogtheserecordstoensurereinspectionorinsuranceandpermitrenewals

asrequired.Sensorscouldmonitortheoverall“health”ofthevehicleandsignal

necessaryrepairs,maketheappointmentattheappropriaterepairshop,andpreorder

anynecessaryparts.Becausethevehiclesaredriverless,they’renotsubjectto

sarcasm,cronyism,sexism,racism,orotherformsofhumandiscriminationor

corruption.Plus,theywon’ttrytopushtheirpoliticsorlinethedashboardwith

incense.Allofthishappensbehindthescenes,betweenobjects,andpoweredbyan

autonomousapplication.Thedrivershavecreatedablockchaincooperativeas

describedinthepreviouschapterandtheyreceivenearlyallthewealththeycreate.

Theusers—MelissaandJohn—experienceonlytheconvenience,withnoneofthe

hassle.What’snottolove?

WheretheInternetreducedthecostsofsearchandcoordination,adigital

currencylikebitcoinontheblockchainwillenableustocutthecostsofbargaining,

contracting,policing,andenforcingthesecontracts.We’llbeabletonegotiatethebest

dealandgetthepromiseddeliveryfromanyotherentitythatwillacceptbitcoin,

includingadriverlesstaxi.HowwilltheUbersoftheworldcompete?

Butthescenariodoesn’tstopthere.Intelligencedesignedintothecity’s

infrastructurewillmovetrafficalong(variablelanedirection,variablepricing,

automatedtrafficsignalmanagementbasedontrafficflow),furtherreducingwasted

energyandcosts.Theblockchaincouldsupportsafetycontrols,bothonthevehicles

(driveranddriverless)and/orontheinfrastructure,suchasproximitywarningsand

automatedbraking,aswellasantitheftorpreventionofunqualifiedorinebriated

driversfromtakingthewheel.Inaddition,citieswillusethesensorstohelpmanage

thetransportationinfrastructure,includingassetmanagementofinfrastructureand

fleets,monitoringraillineandpavementconditions,generatingmaintenanceplans

andbudgets,anddispatchingrepaircrewswhennecessary.

What’strulypowerful,thesystemsworktogether—intelligentvehiclesoperating

onanintelligentinfrastructure.Whiletherewillstillbebusinessfordriversofshared

vehicles,autonomousvehicleswillbeabletooperatesafelyoncitystreetswiththeir

built-innavigationandsafetysystems,ofteninteractingwiththeintelligent

infrastructuretofindandpayforanacceleratedlane,orparking,ortosearchforand

findapreferredroute.Thereadyavailability,affordability,andreliabilityofthe

autonomousvehicleswillsignificantlyreducethenumberofprivatevehiclesthat,like

thecommercialrealestateexampleabove,areoftenjustparkedwaitingandunused.

Anditwon’tjustbetechnologyorcarcompaniesthatwillmakethishappen.

Whileallofthiscould,intheory,bedeveloped,owned,operated,andmanagedbya

singlecivictransportationauthority,thatislikelynottobethepathforward.SUberis

morelikelytoevolveandinnovateasanopenandsharedtransportationplatform,

withvariousapplicationsdevelopedandintroducedbylocalentrepreneurs,

communitygroups,government,andothersineitheraprofit-making(throughrevenue

earnedonafleetofdriverlessvans),sharedco-op(aneighborhoodgroupinvestsin

tenvehiclestobereservedandsharedusingtheSUberapp),publicservice

(maintainingandoperatingatrainorexpressbusesonhigh-demandroutes),orsocial

enterprise(not-for-profitsinvestinginSUber“points,”whichtheirclientscanaccess

whentheyneedtransportation).

Thismayemergefirstinjurisdictionswithrelativelyadvancedinfrastructure,

alreadyseparatetransportationcorridors(rail,road,bike,pedestrian),significant

transportationissues(trafficcongestion),andapopulationwithalongtraditionof

obeyingtrafficrules.Itmayalsobeginin“greenfield”citydevelopmentsin

cooperationwithtechnologycompaniesandcarcompanieslookingfortestbedsfor

theirapplications.Anyscenarioinvolvingdriverlessvehicleswouldbeless

successful,evenhighlydangerous,whenotherroaduserscannotbeisolated(on

separatecorridors),orpredicted(animalsontheroad),orcontrolled(distracted

pedestrians).

TheSUberscenarioisincreasinglyfeasible.Suchapplicationswilllikelyemerge

inthenextfewyearsandcometosolveourtransportationneedsoverthelongterm.

Alreadytoday,localtaxiandlimousinecommissionsarebattlingUberinmanycities.

Citygovernmentsarestrugglingtobalanceconsumerdesireforaffordableoptions

withpublicsafetyandtaxilicensing,evenasthenewmodelsareseemingly

inevitable.Whynotlookwherethetransportationsectorisgoinganddesignsolutions

thatbestmeetthecity’sneeds,asChicagohasdoneinourhypotheticalSUber

scenario?

HACKINGYOURFUTUREFORAWORLDOFSMARTTHINGS

We’veseenthroughoutthischaptersomemind-bogglingopportunitiesinvirtuallyall

aspectsofourlives,including—perhapsespecially—manyareasbarelytouchedby

thefirstwaveofthedigitalrevolution.Atthesametime,theseopportunitiesthreaten

existingbusinessesandwaysofdoingbusiness.

KeyIssues:Whatshouldyouasamanagerbedoingonbothsidesofthis

equation—torealizenewopportunities,whileminimizingthreats?Whetheryou’rea

managerinthepublic,private,orsocialsector,doyouhaveun-orunderutilized

physicalassetsthatcanbetappedforgreatervalue?Areyourealizingthegreatest

possibleefficienciesandopportunitiestodevelopproductsandtechnologiesforthe

IoTitself?Arenewentrantsintothiseconomytakingyourcustomersandreducing

yourrevenuesthroughinnovativenewapp-basedbusinessmodelsthatyoushouldbe

installingfirst?

NewValue:Whatareyourphysicalassetsandhowcanyouenhancethemto

delivergreatervaluetoyourorganizationorcommunity?Doyouhavephysical

spaces,machines,inventory,orotherassetsthatyoucouldtag,monitor,andanimate

aspartofanautonomousnetworkwhereyouestablishtheoperatingparametersto

driveoutcostsoraddvalue?Couldyouembed,upgrade,andprogramsensorsaspart

ofalargernetworkforgreaterfunctionalityandvalue?Couldyougleannew

informationfromanIoTnetworktoimproveyourplanningandanalysisforthe

future?

NewBusinessModels:Whatopportunitiesexistfornewproductsandservices

basedonthenewfunctionalityanddatayoucouldgatherthroughyournetwork?

Couldyourinformationandassetsearnrevenuebecauseoftheirvaluetoothers,for

example,rentingoutthatexpensivepieceofequipmentwhenyou’renotusingit?

Thinkingaboutthevalueofinformationisnotnew(rememberSabreandAmerican

Airlines?),butstilloverlooked.

Opportunities:Couldyoulinkyournetworkupwithothersforevengreater

value,perhapsaspartofanend-to-endsupplychainordistributionandsaleschannel?

Asanindustry,aretheresharedprocessesandfunctionsthatcouldbeautomatedby

utilizingtheblockchain?Areyouenablingthisinteroperabilitybyusingtechnology

builtonopenstandardsandvettedthroughinternationalcollaboration?

Threats:WhatlinesofbusinesswillnewentrantsattackwiththeirnewIoT-based

businessmodelstoservemarketsthatyoucurrentlyserve?Forexample,ratherthana

one-timesaleofavehicle,consumergood,orpieceofspecializedequipment,isthere

ongoingvalueforyouandyourclientsinanewservicemodelbuiltuponyour

ongoingconnectiontothatequipment?Canyoucapitalizeuponyourexisting

expertise,resources,infrastructure,andcustomerloyaltytodesignnewIoT-based

businessmodelsthatdecreasethe“space”and,therefore,thelikelihoodofentryofa

disruptivenewplayer?

BusinessCase:Whatarethecostsandbenefitsoftheseopportunities?Where

doestherealvalueexistforyourorganization?Areyousolvinganactualbusiness

problemorneedorjustleadingwiththetechnology?Howaboutdevelopingaproof

ofconceptwithaleadingclient?

StrategicPlan:AccordingtoMcKinsey,“executiveswillneedtodealwiththree

setsofchallenges:organizationalmisalignment,technologicalinteroperabilityand

analyticshurdles,andheightenedcybersecurityrisks.”

Weaddafourthmajor

challengetothislist—buildinginprivacyandanincentiveplan,includingappropriate

safeguards,fromthebeginning.HowwillITandbusinessfunctionshavetoadaptto

theIoT?Whichpartsoftheorganizationandbusinessleadersshouldyouinvolve?

CHAPTER7



SOLVINGTHEPROSPERITYPARADOX:

ECONOMICINCLUSIONANDENTREPRENEURSHIP

APIGISNOTAPIGGYBANK

hePacificcoastofNicaraguaisoneofthemostbeautifullandscapesinthe

Americas,whereverdantgreenforestmeetsendlessbluewaters.Itsrollinghills

andstunningbeachesmakeitatopdestinationforbackpackers,sunbathers,and

ecotouristsalike.Nicaraguaisalsooneofthepoorestandleastdevelopedcountriesin

theregion.Sixtypercentofthepopulationlivesbelowthepovertyline.Thosenot

employedinitstourismindustrysurviveonnear-subsistence-levelagricultureand

fishing.Nicaraguahasthesecond-lowestnominalgrossdomesticproductinthe

Americas,with10percentofitsentireGDPfromremittances—moneyearned

overseasandrepatriatedbytheNicaraguandiaspora.NineteenpercentofNicaraguans

haveaformalbankaccount,butonly14percentareabletoborrowandonly8percent

haveformalsavings.

Yet93percenthaveamobilephonesubscription,usuallyinthe

formofprepaidaccess.

ThatistherealitythatJoyceKimfacedwhenshetookherteamdownto

Nicaragua.KimistheexecutivedirectoroftheStellarDevelopmentFoundation,a

not-for-profitblockchaintechnologyorganization(nottobeconfusedwithStellar,the

largearchitectureandconstructionfirm).ANicaraguanmicrofinanceoperation

wantedtolearnmoreaboutStellar’sfinancialplatform.Thewoefullyunderdeveloped

bankingindustryinNicaraguakeepsmostpeopleinaninescapablecycleofpoverty

andexacerbatestheplightofwould-beentrepreneurs.Theystruggletostartnew

businesses,registertitlestotheirlandandotherassets,andresolveoutstandingclaims

fromtheSandinistagovernment’smasslandexpropriationinthe1980s.

Stellar’s

platformwouldenableNicaraguanstotransfer,save,invest,borrow,andlendmoney.

Kimwasbothimpressedandsurprisedbythelocalfocusonmicrocredit.She

understoodthataccesstocreditwasparamounttoeconomicinclusionbutbelieved

thatsavings,theabilitytostorevaluereliablyandsecurely,wasaprerequisitefor

almostallotherfinancialservices.WhenKimaskedaboutsavings,shewastold,“Oh,

savingsisnotaproblemaroundhere.Peoplehavepigs.”

Livestockmakesupthevastmajorityoffarmers’networthinmanyagrarian

economiesbecausefinancialservicesarenotwidelyavailableandindividualshavea

tenuousrighttotheirland.InNicaraguathatmeanspeopleownpigs,andlotsofthem.

Kimwassurprisedatfirst,butquicklysawtheage-oldlogictoit.“Youwalkoutofa

meeting,andyoulookaroundandyouseepigsareeverywhere.”

Livestockhaslong

beenanaccepted,relativelyusefulformofsavings.Forthoseexcludedfromthe

digitaleconomy,animalsareaboutasliquidanassetasyoucanown,evenmoresoif

theyproducemilk,andtheypaydividendsinpiglets,eggs,lambs,calves,and

sometimescheese.

Prosperityisarelativeconcept.InKenya,Masaitribesmenwhoownfourtofive

hundredheadofgoatsareconsideredprosperous,buttheirlivescanberough,brutish,

andshort.Livestock-basedwealthis“highlylocalized,sothatyoucan’tactually

transactwithanybodyunlessthey’rerightthereinfrontofyou,”Kimsaid.“Yourun

thehugeriskswithyouranimalsrunningawayorgettingsickorsomeblightcoming

thatcouldactuallywipeoutallofyoursavings.”

Creditwasaneventoughernuttocrackthansavings.Kimgottoknowalocal

Nicaraguanfisherman,amemberofacooperative,whoexplainedthatnoone

fishermaneverhasaccesstoenoughcredittooutfitanentirerig.AccordingtoKim,

“theyformfishermencrewswhereonepersonwillgetaloanforthenet,somebody

elsewillgetaloanforthebait,somebodyelsegetsaloanfortheboat,somebodyelse

aloanforthemotor,andthentheycometogetherandtheyformacrew.”Noone

personisabletofloathisorherownventure(nopunintended)becauseaccessto

creditissotight.Themodelworks,butitinvolvesasmanymiddlemenasthereare

fishermen.

ThelifelongfinancialstruggleoftheNicaraguanfishermenandfarmersisthe

storyofmostunbankedpeople,aroundtwobillionadultsintheworldtoday.

What

theylack—astoreofvaluethatwon’tgetmadcowdiseaseordieofoldage,ora

paymentmechanismthatextendsbeyondthevillage—wetakeforgranted.

Financialinclusionisaprerequisiteforeconomicinclusion.Itsrepercussions

extendbeyondfinance.Kimsaid,“Idon’tconsiderfinancialaccessandfinancial

inclusiontobetheendgoal.It’sapathweallhavetowalktogetbettereducation,

betterhealthcare,equalwomen’srights,andeconomicdevelopment.”

Inshort,

financialinclusionisafundamentalright.

Thischapterlooksatopportunitiesformobileandfinancialserviceprovidersand

otherbusinessestouseblockchainstounleashtheeconomicpotentialatthebottomof

thepyramid.We’retalkingbillionsofnewcustomers,entrepreneurs,andownersof

assets,onthegroundandreadytobedeployed.Remember,blockchaintransactions

canbetiny,fractionsofpennies,andcostverylittletocomplete.Anyonewiththe

smallestofassets—say,atalentforembroideryormusic,sparewaterpails,achicken

thatlayseggs,amobilephonethatrecordsdata,audio,andimages—couldexchange

value.Thenewplatformalsoeliminatesthepoint-of-accessbarrier.Ifyoucanaccess

theInternetonamobiledevice,thenyoucanaccessassetswithnoformstofillout

andverylittleliteracy.Theseareseeminglysmallbutincrediblyimportant

breakthroughs.Ifwedothisright,blockchaintechnologycouldunleashthebiggest

untappedpoolofhumancapitalinhistory,bringingbillionsofengaged,prospering

entrepreneursintotheglobaleconomy.

THENEWPROSPERITYPARADOX

Forthefirsttimeinmodernhistory,theglobaleconomyisgrowingbutfeware

benefiting.Ononehand,thedigitalageisbringinglimitlesspossibilitiesfor

innovationandeconomicprogress.Corporateprofitsareballooning.Ontheother

hand,prosperityhasstalled.Throughoutmodernhistory,individualsandfamiliesat

the51stpercentilewereontherise.Despitedepressionsandupheavals,prosperityfor

theseindividuals,andforsocietyasawhole,steadilyincreased.Thisisnolongerthe

case.Standardsoflivingareevendeclininginthedevelopedworld.Medianwages

arestagnatinginOECDcountries.And,accordingtotheInternationalLabour

Organization,youthunemploymentinmostoftheworldisstuckatabout20percent.

“Youngpeople[are]nearlythreetimesaslikelyasadultstobeunemployed,”theILO

reported.

Inmanydevelopingnations,thenumbersaresignificantlyhigher.Such

unemploymentiscorrosivetoallsocieties,nomatterwhattheirlevelofdevelopment.

Mostcitizenswanttocontributetotheircommunity.Anyonewhohasbeenjobless

knowshowiterodesself-esteemandwell-being.Thosewithpowerandwealthare

gettingahead,andthosewithoutarefallingbehind.

Thisnewprosperityparadox,nottobeconfusedwiththeintergenerational

“ParadoxofProsperity”coinedbyeconomistssuchasGilbertMorris,hasbefuddled

everypolicymakerintheWesternworld.Oneofthebest-sellingbusinessbooksof

2014,CapitalintheTwenty-FirstCenturybyThomasPiketty,becamethe#1best

sellerontheNewYorkTimeshardcovernonfictionlistin2014.Atourdeforceof

academicscholarship,Capitalexplainswhyinequalityisacceleratingandwilllikely

continuetodosoaslongasthereturnoncapitalexceedslong-termeconomicgrowth.

Therichhavegottenricherbecausetheirmoneymadethemmoremoneythantheir

workdid.Hence,theproliferationofnewmillionairesandbillionaires.Buthis

solutionforhowtostemgrowingsocialinequality,byimposingawealthtaxonthe

oneswhoownmostoftheworld’swealth,wassomewhatlessinspiring,ifonly

becausewe’vehearditbefore.

Indeed,foraslongascapitalismhasbeenthe

primarymodeofproduction,thedebateabouthowtosharethefruitsmoreequally

hasnotmovedmuchbeyondtheredistributionofwealth,usuallythroughtaxationof

therichandtheprovisionofpublicservicestothepoor.Advocatesofourcurrent

economicmodelpointtothehundredsofmillionsofpeopleinthedevelopingworld

(mostlyinAsia)whohavebeenliftedoutofabjectpoverty,butoftenoverlookthe

asymmetricbenefitsconferredtotheverywealthyandthewideningchasmbetween

thesuperrichandtherestofthepopulationinthosesamecountries.Today,theglobal

1percentownshalftheworld’swealthwhile3.5billionpeopleearnfewerthantwo

dollarsaday.

Defendersofthestatusquoarequicktopointoutthatmostoftheworld’s

superrichgotrichbycreatingcompanies,notthroughinheritance.However,behind

thesuccessesofafewaresomeverytroublingstatistics.Therateofnewbusiness

formationisdown.IntheUnitedStates,theshareoftotalfirmsthatareyoungerthan

oneyearoldfellbynearlyhalfbetween1978and2011,from15percentto8

percent.

Themillennialgeneration,oftcharacterizedasentrepreneurialrisktakers,

isdoinglittletobuckthetrendandmaybecontributingtoit.Arecentanalysisof

FederalReservedatafoundthatonly3.6percentofAmericanhouseholdsheadedby

someoneunderthirtyheldastakeinaprivatecompany,downfrom10.6percentin

1989.

Inthedevelopingworld,thedigitalrevolutionhasdonelittletoclearthe

entrepreneurialpathofredtapeandcorruption.Whereitcostsonly3.4percentofper-

capitaincometostartabusinessinOECDcountries,itcosts31.4percentinLatin

Americaandashocking56.2percentinsub-SaharanAfrica.InBrazil,an

entrepreneurhastowaitalmost103daystoincorporatehiscompanyversus4daysin

theUnitedStatesandhalfadayinNewZealand.

Exasperatedbygovernmentbloat

andinefficiency,manywould-bedeveloping-worldentrepreneursinsteadchooseto

operateintheso-calledinformaleconomy.“Thereareabunchofthingstakenfor

grantedintheWest.Propertyrecordsarefine-tuned,forexample.IntheGlobalSouth,

entrepreneurswouldratherthegovernmentnotknowtheyexist.Weneedtomake

identityaprofitableproposition,”saidHernandodeSoto.Fornow,stayinginthe

shadowsfreestheseentrepreneursfrommeddlesomeandcorruptofficials,butitalso

profoundlylimitstheirabilitytogrowtheirbusiness,limitsrights,andmakes“dead

capital”ofmoneythatcouldotherwisebedeployedmoreefficiently.

Moreover,

evenforthosewhooperatetheirbusinessesintheopen,lawsofmanycountriesdo

notprovideforlimitedliability.Ifyourbusinessfails,you’repersonallyonthehook

forallliabilities.IfyoubounceabusinesscheckinmanyArabcountries,yougo

straighttojail—“donotpassgo”oranyotherinstitutionsofdueprocessontheway.

Okay,then,theworldhasalwayshadhavesandhave-nots.Todayfewerpeople

starvetodeath,ordiefrommalariaorthroughviolentconflict.Fewerpeoplelivein

extremepovertytodaythanin1990.

Certainemergingeconomieshavebenefited

fromoutsourcingofmanufacturingandliberalizationofeconomicpolicies—China

beingaprimeexampleofboth—andthemeanincomeofcitizensinmostdeveloped

countriesincreased.Onbalance,peoplearebetteroffthantheyusedtobe,right?So

whatiftherichjusthappentoownsignificantlymore?Shouldn’ttheykeepwhat

they’veearnedthroughtheirefforts?What’stheproblem?

Pikettypointedatcapitalism.Butcapitalism,asasystemfororganizingthe

economy,isnottheproblem.Infact,capitalismisagreatwaytocreatewealthand

prosperityforthosewhoknowhowtouseit.Theproblemisthatmostpeoplenever

getashotatseeingthebenefitsofthesystembecausetheRubeGoldbergmachineof

modernfinancepreventsmanyfromaccessingit.

Financialandeconomicexclusionistheproblem.Fifteenpercentofthe

populationinOECDcountrieshasnorelationshipwithafinancialinstitution,with

countrieslikeMexicohaving73percentofthepopulationunbanked.IntheUnited

States,15percentoverfifteenyearsofage,or37millionAmericans,areunbanked.

Financialinequalityisaneconomicconditionthatcanquicklymorphintoasocial

crisis.

In2014,theWorldEconomicForum,amultistakeholderorganizationwhose

membersincludethelargestcompaniesandmostpowerfulgovernmentsintheworld,

arguedthatgrowinginequalityposedthesinglebiggestriskglobally,beatingout

globalwarming,war,disease,andothercalamities.

Blockchaincouldbethe

solution.Byloweringbarrierstofinancialinclusionandenablingnewmodelsof

entrepreneurship,thetonicofthemarketcouldbebroughttobearonthedreamsand

ideasofbillionsoftheunbanked.

ProsperityPurgatory:AnExerciseinFutility

Forcenturies,bankshavereliedonnetworkeffects.Eachsuccessivecustomer,

branch,product,dollarin,anddollaroutincreasesthevalueofthebank’snetwork.

However,buildingthesenetworkshascomeatacost.Specifically,thecostof

acquiringaprofit-turningcustomerhasonlyincreased.Ifaprospect’smoneywon’t

earnitskeep,thebankwon’tbeinterestedinkeepingit.Thus,bankshavelittle

economicincentivetowincustomersinthebottomhalfofthepyramid.Accordingto

TylerWinklevoss,banksdon’tservemostoftheworldandhavenoexistingplansto

servethem.However,newtechnologycouldremovethatstep.Hesaid,“Alotof

Africancountriesleapfroggedtheinfrastructureoflandlinetelecomswithcellular.

Theyskippedthatstep.Blockchainwillhavethegreatestimpactinareaswherethe

paymentnetworksdon’texistorareverypoor.”

Blockchainwillpushmanynascent

initiatives,suchasmobile-moneyserviceproviderslikeM-PesainKenya,ownedby

Safaricom,andmicrocreditoutfitsglobally,intohighgearbymakingthemopen,

global,andlightningfast.

Abankisthemostcommonfinancialinstitution,andsowewilluseitasan

examplehere.Howdoyouopenabankaccount?Ifyouliveinthedevelopingworld

today,youwilllikelyhavetovisitthebranchinperson.InNicaragua,thereareonly7

bankbranchesper100,000peoplecomparedwith34per100,000intheUnitedStates.

NicaragualookswellbankedcomparedwithmanycountriesinAfrica,wherethere

canbefewerthan2branchesper100,000people.

Soyouwillprobablyhaveto

travelagooddistancetofindabank.Youwillalsoneedtobringagovernment-issued

identitycard,butthatwillbejustasdifficulttocomebyifyoudon’talreadyhave

one.

Inthedevelopedworld—say,theUnitedStates—youneedtomeetcertain

requirements.Whiletheserequirementsvaryfrombanktobankandstatetostate,you

typicallyneedtodepositandmaintaina$100to$500minimumbalance.Youalso

needtoproveyouridentity.BanksthatdobusinessintheStatesmustcomplywith

stringent“knowyourcustomer,”“anti–moneylaundering,”and“anti–terrorism

financing”regulations.

Andsotheymustdomorecomprehensivebackground

checksonapplicantsbeforegrantingthemanaccount.Ultimately,thebankisless

interestedinevaluatingyourcharacterthanitisincomplyingwithregulatory

agencies.Thatmeansalaundrylistofrequirements.First,youneedaSocialSecurity

card.Don’thaveone?That’susuallyenoughtogetrejected.HowaboutaphotoID

likeadriver’slicenseorpassport?Don’thaveone?You’renotopeningabank

account.Let’ssayyouhavebothaSocialSecuritycardandphotoID.Thebank,just

tobesafe,asksforarecentutilitybillasproofofpermanentresidenceorsomeproof

ofapreviousbankaccount.Ifyouhappentobenewtotown,orstayingwithfamily,

orfromanentirelyunbankedregionoftheworld,you’dlikelyfailsomeofthesetests.

Thebankdoesn’twantyouasacustomerunlessitcanconfirmyouridentitybasedon

variouspaperedcredentials.It’snotinterestedinknowingyouasawell-rounded

person.It’sinterestedinknowingyouasasetofcheckedboxes.Previousattemptsto

streamlinethisprocessforimmigrantsandthepoor,suchastheNewYorkschemeto

allowpeopletousetheircityIDcards,havefailed.

TheProsperityPassport:AnExerciseinUtility

Fortunatelyfortheunbanked,blockchaintechnologyisengenderinganewformof

financialidentity—onenotdependentuponone’srelationtoabankbutrootedin

one’sownreputation.Inthisnewparadigm,being“banked”inthetraditionalsenseis

nolongeraprerequisite.InsteadofpassingthetraditionalIDtests,individualscan

createapersistentdigitalIDandverifiablereputationanddeployit,inwholeorin

part,indifferentrelationshipsandtransactions.TheblockchainendowsthisdigitalID

withtrustandaccesstofinancialservices.Thiscapabilityisunprecedentedata

massivescale.JosephLubinofConsenSyssaid,“Weallhavereputation.Itjustisn’t

easytouseassocialandeconomicsystemsarecurrentlyconstructed.Mostofitis

etherealandephemeral.Inthebestcase,itisfragmentedandyouhavetopresent

shallowdocumentationofitanewforeveryventurethatrequiresit.Intheworstcase,

billionsofpeopledon’thaveawayofpresentingreputationtoanybodybuttheir

immediatesocialcircle.”

Itmightaswellbeapigoracow.However,withthebasic

buildingblocks,peoplecanconstructdigitalidentitiesthatarenotfragmentedor

etherealbutuniversalandstandardized,withrobustattestationsofaspectsof

themselvesandtheirinteractions.TheycansharethesedigitalIDsgranularly—thatis,

shareonlyveryspecificinformationabouttheiridentity—tofacilitatemore

interactionsthatwilllikelyleadtotheirownpersonaleconomicgrowthand

prosperity.DavidBirch,acryptographerandblockchaintheorist,summeditup:

“Identityisthenewmoney.”

Considerthepossibilities:theunderbankedoftheworldcanenfranchise

themselvesastheyinteractwithmicrolendingoutfits.Potentialvendorsorlenderscan

tracktheirusageandrepaymentoftinyloans,previouslyunfeasible,onthe

blockchainratherthanrelyonsomecreditscore.“Onceapreviouslyunbankedperson

paysbackamicroloan,theyareontheirwaytosecuringmoreandlargerloansto

buildtheirbusinesses,”

saidLubin.Thisbehavior,whenrepeated,addstothe

reputationscoreoftheborrower.Combinedwithaglobal,frictionlesspayment

platform,individualsandsmallbusinessownerscandothepreviouslyimpossible:

payaremotevendorformerchandiseorservices,therebyadvancingtheirprospectsin

theglobaleconomy.JoyceKimmused,“Whatifwecouldcreateacreditscorefor

womenbasedontheirhouseholdhistory?”

Economicandfinancialfaultlinesoften

runalongsidegenderlines,makingthistechnologyaboonfortheworld’s

disenfranchisedwomen.Referringtotheglobalpoor,deSotosaid,“It’snotthatthey

don’twanttocomeintotheglobaleconomy.It’sthatthestandardsandinformationto

bringthemintothesystemarenotinplace.Blockchainisterrificbecauseitgivesusa

commonplatformtobringpeopletogether.”

Whatcouldthispersistentreputationmeanforglobalentrepreneurship?Ifyou

haveareliable,unique,androbustidentity,andyou’redeemedtrustworthy,

counterpartieswillfeelmorecomfortableprovidingyouwithaccesstovalue.Thisis

notredistributionofwealthbutawiderdistributionofopportunity.HalukKulin,CEO

ofPersonalBlackBox,said,“Thebiggestredistributionthatisabouttohappenisnota

redistributionofwealthbutaredistributionofvalue.Wealthishowmuchmoneyyou

have.Valueiswhereyouparticipate.”

Blockchaincanenableeverypersontohavea

uniqueandverifiablereputation-basedidentitythatallowsthemtoparticipateequally

intheeconomy.Theimplicationsofthisequalityareprofound.Lubinimaginesa

futurewherethe“unbankedandunderbankedwillbecomeincreasinglyenfranchised

asmicrolendingserviceswillenableinvestorsacrosstheglobetoconstructdiverse

portfoliosofmanymicroloansofwhichtheusageandrepaymentcanbetrackedin

fulldetailontheblockchain,usingBalanc3’s[aConsenSysportfoliocompany]triple-

entryaccountingsystem,forinstance.”

Inthisnewfuture,whenpeoplerepay

microloans,theyareontheirwaytosecuringmoreandlargerloanstobuildtheir

businesses.

ROADMAPTOPROSPERITY

Financialidentityisthegenesisforawidearrayoffinancialandeconomic

opportunitypreviouslyunattainableformorethantwobillionoftheworld’s

population.Blockchaintechnologyenablespeoplefromallwalksoflifetomapout

theirownprosperity.Imaginethat,awealthofone’sown—forlargenumbers,

ultimatelybillionsofpeople.

ToolsofAbundance:Themostbasicrequirementstoparticipateinaneconomy

aretoolslikeamobilephoneandsomekindofInternetaccess,theportalthrough

whichpeopleinteractwithdifferentvaluesystems.Dr.BalajiSrinivasan,managing

partneratAndreessenHorowitzandalectureratStanfordUniversity,said,“Ifyou

canaccesstheInternetonamobilephone,suddenlyyou’reabletoaccessallthese

otherthings.Youcanaccessabankoratleastthemechanismsforit.”

Blockchain

technologycreatesawholenewsetofbusinessmodelspreviouslyunimaginablethat

empowerindividualsaseconomicagents.

PersistentIdentity:Youcanuseandportidentityintodifferentnetworksto

establishreputationinafinancialtransactionortoplugintodifferentsocialnetworks.

Suddenly,apignolongerhastobethefamilypiggybank.Newpaymentrailsand

meanstostorevalueandtransactwithcounterpartieswillopennewfrontiers.Indeed,

thisloweringofbarrierstofinancialinclusionwillmakeiteasierthaneverfor

entrepreneursinthedevelopedanddevelopingworldaliketobuildbusinesses.This

includeseverythingfromturningonapaymentmechanism,tohavingareliablestore

ofvalue,tousingblockchainsoftwaretomanagefinancialstatements.

DemocratizedEntrepreneurship:Undertherightconditions,entrepreneursare

theenginesofeconomicgrowthinsociety.Theybringfreshthinkingtothe

marketplaceandfuelthecreativedestructionthatmakesmarketeconomiesprosper.

Blockchaintechnologybestowsindividualsandsmallcompaniesanywhereinthe

worldwithmanyofthesamecapabilitiesoflargerorganizations.Blockchain-based

ledgersandsmartcontractslowerbarrierstostartingacompany,expedite

incorporation,andcutredtapeparticularlyinthedevelopingworld,whereittakes

threetimeslongertoincorporateandcostsfivetimesasmuch.

Blockchainscanautomate,streamline,andotherwisedramaticallyimprovethe

threecomponentsofbusinessbuilding:formation,fund-raising,andsales.Formation

costswilldropsignificantly,asblockchainisatrusted,knownwaytoincorporatea

business.Youcanseeownershipandmaintainrecordseasily,especiallyhelpfulin

areaswheretheruleoflawisabsent.Financingacompanyiseasierasyoucanaccess

equityanddebtcapitalonaglobalscale,andifyou’reusingacommondenominator

—likebitcoin—youneednotworryaboutexchangeratesandconversionrates.Sales

becomeafunctionofaccessinganyonewithaconnecteddevice.Buyersdon’tneeda

creditcard,localcurrency,orbankaccount.

Throughsecureandimmutableledgers,entrepreneurswillbeabletoregistertheir

businessandtitleofcorporateassets;manageinventory,payables,andreceivables;

andleverageotherfinancialmetricsthroughtriple-entryaccountingsoftwareand

otherblockchain-basedapplications,reducingtheneedforauditors,taxlawyers,and

othervendorswhoweighonsmallbusinesses.

Regulatorsmightcutsmall

businessesabreakforoptingintoatriple-entryaccountingscheme.Thatmeansmore

tothebottomlineandlesswastedtime.Asthecompanygrows,reconcilingcorporate

actionsanddocumentationwillbecomelesscomplex.Throughsmartcontracts,an

entrepreneurcouldautomatemanyaspectsofacompany’soperations:purchase

orders,payroll,interestondebt,andfinancialauditsinrealtime.Twonewmodelsfor

individualentrepreneurshipwillgaintraction:

METERINGEXCESSCAPACITY.Fromthecentralizedsharingeconomytothe

distributedmeteringeconomy,individualswillbeabletoloanouttheirsparebeds,

wheelbarrows,oxen,andothertangibleandintangibleassetstopeersinanetwork

basedonreputationscores.Blockchainenablespreviouslyimpossiblerevenue

streamssuchasmeteringWi-Fi,electricitygeneratedfromroof-installedsolarpanels,

Netflixsubscriptions,latentcomputingpowerinyourphone,andotherhousehold

appliances—allthroughmicropaymentsandsmartcontracts.Theblockchainbecomes

anewutilityforindividualstocreatevalueandearnincomeinnontraditionalways.

MICROMONETIZINGDATA.Parentswhoworkinthehomeandfamilycaregiversof

allkindswholabortirelesslyoveryoungchildrenandagingparentscanatlast

monetizetheireffortsandberecognizedforthevaluetheydelivereveryhourofthe

day.Thisisnotadeveloped-worldopportunityexclusively.Bigcompaniesare

lookingforwaystomarkettopeopleintheglobalSouthbutoftenlacktherightdata

tomakebusinessdecisions.Contractingandlicensingpersonaldatacouldbeagreat

opportunitytoaddanewrevenuestreamforayoungentrepreneurwhileheis

launchinghisnewblockchainIPO.Today,hugedigitalconglomerateslikeFacebook

andGoogleharvestpetabytesofdataaboutbillionsofpeople.Weenterintoa

Faustianbargainwherewegiveupdatainexchangeforcoolservices,butwelose

privacyanddataintegrityintheprocess.Blockchainturnsconsumersintoprosumers.

Nikemightliketoknowwhatyouateforbreakfast,howoftenyougoforarun,and

whetheryouarethinkingofbuyingnewworkoutgear.Whynotcontractthatdatain

exchangeforNikepointsorrealmoney?Let’sgoonestepfurther:Insurance

companiesaresearchingforthebestdatatomakeactuarialcalculations.Yourown

data—howmuchyouexercise,ifyousmoke,whatyoueat—areveryvaluableto

them.Enterintoalicensingagreementwhereeverytimetheyuseyourdatatomake

anactuarialcalculationandpriceanewproduct,yougetamicropayment.

DistributedOwnershipandInvestment

We’removingintoaperiodofhumanhistorywherebyverylargenumbersofpeople

canbecomeownersofwealththroughdistributedledgertechnology.Enablingaccess

totheworld’sfinancialmarketsandthereforetheuniverseofinvestment

opportunities,fromconventionalinvestmentstoparticipationinmasscollaborative

ventures,microlendingschemes,blockchainIPOs,andreputation-based

microlending,willopenaccesstocapital.Already,crowdfundingischangingtheface

offinance.In2012,nonblockchaincrowdfundingcampaignsraised$2.7billion

aroundtheworld,an80percentincreaseovertheyearbefore.Withdirectpeer-to-

peercrowdsourcedblockchainfinancings,thesenumbersarepoisedtogrow

manifold.Individualscancontributesmallamountsofmoneythroughcrowdfunding

campaigns.Imagineacampaignthatengagesamillionpeopleeachgivingadollar.

Callitdistributedownership.Notmeaningful,yousay?Augur,thepredictionmarket

platform,raisedmillionsofdollarsinsmallincrementsfromthousandsaroundthe

globe.Therangeofpossibilitiesisvast.BlockchainIPOsnotonlycanimprovethe

efficacyandefficiencyofraisingmoney,loweringthecostfortheissuer,theycan

alsobebroadlyinclusive,allowingpreviouslyunimaginablegroupsofburgeoning

investorstoparticipate.Todate,therangeofproposalstochangeincomeandwealth

disparityhasnotreachedbeyondhighertaxesforthewealthyontheoneend,or,atits

mostextreme,outrightexpropriationbythestate.Insteadofredistributingand

expropriatingwealth,let’simaginehowblockchaincancreateopportunitiestoshare

moreequallyinthewealthcreatedbysociety.

REMITTANCES:THESTORYOFANALIEDOMINGO

AnalieDomingo

hasbeenworkingasanannyandhousekeeperfortwenty-five

years.Oneofmorethan200,000Filipino-bornpeoplelivinginToronto,

herstoryis

fairlytypical:SheleftthePhilippinesasayoungwomantosettleinCanadawithno

savings,noformaleducation,andverylittleknowledgeofheradoptivecountry.

Analiehasworkedveryhardandhascarvedoutalifeforherselfandherfamily.Ten

yearsago,sheusedhersavingstoputadownpaymentonahouse,aremarkablefeat

asshehadbeendutifullysendingmoneytoherfamilyinthePhilippinesforthe

previousthreehundredmonths.Analiesenthomesomuchmoneythathermother,

nowinherseventies,wasabletopurchaseahomeofherowninManila.

Analiegraciouslyagreedtoletusjoinheronpaydaytodocumentherexperience.

OnFridayafternoon,Analiegotherpaycheck,handwrittenbyheremployer,and

walkedittothelocalbank.Thistookfifteenminutes;twentyminutesifyouinclude

thelineupattheteller.Aftershedepositedit,shewithdrew$200Canadian.Coldhard

cashinhand,shewalkedablocktocatchalocalbus.Insteadofheadingtowardher

home,shewenttwomilesintheoppositedirectionandgotdroppedoffatwhatcan

onlybedescribedasabadneighborhood.Shewalkedforanotherfourblocksand

finallyarrivedatthe“financialinstitution”fromwhichshewouldsendthemoney:an

iRemitcounteratthebottomofahousingblockinToronto’sSt.JamesTown—oneof

thepoorestandmostnotoriouslydangerousneighborhoodsinCanada.Becausemany

peoplewhouseiRemit’sservicesareunbanked,thecompanyhasbegunoffering

otherfinancialservices,suchascheckcashing.Analiefilledoutapaperform,asshe

hasdonehundredsoftimesbefore,andhandedoverherhard-earnedmoney.Fora

$200wire,Analiepaidaflatfeeof$10.Onthereceivingend,herseventy-year-old

motherenduredasimilarlytaxing(andequallyridiculous)trektoreceivethemoney.

Ofcourse,shehadtowaitthreetofourdaysbeforegoingtothebank,theaverage

timethesepaymentstaketogetprocessed.Analiewalkedbacktothebusstop,

boardedthebus,asubway,andanotherbus,andeventually,onehourlater,reached

herhome.

Thecostofsendingthatremittance,$10,isequalto5percentofthetotalvalue.In

addition,thereistypicallyaspreadontheexchangerateofaround1to2percent.At

around7percentthisisaslightdiscounttotheinternationalaverageof7.68percent.

Thattheyareboth“banked”andstillhavetogothroughthisprocessmakesthewhole

farcicalroutinemoreegregious.Thehardcostfailstocapturetheall-incost.For

example,thetimevalueofthetwohoursAnaliewasteddoingthisisequaltoanother

$40,basedonherwages.Moreover,shehadtoleaveworkearlybecauseshefeels

unsafegoingtotheneighborhoodwhenit’sdark.Forhermother,aseptuagenarian

livinginManila,thephysicaltollonherbodyofmakingthejourneytopickupthe

moneyisequallysignificant.Thepurchasingpowerofthe$10Analieforwentto

makethetransactionhappeniscertainlymaterialtoher,butfarmoreforhermother.

WhereasinCanada$10isthecostofamealandbusfare,inManilaitcouldbuyfood

foraweek.Overherlifetime,Analiehaspaidthousandsofdollarstointermediaries

suchasWesternUniontosendmoneyhome.Eachmonthlyfeecontributestoaglobal

honeypotof$38billioninfeespaidannuallyonremittances.

Remittancesoffundssentbacktotheirhomelandsbypeoplelivingindistant

locationsconnectdiasporasglobally.Diasporasareglobalcommunitiesformedby

peopledispersedfromtheirancestrallandsbutwhoshareacommoncultureand

strongidentitywiththeirhomeland.

Oneofthefunctionsofmanyoftoday’sdiasporasistoaddressandhelpsolve

common,globalproblems.Remittancesrepresentoneofthelargestflowsofcapitalto

developingcountriesandcanhaveanenormouslypositiveimpactonthequalityof

thelivesofsomeoftheworld’smostvulnerablepeople.Insomecountries,

remittancesareahugeandvitalcomponentoftheeconomy.InHaiti,forexample,

remittancesaccountfor20percentofGDP.ThePhilippinesreceives$24billionevery

yearinremittances,or10percentofGDP.

AccordingtotheInternationalMonetary

Fund,recipientsusuallyspendremittancesonnecessities—food,clothing,medicine,

andshelter,meaningremittances“helplifthugenumbersofpeopleoutofpovertyby

supportingahigherlevelofconsumptionthanwouldotherwisebepossible.”

Remittanceflowstodevelopingnationsareestimatedtobethreetofourtimesaslarge

asforeignaidflows.

Thepositiveeffectsofremittancesonthepoorindeveloping

countriesarewellunderstood,yetdespitethisenormouseconomicinjection,

remittancecostsarestillappallinglyhigh.Insomeofthemostexpensivecorridors

betweennations,feesonremittancescanrunnorthof20percent.

Canadaisoneofthelargestnetsendersofremittancesintheworld.InOntario,

Canada’slargestprovincebypopulationandlargesteconomy,3.6millionpeople

identifyasbeingforeignbornandeveryyearbillionsofdollarsleavetheprovincein

theformofremittances.

Analie’sstoryisnoteworthybecauseitisthenormin

Canada.

ConsidertheDufferinMall,alsoinToronto.Onmostdaysthemallseesasteady

flowoftrafficandcouldbemistakenforanyothershoppingcenterinCanadaorthe

UnitedStates.ButeveryThursdayandFridayaroundfiveo’clockintheevening,

somethingentirelydifferenthappens.Paychecksinhand,thousandsofforeign-born

Canadiansdescendonthemalltosendremittancesfromthemall’svariousbanksand

foreignexchangedealerstoneedyfamilymembersintheirhomecountries.Acottage

industryofforeignexchangedealersandWesternUnionoutpostshaspoppedupin

conveniencestores,bars,andrestaurantsinthesurroundingareatodealwiththe

overflow.

Oftentimestravelingbybus,streetcar,orsubway,withchildrenintowand

exhaustedfromalongday,TorontoniansspeakingFilipino,Cantonese,Spanish,

Punjabi,Tamil,Arabic,Polish,andotherlanguagesgettothemall,andthenstandin

longlineswaitingforthechancetosendtheirhard-earnedmoneyhome.Thesedays,

mostpeoplepassthetimeontheirsmartphones,chattingoverWhatsApp,Skyping

friendsandfamilyinTorontoandabroad,playinggames,andwatchingvideos.More

oftenthannot,ittakesupwardsofaweekforthismoneytoarriveatitsintended

destination,atwhichpointsomeoneonthereceivingendneedstogothrougha

similarlytedious,time-consumingprocess.

What’swrongwiththisscenario?Justabouteverything.Let’steaseoutthebright

spots.Remember,mostofthepeoplewaitinginlinewereusingsmartphones,a

technologythatispervasiveinCanadaandincreasinglyubiquitousglobally.Seventy-

threepercentofCanadiansownasmartphone,andinTorontothenumberisalmost

certainlyhigher.Thecountryhasawirelessnetworkinfrastructureamongthebestin

theworld,whichmeansthatnotonlycanmostCanadiansownasmartphone

(effectivelyasupercomputer),buttheycanalsouseittoharnessthepowerofthe

mobileWebinwaysthatwouldhaveseemedlikesciencefictiontwodecadesago.

Whydothosepeoplewaitinlinetosendmoneyviaaphysicalpointofsaleusing

decades-oldtechnologyinsteadofwhattheyhaveattheirfingertips?Dollarsarealot

lessdataintensivethanHDvideo.Infact,accordingtoSkype,videocallingconsumes

500kilobitspersecond.

Sendingonebitcointakesabout500bits,orroughlyone

one-thousandththedataconsumptionofonesecondofvideoSkype!

Bydisintermediatingtraditionalthirdpartiesandradicallysimplifyingprocesses,

blockchaincanfinallyenableinstant,frictionlesspayments,sothatpeopledon’twait

inlineforanhourormore,travelgreatdistances,orrisklifeandlimbventuringinto

dangerousneighborhoodsatnightjusttosendmoney.Today,anumberofcompanies

andorganizationsareleveragingthebitcoinprotocoltolowerremittancecosts.Their

goalistoputbillionsofdollarsintothehandsoftheworld’spoorestpeople.These

industrieshavebeencontrolledbyahandfuloffirmsthathaveusedtheirunique

positioningandlegacyinfrastructuretoproducemonopolyeconomics.Buttheytoo

seetheriskfromthistechnologyandthey’rescared.AccordingtoEricPiscini,who

leadsDeloitte’scryptocurrencygroup,companiesinthepaymentspacetoday“are

reallynervousaboutwhattheblockchainisactuallydoingtothem.WesternUnion,

MoneyGram,iRemit,andothersareverynervousaboutthedisruptiontotheir

businessmodel.”

Theyshouldbe,asthereisanemergingindustryofnewand

disruptivecompaniesthatplantotaketheirplace.

Well,Luke,MyFriend,WhatAboutYoungAnalie?

Therearetwomainobstaclestocreatingablockchain-basedpaymentnetworkforthe

world’spoor.First,manyofthepeoplesendingthemoneygetpaidincashandthose

onthereceivingendliveinapredominantlycash-basedeconomy.Second,most

peopleinthedevelopedanddevelopingworldalikedon’thavetheknowledgeand

toolstouseblockchaineffectively.Whilecashmayverywellgothewayofthedodo,

untilemployersstartbeamingvaluetosmartwalletsinthedevelopedworld,andtiny

streetsidemerchantsinManila,Port-au-Prince,andLagosstartacceptingdigital

payments,wewillstillneedhardcurrency.WesternUnionunderstandsthat,andthat’s

whyitisstillveryrelevanttoday,withmorethan500,000agentsallovertheworld.

Ifyou’relookingtoexchangeyourremittanceforcash,youroptionsarelimited.

WesternUnionwouldn’tbeeffectiveifithadonlyoneagent.Itsnetworkhasallowed

ittomaintainamonopolypositionontheentiremarketfordecades.Therehavebeen

fewifanycompanieswithaseamless,easy-to-use“killerapp”technology.Untilnow.

EnterAbra,andothercompanieslikeit.WithanamelikeAbra,onewouldexpect

toseealittle“cadabra,”andthecompanydoesnotdisappoint.Abraisbuildinga

globaldigitalassetmanagementsystemonthebitcoinblockchain.Itsstatedmission

istoturneverysmartphoneintoatellerthatcandispensephysicalcashtoanyother

memberofthenetwork.WewantedtotestwhetherthissolutionimprovedAnalie’s

experience.

AnalieandhermombothdownloadedtheapptotheirAndroidsmartphones.

Analie’sbalancetostartwasinCanadiandollars.Attheclickofabutton,Analie

initiatedthetransfertohermom.Shegotit,inpesos,almostinstantly.Atthispoint,

hermomhadthechoiceofkeepingpesosonherphoneasastoreofvalueand

choosingtospendthematagrowingnumberofmerchantsthatnowacceptAbraasa

paymentsystem.Bycreatingapaymentmechanismandstoreofvalue,Abra

effectivelydisplacestheconventionalbankingsystem’stwomostessentialroles:

paymentsandvaluestorage.Thisaloneisarevolutionaryconcept,buthere’swhereit

getsreallyinteresting:Momwantscash.Shepaysherrent,buysherfood,and

managesvirtuallyallotherexpensesincash.Shecheckstheappandnoticesthereare

fourotherAbrauserswithinafour-blockradiusofher.Shemessagesthemalltosee

whowillexchangeherdigitalpesosforphysicalpesosandatwhatprice.Thefour

comebacktoherwithdifferent“bids”fortheirservices.Onepersonwilldoitfor3

percent,anotherfor2percent,andtwomorefor1.5percent.Momdecidestogowith

thetelleroffering2percent—notbecauseit’sthecheapestbutbecausethistellerhasa

five-starratingandhasagreedtomeetherhalfway.Theymeetandsheswapsher

Abrapesosforphysicalpesos,thetellermakeshiscommission,andtheybothwalk

awayhappy.Abratakesa25-basis-pointfeeonconversion.

Theentireprocess,frommoneyleavingTorontototheFilipinorecipientholding

cash,takeslessthananhourandcosts25basispointsnet,inclusiveofforeign

exchangeandallothertransactioncosts.WhereaseveryWesternUniontransaction

requiresuptosevenoreightintermediaries—correspondingbanks,localbanks,

WesternUnion,theindividualagents,andothers—theAbratransactionrequiresonly

three:twopeersandtheAbraplatform.“Igetitnow.That’sreallycool!”saidAnalie,

ecstatically.

ForAbratoscaleglobally,itmustaddresstwocorechallenges.First,thenetwork

requiresacriticalmassoftellerstomaketheserviceconvenient.Analie’smomwon’t

useitifthenearesttelleristwentymilesaway.Abraunderstandsthis,anditis

presigningtellers—atlastcountmanythousandsinthePhilippinesalone—whoare

readytotransactwhenthingsgolive.Second,themodelworksontheassumptionthat

tellersandcustomerswillabidebytheircommitmentwhentheytransferdigitalfor

physicalcurrency.Thisislessofaconcern.BusinesseslikeAirbnb,LendingClub,

andZipcarhavedebunkedthemyththatindividualswillnottrustoneanother.Indeed,

forAbraCEOBillBarhydt,thestaggeringgrowthinthenumberofso-calledsharing

economycompaniesconvincedhimthiswasn’tanissue.“Peoplearewillingtotrust

eachotherfasterthanthey’rewillingtotrustaninstitution,”hesaid.

Thesmartphoneiskeytoallofthis.Inthesamewaythesmartphoneallowsyou

torentyourapartmenttosomeoneelseorrentyourcartosomeoneelseorprovide

ridesharingtosomeoneelse,itcanalsobeusedasanATM.Barhydtsaid,“It’s

amazingwhatpeoplearewillingtodoinasharedeconomymodelandthey’rejustnot

doingitformoneyyet,maybewiththeexceptionofpeer-to-peerlending.”Moreover,

hesaid,“It’smoreimportanttousthatyoutrusteachotherratherthanAbra.Ifyou

trusteachother,it’shighlylikelythatyou’regoingtogettoknowAbra,andthat

you’regoingtolikeitandyou’regoingtohaveagoodexperience,”andultimately

trusttheplatform.

Abraisnotaremittanceappbutinsteadanewglobalplatformforvalueexchange

thatcombinesinequalmeasurethedistributed,trustlessblockchainnetwork,the

powerofsmartphonetechnology,andtheveryhumaninclinationtowanttotrust

peersinanetwork.Byofferinguserstheabilitytostorevalueintraditional

currencies,transmitvalueacrossthenetwork,andalsopayatagrowingmerchant

network,AbratakesonnotonlyWesternUnion,butalsothecreditcardnetworks,

likeVisa.AccordingtoBarhydt:

ThesettlementrailsforaWesternUniontransaction,andthesettlementrails

foraVisatransaction,areverydifferent.ButthesettlementrailsforanAbra

transactionthat’susedforbothperson-to-personpayment,aswellasperson-

to-merchantpayments,areexactlythesame....Wehavecomeupwitha

singlesolutionthatworksdomesticallyorcross-border,andthatcanbeused

forbothperson-to-personpaymentsandperson-to-merchantpaymentsfor

thefirsttime.

Abramighteventuallybecomeaglobaljuggernaut,rattlingthewallsofthe

biggestfinancialinstitutionsintheworld.Butfornow,it’sanelegantandsimple

solutiontoanimportantglobalproblem.Withremittancestoppinghalfatrillion

dollarsnextyear,themarketopportunityisnothingtosneezeat.

BLOCKCHAINHUMANITARIANAID

CanblockchainfundamentallytransformhowNGOs,governments,andindividual

donorsdeliverforeignaid?Hundredsofbillionsofdollarsofaidflowannuallyinto

developingnations,yetthemacroeconomiceffectsofaidarenotalwaysclear.

There

isampleevidencetosuggestthatcorruptofficials,localstrongmen,andother

intermediariesstealmuchofitlongbeforeiteverreachesitsintendedsource.More

troubling,accordingtotheJournalofInternationalEconomics,an“increasein

governmentrevenuesmaylowertheprovisionofpublicgoods.”Thereportconcluded

that“largedisbursementsofaid,orwindfalls,donotnecessarilyleadtoincreased

welfare.”

Organizationalbloatandleadershipcorruptioncombineforlotsofwaste

andgreaterdisparitybetweenhavesandhave-notsinthepoorestcountries.Thisis

truefordirectforeignaidfromgovernmenttogovernmentbutalsoforNGOsthatput

bootsonthegroundinhard-hitplaces.

Wetouchedbrieflyonthequestionofforeignaidinourintroduction.Let’s

exploreitfurther.RecallthattheRedCrosscameunderfireintheaftermathofthe

2010HaitiearthquakeafterastudyconductedbyProPublica,anindependent,not-for-

profitnewsorganization,andNationalPublicRadiofoundtheorganization

squanderedfundsanddidnotfulfillmanyofitscommitmentssuchasbuilding

130,000newhomes.Itbuiltonlysix.

Initsdefense,theRedCrossarguedthat

Haiti’sshoddylandtitleregistryhindereditsefforts:nobodycouldfigureoutwho

actuallyownedtheland.Asaresult,theRedCrossimprovisedalessdesirable

solution.Couldablockchain-basedlandtitleregistryimprovethissituationby

providingcleartitleandperhapspreventunlawfulexpropriation?

Foreignaidisperhapstheclearestexampleoftheineptitudeofmany

governmentsandtherent-seekingbehaviorofunethicalintermediaries,andisthus

excellentgroundstoexploreblockchainsolutions.The2010Haitiearthquakewasone

ofthemostdevastatinghumanitariancrisesofthepasthundredyears.

Whilethe

governmentwasparalyzedandthecrisisragedon,thousandsof“digital

humanitarians”convergedontheInternettohelpfirstresponderscollect,triage,and

visualizepleasforhelpfrommobilephonesofdevastatedHaitians.Originallyformed

onlinebylike-mindedvolunteers,theseadhocgroupsbecameincreasinglyorganized

andeffectiveamidthecrisis.Oneinparticular—CrisisCommons—madeareal

difference.CrisisCommonsexemplifiesaglobalsolutionnetwork,anemerging

nonstatenetworkofcivilsocietyorganizations,companies,andindividuals,

collaboratingtosolveamajorproblem.Thedigitalrevolutionhasenablednew

networkstoconnectandcollaborateacrossbordersandcansolveproblemsand

enableglobalcooperationandglobalgovernance.TheInternetmakesallthispossible.

Neverbeforecouldpeopleorganizecollectivelytocreateapublicgoodastheydidin

Haiti.ThisinformationlayeroftheInternetprovedvital—providingcritical

connections,know-how,anddataforpeopleinneedandvolunteerorganizations

alike.Imagineiftherewasalsoavaluelayer.Whatkindofpossibilitiescouldthat

enable?

Theblockchaincanimprovethedeliveryofforeignaidintwoways.First,by

disintermediatingthemiddlemenwhoactasconduitsoflargeaidtransfers,itcan

reducethechronicproblemofoutrightmisappropriationandtheft.Second,asan

immutableledgeroftheflowoffunds,itcompelslargeinstitutions,fromaidgroups

togovernments,toactwithintegrityandabidebytheircommitments.Iftheydon’t,

peoplewillbeabletoseetheirmalfeasanceandholdthemtoaccount.

OnecouldeasilyimagineUNICEFortheUN’swomen’sinitiativeusingthe

blockchaintogetfundingdirectlytowomenandchildrenwithouthavingtogo

throughlocalpowerstructures.Individualsinpoorcountriescouldsignupforcertain

benefitsthroughadistributedledgermanagedbyanetworkofdifferentaidgroups

actingasnodesonthenetwork.Whenparticularaidisdelivered—say,vaccinations

fromtheRedCrossorschoolsuppliesbyUNICEF—those“transactions”canbetime-

stampedontheledger.Thiswouldreduceorperhapspreventaidgroupsaccidentally

doublespendingonparticularpeopleorcommunities,thusspreadingthebenefitsof

aidmoreequitably.

Indeed,UNICEFhasbegunexploringcryptocurrencies.InJune2015,UNICEF

announcedthelaunchofUnicoin,adigitalcurrencythatchildrencan“mine”by

submittinganinspirationaldrawingtotheprogram.Thecoinsarethenexchangedfor

anotepadandpencil.

Thisisasmallstart,buttheopportunitiesarelimitless.It’snot

fartoimaginethehypotheticalweposedinchapter1—orphanagesinvillagesall

aroundthedevelopingworldworkingwithUNICEFtosetupaccountsforeachchild

fromthemomenttheyarrive.Donationscouldbesplitonaproratabasisintoeach

kid’spersonalindividualaccount.Governments,strongmen,andothercorrupt

officialssimplycouldn’taccessit.Thepoorestandmostvulnerablechildreninthe

worldwouldhavethefundstostartalifewhentheymoveintoadulthood.Thisis

attainablewithblockchain.

Naturaldisasterrelieforprovisionsforthepoorcannotallbepeertopeer,of

course.Oftentimes,institutionsarenotonlydesirablebutalsoessential.Butthe

blockchaincanradicallyimprovethetransparencyofhowthoseorganizations,and

otherinstitutionsintheforeignaidvaluechain,function.Everydollardonatedtothe

RedCrosscouldbetrackedfromitsstartingallthewaythroughthevaluechaintothe

individualitdirectlybenefits.Recallourhypotheticalinchapter1—theRedCross

couldruncrowdfundingcampaignsforeachofitsmostimportantinitiatives—

deliveringmedicalaidandfightingthespreadofdisease,waterpurification,the

rebuildingofhomes—andwhenyoudonateyouwouldknowwhetheryourdollar

wenttoaplankofwood,agallonofwater,oragauzeBand-Aid.Iffundswent

missing,thecommunitywouldknowandcouldholdtheseorganizationsaccountable.

Smartcontractscouldbeemployedthatholdtheaidgroupsthemselvesaccountable.

Thefundsformajorprojects—fromhousinginitiativestotheimplementationofa

waterpurificationscheme—couldsimplygointoescrowandbereleasedonlyafter

thesuccessfulcompletionofkeymilestones—securingtitleforasite,importingraw

materials,signingacontractwithalocalsupplier,buildingthefinishedproduct,

installingacertainnumberofcleanwateraccesspoints—isachieved.Theresult?

Radicallyimprovedtransparencyandaccountabilityinthedeliveryofforeignaid,and

thussignificantimprovementsintheendresults.

Foreignaidisthesecond-largestfundtransferfromdevelopedtodeveloping

nations,afterremittances.Blockchaintechnologycanenabletransparency,

accountability,andmoreefficientoperationsforwell-meaningNGOsandbetter

deliveryofcriticalservicesintimesofcrisisandinnormalcircumstances.Ofcourse,

thereareamultitudeofimplementationchallenges—thingsthatmustbeovercome.

Peopleonthegroundwillneedtoknowhowtousethistechnology.Mobilephone

networkscouldfailinthemidstofacrisis.Craftycriminalelementsandcorrupt

governmentsmightstillfindwaystodefraudthepooranddestitute.Butarethese

reasonsnottoexplorethistechnology?No.Thesituationtodayisdysfunctionaland

inmanycasesplainlybroken.Empoweringindividualsandholdingaidgroups

accountablewillmeanmoreaidinthehandsoftherightpeople.Alleviatingpoverty

andaddressingcatastrophiccrisesisthefirstrungoftheladdertoglobalprosperity.

Let’stakeachanceonblockchain.

Microfinance:Peer-to-PeerAidwithPicopayments

Microfinanceisanindustrythattranscendsbothfinancialservicesanddevelopment

aid.Ratherthandeliveringaidfromthetopdown,microfinanceinstitutions(MFIs)

trytoempowerindividualstosave,invest,andbuildsmallbusinesses.Moreoften

thannot,theytaketheformofcommunalsavingsco-ops,wheremembersofthe

communitycometogethertopooltheirfundsandloanthemouttooneanotherfor

short-termneeds.Whenimplementedandmanagedproperly,microfinanceoutfitscan

deliverarealbenefittostrugglingcommunities:theyreducechronichunger,increase

savingsandinvestment,andinmanycasesempowerwomen.

However,therearesomeproblemswithMFIstoday:First,thereisverylittle

oversightintohowtheyarerunandoccasionallytheyenablepredatoryloansand

coerciveloanrecoverymethods,strainingcommunitiesandaddingtotheir

desperation.Second,inlightofthis,governmentsindevelopingcountrieshavefound

thatthebestwaytocurbbadbehavioristooutlaworseverelyrestrictMFIs

altogether,aswasthecaseinIndiain2010,followinganMFIcontroversy.

Third,

fundsdon’talwaysendupintherighthands.Thereisnowaytoensurethatthe

communitymemberwhoneedsthemoneythemostreceivesit.Fourth,theyarestill

largelyregional,limitingbothfundsandalsoopportunitytoinvestandsave.

So,peoplewhoareworkingonpovertywillaskthemselves,wheredoesthe

blockchainfitinthemixoftools?Howcanitimproveonwhatwe’redoing?

First,itwillimproveadministrativeaccountability.Aswithcorporate

transparency,donorswillbesimilarlyattractedtoanynonprofitoutfitthatusesthe

blockchainforgreatertransparencyandaccountability.Additionally,ifmicroloansare

recordedtotheblockchainandcustomersofanMFIaregrantedpermissiontoaccess

them,thentheycanholdthoseoutfitsmoreaccountableforbadbehavior.What

would-beborrowerorsaverwouldchoosetheopaqueandmurkywhenshecan

choosetheopen?

Second,itcanmeanbetterprotectionofwomenandchildren.Throughsmart

contracts,fundscanbedonatedintoescrowaccounts,accessibleonlybywomen,say,

foraccessingfood,feminineproducts,healthcare,andotheressentials.Themencan’t

takeitoutoftheirhandstobuycigarettesorbooze,ortogamble,whichcanbea

persistentproblemwithmoneyfromsavingsormicrofinance.

Third,itwillenablepeopletosourcefundsandopportunityworldwide,andwill

attractdonorsworldwide.Communitiesaretypicallylimitedbygeographyinwhich

MFItheyuse.Inthefuture,awould-beborrowercouldgoonlineandsourcethebest

bidsfromanumberofpotentiallenders,findingtheonewiththebestrates,terms,and

reputation.FormalMFIswillcontinuetoexist,ofcourse,buttherewillbeeasier

waystoconnectpeersthroughblockchainthatwillmakethemlessnecessary.

Finally,blockchainpaymentrails,suchasbitcoin,arebasicallytailor-madefor

small,disenfranchisedborrowersbyenablingtinypayments(picopayments,wecall

them)andbydroppingcostsclosetozero.Inaworldwhereeverypennycounts,users

shouldbeabletopaybackloans,withdrawfunds,andsaveintinyincrements,allof

whichwasfarmorechallenginginapreblockchainworld.Theyshouldalsobeableto

doitinstantlyandefficiently,giventhatdespiteabjectpovertyinmanypartsofthe

world,cellphonepenetrationandInternetconnectivityarebecomingcommoditized.

SAFEASHOUSES?THEROADTOASSETOWNERSHIP

LandtitleregistrationiswhatHernandodeSotoreferredtoasanonmarketed

transaction,aneconomicexchangegenerallyinvolvingalocalgovernment.

Nonmarketedtransactioncostsincludetheresourceswastedbywaitinginline,

trackingdownownership,completingandfilingpaperwork,cuttingthroughredtape,

resolvingdisputes,greasingthepalmsofofficialsandinspectors,andsoon.

These

costsarerampantinpooreconomieswheresystemsareweakandgovernment

officialsareknowntobehavewithoutintegrity.Hondurasissuchaplace,thesecond-

poorestcountryinCentralAmericawithanextremelyunequaldistributionofincome.

Theeconomicdownturnof2008stymiedtheinflowofremittances,andamilitary

coupoustedthedemocraticallyelectedManuelZelayain2009.Thecoupwasbacked

byoneoftheregion’slargestlandowners,apalmoiltycoonwhobenefited

significantlyinearlierlandgrabsthatcoercedAguáncampesinostoselltheirland

titles.

Sincethemid-1990s,theWorldBankandotherglobalNGOs

havepoured

$125.3millionplustechnicalexpertiseintoHondurasfordesigningandmanaging

land-relateddevelopmentprojectsthatwouldacceleratethecountry’sgrowth.

We

cameacrossplanstoincorporatespatialdatainfrastructuresthatwouldsupportthe

geotaggingofdataonlandandnaturalresourceownershipandusage,climaticand

naturalhazards,andsocioeconomicconditionsthatmunicipalitiescouldusetoinform

strategicplanningandinvestment.Therewasalsomentionofintegratingdatabasesof

landprojectswithdatabasesofenvironmentalanddisastermanagementprojectsat

nationalandlocallevels.

Veryambitious.

Theproblemisthattherearestillallegationsofpervasivecorruptioninproperty

registry,landsales,anddisputeresolution,includingaccusationsagainstthe

middlemen,judges,andlocalbureaucrats.AccordingtotheOfficeoftheU.S.Trade

Representative,thepropertyregistrationsystemisstillhighlyunreliable.

Householdsinruralvillagesweresystematicallypassedoverduringlandtitle

registrationofresidences,usuallytheirmostvaluableasset,becausethegovernment

limitedtheWorldBank’sjurisdictiontourbanzones.Inruralareas,thecash-strapped

campesinosbenefitedleastfromlandadministrationprograms.Ruralpovertyhasnot

decreasedinHondurassince1998.Ambiguityandcorruptionmanifestthemselvesin

titledisputesalloverthedevelopedworld.IfHonduraswastosufferacatastrophic

naturaldisaster,asHaitididin2010,aidorganizationsliketheRedCrosswouldbe

similarlyhamstrunginuntanglingthemessoftitlestodeliversafe,durablehousing.

“Whatiftherewasauniversalledgerthatcouldincludeallthesedataandinfuse

trustintoahighlyuntrustworthysituation?Blockchainseemstobeparticularlygood

athandlingtransactions,whichnoneoftheothersystemsnecessarilyare,”saidde

Soto.“Thefactispoorcountriesarebynatureverycorrupt,andsohavingyour

transactionledgerineverynodewithsafetyproceduresmakesthesystemefficient,

cheap,andfast,butitisalsothekindofthingthatthepoorwanttoobecauseit

protectstheirrights,”headds.

Here’showitworks:Theblockchainisanopen

ledger,meaningthatitcouldresideonthedesktopsoftheHonduranofficialswho

neededtoreferenceit,themobiledevicesoffieldworkerswhoinputdata,and

citizenswhowanttomaintainacopy.It’sadistributedledger,meaningthatnoneof

thesepartiesownsit,andit’saP2Pnetwork,meaningthatanybodycouldaccessit.In

jurisdictionslikeHonduraswheretrustislowinpublicinstitutionsandpropertyrights

systemsareweak,thebitcoinblockchaincouldhelptorestoreconfidenceandrebuild

reputation.

That’swhattheTexas-basedstart-upFactomplanstodoincooperationwiththe

HonduranregimeandinpartnershipwithEpigraph,atitlesoftwarecompany.

Factom’spresident,PeterKirby,said,“Thecountry’sdatabasewasbasicallyhacked.

Sobureaucratscouldgetinthereandtheycouldgetthemselvesbeachfront

properties.”Headdedthat60percentofHonduranlandisundocumented.Thegoalof

theproject,whichhasnotbeensigneddefinitively,istorecordthegovernment’sland

titlesontheblockchainledger.KirbytoldReutersthatHondurascouldleapfrog

legacysystemsusedinthedevelopedworldbydeployingFactom’sblockchain

technology,anditwouldeventuallymakeformoresecuremortgagesandmineral

rights.

“Documentationforownershipfrompatentstohousesisextraordinarily

paper-based,andthere’snoreasonitshouldbe,otherthanhistory.Blockchainworks

withanytransactionorinteractionwherepropertyrightsandtimingmatters,”

said

KausikRajgopal,whoheadsupMcKinsey’sSiliconValleyofficeandpayments

practice.

Attheendofthedaywedon’tknowwhethertheHondurangovernmentwill

enforcelandtitlesregisteredontheblockchainorsustainitsuse.Inpreviousland

registrationattempts,thegovernmenthasbackedawayfromtheadditionalcostsof

scalingupandincludingmorepeople.Butiftheledgerdeliversreliable,tamperproof

data,thenNGOscouldgettheadditionaldatatheyneedtoinformandinfluence

policydecisionsandgovernance.Ifiteliminatesfiveofthesixstepscurrently

requiredtoregisterlandinHonduras,andcutsthelengthoftimefromtwenty-two

daystotenminutes,thenthosenonmarketedtransactioncostsdroptonearlyzero.

Andperhapsitwouldenablejournalistsandrightsadvocatestoshamelargeglobal

corporationsintonotpurchasingorbuildingonorsourcingtimberorwaterfromland

thathasbeendesignatedforenvironmentalprotectionorhashistoricallybeenusedby

thecampesinosorindigenouspeoplewithoutcompensatingthemfairly.We’re

hopeful!

IMPLEMENTATIONCHALLENGESANDLEADERSHIPOPPORTUNITIES

Blockchaintechnologyisobviouslynotapanaceafortheworld’seconomicand

financialwoes.Technologydoesnotcreateprosperity;peopledo.Thereareobstacles

toovercomeandopportunitiesforleadership.Thefirstistechnical.Accordingto

InternationalTelecommunicationsUniondata,therearestillsignificantgapsin

Internetconnectivity,eitherbecausethetelecommunicationsinfrastructureispooror

becauseserviceisunaffordable.

Thesecondisliteracy.Usingsmartphonesandinteractingonlinerequiresa

workablelevelofliteracy.IntheUnitedStates,18percentofadultsovertheageof

sixteenreadbelowthefifth-gradelevel,30percenthavelowmathliterary,

and43

percentoftheseilliterateadultsliveinpoverty.

Literacyishighlyuneveninthe

developingworld.InmanypartsofAfrica,literacyhoversaround50percent,andthe

problemisevenmoreseverewhencomparingthegenders.Forexample,inplaceslike

Afghanistan,Niger,SierraLeone,Chad,Mozambique,andotherpoornations,thegap

betweenmaleandfemaleliteracyisastaggering20percent.

Thethirdiscorruption.Blockchainisapowerfultool,butlikealltechnologies,it

isnotinherentlygoodorbad.Peoplecanharnessbrillianttechnologies,from

electricitytotheradioandthroughtotheInternet,forbenevolentormalevolentgoals.

Weneedleadershipfromtheinstitutionsinsocietythatcanleverageblockchain

technologyforgood,suchasaidgroups,civilsocietyorganizations,companies,and

governments,rightdowntotheindividualswhoareconnectingtothisvastnetwork.

Onlywhenthesechallengeshavebeenmetandovercomewillblockchaintechnology

fulfillitspotentialasaninstrumentofglobalprosperityandpositivechange.

CHAPTER8



REBUILDINGGOVERNMENTANDDEMOCRACY

heRepublicofEstoniaisaBalticstatewithLatviatothesouthandRussiatothe

east.Withapopulationof1.3million,ithasslightlyfewerpeoplethanthecityof

Ottawa.

WhenEstoniaregaineditsindependencefromtheformerSovietUnionin

1991,ithadanopportunitytocompletelyrethinktheroleofgovernmentandredesign

howitwouldoperate,whatservicesitwouldprovide,andhowitwouldachieveits

goalsthroughInternettechnologies.

Today,Estoniaiswidelyregardedastheworldleaderindigitalgovernment,and

itspresident,ToomasHendrikIlves,willbethefirsttosayso:“We’reveryproudof

whatwe’vedonehere,”hetoldus.“Andwehopetherestoftheworldcanlearnfrom

oursuccesses.”

Estoniarankssecondofallcountriesonthesocialprogressindexforpersonaland

politicalrights,tiedwithAustraliaandtheUnitedKingdom.

Estonia’sleadershave

designedtheire-governmentstrategyarounddecentralization,interconnectivity,

openness,andcybersecurity.Theirgoalhasbeentofuture-proofinfrastructureto

accommodatethenew.Allresidentscanaccessinformationandservicesonline,use

theirdigitalidentitytoconductbusiness,andupdateorcorrecttheirgovernment

records.WhilemuchofEstonia’sworkpredatestheblockchain,thecountry

introducedakeylesssignatureinfrastructurethatintegratesbeautifullywith

blockchaintechnology.

Centraltothemodelofe-Estoniaisadigitalidentity.Asof2012,90percentof

EstonianshadanelectronicIDcardtoaccessgovernmentservicesandtravelwithin

theEuropeanUnion.

Thechipembeddedinthecardholdsbasicinformationabout

thecardholderaswellastwocertificates—onetoauthenticateidentityandoneto

provideadigitalsignature—andapersonalidentificationnumber(PIN)oftheir

choice.

Estoniansusethesetovote,review,andedittheirautomatedtaxformsonline,

applyforsocialsecuritybenefits,andaccessbankingservicesandpublic

transportation.NoneedforbankcardsorMetrocards.Alternatively,Estonianscando

thesamewithmobile-IDontheirmobilephones.In2013,Estonianssubmittedover

95percentoftaxeselectronicallyandconducted98percentofbankingtransactions

online.

ParentsandstudentsuseEstonia’se-Schooltotrackassignments,curriculum,and

grades,andtocollaboratewithteachers.Estoniaaggregatesinrealtimediversehealth

informationfromvarioussourcesintoasinglerecordforeachcitizen,andsothese

recordsdon’tresideonasingledatabase.EachEstonianhasexclusiveaccesstohis

ownrecordandcancontrolwhichdoctorsorfamilymembershaveaccesstothese

dataonline.

Since2005,citizenshaveusedi-votingfortheirnationalelections.UsingtheirID

cardormobile-ID,Estonianscanloginandvotefromanywhereintheworld.Inthe

2011parliamentaryelection,citizenscastalmost25percentofballotsonline,upfrom

5.5percentinthepreviousparliamentaryelection.Thepeopleobviouslylikeandtrust

thesystem:thenumberwentupagainforthe2014EuropeanParliamentelectionsin

whichathirdofvotersparticipatedovertheInternetfromninety-eightdifferent

countries.TheEstoniancabinetusesapaperlessprocessandmakesalldraft

legislationaccessibleonline.Theaveragelengthofweeklycabinetmeetingshasgone

fromaroundfivehourstounderninetyminutes.

Estoniahasanelectroniclandregistrythathastransformedtherealestatemarket,

reducinglandtransfersfromthreemonthstoalittleoveraweek.

Inthelastfew

years,Estoniahaslauncheditse-Residencyprogram,whereanyoneintheworldcan

applyfora“transnationaldigitalidentity”andauthenticationtoaccesssecure

services,encrypt,verify,andsigndocumentsdigitally.Anentrepreneuranywherein

theworldcanregisterhisorhercompanyonlineinfewerthantwentyminutesand

administerthecompanyonline.ThesecapabilitiescontributetoEstonia’simageasa

digitalcountry.

Noneofthiswouldworkorbeacceptablewithoutsolidcybersecurity.AsMike

Gault,CEOofGuardtime,noted,“Integrityisthenumber-oneproblemincyberspace

andthisiswhatEstoniarecognizedtenyearsago.Theybuiltthistechnologysothat

everythingongovernmentnetworkscouldbeverifiedwithouthavingtotrust

humans...itisimpossibleforthegovernmenttolietoitscitizens.”

Estonia’scybersecurityderivesfromitskeylesssignatureinfrastructure(KSI),

whichverifiesanyelectronicactivitymathematicallyontheblockchainwithout

systemadministrators,cryptographickeys,orgovernmentstaff.Thiscapability

ensurestotaltransparencyandaccountability;stakeholderscanseewhohasaccessed

whichinformation,when,andwhattheymayhavedonewithit.Consequently,the

statecandemonstraterecordintegrityandregulatorycompliance,andindividualscan

verifytheintegrityoftheirownrecordswithouttheinvolvementofathirdparty.It

lowerscosts:therearenokeystoprotect,andnodocumentstore-signperiodically.

Accordingtoe-Estonia.com,“WithKSI,historycannotberewritten.”

Clearly,blockchaintechnologyappliesnotonlytocorporationsfixatedonprofits

butalsotopublicinstitutionsfocusedonprosperityforall,fromgovernment,

education,andhealthcaretoenergygrids,transportationsystems,andsocialservices.

Wheretostart?

SOMETHINGISROTTENINTHESTATE

InhisGettysburgAddressin1863,AbrahamLincolnsaidthatsociety’sgreatestgoal

wasa“governmentofthepeople,bythepeople,forthepeople.”Twelvedecades

later,PresidentRonaldReagansaidinhis1981InauguralAddress,“Governmentis

notthesolutiontoourproblem;governmentistheproblem.”Manyinthenascent

blockchainecosystemagree.Ina2013survey,over44percentofbitcoinusers

professedtobe“libertarianoranarcho-capitalistswhofavoreliminationofthe

state.”

Libertariansofallstripestendtosupportbitcoin.It’sdecentralizedandfreefrom

governmentcontrol.It’sanonymousanddifficulttotax.Itresemblesgoldinits

scarcity,andlibertariansfavorthegoldstandard.It’sapuremarket,drivenbysupply

anddemandratherthanquantitativeeasing.Notsurprising,thefirst2016presidential

candidatetoendorsebitcoinforcampaignpaymentwasRandPaul.

Thelibertarianbenthasgivenopponentsofdigitalcurrenciesfodderfor

dismissingblockchaintechnologiesoutright.JimEdwards,foundingeditorof

BusinessInsiderUK,wroteofthelibertarianparadisehecalledBitcoinistan,a

countrylikeSomalia“withaslittlegovernmentinterferenceaspossible,inamarket

freeofburdensomelawsandtaxes.”Hedescribedtheparadiseas“atotal

nightmare...characterizedbyradicalinstability,chaos,theriseofaboss-classof

criminalswhoassassinatepeopletheydon’tlike,andamasshandoverofwealthtoa

minorityevensmallerthantheonepercentthatcurrentlylaudsitintheUnited

States.”

Certainly,weliveinacrisis-rackedworld.“Theworldhasnotseenthismuch

tumultforageneration.Theonce-heraldedArabSpringhasgivenwayalmost

everywheretoconflictandrepression,”wroteKennethRoth,executivedirectorof

HumanRightsWatch,foundedinthe1970stosupportcitizengroups.“Many

governmentshaverespondedtotheturmoilbydownplayingorabandoninghuman

rights,”usingtheInternettospyoncitizens,usingdronestodropexplosiveson

civilianpopulations,andimprisoningprotestersatmegapubliceventslikethe

Olympics.

That’sthewrongresponsetoturmoil,accordingtorenownedPeruvianeconomist

HernandodeSoto.“TheArabSpringwasessentiallyandstillisanentrepreneurial

revolution,peoplewhohavebeenexpropriated,”saiddeSoto.“Basically,it’sahuge

rebellionagainstthestatusquo,”andthestatusquoisserialexpropriation—the

repeatedtramplingofcitizens’propertyrightsbytheirgovernmentsuntiltheyhaveno

choicebuttoworkoutsidethesystemtomakealiving.

Sotramplingmorerightsistheworstpossibleresponsebecauseitpushesmore

people—suchasjournalists,activists,andentrepreneurs—outsidethesystem.During

thepasttwentyyears,voterturnouthasdroppedinmostWesterndemocracies,

includingtheUnitedStates,theUnitedKingdom,France,Germany,Italy,Sweden,

andCanada.Inparticular,youngpeoplearelookingtobringaboutsocialchange

outsidethesystem,certainlynotbyvoting.MostAmericansthinktheirCongressis

dysfunctionalanddeeplycorrupt.Andforgoodreason:asinmanycountries,U.S.

politiciansarebeholdentowealthycontributorsandinterestgroups,andmany

membersofCongressgoontobecomelobbyists.Caseinpoint:92percentof

Americanswantbackgroundchecksofpeoplebuyingguns,buttherichandpowerful

NationalRifleAssociationthwartsanylegislationtoeffectchange.Somuchfora

“governmentofthepeople,bythepeople,forthepeople.”

Themorecitizensdon’tfeeltheirpoliticalinstitutionsreflecttheirwilland

supporttheirhumanrights,themoretheseinstitutionsoversteptheirauthority,the

morecitizensquestionthelegitimacyandrelevanceoftheinstitutions.Political

sociologistSeymourMartinLipsetwrotethatlegitimacyis“thecapacityofapolitical

systemtoengenderandmaintainthebeliefthatexistingpoliticalinstitutionsarethe

mostappropriateandproperonesforthesociety.”

Andincreasinglyyoungpeople

looktobringaboutchangethroughmeansotherthangovernmentsandeven

democracy.Thebumpersticker“DON’TVOTE!ITONLYENCOURAGESTHEM”tellsthe

story.

“Forindividuals,itmightnotbedesirableforthemtobeinasearchable,

verifiabledatabaseofrecordedhistorythatgovernmentscouldpotentiallyuseto

exploitorsubjugatepeople,”deSotosaid.“Thelegislationofmostofthecountriesin

theworldissobadlydone,sounwelcoming,thatthecostofcomingintothelegal

systemdoesn’tmakesensetopoorpeople.Andacountrywithtoomanypoorand

disconnectedpeoplecausestoomanyproblems.”

Aslegitimacyfades,libertarianismascends.Butit’snottheanswertowhatails

thebodypolitic.Inthistroubledworld,weneedstronggovernments,andonesthat

arehighperformance,effective,responsive,andaccountabletocitizens.

Whatshouldgovernmentsdo?“Build,streamline,andfortifythelawsand

structuresthatletcapitalismflourish,”deSotowroteinTheWallStreetJournal.“As

anyonewho’swalkedthestreetsofLima,TunisandCairoknows,capitalisn’tthe

problem—itisthesolution.”

Sowhat’stheproblem?“Gettingtheirpeople

identified,”hetoldus.“Thereisnowayagovernmentcangoinandforcepeople

insidethesystem.SoIthinkthatgovernmentsallovertheworldrightnowarewilling

toturnthesystemaround.”

That’swheretheblockchaincomesin.Thedesignprinciplesoftheblockchain

shoulddrivethistransformationasitsupportsandenableshigherlevelsofthe

following:

Integrity.Torebuildthepublic’strustinpoliticalinstitutions,electedofficials

mustbehavewithintegrity.Trustmustbeintrinsictothesystem,encodedinevery

process,notvestedinanysinglemember.Becausetheblockchainsupportsradical

transparency,itisbecomingcentraltorebuildingtrustbetweenstakeholdersandtheir

representatives.Ongoingtransparencyiscriticaltomaintainingthisrelationship.

Power.Everyonehasarighttotakepartinthegovernment,directlyorbyvoting.

Whoeveriselectedmustconductaffairsinthefulllightofdayasapeeramongpeers.

WiththeInternet,citizenstookmoreresponsibilityfortheircommunities,learned

fromandinfluencedelectedofficialsandviceversa.Withblockchain,citizenscango

onestepfurther:theycanadvocateforsealinggovernmentactioninthepublicrecord

inanunalterableandincorruptibleledger.Notjustchecksandbalancesamongthe

powerfulfewbutbroadconsensusofthemany,forexample,toeffectbackground

checksonpotentialgunowners.

Value.Votesmusthavevalue.Thesystemmustaligntheincentivesofall

stakeholders,beaccountabletocitizensratherthanbigmoney,andinvesttaxdollars

wisely.Themachineryofgovernmentmustbehighperformance,betterandcheaper

withtechnology.

PrivacyandOtherRightsPreserved.Nospyingoncitizens,noarbitrary

interferencewithprivacy,family,orhome,noattacksuponanyone’shonoror

reputation.Noarbitraryseizureofproperty—realestateorintellectualpropertysuch

asthepatentsofinventors—withoutcompensation.Nocensorshipofnews

organizations,nointerferencewitheffortstoassemble.Peoplecanregistertheir

copyrights,organizetheirmeetings,andexchangemessagesprivatelyand

anonymouslyontheblockchain.Bewareofanypoliticianwhoarguesfortrade-offs

betweenpersonalprivacyandpublicsecurity.Remember,it’safalsedichotomy.

Security.Everyonemusthaveequalprotectionofthelawwithoutdiscrimination.

Noarbitrarydetentionsorarrests.Noonepersonorgroupofpeopleshouldlivein

fearoftheirowngovernmentorlawenforcementagenciesorbesubjectedtocruel,

inhumane,ordegradingtreatmentfrommembersofthoseagenciesbecauseoftheir

race,religion,orcountryoforigin.Membersofpoliceforcescan’twithholdevidence

ofundueuseofforce,andevidencecan’tgomissing.Itwouldallbeloggedand

trackedontheblockchain.

Inclusion.UsingtheInternet,citizensbecamemoreinvolved,learnedfromone

another.Withtheblockchain,thesystemcancost-effectivelyengageallcitizens,

recognizeeveryoneasapersonbeforethelaw,andprovideequalaccesstopublic

services(e.g.,healthcare,education)andsocialsecurity.

Technologyisapowerfultoolbutitalonecannotachievethechangeweneed.In

thespiritofthesaying“Thefutureisnotsomethingtobepredicted,it’ssomethingto

beachieved,”let’sreinventgovernmentforaneweraoflegitimacyandtrust.It’stime

tostopthetinkering.

HIGH-PERFORMANCEGOVERNMENTSERVICESANDOPERATIONS

Thecriticsof“biggovernment”arerightinonesense.Whenitcomestoefficiency,

governmentservicesandoperationshavealongwaytogo.Governmentsare

organizedintosilosthatdon’tshareinformation.Bureaucracytoooftentrumps

commonsenseorsharedpractices.Citizensrarelyhaveone-stopshoppingfor

governmentservices.Everycountryhascountlesstalesofpoliticiansandbureaucrats

squanderingtaxpayerdollars.

Blockchaincanimproveclientservice,increaseefficiency,andimproveoutcomes

whileenablingbothintegrityandtransparencyofgovernment.Thepotentialto

improveallfacetsofgovernmentissignificant,butsomeareespeciallyimportantin

thedevelopingworld,wheregovernmentsareestablishingnewprocessesandcan

leapfrogthesystemsoflong,stable,andopengovernments.

Let’slookattwobroadareaswherewecanapplytheblockchain:integrated

governmentandthepublicsectoruseoftheInternetofThings.

IntegratedGovernment

Estoniaiscuttingadministrativeinefficienciesandprovidingintegratedservicestoits

residentsandbusinessesbycreatinganelectronicIDcardforeveryoneandusinga

blockchain-enabledInternetbackboneknownasthe“X-road”toconnectacross

multipleprogramsanddatabasesinbothpublicandprivatesectors.Otherscandoit,

too.

ManycountriessuchasCanada,theUnitedKingdom,andAustraliahave

explicitlyrejectedtheconceptofacentralpopulationregistryandsinglegovernment

IDasamatterofpublicpolicy.Thisdecisionstemsfromaconcernforpersonal

privacyandanaversiontoexpandingstatepower,especiallyingrantingorrevoking

identities.

However,asEstoniashows,ifwehashofficialdocuments(passport,birth

certificate,marriagelicense,deathcertificate,driver’slicense,healthcard,landtitles,

voterID,businessregistration,statusoftaxpayments,employmentnumber,school

transcripts,etc.)thatcurrentlyexistinmultipledatabasesintoasingleblockchain,

blockchain-enablednetworkscoulddeliverintegratedserviceswithoutgoingthrough

anycentralprocessing.Notonlycouldthismodelprotectprivacy,itcouldenhanceit

byallowingpeopletoverifytheaccuracyoftheirinformation,andtoseewho

accessedoraddedtothatinformation(i.e.,apermanentinformationaudit).

Infact,inthefutureitmakessensethateachcitizenownsheridentityinformation

ratherthanagovernment.Asweexplainedinchapter1,justasnetworksandmass

collaborationcaneliminatetheneedforagovernmenttoissuecurrencyorforabank

toestablishtrust,peoplewon’tnecessarilyevenneedagovernment-issuedidentity

card.SaidCarlosMoreiraofthecryptographicsecuritycompanyWISeKey,“Today

youneedanorganizationwithendowedrightstoprovideyouwithanidentity,likea

bankcard,afrequentfliercard,oracreditcard.Butthatidentityisnowyoursandthe

datathatcomesfromitsinteractionintheworldisownedbysomeoneelse.”

Onthe

blockchain,theindividualownstheidentity.Your“personalavatar”coulddecide

whatinformationisprovidedtowhomunderyourcommand.Itcouldalsomake

choicesaboutintegratingdata.However,ratherthaneverythingyoudowith

governmentbeingintegratedinsomemassivegovernmentdatabase,theintegrationis

achievedbythevirtualyou—ownedandcontrolledbyyou.

Betterintegrationwouldsupportlifeeventssuchasmarriage.MelanieSwan,

founderoftheInstituteforBlockchainStudies,explained:“Theblockchain—withits

structurethataccommodatessecureidentities,multiplecontracts,andasset

management—makesitidealforsituationssuchasmarriagebecauseitmeansa

couplecantietheirweddingcontracttoasharedsavingsaccount,andtoachildcare

contract,landdeed,andanyotherrelevantdocumentsforasecurefuturetogether.”

Somehavesuggestedthattheblockchaincouldbecomeapublicdocumentsregistry

outsideanygovernmentsanctionorinvolvement.Theworld’sfirstblockchain-

recordedweddingtookplaceatWaltDisneyWorld,Florida,inAugust2014.Smart

prenuptialcontracts,anybody?

Beyondintegratedservices,governmentscouldregisterandmanagedocuments

withtransparencyandreliability.Considerthestafftimespentinissuing,verifying,

updating,renewing,andreplacingpeople’sofficialgovernmentrecords.Inadditionto

ensuringdocumentveracity,blockchain-enabledregistrationthroughpeer-to-peer

networkswouldsupportself-service,wherepeopleverifyadocumentthroughthe

network,notthrougharegistrar,aswellaspersonalizedservice—whenyougenerate

anofficialdocument,itautomaticallycontainsyourrelevantinformationandaccess

rightstothatinformation,andtrackswhoaccessesandusesitinthedocument

metadata.

Forexample,theU.K.governmentisinvestigatingtheuseoftheblockchainin

maintainingnumerousrecords,especiallyforensuringtheirintegrity.PaulDowney,a

technicalarchitectwiththeU.K.GovernmentDigitalService,notedthattheperfect

ahistoryofthechangesthathavebeenmade,plus“beopentoindependent

scrutiny.”

Blockchain-basedsystemscaninfuseefficiencyandintegrityintodocument

registriesofallkindsandmanyothergovernmentprocesses.Let’scombinesupply

chainmanagementwiththeInternetofThingstotaganewpieceofequipmentwitha

smartchipthatcommunicatesitsprovenance,ownership,warranties,orspecial

information.Governmentprocurementofficescouldtrackitemsandautomate

processesateverystep:purchasing,releasingpayment,payingsalestaxes,renewinga

lease,ororderinganupgrade.That’ssimplybetterassetmanagement,reducing

administrativecoststotaxpayerswhileincreasingrevenuestogovernments.

Particularlyinterestingarenationalandlocalopportunitiestoconnectdifferent

blockchainnetworksforgreaterefficiencyacrossjurisdictions.Forexample,

departmentsofmotorvehiclescouldconnectdrivers’databasesacrossstateor

provincialboundariestocreateavirtualdatabasethatfacilitatesconfirmationof

driveridentity,status,andtrackrecord.OrintheU.S.healthcaresystem,“Suppose

thepatient,insurancecompany,doctorandagovernmentpayerallhadtheirfinancial

recordscometogetheronasingleledger,visibletoall,foranygiventransaction.The

potentialfortransparencywouldbematchedonlybytheopportunitiesfornewlevels

ofefficiency,”saidSwan.

TheInternetofPublicThings

WealreadywroteaboutpublictransportationontheInternetofThings.That’sperhaps

theeasierIoTopportunityforgovernment:recordsmartdevicesinablockchain

ledgerforlifecycleassetmanagementofbuildings,workandmeetingspaces,vehicle

fleets,computers,andotherequipment.AswithbAirbnb,governmentemployees

coulddynamicallymatchavailablesupplyanddemand,loweringsecurity,

maintenance,andenergycoststhroughautomatedaccess,lighting,andtemperature

controls,andtrackinglocation,repairs,androadworthinessofgovernmentvehicles,

aswellasthesafetyofbridges,rails,andtunnels.

Publicleaderscouldalsoachievebetterpublicoutcomesininfrastructure

management,energy,wasteandwatermanagement,environmentalmonitoringand

emergencyservices,education,andthehealthsector.Inadditiontoimproving

efficiencybenefits,theseblockchain-enabledapplicationscouldalsoimprovepublic

safetyandhealth,easetrafficcongestion,andreduceenergyconsumptionandwaste

(e.g.,throughleakypipes),tonamebutafewbenefits.

SecuringInfrastructure

Byintelligentlypartneringwiththeprivatesectorandotherstakeholders,the

governmentofEstoniahascreatedapublicsectorinfrastructurethatenablesmuch

greaterconvenienceandaccesstogovernment,banks,publictransit,andother

servicesforitscitizenry.Inadditiontoconvenience,Estoniaalsogainscompetitive

advantageintheglobaleconomy,attractingbusinessandinvestmenttothecountry.

Governmentsalreadyprovideservicestoneighboringjurisdictions(fireand

ambulance);outsourcetootherjurisdictions(dataprocessing);deliverserviceson

behalfofanotherjurisdiction(federalgovernmentprocessingincometaxesonbehalf

ofboththenationalandprovincial/stategovernments);andsharingservices(sharing

officebuildings).

Estonia’se-Residentserviceisusefulforindividualsanywhereintheworldwho

needanofficialIDtolaunchabusiness,particularlyonline.Estoniaispositioning

itselftoprovideservicestoforeigncitizensthatothercountriesarechoosingnotto

provide.Whiletheservicesavailablenowarefairlylimited,thereisnolimittoother

governmentservicesultimatelybecomingdigitalfromendtoend.Forexample,

publiclyfundedlibrariesthatarefreetolocalresidentscouldofferaccesstotheir

digitalcollectionstononresidentsandscholarsanywhereintheworldforasmallfee.

Whatotherservicesmightlendthemselvestosimilartreatment,especiallydigital

serviceswheredatamanagementandintegrityareimportant?

Offeringgovernmentservicesbeyondnationalbordersoftencomeswith

regulatoryhurdles.However,weliveinanincreasinglyglobalizedworldwheremany

ofourbiggestchallengesarenotexclusivetoonejurisdiction.Globalproblems

requirenewmodelsforproblemsolving,forworkingwithotherstakeholders.Policy

thattreatsbordersasporous,combinedwithblockchaintechnologysuchasthe

InternetofThings,coulddomoretoaddressbig,intractableissues.

EMPOWERINGPEOPLETOSERVESELVESANDOTHERS

Blockchain-enablednetworksmakegovernmentservicesmorerobustandresponsive.

Self-service,inanythingfromrenewingapermittogettinganofficialdocument,will

improvehowgovernmentsoperate.Byfreeinguptime,removingthepotentialfor

corruptionorotherartificialbarriers,providingself-trainingmodulesonline,and

payingcitizenstheirsocialsecurityfundsontime,governmentsempowertheir

citizens.

Newmodels,manytobedefined,canempowerpeopletocollaborateonpublic

policygoals.Throughtheblockchain,wecanstrikeanewandappropriatebalance

betweengovernment’sneedforcontrolandaccountabilityforanentirebudget,and

theneedforindividualsandgroupstocontrolandcontributetoportionsofthat

budget.Somejurisdictionshavebeenexploringnewmodelstogiveindividuals

(recipientsofbenefitsfrommultiplegovernmentprograms)orcommunities

(neighborhoods),orevenentirepopulations(citywide)controloftheirownpersonal

budgetspreviouslycontrolledbycivilservants.

Forexample,ratherthanrequiringindividualstoapplytomanydifferent

governmentprogramsforvariousbenefits,eachwiththeitsowncriteria(income,

assets,numberandageofchildren,typeofhousing,levelofeducation,etc.),the

governmentplatformcouldpersonalizeabudgetbasedonidentity,storedinformation,

andproductionandconsumptionpatternsincludingriskfactorssuchasresidencein

poorzipcode,levelofeducation,andpurchaseratesofcigarettes,alcohol,and

processedfoods.Theindividualcouldthendecidehowtousetheresourcestoachieve

hisorherobjectivesaccordingtohisorhercircumstances.

Imaginethat—ratherthanpersuadingsomebureaucratthatyourchildneedsa

newwintercoat,youcandecideonyourown!Theresultisincreasedpersonal

accountabilityandempowerment.Wecoulddothesameatthecommunitylevel

(portionsofbudgetsrelatedtocommunity-specificservicessuchasparksand

communitycenters)oratacross-governmentlevel(establishingprioritiesandthen

spendingdiscretionarybudget).

Somejurisdictionsarealreadyempoweringtheleastadvantaged.

The

blockchaincouldacceleratethistrend,allowingtaxpayerstoseewheretheirdollars

areflowing,howfellowcitizensareusingtheseresources,andwhetherprogramsare

achievingresults(incomechanges,educationalgoalsreached,housingfound,etc.).

Theplatformreducesoreveneliminatestheneedfortime-consumingandcomplex

monitoringandreport-backs.Whilethevastscopeofthedataandhowthey’retracked

throughpeer-to-peernetworksmaysoundscaryandOrwellian,itisactuallyjustthe

opposite.Ratherthanallthedataandauthorityrestinginthehandsofsomecentral

authorityoranonymousbureaucrat,individualsandcommunitiescouldactbasedon

verifiedandtrustworthyinformation.Atthesametime,theblockchainledgerassures

accountabilityfortheuseofpublicfunds.Wecannowachievetwopreviously

seeminglycontradictorygoals:“moregovernment”throughmoreinformationand

context;and“lessgovernment”throughprovidinginformationandbettertoolsfor

individualandgroupdecisionmakingandactionwithinthatcontext.

StreamingOpenandTrustedData

PerianneBoring,founderandpresidentoftheChamberofDigitalCommerce,

championstheideathatdistributedledgersopenupgovernmentforthebetter.Toher,

“Blockchainenablesradicaltransparencybecauseitprovideseveryonewithprovable

facts.Anyonecanviewanytransactionthathaseverhappenedontheblockchain.”

Governmentscaneasilyprovidedatathatotherscanuseforpublicorprivate

good.Thisdiffersfromso-calledFreedomofInformationlegislationwherecitizens

mustrequestaccesstoimportantgovernmentinformation.Ratherthisinvolvesthe

releaseofassets—actualdata.Governmentscouldreleasethousandsofcategoriesof

datainrawformat,strippedofpersonalidentifiers:trafficpatterns,healthmonitoring,

environmentalchanges,governmentproperty,energyusage,governmentbudgetand

expenditures,expenseaccounts.Citizens,companies,NGOs,academics,andothers

couldanalyzethesedata,putthemintoapplications,mapthem,andotherwiseuse

themfor,say,understandingconsumerdemographictrends,researchingpatternsin

humanhealth,orknowingwhetherthebusisgoingtobeontime.

AsofAugust2015,theU.S.governmenthasalreadypublished165,000datasets

andtoolsonitsOpenGovernmentWebsite.

TheU.S.government’sphilosophythat

government-helddataispublicdatahasmadeitapioneerintransparency.Other

governmentsarefollowingsuit.AsofAugust2015,theU.K.governmenthasreleased

22,000datasets.

Releasingdatathroughpeer-to-peernetworksandtheblockchainwillintroduce

evengreaterlevelsofefficiency,uniformity,utility,andtrust.Makingdatapublicis

anincentiveforensuringdataaccuracy.Peoplecanviewandflagdatawhentheyfind

anerrororcanprovethatdatahavebeenalteredorcorrupted.

Ifyouregisteracompletedatasetinablockchainnetwork,thenthenetworkcan

logadditionsandchangestothedatasetandcanblockeffortstotamperwiththedata.

Noneedforacentraladministrator.Governmentscouldreleasemoreprogrammatic

datatohelpthepublicandanalystsunderstandtheseprogramsandtheirimpact.

PartneringtoCreatePublicValue

We’vealreadyseenhowsimplymakingmoretrustedinformationavailablecanbe

usedforpositiveeconomicandsocialvalue,andhowindividualsandcommunities

canbeempoweredtoimprovetheirownlives.Blockchain-enabledpeer-to-peer

networkswillrequireustorethinkhowwedivideresponsibilityincreatingpublic

value.Whengovernmentspublishrawdata,theybecomeaplatformonwhich

companies,thecivilsociety,andothergovernmentagenciesandindividualscanself-

organizetocreateservices.Wehaveused“payforsuccess”modelsforafewyears

nowtoengagebusinessesinsolvingcivicproblems.Forexample,theU.S.

DepartmentofLaborfundedinitiativesthathireex-offendersandreducerecidivism,

andtheCityofChicagoraisededucationlevelsamongdisadvantagedpreschoolers.

Thismodelalsoencouragesinnovationandincentivizesachievementofdesired

resultsbyreleasingfundsonlywhentheseresultshavebeenachievedandare

measurable.Thinkaboutthepowerofongoingmicropaymentstoasmallnot-for-

profitgroupworkinginacommunityonsustainableenergyinitiatives.Agovernment

programcouldlinkfundingtoactualdeclinesinconsumption.Thenot-for-profit

groupcouldsupportitselfwithouthavingtorelyoncomplexpaperworkfor

reimbursementandmightevensecurefinancingbasedonthegovernment’s

commitmenttoitsparticipationinthe“payforsuccess”model.

PeggingSmartSocialContractstoPoliticalReputations

Justasthebitcoinnetworkusesblockchaintechnologytoconstantlyensurethe

integrityofpayments,governmentnetworkscanuseblockchainstoensurethe

integrityoftheirtransactions,records,andimportantdecisions.Officialscan’thide

“offthebook”paymentsorothergovernmentrecords,includinge-mailrecords,

decisionlogs,anddatabases.Whereassecurityoftenderivesfromfences,walls,ora

perimeterofprotection,theblockchainprotectsagainsttamperingfrombothinside

andoutside.Therefore,itkeeps“honestpeoplehonest.”

Transparencyiscrucialforchangingthebehaviorofaninstitution.Whileweof

coursecannotforcethesevaluesandbehaviorsonourpublicrepresentatives,wecan

limittheirdecisionsandactionsthroughsmartcontractsthatdefinetheirrolesand

responsibilitiesasourrepresentativesandthenmonitorandmeasurethemonthe

blockchain.

Remember,smartcontractsareself-executingagreementsstoredonthe

blockchain,whichnobodycontrolsandthereforeeveryonecantrust.Politicalfactions

suchastheGrandOldPartycouldusethemsothatcandidateslikeDonaldTrump

whousetheirpartyinfrastructuretodebateandcampaignduringprimariescouldn’t

runasindependentsinageneralelection.Wecouldapplysmartcontractstodifferent

governmentoperations(supplychain,externallegalservices,pay-for-success

contracts)andevenmorecomplexrolesofgovernmentandourelected

representatives.Wedoforeseepeer-to-peernetworkstrackinganelectedofficial’s

commitmentsandhisorherfulfillmentofthesecommitments.Watchdogsalreadydo

thisthroughformalandinformalpeernetworksontheWeb.

Whilethisapproachcouldnotapplytoeverythingweexpectfromourpolitical

leaders,wecoulduseitforallmannerofspecificcommitmentsandactions.While

measurementofeventualoutcomeswillbemoreofachallenge(e.g.,resultsachieved

withmoneyspent),overtimewewillbuildexperienceandexpertisewithindicators

sothatwebaseourassessmentsonfactsratherthancurrentspin.Thisisnotpieinthe

sky—inLondon,acandidateinthe2016mayoraltycampaigniscallingalreadyfor

theuseoftheblockchaintoholdelectedofficialsaccountableforpublicbusiness.

Regulatorscouldimplementblockchainprocessesasaverifiablemeanstotrack

thecommitmentsofregulatedindustriesinrealtime,assessingwhethertheyare

followingthroughonpromisesmade(e.g.,investmentsinsustainableenergy)or

complyingwithregulatedpractices(e.g.,on-timedelivery,safetytargets).While

publicationofkeyperformanceindicatorsandresultsonpublicWebsitesis

increasinglycommon,theblockchainwouldenabletheseprocessestobeautomated

andguaranteedaccuratewhenappliedtomeasurableresults.

Thedatageneratedbytheseprocessesensurethatthepublicisconstantlyaware

ofwhoisbehavingwithintegrity.Howoftendidheshowupatmeetings?Howdidhe

vote?Didheabidebyhiscommitmentstodosuch-and-such?Whodonatedtoher

politicalcampaign?Whoviolatedthetermsofhersmartcontract?Electedofficials

andthoseregulatedmusthonortheircommitmentsorexplainwhytheyhaven’t.It

alsoprovidesfeedbacktotheelectorateonwhethertheirdemandsasconstituentsare

reasonableandfair,notreactionary.Votersoftenwantmoreservicesbutlowertaxes,

ormorefactoriesbutnotintheirbackyard,orlowerpricesbuthigherwages.Assuch,

opendataprovidesameansofunderstandingtrade-offsandincreasingthe

accountabilityofallparticipants.

THESECONDERAOFDEMOCRACY

Whilerepresentativedemocracyiscomplexandvariesglobally,onethingremains

constant:passivecitizenry.Todatethediscussionhasfocusedonhowblockchain

technologycanhelpcreatetheconditionsforfair,secure,andconvenientvotingto

occur.Tobesure,wehavebigopportunities.Onlinevotingbasedontheblockchain

wouldenablecitizenstogivetheirviewsmoreoften.Butattemptingtoreplace

representativedemocracywouldbeamistake.“Motionsputtoavoteareusuallywell

refineddistillationsoflargeandcomplexissues.Theyresultfromalongprocess

involvingconflicts,contradictionsandcompromises.Tounderstandamotionandto

voteresponsibly,citizensneedtoparticipateinsomeformofrefiningprocess,”Don

wroteinTheDigitalEconomymorethantwentyyearsago.

However,ifwe

understandthecontoursofanewmodel,wecanseehowblockchaintechnologycan

helpfarbeyondvoting.

TechnologyandDemocracy:NotaHappyStory

Howhastechnologyaffecteddemocracy?Surprisingly,thestoryismixedatbest.

Televisionarguablydegradeddemocraticdiscussion,turningwhatAlGorecalled“the

marketplaceofideas”

intoaone-waydialogue.Addequallytoxiccablenews—

wheretalkingheadswinratingsbyattackingopponentsratherthandiscussingideas—

andyou’vegotstupefyingbattlesofextremes.AsthefictitiousnewsanchorHoward

BealeinthefilmNetworksaid,“I’masmadashellandI’mnotgoingtotakethis

anymore!”

SofartheInternethasn’tchangeddemocracyforthebetter.Ifanything,with

increasedsurveillanceandinfringementofprivacyonthepretextofnationalsecurity,

democraticgovernmentsarebehavingmorelikeauthoritarianregimes.We’dliketo

focusonthreeparticularchallenges.

1.FragmentingPublicDiscourse

AlGorehopedthedigitalagewouldreversethetideofnegativityerodingourbasic

institutions.“Thegreatestsourceofhopeforreestablishingavigorousandaccessible

marketplaceforideasistheInternet.”

Hewasnotalone.Wehavelongarguedthat

astheWebextendsinusage,resources,andconnectivity,increasedaccesstofactual

informationwouldimprovethequalityofpublicdiscourse.

However,theoppositeseemstobeoccurring:balkanizationofperspectivesand

exploitationofthenewtoolsbyideologueswhoorganizeintobattalions.Todayas

contentproductionbecomesmoredistributedandthesourcesofinformationand

opinionproliferate,anyonecanpresentacertainviewandattractalike-minded

audience,whichmaybesmallbutmayalsobezealous.

Thenewcommunicationsanddataanalysistoolshavealsoallowedideologically

drivengroupstohijacksocialandpoliticaldebates.Bothliberalsandconservatives

areusingthemtocreateechochambersthatunderminethepotentialforcompromise,

letaloneconsensus.

2.ScalingIgnoranceontheWorldWideWeb

Justaspeoplecan’ttellapersonfromadogontheInternet,theycan’talwaysdiscern

thetruth.Conspiracytheoristspopularizetheirantievidenceviewsindaysoreven

hours,

mostrecentlythosearoundthecrashofMalaysiaAirlinesFlightMH370.

ConsiderthatthreeintenAmericansnowbelievethathumanbeingshaveexisted

sincethebeginningoftime.

Anddespiteoverwhelmingscientificevidencethat

carbonemissionsthreatenlifeonEarth,thosewithshort-termvestedinterestshave

effectivelydenigratedthescienceandblockedintelligentdiscussion,letaloneaction

plans.ThoseusingtheWebtofurtherignoranceanddenialismareoutgunning

scientistsandrationalists.InternationallyrepressivecountriesfromIrantoNorth

Koreaarecreatingprivate,restrictedversionsoftheInternetfortheircitizens,making

theWebanevermorepowerfultooltotrumprationalismwithideology.

3.ComplicatingPolicyandImplementation

Inthepredigitalera,enactingandenforcingpolicywaslesscomplicated.Policy

specialistsandpresidentialadvisershadstrongcommandoftheissues.Todaythey

canbarelykeeppacewithdefiningtheproblems,letalonecraftingthesolutionsor

explainingthemtothepublic.SobadistheproblemthatPresidentObamasignedinto

lawthePlainWritingActof2010requiringfederalagenciestouselanguagethe

publiccanunderstand.

Today,manyunforeseenissuesarisebetweenelections.Nogovernmentcan

crediblyassertthatithasavotermandatetotakespecificactionsonallpertinent

issues.Moreover,governmentslacksufficientin-housepolicyexpertiseonmany

issues.Soevenifagovernmentcommissionsanopinionpolltodiscernthepublic’s

view,thepollingprocessdoesn’ttapintothewisdomandinsightthatanation’s

citizenscancollectivelyoffer.

PuttingDemocracyontheBlockchain

Alloftheseproblemssuggestanewmodelofdemocracythatemphasizespublic

discourseandcitizenengagement.Let’snotconfusecivicengagementwithnotionsof

so-calleddirectdemocracywhereweallwatchtheeveningnewsandvoteonpublic

hangingsviaourmobiledevicesorinteractivetelevisions.Citizensdon’thavethe

time,interest,orexpertisetobecomeinformedonallissues.Wewantreasoned

opinion,notjustanyopinion.Westillneedlegislativeassembliestodebate,refine,

andresolveissues.

Butsurelyamorecollaborativemodelofdemocracy—perhapsonethatrewards

participationsuchastheminingfunction—couldencouragecitizens’engagementand

learningaboutissues,whileatthesametimeinvigoratingthepublicsectorwiththe

keenreasoningthenationcancollectivelyoffer.Couldwecreateaculturewhere

peopleareturnedonbythedemocraticprocess,notturnedoffbytheir

representatives’abuseoftheirseats?

Whyhasthisnotoccurredtodate?Themainproblemisnotatechnologicalone.

Mostpoliticians,regardlessofpoliticalstripe,seemtocaremoreaboutwinning

electionsthanaboutsolvingthecrisisoflegitimacythroughcitizenengagement.

Let’sstartwiththebasics.Themostfundamentalprocessforrepresentative

democracyistheelection.Votingistheright(andinsomecountries,likeBelgium,the

responsibility)ofalleligiblecitizensinademocracy.Yetaroundtheworldelections

aredeeplyflawed.Corruptofficialstamperwithresultsoroutrightrigthem.Voting

canbesuppressedusingeverythingfromlackofaccesstobriberyandintimidation.

Manipulatingelectionsisacomplexbusinessbutit’sdonealmosteverywhere.Could

blockchaintechnologieshelpimprovethevotingprocess?

Forallourtechnologicaladvances,themechanicsofvotinginelectionshave

remainedlargelyunchangedforhundredsofyears.Inmanypartsoftheworld,tocast

yourvoteyougotoapollingstation,identifyyourself,markapaperballot,putitina

securedbox,andwaitforhumanbeingstocounttheballots.

Electronicvoting(e-voting)isatermforvotingwiththeaidofanyelectronic

system.E-votinghas,inmanycases,provedasunreliableasmanuallytalliedvotes.

E-votingtodaysuffersfromthreeproblems:attacksonthesoftwareandhardware,

mistakesorbugsinthecoding,andhumanerror.In2004,avotingmachineaidingin

thegeneralelectioninNorthCarolinawasaccidentallysettostoreonly3,000votes.It

irrevocablylost4,438votesinaracethatwasdeciedbyadifferenceofonly2,287.

BLOCKCHAINVOTING

Howmightvotingontheblockchainwork?Imaginetheboardofelectionscreating

digital“wallets”foreachcandidateorchoice,withapprovedvotersallocatedone

tokenorcoineachforeachopenseat.Citizensvoteanonymouslythroughtheir

personalavatarbysendingtheir“coin”tothewalletoftheirchosencandidate.The

blockchainrecordsandconfirmsthetransaction.Whoeverendsupwiththemost

coinswins.

Somehavetriedtosolvetheproblemoftrustbyusingend-to-endauditable

votingsystems.Votesaretypicallymadeviakiosk,whichproducesa

cryptographicallyauthenticatedpaperrecordoftheballotbutallowsvotestobe

countedelectronically.

CommitCoinusescryptographicproof-of-worksystemstoproveamessagewas

sentatacertaindate.Theinventors,JeremyClarkandAleksEssex,saywecanuseit

toprovetheintegrityofelectiondatabeforetheevent,asameansof“carbondating

commitments,”providingabaselinetocounteractfraudanderror.

End-to-EndE-VotingSystems

Citizensaremakingadvancesallthetime.In2015,academicsfromtheNationaland

KapodistrianUniversityofAthenspublishedapaperintroducingDEMOS,anewend-

to-end(E2E)e-votingsystemverifiableinthestandardmodel,withoutrelianceon

setupassumptionsoraccesstoa“randomnessbeacon.”

Itusesadistributedpublic

ledgerliketheblockchaintocreateadigitalballotboxthatcitizenscanusetovote

fromanywhereintheworld.

AnE2Everifiableelectiondetectselectionauthoritieswhotrytomisrepresent

outcomes.Voterscastballotsinexchangeforreceiptsthatallowthemtoverifythat

(a)theirvotewascastasintended;(b)itwasrecordedasitwascast;and(c)itwas

countedasitwasrecorded.Anexternalthirdpartycouldverifytheelectionresults.

Votersstillmustacceptsetupassumptionsandtakealeapoffaithontheelection

results.

WithDEMOS,thevotingsystemgeneratesaseriesofrandomizednumbers.

Votersgettwosetsofnumbers,orkeys:onecorrespondingtothem,andonetotheir

preferredcandidate.Aftertheencryptedvoteiscast,it’ssentacrossmultipleservers.

Resultsarepublishedtoabulletinboardpubliclydisplayingalltheinformation

relatedtotheelection.

NeutralVotingBlocs

InAustralia,anorganizationcalledtheNeutralVotingBloc(NVB)isusingvotingon

theblockchaintorevolutionizedemocracyinanotherwayentirely.Theyhavea

uniqueapproachtogovernment,andit’soptimistic:“Webelievethebestwaytofix

politicsistoparticipateourselves.”

FounderMaxKayedescribesNVBasa“politicalapp”whereinterestedcitizens

canregistertheiropinionsonpolicyissuesby“voting”ontheblockchain.Oncethe

timeisup,thefinaltallyinstructselectedofficialsonhowtovoteingovernmental

proceedings.Whenasked,whyareyouusingtheblockchain?MaxKayereplied,

“Becauseweintendtofacilitateavarietyofparties,someofthemwillnecessarily

disagreestrongly.Tomaintainintegrityweneedeachpartytobeableto

independentlyverifythevotingrecord,andeachvote.”Furthermore,Kayesuggests

thereareanticensorshipproperties,andimmutability.Hesaid,“Theonlyelectronic

structureontheplanetI’mawareofthatcandothisisthebitcoinnetwork.(Although

thereareotherblockchains,theyarenotimmutableenoughbecausetheirhash-rates

aresolow).”

ProtectingtheVoters

Voterintimidationcantakeaviolentturn.InZimbabwe,thepartyopposingRobert

Mugabewithdrewfromtheelectionwhencoercionfromsupportingmilitiashad

becometoolethal.Theelectionswerecarriedoutanyway—Mugabewon.While

technologicaladvancesalwayscomewithpeoplewhoexploitthemtotheirown

advantage,somearebeginningtosaythatblockchaintechnologycoulderadicate

corruptioninplacessuchasAsia.

InJuly2014,duringoneofthemostcontestedpresidentialelectionsinIndonesian

history,ananonymousgroupofsevenhundredhackerscreatedanorganizationcalled

KawalPemilu,or“ProtecttheVote.”Itsmissionwastopubliclytallyelectionballots

onlinetoletvotersverifyresultsateachpollingstation.Theprinciplesof

decentralization,transparency,andindividualanonymitycombinedtowardoff

maliciouscyberattacksandensureafairerelection.

“Docorruptgovernmentswanttokeepthemselveshonest?”

askedAnsonZeall,

CEOofCoinPip,acompanyspecializinginsendingfiatcurrenciesacross

internationalboundariesusingtheblockchain.Hequestionswhethereveryone

embracesadvancesinvoting,andwhetherpoliticiansactuallywantfairelections.To

others,e-votingseemslikeanunnecessaryorhastyleapforward.Wearguethatmany

oftheseissuesbelongtotherealmofimplementation,notdesign.

Theredesignofourelectoralandpoliticalsystemswilllikelyinfluencemore

fundamentalissueswithvotingindemocraticelections.ComparevoterIDfraudwith

othermoreinsidiousfactors.AcomprehensiveinvestigationofvoterIDfraudinthe

UnitedStatesin2014foundthirty-oneincidents,includingprosecutionsandcredible

allegations,infederal,state,andmunicipalelections—since2000.

Inthattime,

morethanonebillionballotswerecastingeneralandprimaryelectionsalone.

InthefourstateswiththeharshestIDlaws,morethanthreethousandvoteswere

positivelyrejectedforlackofproperID.

Thisdoesn’tincludethosewhodidn’t

bothertotryatall—andthatisamuchbiggerproblem.Whiletheirmodelof

democracyisheraldedaroundtheworld,mostAmericansdon’tvoteinelections,

citingreasonslike“nothingevergetsdone,”“politicsissocorrupt,”and“thereisno

differencebetweenthechoices.”

Weexpectblockchaintechnologytohavesome

innovativeapproachestotheseproblems,too.

Withtimeanddevelopment,blockchaintechnologymightbetheimpetusthat

allowse-votingtotransformdemocraticelectionsandinstitutionsbyeffectivelyand

reliablybringingthemintovoters’hands.

ALTERNATIVEMODELSOFPOLITICSANDJUSTICE

Iftheblockchaincouldenableamoreefficient,responsivegovernmentandimprove

howdemocracyisadministeredthroughnewvotingprocedures,coulditalsocatalyze

newpoliticalprocessesaswell?

Forsomesupportersofnext-generationgovernment,theultimateaimofelectoral

reformistoenableasystemof“liquiddemocracy.”EduardoRoblesElvira,CTOof

AgoraVoting,isonesuchfan.Hedescribesliquiddemocracyascombiningthebest

partsofdirectdemocracy(likethesortpracticedinancientAthens)withtoday’s

representativedemocracies,whichaskverylittleoftheirelectorates.

Liquiddemocracy,alsocalleddelegativedemocracy,allowscitizenstheultimate

incustomizationandpersonalizationofthedemocraticexperience.InRoblesElvira’s

words,inaliquiddemocracy“youcanchooseyourlevelofparticipationatanypoint

intime.”

Yourinputisalwayswelcome,butnotrequiredtokeepthecountry

running.

Voterscandelegatevotingauthoritytomultiplerepresentativesdelineatedacross

anarrayoftopics.

Referendaarethenheldfrequentlyandcategorizedbytopic,

indicatingwhichproxy(ifany)shouldbepromptedtocasttheirvoteontheissue.

Thisenablesasysteminwhichvoterscanselectmanytrustedexpertsoradvisersto

voteontheirbehalf.Underlyingthisideologyisthebeliefthatnooneperson(or

party)hasthefull,rightanswertoeveryquestion.Inrepresentativedemocraciesthis

axiomisoftenbothassumedandignored.

RoblesElviraisworkingwithgovernmentstobuild“ahighlydistributed,unique

logofeventsreallygoodatsolvingdistributeddenial-of-service(DDOS)attacks.”

Blockchaintechnologyenablesthis.Hesaid,“Itisverydifficulttocreateasecure,

distributedsystemandtheblockchainallowsustodothis...andit’snotjustthatit’s

distributed,butthatit’sdistributedinasecureway.Thisisreallyimportantandcanbe

usefulforalotofapplications;e-votingisjustoneofthem.”Hiscompany,Agora

Voting,providesthetechnologicalinfrastructureneededtoconductauditable,

transparent,andverifiablee-elections.“Withtop-notchcryptographictechnology,

humansbecometheweakestlinkinthesecuritychain.”

Spain’santiausteritypartyPodemos(translatedto“WeCan”)usesAgoraVoting

toholditsprimaryelections.Withtheparty’scommitmenttoparticipatorydemocracy

cameacommitmenttotransparency,anideologicalshiftinSpainandelsewhere

consistentwiththeoneunderpinningdistributedtechnologies.

RoblesElviraseessomelimitations,too.Tomaximizesecurityandanonymity,a

usercurrentlyneedsaccesstothewholeblockchain,abehemothofafile.Sizemakes

itdifficulttoaccess(especiallyonamobile)anddecidedlyuser-unfriendly.Still,the

technologyisalwaysevolvinganddesignsareeverimproving.“Weareatthe

beginningofe-voting,”saidRoblesElvira.

Thetechnologyispliable.Undoubtedly,

itsbestapplicationsareyettocome.

DisputeResolution

Somelegaldisputesarebestleftoutofthecourts.We’veseenhowsmartcontracts

canenabledecentralized,independent,autonomousadjudicationofcommercial

disputes.Smartcontractsareindifferenttonotionsoffairnessorjustice,however,and

unabletoreconcileconflictingversionsoffacts.Evenmorerevolutionaryfor

adjudicationthanaverifiablerecordofevidence,theblockchaincanbetheplatform

forP2Pdisputeresolution.Inthismodel,ajuryofhundredsorthousandsofyour

peerscouldweighintoeffectively,asPamelaMorganofEmpoweredLawsaid,

“crowdsourcejustice.”

Random-SampleElections

Anotherdemocraticmodelenabledbyblockchain-stylegovernanceisrandom-sample

elections.Votersselectedatrandomwouldreceiveaballotinthemailanddirections

toWebsiteswithcandidateinformationandstatementsfrominterestedparties.

Anyonemayrequestaballot,butitwillnotbecounted,andwillappear

indistinguishabletoitsvalidcounterpartstoallbuttherequestingvoter.Thesecanbe

soldtoavotebuyer,buttheywouldneverknowifthatvotecounted.Asthesevotes

arebelievedmorelikelytobesoldthantheircountablecounterparts,itmakes

coercionimpracticallycostly.DavidChaum,inventoroftheconcept,saidrandom-

samplepollingcouldproducemorerepresentativeandreliableresultsthanelections

todayregularlyachieve.

PredictionMarkets

ThecompanyAugurisusingtheblockchaintoaggregatemanysmallwagersabout

futureeventsintopowerfulpredictivemodels.Withtherightapplication,itcouldhelp

createcollaborativedemocracy.Governmentscouldusepredictionmarketstoengage

citizensinhelpingbetterunderstandfuturescenarios,enablinggovernmentstomake

betterpolicychoices.

Ethereum’sVitalikButerindiscussesanalternativemodelofpoliticallifecalled

futarchy.

ConceivedbyeconomistRobinHanson,itstenetscanbeneatly

summarizedas“voteforvalues,butbetonbeliefs.”Citizenselecttheirdemocratic

representativesinatwo-stageprocess:First,picksomemetrictodeterminetheir

country’ssuccess(likeliteracyorunemploymentrate).Then,usepredictionmarkets

toselectgovernmentpoliciesdesignedtooptimizetheelectedmetric.

Augur’sstyleofpredictionmakingcouldengagecitizensinmakingsmallchoices

thatcontributetonationaldiscussionsofpolicy,eventuallyshapingthefutureoftheir

owndemocracy.

BlockchainJudiciary

Theblockchaincanalsotransformourjudiciary.Combiningtheconceptsof

transparency,crowdsourcing,andonlinecitizenparticipation—overablockchain—

wecanenvisionreintroducingconceptsofancientAtheniandemocracyintothe

twenty-firstcentury.

CrowdJury

lookstotransformthejusticesystembyputting

severaljudicialprocessesonline,usingbothcrowdsourcingandtheblockchain,

includingfilingachargeorcomplaint,gatheringandvettingofevidence,engaging

citizensinopentrialsonlineandasonlinejurors,andissuingaverdict.Think

transparentprocesseswithcrowdsourceddiscovery,crowdsourcedanalysis,and

crowdsourceddecisionmakingandpresto—yougetanaccurateoutcomeinamuch

shortertimeframeandatvastlyreducedcost.

Theprocess

startswiththereportingonlineofasuspectedcivilorcriminal

wrongdoing(e.g.,apublicofficialsuspectedofreceivingbribes)andinviting

potentialwitnessestoprovideevidence,andcombininginformationfrommultiple

sources.Theoriginalcomplaintorclaim,aswellasalltheevidence,wouldbe

cryptographicallystoredviatheblockchaintoensurethatitremainsonrecordandis

nottamperedwith.

Onceitisfiled,relativelysmall(ninetotwelvepeople)groupsofvolunteersself-

selectedbasedonrequiredexpertisewouldanalyzethefactsanddeterminewhether

thereisvaliditytogototrial.Attrial,therewouldbetwopossiblepaths.First,the

named“wrongdoer”pleadsguiltyandproposesrestoration(whichmayormaynotbe

acceptedbyajury)orthecomplaintproceedstoonlinetrialwithamassivejury.Just

asinAthens,whereanycitizenoverthirtycouldapplyforjuryforanygivenperiod

(butnotforaspecificcase),individualswillapplyforjurieswithfinalselectionbya

randomizationdevice,justasAthenianjurorswereselectedbyakleroterioninthe

fourthcenturyBC.

Asaresult,thereisnobiasinthedistributionofjurorsto

specificcases.Thetrialandalltheevidencearebroadcastonlineinanopen-court-like

model.Anyonecan“attend”andaskquestionsofthedefendant,butonlyjurorsvote

fortheverdictviaanonlinevote.

Let’sstartwithconflictadjudicationinlow-valuedisputesandresolvingissuesin

globalcommunitiesacrossjurisdictionallines,forexamplesocialnetworks.TheU.K.

CivilJusticeCouncilrecentlylookedatonlinemodelsworldwidetorecommend

onlinedisputeresolution.

Mostoftheearlymodelsdependuponuseofjudgesor

otherexpertadjudicatorsatsomestagesintheonlineprocess.Otherprocessesin

placerelyuponotheronlineparticipantstocalloutandaddressinappropriate

behavioronlinesuchasdefamatoryfeedback(e.g.,eBay’ssubsidiaryinthe

NetherlandsMarktplaats’IndependentFeedbackReview)orcheatingatonlinegames

(e.g.,likeValve’sOverwatch,whichallowsqualifiedmembersofthecommunityto

reviewreportsofdisruptivebehaviorandapplytemporarybans,ifappropriate.)

Thisisafarcryfrommobjustice.It’sthe“wisdomofthecrowd”appliedtomany

morejudicialprocesseswithbeneficialresults.

ENGAGINGCITIZENSTOSOLVEBIGPROBLEMS

Mostpeoplewhobelieveinscienceunderstandthathumancarbonemissionsare

warmingtheatmosphere.Thisclimatechangeisdangeroustooursandmanyother

life-formsontheplanet.Governments,companies,andNGOsworkingonreducing

carbontendtoagreethatso-calledcarbontradingisanenvironmentallyeffectiveand

economicallysensibleapproachtoloweringemissions.

Onepolicyiscalled“capandtrade.”Aregulatorybodysetsa“cap”orlimiton

carbonemissionsandlowersitovertimetoreducetheamountofpollutantsreleased

intotheatmosphere.The“trade”representsamarketforcarbonallowances,helping

companiesandotherorganizationstocomplywiththeirallocatedlimit.Accordingto

theEnvironmentalDefenseFund,“Thelesstheyemit,thelesstheypay,soitisin

theireconomicincentivetopolluteless.”

TodaytheEuropeanUnion’smostdevelopednationshavecap-and-trade

exchanges.California,Ontario,andQuebecagreedontheMontrealProtocol,

advocatingforaglobalexchange.Officialsatnation,state,city,andenterpriselevels

couldallocatecap-and-tradecreditstobalancesetallowances.Atthesametime,

blockchain-basedreputationsystemscouldratethekilowatt-hoursofenergyproviders

tothegridaccordingtostandardsofsustainablegreenhousegasreduction.For

example,thesystemcouldtagenergysourcedfromcoalwithhighercapdebitsand

renewableslikesolarascredits.Blockchaincanhelpautomatethecap-and-trade

systemonanindustrialscale.Efficientpricingalgorithmscomputecreditsanddebits

inrealtime,andgreenorganizationscaptureandtracktheircarboncreditsonthe

ledgerandrollthemintoanexchange.

Whatifwecreatedacap-and-tradesystemforpeople?Surelyweneedmorethan

ourinstitutionstochangetheirbehavior!Personalcarbontradingwouldworkthrough

theInternetofThings.Sensors,detectors,andinstrumentationwouldmeasureyour

waterheater,dishwasher,andhouseholdthermostatinrealtimeandinformyouof

yourcarboncreditsbalance.Atthesametime,youcouldearncreditsbyactingin

practical,sustainableways.Ifyouaddedanarrayofsolarpanelstoyourroof,you

wouldearncreditsbyreturningexcessenergytothegrid.

Couldthiscreatenewsourcesofannualincomeforpeople?Afterall,thepoor

andhomelessarelowcarbonusers.Bybikingtowork,youcouldsavecreditsthat

yourhotwaterheatercouldspend:“Hey,dishwasher—mypersonalcap-and-trade

watchindicateswecanaffordtorunonfullwashandthirty-minutedrycycle.”Water

sensorsinthewashercouldmanagewaterusagebasedonanacceptablelevelof

particulatedensity,dampnesssensorsinthedryercouldturnthedryeroffwhenthe

clotheshavereachedanacceptablelevelofdryness,andthebuilding’sHVACsystem

couldharnesstheexcessheat.

WIELDINGTOOLSOFTWENTY-FIRST-CENTURYDEMOCRACY

Asaglobal,distributed,andprogrammableledgerthatissecure,designedforprivacy,

andenrichedwithincentivesystems,blockchaintechnologylendsitselftothe

developmentofnewdemocratictoolssuchas:

DigitalBrainstorming:Bringingtogetherpolicyofficialsandcitizenstohave

real-time,moderated,onlinebrainstormingsessionstoidentifynewpolicyissuesor

needs.Consensusisthenachievedthroughone-token,one-votesystemsthatcanhelp

achievethoughtfuldiscussionandmakeitharderfordisrupters,trolls,andsaboteurs

tocausedamage.

Challenges:Onlinecontestswithapanelofjudges.Thinkofpreblockchain

modelsliketheGoldcorpChallenge(mentionedearlier),theXPrize,orthenumerous

innovationchallengesconductedbymanyWesterngovernments.Thegoalof

challengesistoengagecitizensininnovationandthecreationofpublicvalue.

OnlineCitizenJuriesandPanels:Citizenschosenatrandomserveaspolicy

jurorsoradvisersonatopic.ThejuryusestheInternettoshareinformation,ask

questions,discussissues,andhearevidence.Blockchainreputationsystemshelp

questionerstoknowthebackgroundandreputationofthejuryandpanelmembers.

Decisionsandrecordsarerecordedontheblockchain.

DeliberativePolling:Thisgivescitizenstheresourcestolearnaboutandreflect

upontheissuesinacollaborativeanddeliberativefashion.Thiswouldcombinesmall

groupdiscussionsontheInternetwithscientific,randomsamplingtocontributemore

informedpublicinputinpolicymakingthaninstantpollingcanprovide.

ScenarioPlanning:Buildingscenarioswithsimulationandmodelingsoftwareto

projectfuturepolicyneedsandtounderstandthelong-termconsequencesof

decisions.Politicians,bureaucrats,andcitizenscouldassessthepotentialimpactsona

rangeoffactors,rangingfromhealth,totheenvironment,totheeconomy.

PredictionMarkets:AsweexplainedinthecaseofAugur,therearecountless

opportunitiestousepredictionmarketsfortradingtheoutcomeofevents.

Governmentscanusethemtogaininsightintomanysubstantivequestions:Whenwill

thebridgeactuallybebuilt?Whatwillbetheunemploymentlevelintwelvemonths?

WilltherebeaNationalPartyprimeministerafterthenextelection—anactual

questionfromaniPredictmarketinNewZealand.

Blockchaintechnologiescouldsuperchargeallofthesetools.Tobegin,

contributionsfromcitizenscouldbeprivate,openingupthepossibilitiesof

engagement.Thisisbadforrepressivegovernmentsbutgoodfordemocracyasit

makesitmoredifficultforgovernmentauthoritiestocensor,suppress,andtrackdown

opposition.Atthesametime,asdescribedearlierinthecaseofBlockapedia,

blockchain-basedreputationsystemscouldenhancethequalityofdiscussions,reduce

thenumberoftrollsandsaboteurs,andensurethatallcommentsareaccuratelyand

indeliblyrecorded.Whenthereiscompensationforwinnersorothercontributors,

settlementscouldbemuchmoregranularandinstantthroughdigitalcurrencies.

Varioussmartcontractscouldbeconstructedwithcitizensandgroupstobetterclarify

theroleofeveryoneintheprocess.

MelanieSwan,founderoftheInstituteforBlockchainStudies,arguesthat

blockchaintechnologymighthaveamaturingimpactonhowsocietyapproaches

topicslikegovernance,independence,andcivicduty.“Itmightseemhardertoletgo

ofcentralizedauthorityinmattersofgovernmentandeconomicsasopposedtoculture

andinformation,butthereisnoreasonthatsocialmaturitycouldnotdevelop

similarlyinthiscontext.”

Clearly,thenext-generationInternetprovidesprofoundnewopportunities.The

mainchallengesarenottechnological.Onecautionaryexample:Obama’s2008

campaigncreatedanexpansiveInternetplatform,MyBarackObama.com,thatgave

supporterstoolstoorganizethemselves,createcommunities,raisemoney,andinduce

peoplenotonlytovotebuttogetinvolvedintheObamacampaign.Whatemerged

wasanunprecedentedforce:thirteenmillionsupportersconnectedtooneanotherover

theInternet,andself-organizedtobuildthirty-fivethousandcommunitiesofpeople

withcommoninterests.Whenyoungpeoplechanted“YesWeCan,”itwasn’tjusta

sloganofhope;itwasanaffirmationofcollectivepower.

However,in2012theObamacampaignshiftedfromcitizenengagementto“big

data,”replacing“YesWeCan”with“WeKnowYou.”Ituseddatatoswingvotersand

targetsupportersforfunds.Thecampaignwontheelection,butrelegatedcitizensto

consumptionofitsmessages.Thebigdatastrategyhadfewerrisksthanastrategyof

self-organizingcommunities.

Duringbothhistermsthepresidentdidtakeimportantstepstoengagecitizens,

primarilythrough“Challenges,”whichareelaboratecontestsforinnovativeideas.But

inhiscriticalsecondcampaign,Obamafailedtoengagecitizensandmissedahistoric

opportunitytostrengthengovernmentlegitimacy.Intheend,evenPresidentObama,

whohadbeencalled“TheFirstInternetPresident,”tooktheexpedientroutetopower,

usingsocialmediatobroadcastmessagesandraisefundsthroughdata-enriched

targetedadvertisingonline.

IfnottheInternetPresident,thenwho?

Thereisaroleforeveryoneinmovinggovernmentanddemocracyonto

blockchains.First,thereareunlimitedopportunitiesforeliminatingredundancyand

wastedtime,votingandparticipatinginnewdemocraticprocesses,servingasajuror,

earningenergycredits,payingtaxesandreceivingpublicservices,andseeingwhere

one’staxdollarsaregoingandhowrepresentativesarevoting.Electedrepresentatives

needtostepupandshowleadershipindesigningandimplementingsmartcontracts.If

youhaveintegrity,whynotencouragethecreationofblockchainreputationsystems?

“Votershaveshortmemories,”

saidAndreasAntonopoulos.Createbetter

transparency,whetheryouareajudge,attorney,policeofficer,orparliamentarian.

Civilservantsandgovernmentemployeescouldusesensorsandcamerastotrack

publicassetsandinventoryontheblockchain,prioritizeinfrastructurerepairs,and

allocateresources.Ifyou’reayoungperson,don’tgiveupondemocracy.Itmaybe

brokenbutit’sfixable.Focusoncampaignfinancingasastartingplaceforblockchain

transparency,asbigmoneyiscurrentlythemostfundamentalproblem.Ifyou’rea

governmentcontractor,usesmartcontractstocleanupgraftandwasteandevidence

yoursuperiorperformance.Thepossibilitiesabound.

Clearlytherewillbeastruggletobringaboutchange,butcitizensoftheworld,

unite!Youhaveeverythingtogainthroughtheblockchain!

CHAPTER9



FREEINGCULTUREONTHEBLOCKCHAIN:

MUSICTOOUREARS

twasn’tyourtypicalyearling’sbirthdayparty.Thecelebrationtookplaceatthe

RoundHouseanhouroutsideLondon,inamassivebarncompletewithsound-

reactiveLEDtree,abouncycastle,andabuffetfitforHenryVIII.Thecrowdwas

eclectic:a“contact”juggler,twodozentoddlers,theirparents,neighbors,musicians,

andahandfulofblockchaindevelopers.TherewasVinayGupta,aScottish-Indian

engineerbestknownforinventingthehexayurt,asmalldisasterreliefshelter.Gupta

isnowexplainer-in-chiefwhenitcomestocommunicatingblockchaintechnologyto

themasses.TherewasalsoPaulPacifico,CEOoftheFeaturedArtistsCoalition.

Afteracareerinbanking,Pacificoisnowfightingfortherightsofmusicians.And,of

course,therewasourhost,ImogenHeap,anaccomplishedcomposerandmusician,

voted“inspirationalartistoftheyear”byreadersofMusicWeek,

andthemotherof

one-year-oldScout.

“IwanttoknowthatthestuffI’mmakingcouldbeworthsomethingtoScout

someday,”Heaptoldus.Shewasexpressingherdeepconcernsaboutthemusic

industry.“It’ssofragmented;there’ssolittleleadership,andthere’ssomuch

negativityaroundthebusinesssideofit,”shesaid.“Everythingistopsy-turvy.It’sall

upsidedown.Theartistsareattheendofthefoodchain.Itjustdoesn’tmakesense.

Musiciseverywhere,allthetime.It’sonourphones,it’sinourtaxis,it’severywhere.

Buttheartistsaregettinglessandless.”

Andthereinliestherub.TheInternetisamarvelousmuse,bothamediumof

creativityandachannelforfreespeech.There’snoshortageofideasforwhattalented

artists,designers,andcoders—andtheirmanyfans—candowithoneanotheronthe

WorldWideWeb.Noristhereadearthofwaystomakemoneyfromallthiscreative

collaboration.Creativeindustriessuchasmusicpublishingandrecordinghavebeen

tappingnewrevenuestreamslikedigitaldownloadsandstreamingaudio.The

problemisthat,witheachnewintermediary,theartistsgetasmallercutandhave

littlesayinthematter.DavidByrneofTalkingHeadsfamesummedupthesituation

inanop-edpiece:“Itseemstomethatthewholemodelisunsustainableasameansof

supportingcreativeworkofanykind.Notjustmusic.Theinevitableresultwould

seemtobethattheInternetwillsuckthecreativecontentoutofthewholeworlduntil

nothingisleft.”

Thischapterlooksatwaysthatblockchaintechnologiesareputtingartistsatthe

centerofthemodelsotheycannotonly“havetheircake,”thatis,exercisetheir

freedomofexpression,butalso“eatit,too,”maximizingthevalueoftheirmoraland

materialinterestsintheirintellectualproperty.Inotherwords,torestoretheirrights.

Nomorebig,greedyintermediary,nobiggovernmentcensors.Here,wesurveythe

culturallandscape—art,journalism,andeducation—wherebasichumanrightsand

livelihoodshanginthebalance.

FAIRTRADEMUSIC:FROMSTREAMINGMUSICTOMETERING

RIGHTS

“IfScouteverdidendupbeingamusician,howonearthwouldshemakemoney?

Shewouldn’tbeableto,”saidImogenHeapofherdaughter’smusiccareer,wereit

dependentonthecurrentmusicindustrymodel.“Weneedsomethingreallysimple

andcore,somethingtrustworthy,forpeopletofeelthatmusicissomethingtheycan

doforaliving.”

PaulPacificoagreed:“Wewantamusicindustrythatreflectsthe

cultural,technological,social,andcommercialsenseofourtimesandallowsfora

sustainableandviablefutureforcreatorsandconsumersalike.”

Heaphasteamedup

withPacifico,VinayGupta,andotherstocreatethisnewmusicecosystem.

Iftherewereapredictionmarketforinnovations,we’dbetonTeamHeap.In

2009,shebecamethefirstwomantowinaGrammysoloforengineeringherown

album,Ellipse.ShetookallherTwitterfollowerstotheawardceremonybywearing

whathasbecomeknownasthe“Twitterdress.”Heroutfit,designedbyMoritz

Waldemeyer,featuredanLEDzipperthatstreamedherfans’tweetsaroundher

shoulders.In2013,Heapkick-startedthenonprofitMi.Mutoinventamusicalglove

system.Itcombinesmappingsoftwarewithmotiondetectionsensorssothat

performerscancontrollights,music,andvideowithuser-customizedgestures.The

inventionwontopprizeatthe2015BerlinAwardsforWearableIT/FashionTech.The

glovesarequicklycatchingon.PopstarArianaGrandepostedthismessageon

YouTubewithhervideocoverofHeap’s“HideandSeek”:“wanttothankmyidol

@imogenheapforallowingmetousetheMimuglovesonmyfirsteverworldtour.”

IfanyonedoubtsHeap’sabilitytorallyacommunityaroundnewtechnology,think

again.

“Wereallyknowwhatwewant,”Heapsaid.“We’renotabunchofairheadswho

liketosmokepotinourlivingroomsandmakemusic.We’rehardworking

entrepreneurs.”

Heapviewsblockchaintechnologyasanewplatformforcreatorsof

intellectualpropertytogetfairvalueforit.Smartcontractsinparticularcould

eliminatethemagnitudeofindustrycomplexity,simplifyingamission-criticalroleof

musiclabelsinthisecosystem.

RubeGoldbergStrikesAgain:ComplexityintheMusicBusiness

ToparaphraseTalkingHeads,howdidwegethere?Howdoweworkthis?

Itstarts

withabasicproblemforartists—thattheysignedcontractsdraftedforthevinylage,

whenhugeanalogproductionanddistributioncostsstoodbetweenrecordingartists

andtheirpotentialconsumers.Heaptoldus,“WhenIfirstfoundarecordlabel,Ithink

Imanagedtogetsomethinglikefifteenpercent.Mylastrecorddealafewyearsago,I

gotmaybenineteenpercent.Ifpeoplearelucky,theymightgetmorenow.”

Artists

mayhaveassignedtheirrightstoalabelforthefulltermofcopyright.IntheStates,

that’seitherninety-fiveyearsorthelifeoftheartistplusseventyyears.Imagineall

theunforeseeninnovationsthatacontractwouldhavetocovertokeepthedealfair

forartistsandtheirheirs.

Initially,thelabelsweresmall,radiowasking,therecordstorewasqueen,and

artistandrepertoirepersonnelnotonlyscoutedfornewtalentbutalsooversawtheir

artisticdevelopment.Inthelasttwenty-fiveyears,theindustryhasconsolidatedfrom

thousandsoflabelsdowntothreeglobalsuperpowers—SonyMusicEntertainment,

Vivendi’sUniversalMusic,andWarnerMusicGroup—andafewhundredindie

labels.Thesethreemajorshaveacombined15percentstakeinSpotify,themost

popularandlucrativestreamingmusicservice.

Sotheywillgetanextracash

infusionifandwhenSpotifygoespublic.Applehasbecometheworld’slargestmusic

retailer,andLiveNationtheworld’slargestliveentertainmentcompany.

Socontrolofmusiccopyrightisconcentratedinthefew.Thelabelsandthetour

promotioncompanieshavestartedaskingfor360-degreedealsfromartists.That

meansgettingacutofalltherevenuesanartistgenerates—publishingrightstothe

underlyingcomposition,usagerightstothesoundrecording,performancerightswhen

theartistgoesontour,potentiallyevenmerchandiseandsponsorshiprights—

regardlessofwhethertheyinvestedinthecultivationofthoserights.

Withconsolidationcomessystemsintegration,andthat’snevereasy.Each

conglomeratehasitsownprocessofaccountinganditsownversionofacontractand

aroyaltystatement,makingside-by-sidecomparisonsachallenge.“Wehaveabig

probleminthattheindustryisveryfragmented.Withallofitsdifferentplatforms,it’s

abitofanightmare,”Heapsaid.

Thesesystemsmustaccommodateinnovationin

production,format,distribution,andcontextofusage.Butrarelyisanelement

immediatelyoutmoded,andsoeverypartymustmaintaintwoormoremodels

concurrently,themostobvioustwobeingthephysicalandthedigital.

Toaddtothecomplexity,therearemanymembersofthesupplychain,notjust

thepublishersandtheperformancerightsorganizations(PROs)—organizationsthat

monitorpublicperformancesofmusicandcollectperformanceroyaltiessuchasthe

not-for-profitAmericanSocietyofComposers,AuthorsandPublishers(ASCAP),

not-for-profitBroadcastMusic,Inc.(BMI),andtheenterpriseformerlyknownasthe

SocietyofEuropeanStageAuthorsandComposers(SESAC)—butalsotheproducers

andthestudios,thevenues,theconcerttourorganizersandpromoters,the

wholesalers,thedistributors,andtheagents,eachwithitsowncontract,accounting,

andreportingsystem.Theytaketheircutandpassalongtheremaindertotheartists’

managersandagents.Whatever’sleftgoestotheartiststhemselves,perthetermsof

theircontracts.That’sright—theartististhelasttobepaid.Itcouldbesixtoeighteen

monthsbeforethefirstroyaltycheckarrives,dependingonthetimingoftherelease

andthelabel’saccountingcycle.

Finally,anentirelynewlayerofintermediaries—technologycompanieslike

YouTubeorSpotify—insertedthemselvesintothesupplychainbetweenartistsand

labels,slicingtheartists’pieceofthepieeventhinner.Let’slookatstreamingmusic.

Spotifypaysonaveragebetween$0.006and$0.0084perstreamtorightsholders,

usuallythelabels.

Thecalculationofthisinitialpaymentmayseemtransparentat

first.Spotify’ssitestatesthatitpays70percentofitsadvertisingandsubscription

revenuestorightsholders.Butwerevieweditsforty-one-page“DigitalAudio/Video

DistributionAgreement”withSonyUSAInc.,andthepayoutofsome$42.5million

innonrecoupableadvancestoSonyartistsisanythingbutclear.Infact,thefirst

paragraphoftheagreementcallsforconfidentiality.ItappearsthatneitherSpotifynor

SonycaninformSony’sartistsoftheimpactofthisagreementonartists’revenues.

RichBengloff,presidentoftheAmericanAssociationofIndependentMusic,said

that,inhisexperience,thelabelsdon’tusuallysharemoneynotdirectlytiedto

usage.

IndustryanalystMarkMulligansaid,“Artistsaregoingtofeelpainforat

leastanotherfourtofiveyears,justastheydidinthefirstfourtofiveyearsafter

iTuneslaunched.”

Sowhatvaluedothelabelsadd?Certainly,theyattempttomanagethis

complexity,policepiracy,andenforcerights.Forexample,UniversalMusic

PublishingGrouphaddedicatedathirdofitsworkforcetoroyaltyandcopyright

administrationinlocalmarketsaroundtheworld.

Universalrecentlydeployedan

artist’sportalthatallowsartiststopeekatthestatusoftheirroyaltiesandtorequest

advancesagainstfuturerevenuesfornofee.Theportalalsoprovides“insightsinto

Spotifyusage:howmanytimesasongstreams,whatkindsofpeoplearestreamingit,

whatelseisonthoselisteners’playlists,andhowspecificsongsresonatewithcertain

audiences.”Universalhasdevotedsixteenstafferstoupgradingtheportaland

interpretingdataforartists.

Thelabelsalsohavehugeteamsoflawyersand

lobbyists.Theycanlaunchnewartistsglobally,demandingtheirboilerplateterms,

marketingthroughlocalforeignmedia,distributingtheirmusicinforeignmarkets,

licensingrightstoforeignpublishers,supportinginternationaltours,andaggregating

alltherevenues.Thecostofpolicingroyaltieshasincreasedwiththecomplexityof

thebusiness—thatisacostthatdirectlyaffectsartistseverywhere,becauseit

functionslikeatax.

Smartcontractsontheblockchaincaneliminatethemagnitudeofthiscomplexity,

replacingamission-criticalroleofmusiclabelsinthisecosystem.Accordingto

ImogenHeap,“Ifyou’reacomputerprogram,apieceofsoftware,adatabase...

theseissuesdisappear,asit’sjustmathshalfthetime.Thisbitgoestothisperson...

anditdoesn’ttakeayearortwotoreachtheartist,writer,performer....It’sinstant

becauseit’sautomatedandverified.Ontopofthis,culture-shiftingnewmusic

distributionservicesgatherreallyusefuldatafromartists’fans,whichcould

massivelyhelpusbemoreefficientiftheartiststhemselvescouldgettoit.”

That’s

thefutureofmusicontheblockchain.

EmergenceofaNewMusicBusinessModel

Thecombinationofblockchain-basedplatformsandsmartcontracts—plustheartistic

community’sstandardsofinclusion,integrity,andtransparencyindealmaking,

privacy,security,respectofrights,andfairexchangeofvalue—couldenableartists

andtheircollaboratorstoformanewmusicecosystem.

“Wouldn’titbeniceifIcouldjustdecidehowI’dlikemymusictobesharedor

experienced?”Heapasked.“Tosimplyuploadapieceofmusic,forexample,andall

itsrelatedcontenttooneplaceonline,foralltotapintoandderivefrom.Usagerights,

ownership,theequivalentoftoday’slinernotes.Video,latestbiography,”andall

otherparties—notjustrecordlabels,musicpublishers,andtourpromotersbutalso

corporationslookingforjingles,TVproducerslookingforsoundtracks,mobile

serviceproviderslookingforringtones,andthemanyfanslookingtodofanvideos—

coulddecidewhethertoagreetoHeap’stermsofuse.“Wouldn’titbeamazingtofeel

thepresenceoftheartist,thatiftheymakethatdecisionabouttheirmusic,it’sreally

feltinarealphysicalsense,evenfromonedaytothenext?”shesaid.“Imaydecide,

hey,it’smybirthdaytoday,allmymusicisforfreeor...ifyou’reundersixteenor

oversixty,it’sonme!Ortodivertallpaymentsduetometoarelieffund,withjusta

fewalterationsofwordinginthesmartcontract.”

That’sthegoalofdesigninganartist-centricmodelontheblockchain,notamodel

centeredonmusiclabelsortechdistributors.Artistscouldproducemusicandbepaid

fairlyforthevaluetheycreate,andloversofmusiccouldconsume,share,remix,and

otherwiseenjoywhattheyloveandpayafairvalue.Thismodelwouldn’texclude

labelsordigitaldistributors,buttheywouldbeequalratherthandominantmembers

oftheecosystem.

Thenewmusicindustryisnotapipedream.InOctober2015,Heaplaunchedher

firstexperimentbyreleasinghersong“TinyHuman,”andallrelateddata—the

instrumentalversion,sevenstereostems,frontcoverimage,musicvideo,linernotes

onmusicians,gear,credits,lyrics,acknowledgments,andusefullinks,andthestory

behindthesong—ontheInternet.

Thesedetailswouldincreaseherdiscoverability

ontheInternet,thatis,tohelppotentialcollaboratorstofindher.

Heapinvitedfans,developers,andservicestouploadhersongtotheirvarious

platformsandtosharetheirworkaswell.Shegrantedthemnonexclusiverightsto

createanImogenHeapartistprofile,providedthattheygaveherthelogindetailsand

permissionsafteruploadingherfilestotheirsystems.Iftheyexpectedrevenue

streams,thensheaskedthemtoprovidepaymentmodels,percentages,andamounts

sothatshecouldfactorthosedetailsintoheranalysisoftheexperiment.Finally,she

welcomeddonationstoherbitcoinaddressandpromisedtodirecthalftheproceedsto

hercharitablefoundation,Mycelia,hernameforthisnewecosystem.Usagedataand

participantbehaviorwouldinformthenextstageofdevelopmentontheblockchain.

VariouscompaniesareworkingonitsdesignandcollaboratingwithHeapand

otherforward-thinkingmusicians.Thisnewecosystemhasanumberoffeaturesthat

theexistingindustrylacks:

ValueTemplatestoconstructdealsthatrespecttheartistasentrepreneurand

equalpartnerinanyventure,integraltovaluecreation.Good-byearchaicpaper

contractsthatperpetuateunfairbeginnings.“Nomoreclawingbackroyalty

percentages,”saidHeap.

InclusiveRoyaltiesthatdividerevenuesfairlyaccordingtoeachperson’s

contributiontothecreativeprocess,notonlycomposersandperformers,butalsothe

otherartistsandengineers.Everyonecouldhaveanupsideinasmashhit,notjustthe

labelsandthedistributors.

TransparentLedgersdistributedontheblockchainsothateveryonecouldsee

howmuchrevenueasongwasgenerating,thetimingandmagnitudeoftherevenue

streams,andwhowasgettingwhatpercentage.Nomorearchaicandproprietary

paper-basedaccountingsystemstohidebehind.Separatetagsforthenatureof

revenues,fromwork-made-for-hiretoroyaltyrevenues.Easyaccounting,easy

auditing,easypaymentoftaxes.

Micrometering,Micromonetizingfunctionalitytostreamtherevenues,notjust

themusic.Ifthemusicweremetered,whereconsumersmademicro-orpicopayments

perplay,theroyaltypaymentscouldbestreamedimmediatelytotheartistsand

contributors.Nomorepaymentdelays,nomorebiannualorquarterlyroyaltychecks,

nomorecrypticroyaltystatements.Nomorehand-to-mouthartists!Blockchain

theoristAndreasAntonopoulosgavethisexample:“StreamiuminArgentinaisa

streamingvideoservice.Itallowsvideoproducerstochargethousandthsofapenny

fordownloading,say,twohundredmillisecondsoflivestreamingvideo.Ituses

multisig[nature],time-lockedtransactions,atomicity,andsumintegritytoimplement

itsscheme.Producersdeliveronlythevideothathasactuallybeenpaidfor,and

consumerspayforonlythevideoactuallyconsumed.Theyautomaticallyrenegotiate

thatcontractfivetimesasecond.Ifeitherofthemdropsoutatanypointintime,the

contractendsandtheycashinthemostadvantageoustransactionbetweenthem.”

RichDatabasesthatcaninterfacewithoneanotherandassociatethecore

copyrightedmaterial—lyrics,composition,andrecordings—withalltheirmetadata,

thelinernotes,theartworkandphotographs,theindividualtracks,therightsthatthe

composerandtheperformerarewillingtolicense,thetermsoflicensing,contact

information,andsoforth—inthedigitalledgerforalltosee.Nomoreincomplete

databasesofrights.Rightsavailabilityatyourfingertips!Rightsholderswouldbe

easytofind.

UsageDataAnalyticsinthehandsofartistsatlast,toattracttherightadvertisers

andsponsors,organizetours,planpromotionsandcrowdfundingresourcesandfuture

creativecollaborationswithotherartists.Themodelcouldcapture“somuchofthis

lostdataaroundtheworld,likewhereareyourfans,howoldarethey,whatarethey

interestedin,”saidHeap.“Withthatinformation,wecouldreallytailor-maketours,

wecouldconnectupwithbrandsandinitiativesthatresonatewithus,orpromote

artists,products,orcharitiesweloveandsupport.I’mnottalkingnamesande-mail

addressestypeofinfo,abitmorezoomedoutbutstillvitallyusefuldata.Wecould

cross-referenceitwithotherbands’dataforallkindsofinterestingusesforfansand

artistsalike!”

DigitalRightsManagement,thatis,ameansofmanagingdigitalrights,notthe

anticonsumerDRMsoftwarewrapperthatwasallaboutrestrictingusage.We’re

talkingaboutthedeploymentofsmartcontractsthatactuallymanagerightsand

maximizethevalueofpublishing,recording,performance,merchandise,andallother

rights.Thisincludestermsofthird-partyengagementforrecordlabelsand

distributionservices:labelsanddistributorscoulddecidewhethertooptintoan

artist’stermsofuseandexpectationsforservice.Ifartistsdon’twantadvertisingto

interruptthemusicexperience,thentheycanforbidit.Iftheywantacertaincutofad

revenue,thentheycaninsistonit.Iftheywantoneoftheselargefirmstohandle

licensing,distribution,andcopyrightenforcementincertainterritoriessuchasChina,

thentheycandothat.Theycanalsosettermlimits.Ifthefirmsdon’tdeliveracertain

levelofrevenue,thenthecontractscanautomaticallyterminate.Artistsalsoneed

automatedsubsidiaryrightsmanagement,whereverpossibleordesired,where

prospectivelicenseeseitheracceptorrejecttheartist’stermsofuseandpayment.The

contractitselfenforceseachdealandcannotifytheartistofanybreachesand

terminations.

Auction/DynamicPricingMechanismstoexperimentwithpromotionsand

versioningofcontent,evenpegsubsidiaryrightsroyaltypercentagestothedemandof

asong.Forexample,ifconsumerdownloadsofasongspike,thenanadvertiserwho

licensedthatsongforacommercialautomaticallyhastopaymorewhenthe

commercialruns.

ReputationSystemthatcullsdatafromabitcoinaddress’stransactionhistory

andsocialmedia,tocreateareputationscoreforthataddress.Artistswillbeableto

establishtheirowncredibilityaswellasthatofprospectivepartnersindealmaking,

whetheramongartistsascollaboratorsorbetweenartistsandconsumers,labels,

merchants,advertisers,sponsors,licensees,andsoforth.Usingmultisigsmart

contracts,artistscouldrefrainfromdoingdealswithentitiesthatdon’tmeetcertain

reputationalstandardsordon’thavenecessaryfundingintheiraccounts.

Thekeypointofthisnewfairmusicindustryisthattheartistsareatthecenterof

theirownecosystem,notattheedgesofmanyothers.“IseeaplaceforSpotifyand

YouTube.Iseeaplaceforcuration,andIseeaplaceforuser-generatedcontent,”said

Heap.“Iseeaplaceforrecordcompaniesbecausewestillneedpeopletosiftthrough

thehundredsofmillionsofhoursofmusic,orbillionsofbitsofmusicandartallover

theplanetbeingcreatedeveryday.”

Withsoftwaretemplates,theycanengage

creativecollaborators,thebigmusiclabels,thebigdistributors,andthemanysmaller

intermediariesastheyseefitontheblockchain.

TheSelf-LaunchedArtist:SignsoftheNewMusicParadigm

OneofImogenHeap’sfriends,ZoëKeating,Canadian-borncellistandcomposer,has

alwayscontrolledherownmusic.Sheownsallherpublishingrightsandthemasters

toherrecordings.Shecarefullyorchestratesherownmarketing,sales,licensing,and

distributionstrategy.Givenallthecomplexitymentionedabove,we’rehugely

impressed.“Anartistlikemecouldn’texistwithouttechnology.Icanjustrecord

musicinmybasementandreleaseitontheInternet,”KeatingtoldTheGuardian.For

her,theInternethasleveledtheplayingfieldforindependentartists,buther

experiencewiththebigonlinemusicdistributorshasnotdifferedgreatlyfromImogen

Heap’swiththetraditionallabels.“Thisisnotjustanexcuseforservicestoreplicate

thepaymentlandscapesofthepast.It’snotanexcusetotakeadvantageofthose

withoutpower,”saidKeating.“Corporationsdohavearesponsibilitynotjusttotheir

shareholdersbuttotheworldatlarge,andtoartists.”

KeatingwasalludingtothenewcontractthatGoogle’sYouTubepresentedtoher.

Itwaswrappedinnondisclosure.Forseveralyears,she’sdistributedhermusicon

YouTubeandmonetizedthird-partyuploadsofhermaterialusingContentID,a

programthatautomaticallyalertsrightsholderstoinstancesofpotentialcopyright

infringement.Keatingwasn’tconcernedaboutpiracy,filesharing,orroyalties.Toher,

commercialstreamingwasameansofpromotion,reachingnewaudiences,and

analyzingusagedata.Themusicaggregatorsandthehitmakersweretheoneswho

madesignificantmoneybyofferingcompletecatalogsthroughon-demandservices.

Nother.Thelargestshareofherrevenueshadalwayscomefromhard-corefans

who’dpayfromtwentydollarstoahundredforanewalbum.Shewouldreleasenew

workonBandcampfirst,thenuploadittoiTunes,andfinallymakeselections

availableelsewhere—YouTube,Spotify,Pandora.Thatwindowingstrategy—making

contentavailableexclusivelyinaparticularchannelforaperiodoftime—hadproven

itselfeffectiveforherandherhard-corefans.Shecouldthankherexistingsupporters

andcultivatenewrelationships.

YouTubewaslaunchinganewsubscriptionservice,MusicKey,whereusers

wouldpayafeetoavoidadvertising.IfKeatingwantedtocontinuemonetizingher

workthroughYouTube,thenshewouldhavetoagreetoYouTube’sterms:includeher

entirecatalog,andstopwindowingelsewhere.Itwasallornothing.Sheknewthatthe

independentlabelsweren’thappyeitheraboutthenewlicensingterms,buttheywere

moreupsetbythefinancialrepercussions.Keatingwantedtomaintaincontrolover

hermusic,onherterms.

Shesawthepotentialofthebitcoinblockchainasatechnologythatcouldensure

thatgoal,startingwithitstransparency.“Ijustbelieveintransparencyineverything,”

shetoldForbes.“Howcanwebuildafutureecosystemwithoutknowinghowthe

currentoneactuallyworks?”

Forexample,onYouTube,Keatingestimatesthatthere

arefifteenthousandvideos—danceperformances,films,TVshows,artprojects,

gamingsessions—thatusehermusicassoundtrackswithoutherauthorization.She

shouldbeabletoleverageallthatenthusiasmforherwork,butonlyYouTubeknows

exactlyhowpopularhermusicis.Nielsen’sSoundScanisonlyonefacetofa

multidimensionalpicture.

LikeHeap,Keatingwantstoregistercopyrightandleveragecopyrightmetadata

ontheblockchain.Thatway,peoplecouldmoreeasilytrackherdownasthe

distributedledgerofmusicmetadatacouldtracknotonlywhocreatedwhat,butwho

elsewasmateriallyinvolved.Sheimaginesvisualizingusageandrelationships,

calculatingtherealvalueofasongfordynamicpricing,andenablingongoing

micropaymentstocollaboratorsandinvestorswithoutthird-partyblackboxeslike

ASCAPorBMI.

Again,we’renotsayingthatthereisnoroleforlabelsortechnologycompanies,

andthatartistscouldjustmakeitontheirowninapurelypeer-to-peerecosystem.

Ratherwe’retalkingaboutanewkindofmusicecosystemcenteredontheartists,

wheretheycontroltheirownfateandreceivefaircompensationforthevaluethey

create.Blockchaintechnologywillnotcreateanewstandardforhowartistsget

compensated.Instead,itwillliberatethemtochooseandcustomizeaninfinitearray

ofsolutionsthatworkfortheirspecificneedsandbeliefs.Theycangiveitawayfor

free,ormicromonetizeeverything—butit’stheirchoice,notthelabel’sorthe

distributor’s.

OtherElementsoftheNewMusicEcosystem

BasicCopyrightRegistration

Therearetwofundamentaldimensionstomusiccopyright.Thefirstistheworldwide

righttotheunderlyingcomposition—themusicalnotesandthelyrics—inallforms

andlanguages,andthat’susuallyheldbythecomposer-lyricist.Themusicandthe

lyricscanbecopyrightedseparately.Thecomposer-lyricistmakesroyaltieswhenever

someonerecordsorperformsthesong,buysthesheetmusic,adaptsitintoanother

genre(e.g.,elevatorMuzak),translatesitintoaforeignlanguage,orincludesthe

musicinananthologyortextbook.Thesecondistheworldwiderighttothesound

recording,aperformancecapturedandpreservedinsomemediumlikeadigitalfileor

musicvideo.Therecordingisusuallycopyrightedbytheperformerorbandmembers,

whoearnroyaltieswhentherecordingisplayedontheradio,television,orthe

Internet;syncedwithTVshows,commercials,orvideogames;streamed,

downloaded,orpurchasedinsomehardmediumsuchasvinyl,CD,orDVD.

ZoëKeating’slevelofautonomywaswhatmotivatedToronto’sindustrialrock

band22Hertztoturntotheblockchain.InCanada,registeringcopyrightforonesong

costsfiftyloonies,andthecertificatecontainsonlythetitleofthework.Theband’s

founder,RalfMuller,didn’tthinkthat’dbehelpfulincourt,ifanyoneeverusedthe

lyricsormelody.Sohedecidedtogothehashingroute,bycreatingahashofthe

wholesongusingsomethingcalledanOP_RETURNfeature—andencodeditintothe

blockchaininstead.Ifanyoneeverusedhiswordsormusic,hecouldsimply

demonstratehisownershipbypointingtothetransactionontheblockchain,doing

anotherhashofthesong,andcomparingthesecondhashwiththehashonthe

blockchain.Theywouldbeidentical.“OnceyouencodeahashintheOP_RETURN

andblockuponblockgetwrittenontop,itisbasicallyimpossibletogobackand

changeanything.This,tome,isincredible.”Whenaskedwhytheband’sonlinestore

wasacceptingbitcoinandofferingdiscountstobitcoinusers,Mullerresponded

emphatically,“I’mnotinto‘businessasusual.’”

DigitalContentManagementSystem

NorisColu,adigitalcontentmanagementplatformbasedonbitcoinblockchain

technology.Itprovidesdevelopersandenterpriseswithtoolsforaccessingand

managingdigitalassetsincludingcopyright,eventtickets,andgiftcards—muchof

whatatrulydistributedmusicindustrywouldneed.Coluhaspartneredwithmusic

technologyleaderRevelatortobuildarightsmanagementapplicationprogramming

interface(API).ThegoalistorealizewhatImogenHeapandZoëKeatingwere

imagining—thedemystificationofrightsownership,digitaldistribution,andactual

usage.TheAPIwillalsoprovideincumbentsameansofprovidingthemuch-called-

fortransparencyandefficiency.“WeareveryexcitedaboutthepotentialforColu’s

platformtosimplifythemanagementofmusicrights,startingwiththoseassociated

withsongwritersandtheircompositions,”saidBrunoGuez,founderandCEOof

Revelator.“Coluhasmadethecomplextechnologyoftheblockchainaccessiblefor

integrationsintoplatformslikeours,andwe’relookingforwardtoexploringallthe

waysitcanimproveservicetoourclients.”

TheNewArtistsandRepertoire(A&R)

Finally,akeyaspectofanycreativeindustryistalentscoutingandcoaching.

Musiciansnaturallyembracementoringandplayan“artistsandrepertoire”rolein

suchcompetitionsasTheVoice.TheblockchainsupportsthistypeofA&Rwithusage

algorithms.ConsiderPeerTracks.Accordingtoitslandingpage,itis“theultimateone

stopmusicplatform”forbothmusicloversandartists.PeerTracksattachesasmart

contracttoeverysongthatanartistuploads,andthecontractautomaticallydivviesup

therevenuesaccordingtowhateverdealtheperformermadewiththelyricist,the

composer,andothermembersoftheband.Artistscreatetheirowntokens,bearing

theirnameandlikenesssimilartoavirtualbaseballcard.Tokensarecollectibles.The

artistsetsthenumberofavailabletokens.Sotherecouldbelimitededitions,soto

speak.Theconceptissimple:createastoreofvalue,thevaluationofwhichcorrelates

totheartist’spopularity.

Usersgetfullaccess,ondemand,totheentirePeerTracksmusiccatalogforfree

withoutadvertisinginterruptions.Theycansavesongsandplaylistsforofflineuse

anddownloadanysongoralbumfromthecatalog.UnlikewithSpotifyoriTunes,

userscanalsopurchasetokensofartistsandtradethesetokenslikebaseballcards.As

anartist’sstarrises,thevalueofthetokensrises,andsouserscouldpotentially

benefitfinanciallyfromsupportingartistsbeforetheybecomefamous.Lovingan

artisttranslatesintoVIPtreatment,perquisites,andfreebiesfromartists.This

incentiveturnspeoplewhowouldbepassivelistenersonSpotifyintoactive

promotersandbuildsalong-term,engagedfanbase.PeerTracksintendstopayartists

moreforstreamsanddownloads—specifically95percentofrevenues—andtopay

theminstantaneouslyontheblockchain.Artistscansettheirownpriceformusic

downloadsandmerchandise.PeerTracksclaimsthat“swarmsofprofitdriventalent

scouts/curatorslookingforthenexthotstar/token”willhearanewartist’ssong

becausePeerTracksuserswillvotethemtovisibility.

ARTLERYFORARTLOVERS:CONNECTINGARTISTSANDPATRONS

Thetraditionalartmarketisnotoriouslyexclusiveandopaque.Arelativelysmall

numberofartistsandcollectorsrepresentanincrediblylargepercentageofthe

market,andthereareveryfew,narrow,andsometimescircuitouspathsforemerging

artiststoentertheartworld.Evenso,theopennessandgenerallyunregulatednature

oftheartmarketencouragesexperimentingwithnewconceptsandnewmedia,

democratizingtheartmarketononehand,anddemocratizingcapitalmarketsonthe

other,withbothhandsonthetransformativeanddisruptivepowerofthebitcoin

blockchain.

Artlerydescribesitselfasanetworkofartistswhohaveagreedtosharesomeof

theirearningswithpatronsandpeerswhoengagesociallywiththeirworks.

Artlery’sgoalistomintanart-as-asset-backed-currencyontheblockchainby

engagingartloversaspartialownersandstakeholdersoftheartwithwhichthey

interact.Itsapproachistoprovidetherightincentivesforallsidesofthemarket—

artists,patrons,curators,andvenuessuchasgalleries,museums,studios,andfairs—

ratherthanprovideperverseincentivesforonepartyattheexpenseoftheothers.To

fosterpatronageandbuildreputationforanartist,Artlerystagesinitialpublic

offerings(IPOs)ofdigitalpiecesofthatartist’swork.Artlery’sappenablesartists

suchasJaZoNFrings,DavidPerea,KeithHollander,BentonCBainbridge,andthe

BazaarTeenstoreplicatetheirphysicalworksdigitally,breakthemintomanypieces

likeapicturepuzzle,andapportionthemtopatronsbasedoneachpatron’slevelof

appreciationfromwithintheArtleryapp.Duringawork’sIPOperiod,patronscan

accumulateinterestuptothespecifiedpercentageofthepiecethattheartistinitially

giftedtothecommunity.Astheplatformmatures,Artleryplanstoallowforthe

transferandsaleoftheaccumulatedinterestsintheworks.

Atthe2015StanfordBlockchainSummitsponsoredbyArtlery,Dondecidedto

backaworkbyAnselmSkogstad,titledEUR/USD3081,anartisticrenderingofa

eurocurrencynotemagnifiedandprintedonafifty-eight-by-forty-four-inchDibond

aluminumcomposite.

BuyingArtThroughtheBitcoinBlockchain:HowItWorks

Topurchasethepiece,Donopenedhisbitcoinwalletapp.Heusedittocreatea

messagethatspecifiedtheamountofbitcoinrepresentingthepurchasepriceofthe

piece,designatedArtlery’spublickeyastherecipientofthatbitcoin,andusedhis

privatekeyto“sign”orauthenticatethemessage.Dondouble-checkedallthefields

because,unliketraditionalpaymentmethods,therewasnoreversingthisbitcoin

transaction.ThenhebroadcastthemessagenottohisCanadianbankbuttotheentire

networkofcomputersrunningthefullbitcoinblockchain.

Somepeoplerefertothesecomputersasnodes,wheresomenodesaredonating

theirprocessingpowertosolvethemathproblemassociatedwithcreatingablock.As

we’veexplained,thebitcoincommunityreferstothemasminersandtotheir

problem-solvingworkasmining,asingoldmining.It’sanawkwardanalogybecause

itconjuresimagesofexpertswhosetalentmightconfersomecompetitiveadvantage

overnoobs(newbies).Itdoesn’t.Eachminerisrunningthesoftwarelikeautility

functioninthebackground,andthesoftwareisdoingallthecomputations.Serious

minersconfiguretheirmachinestooptimizetheirprocessingpower,minimizetheir

energyconsumption,andleveragehigh-speednetworkconnectivity.Beyondthat,

there’sreallynohumanaptitudenecessaryandnohumaninterferencetolerated.

Notallnodesaremining.Infact,thevastmajorityofnodesonthebitcoin

networkaresimplyperformingbitcoinruleverificationofreceiveddatabefore

routingthedatatopeerconnections.Thenetworkverifiedthetwobitsofdata—that

Doncontrolledtheamountofbitcoinspecifiedandauthorizedthetransaction—and

recognizedDon’smessageasatransaction.Theminersthenracetoconvertunordered

andunrecordedtransactionsintotransactionsorderedandrecordedinablockofdata.

Eachblockhadtoincludethedigestorhashofthepreviousblockoftransactions,as

wellasarandomnumberknownasanonce.Towintherace,acomputermustcreate

ahashoftheblock;thishashmusthaveacertain,butarbitrary,numberofzerosatthe

beginning.It’sunpredictablewhichnoncewillproduceahashwiththecorrect

numberofzeros,andsothecomputershavetotrydifferentnoncesuntiltheystumble

upontherightvalue.It’sreallylikewinningthelotterybecausethere’snoskill

involved.However,ahumanbeingcanincreaseherchanceofwinningthelotteryby

buyingastate-of-the-artcomputerprocessorthatspecializesinsolvingbitcoin’smath

problems;buyingmoretickets,thatis,runningmultiplehigh-powerednodes;or,as

humanbeingsoftendo,poolinghernodewithothernodes—likecolleaguesatthe

office—andagreeingtosplitthepotifoneoftheirnodeswins.Sowinningisamatter

ofluck,processingpower,andthesizeofone’sminingpool.

Hashrateisameasureofthetotalprocessingpowerofthebitcoinnetwork.The

higherthetotalaggregatehashrateoftheentirenetwork,themoredifficultitisto

findtherightnonce.Whenaminerfindsahashwiththecorrectnumberofzeros,it

sharesitsproofofworkwithallotherminersonthenetwork.Thisistheotherbig

scientificbreakthroughindistributedcomputing:usingproofofworktoachieve

networkconsensus.It’sknownastheByzantineGenerals’Problem.Theotherminers

signaltheiracceptanceoftheblockbyfocusingonassemblingthenextblock,which

hastoincludethehashofthenewlymadeblock.JustasDon’spublicandprivatekeys

areuniquetohim,thehashofeachblockisunique:itworkslikeacryptographic

fingerprintthatmakesallthetransactionsintheblockverifiable.Notwoblock

fingerprintsarethesame.Thewinningminerreceivesasetquantityofnewbitcoins

asareward—thesoftwareitselfmintsandallocatesthenewcoins—andthehashed

blockisappendedtothechain.

So,withintenminutesofDon’sbroadcastinghismessage,heandArtlery

receivedaconfirmationthatDon’sbitcointransactioncreatedwhatisreferredtoas

“unspenttransactionoutput,”meaningthatArtlerycanspenditbydoingwhatDon

justdid—broadcastingamessagethatspecifiestheamounttosendandtheaddressof

therecipient,andauthorizingthetransactionwithArtlery’spublickey.Iftheartist

andthepatronsknewbothDon’sandArtlery’spublickeys,thentheycouldseethat

thedealbetweenthemwentthroughandcouldseetheamountofthetransaction.

That’swhywecallitapublicledger—alltransactionsaretransparent—and

pseudonymous,inthatwecanseetheparties’addresses,thoughwecan’tseethe

namesofthepersonsbehindthem.Everysubsequentblockservedasfurther

confirmationoftheirtransaction.

ProfileoftheNext-GenArtPatron:RedefiningMoney

NowDonownsapercentageinterestintherightsofanartisticrenderingofaeuro.

Whenthephysicalworksells,theartist,thevenue,Don,andhisvirtualpatronsall

receiveaportionofthesaleaccordingtotheirlevelofparticipation.Inotherwords,

patronparticipationmatters.Patronswhointeractwiththeartistandthework,who

sharetheirappreciationinsocialnetworks,whosparkotherstoengagewithboth

artistandart,andwhoessentiallyservetopromotetheartist’sbrand,receivemore

thandoesapassivepatronwhovieweditonceonlineandboughtastake.We’renot

surewhetherwritingaboutitinthisbookcountsdirectlytowardDon’sparticipation

points.Artlerywantssignalsofappreciation—intheformofpositivereferencesto

artistsandtheirworks—tocorrelatewiththeappreciationinvalueoftheworkitself,

andsoperhapsfutureplatformreleaseswilltakeexampleslikeoursintoaccount.

Artleryisinitiallyconcentratingongiftingapercentageofeachpiece’ssale.Future

releasesoftheplatformwillallowpatronstopurchaseownershipstakesinartwork

directly,perhapssharingportionsofsubscriptionroyaltyrevenueorcopyright

licensingofthework.

Byinvolvingmultiplepartiesdirectly,includingpatrons,intheprocess,and

engagingthemasstakeholders,Artleryisfocusingmoreeyesonaccounting.The

blockchainasapublic,distributedledgerensuresopen,accurate,andtimely

processingoftransactions.Aspayoutsexpandbeyondfirstsale,secondarysale,and

subsidiaryrightssuchasprintsandmerchandising,individualartistswillneverbe

actingalone.Theywillhaveacommunityofpatronstakeholdersbehindthemto

negotiateandenforcetheircontractualrights.

Artleryutilizesthebitcoinblockchaininseveralways.First,itregistersthe

provenanceoftheartasmetadataontheblockchainthroughapartnershipandAPI

integrationwithanotherbitcoinstart-up,Ascribe.io,andituploadsthepayouttableso

thatallstakeholdersarepaidimmediatelyaccordingtotheirassetshareswith

immediatetransparencyforallparties.Itisexploringvarioustechniquesforencoding

thisinformation,suchasabitcoinscriptinsidetransactions.Whileitsinitialtarget

marketisfineart,Artleryhassignificanttractioninothercopyrightindustriessuchas

music,books,andmovies,whichitwilltargetthroughthereleaseofitsownAPI.

PRIVACY,FREESPEECH,ANDFREEPRESSONTHEBLOCKCHAIN

Personalprivacy,freespeech,andfreepressareessentialtoanopen,free,and

prosperoussociety.Ononehand,citizensmustbeabletocommunicateprivatelyand

anonymously.Ontheotherhand,theymustbeabletospeakfreelyandsecurely

withoutfearofrepercussion.Onlinecensorship,thehackingoflargeinstitutionsand

civilsociety,andEdwardSnowden’srevelationsofmassandtargetedsurveillance

anddatafrackinghavedrivencitizensofwell-establisheddemocraciestoseek

anonymityandencryptiontechnologies.Thesetoolsenablethemtodisguisetheir

identitiesandscrambletheirmessagesintransitandinstoragesothatonlyauthorized

personsmayaccessthem.

Here’stherub—encryptiontechnologiesareeithernotlegalforindividualuseor

notreadilyavailableinthosecountrieswhosecitizensneedthemmost.The

WassenaarArrangement,amultilateralexportcontrolregimethattechnologically

advancednationsagreedto,governstheexportof“dualuse”products,thatis,those

thatcouldbedeployedforbothgoodandevil.Wassenaar’soriginalgoalwastokeep

high-techproductsoutofthehandsofdictatorsinNorthKorea,Libya,Iran,andIraq.

Anonymityandencryptiontechnologiessuchaspublickeyinfrastructurewere

considereddualuse.

Today,incountriessuchasRussiaandChina,bothindividualsandcorporations—

includingforeignfirms—mustseekauthorizationtousethem.Incountrieswhere

theiruseisdiscretionary,governments—eventheObamaadministration—haveasked

techfirmstoinclude“backdooraccess,”thatis,asecretmeansofbypassingthe

normalauthenticationprocess(e.g.,loggingonwithapasswordorothersecurity

code)andgainingremoteaccesstoacomputeranditsdatawithoutauthorizationor

detection.ItisfarmoreinsidiousthanBigBrother,becauseatleasteverybodyknew

thatBigBrotherwaswatching.

Here,techfirmsaren’tsupposedtotellusersthat

there’sabackdoor.Nodoubthackerslookforthem,findthem,andusethem,too.

“Thetrendlinesregardingsecurityandprivacyonlinearedeeplyworrying,”

wroteDavidKaye,SpecialRapporteuroftheOfficeoftheUnitedNationsHigh

CommissionerforHumanRights.“Encryptedandanonymouscommunicationsmay

frustratelawenforcementandcounter-terrorismofficials,andtheycomplicate

surveillance,butStateauthoritieshavenotgenerallyidentifiedsituations—evenin

generalterms,giventhepotentialneedforconfidentiality—wherearestrictionhas

beennecessarytoachievealegitimategoal.”

Hewentontosaythatlaw

enforcementandcounterterrorismagencieshavecometodownplaygoodold-

fashioneddetectiveworkanddeterrencemeasures,includingtransnational

cooperation.

Notsurprisingly,onglobalmeasuresofthepreservationofpoliticalandpersonal

rights—thatis,privacyandthefreedomsofspeech,assembly,andthepress,andthe

toleranceofotherreligions,immigrants,politicalrefugees,andhomosexuals—Russia

ranks114th,andChinasecondtolast,at160th.

Forwhatit’sworth,theUnited

Statesisnoepitome:itranks28th.

BlockingWebsiteswithoutacourtorderhasbecomecustomaryinsuch

countries,andmanycensorshavefiguredouthowtothwartvirtualprivatenetwork

softwareusedtopreventcensorship.

AccordingtoReportersWithoutBorders,

Russiahasbeencurtailingfreedomsofexpressionandinformationandblocking

increasinglymoresitessinceVladimirPutin’sreturntothepresidencyin2012,

amongthemWikipedia.

Chinahasmasteredtheartofthetargeteddatablackout,

censoringsearchtermsrelatedtoHongKong’s“OccupyCentral”prodemocracy

movementandthetwenty-fifthanniversaryoftheTiananmenSquareprotestson

Weibo,China’sTwitterclone.Itmanagedtoblocknearly90percentofallGoogle

services.Imprisonmentisalsopopularinthesecountrieswhenpeoplepostcontent

deemedquestionablebythegovernmentonline.FollowingtheChinesestockmarket

collapseinJuly2015,authoritiesarrestedmorethanonehundredpeopleforusing

socialmediatospreadrumorsthat“causedpanic,misledthepublicandresultedin

disordersinstockmarketorsociety.”

Governmentsthatwishtorepressthevoicesofcitizenseverywhereandhave

capturedtechnologiesliketheInternettosilencedissidentsandblockoutsidemedia

willfindblockchaintechnologysignificantlymorechallengingforseveralreasons.

First,citizensandjournalistscouldusepublickeyinfrastructuretoencrypt

informationandconcealtheiridentitiesfromwould-becensorsandattackers.Second,

wheregovernmentsdiscourageanddeprivegoodandhonestjournalismoffunding,

journalistscouldraisefundsontheblockchain,castingawidernetforinvestors

sympathetictotheircause,especiallyinvestorswhopreferredtoremainanonymous.

Finally,governmentscouldnotdestroyoralterinformationrecordedonthe

blockchain;therefore,wecoulduseittoholdgovernmentsandotherpowerful

institutionsaccountablefortheiractions.

Considercrowdfundingjournalistsontheblockchain.Ifwereleasedthemfrom

thefinancialgripofstate-controlledmedia,theycouldcoverpoliticsfreelywhile

preservingtheanonymityofdonors.VeteranChinesejournalistscouldtryoneofthe

distributedpeer-to-peercrowdfundingplatformssuchasKoinify,Lighthouse,or

SwarmthatusePKItoprotecttheidentitiesofsenderandrecipientbetterthan

Internet-onlysystems.AnothergreatblockchaintoolisthefreemobileappGetGems,

whichbothguardsandmonetizesinstantmessagingthroughbitcoin.Userscansend

allsortsoffilessecurely,withGetGemsfunctioninglikeprivatee-mail,notjust

SMS.

Theseappsarejustthebeginningofwhatispossible.

Anothersolutionisadistributedplatformforfilingstoriesinanimmutableledger

thatmakestheledgerunique,suchaswhatFactomaimstoaccomplishinthe

developingworld.Reporterscouldpurchaseentrycredits—rightstocreateentrieson

Factom’sledger.Aswiththebitcoinledger,everyonewouldgetthesamecopy,and

anyonecouldaddtoitbutnoonecouldalterentriesoncetheywerefiled.Factomhas

acommit/revealcommitmentschemethatservesasananticensorshipmechanism:

serversinChina,forexample,couldn’tpreventthefilingofanotherwisevalidentry

becauseofitscontent.Ifthereporterhadattachedanentrycredittothefiling,thenit

wouldgetrecorded.Agovernmentcouldidentifycertainentriesasoffensivebut

couldn’tdeleteorblockthemastheChinesegovernmenthasdoneonWikipedia.Ifan

officialcourtweretoorderachangeintheledger,anofficerofthecourtcouldmakea

newentrytoreflecttheruling,butthehistorywouldremainforalltosee.

Athirdsolutionisdistributedpeer-to-peermicrobloggingthatdoesn’tgothrough

centralizedservers.StephenPair,CEOofBitPay,describedhowtoreinventTwitteror

Facebooksothatuserscontrolledtheirowndata.“Insteadofhavingjustonecompany

likeFacebook,youmighthavemanycompaniestyingintothiscommondatabase[the

blockchain]andparticipatinginbuildingtheirownuniqueuserexperiences.Someof

thosecompaniesmightaskyouforormightrequirecertaininformationtobeshared

withthemsothattheycouldmonetizethat.Butasauser,youwouldhavefullcontrol

overwhatinformationyou’resharingwiththatcompany.”

ThereisTwister,a

Twittercloneintermsoffeelandfunctionalitydevelopedin2013byMiguelFreitas,

ahackerandresearchengineeratPUC-RioUniversityinRiodeJaneiro,Brazil.

TwisterleveragesthefreesoftwareimplementationsofbitcoinandBitTorrent

protocolsanddeployscryptographyendtoendsothatnogovernmentcanspyon

users’communications.

GETTINGTHEWORDOUT:THECRITICALROLEOFEDUCATION

JoichiItoisamonganelitegroupofwidelysuccessfulentrepreneurs—fromBill

GatesandSteveJobstoBizStoneandMarkZuckerberg—whodroppedoutof

collegetoinventsomethingnewinthedigitaleconomy.

Itisahallmarkofour

entrepreneurialculturethatone’spursuitofanidea,togodeepandunderstandits

nuancesasItolikestosay,drivesavisionaryoutoftheclassroomandintobusiness.

HenryFordandWaltDisneypursuedtheirpassionswithoutcollegedegrees.Andsoit

isoneofthoseparadoxesthattheMassachusettsInstituteofTechnologywould

chooseItotodirectitslegendaryMediaLab,attheepicenterofallthingsdigitaland

relevanttoculture.

Thetimingwasperfect.“DigitalcurrencyissomethingthatI’vebeeninterestedin

evenbeforetheMediaLab....Iranoneofthereallyearlydigitaltestserversfrom

theDigiCashdaysinthe1990s.OneofthefirstbooksIeverwrotewasinJapanese,

calledDigitalCash,thatIcoauthoredwithsomeonefromtheBankofJapan.Sothis

hasbeenanareaofinterestformeforalongtimeandpredatesalotoftheotherstuff

I’vebeendoing.”

WhenhegottotheMediaLab,variousacademicsweredabblinginsomeaspect

ofbitcoinrelativetotheircorediscipline—consensusmodels,cryptography,computer

security,distributedsystems,andeconomics—butnoonespecificallyfocusedonit.

Hedidn’tseefacultydoingfundamentalresearcharoundbitcoin,eventhoughMIT

studentshadlaunchedtheMITBitcoinProjecttogive$100ofbitcointo

undergraduates.

ItohadasenseofurgencysimilartoImogenHeap’sinspreadingthewordand

formingteamsaroundlegal,technical,andcreativechallenges.Blockchain

technologiesweremovingmuchfasterthanInternettechnologieshad,butwithout

muchacademicinvolvement.Thecoredevelopersofthebitcoinprotocolswere

recoveringfromreputationalhits:theBitcoinFoundationwasbankrupt,andboard

memberMarkKarpeleswasarrestedinJapanforembezzlementthroughhisMt.Gox

exchange.Itomovedquickly.HelaunchedtheDigitalCurrencyInitiative(DCI)atthe

MediaLabandhiredformerWhiteHouseadviserBrianFordetodirectit.Hebrought

threeofthebitcoincoredevelopersintotheDCItoprovidethemwithstabilityand

resourcessotheycouldfocusonthecode.

Hethoughtthatcreatinganacademicnetworkofuniversitiesinterestedin

supportingbitcoinwasimportant,andthat’sunderway.“We’resettingupcourses,

we’retryingtoorganizeresearch,butwe’restillveryearly-stage,”hesaid.“We’ve

justgotthecorefundingtogethertosupporttheprogram,andwe’rejusttryingto

drumupinterestfromthefacultyandthestudentsinthespace.”Morebroadly,he

wantstheMITMediaLabtoreinventhighereducationsothatpeoplelikehimwon’t

dropoutandwillseethevalueofadiverseplaceliketheLab.It’sanopportunityto

pilotthefutureofacademia.

MelanieSwan,aleadingblockchaintheoristandacademic,wasmorespecific

aboutwheretoeducatestudentsabouttheblockchain,andit’snotintraditional

universities.It’sontheblockchain.“It’sreallyacompleterevolutioninhowwedo

everything.Academiaisnottherightplacetodoacademicthinkingaboutverynew

thingsliketheblockchain,”shesaid.Forexample,ratherthansubmittingresearchto

scholarlyjournalsforpublicationandwaitingfromsixtoeighteenmonthsfora

rejectionorpublication,ascholarcouldpostthepaperimmediatelyasSatoshi

Nakamotodidtoalimitedaudienceofpeers,receivereviewsinrealtime,and

establishtheneededcredibilitytopublishtoalargeraudience.Reviewerscouldvote

reviewsupordownasredditorsdoonRedditsothatthescholarwouldknowwhich

onestotaketoheart.Thepapermightevenbeavailableforfree,butotherscientists

couldsubscribetodeeperanalysisorthreadeddiscussionwiththeauthor.Thescholar

couldmakeherrawdataavailableorshareitwithotherscientistsaspartofasmart

contract.Iftherewasacommercialopportunityflowingfromthepaper,shecould

protecttherightsinadvance,takingintoconsiderationwhofundedtheresearchand

anyclaimstheymightmaketothediscovery.

SwanisthefounderoftheInstituteforBlockchainStudies.“There’sthestartofa

developmentofaneducationalinfrastructuretosupportlearningaboutthese

technologies.Obviously,allthemeetups,usergroups,andhackathonsare

tremendouslyuseful,”shesaid.“Everystrategyandaccountingconsultancyhasa

blockchainpracticegroupnow,andthereareeducationinstitutionslikeBlockchain

University.”

SwanherselfteachesablockchainworkshopatSingularityUniversity.

Shetalkedofaneducationsystemwhereacollegestudentwouldbecomewhat

shecalledan“educationalsommelier,”pairinginterestsorneededskillswith

accreditedcourses,potentiallymassiveopenonlinecourses(MOOCs).“Thebenefit

ofMOOCisdecentralizededucation.SoIcantakethetopmachinelearningclass

fromAndrewNgatStanfordUniversityviaCoursera.Icantakethetopothercourses

atMIT.”Sostudentscouldfundtheirownpersonaldevelopmentprogramsanywhere

intheworldandreceiveaccreditation.Sheexplained:“JustaswhenIgotakethe

GREortheGMATortheLSAT,IshowupwithmyID,itconfirmslocallythatIam

whoIsayIam,Itakethattest,”andthatlocalconfirmation“couldeasilybepartof

theMOOCinfrastructure.”

SwanhasbeenworkingonhowtodoMOOCaccreditationandtacklestudent

debtontheblockchain.Theblockchainprovidesthreeelementstowardthisgoal:(1)a

trustableproofoftruthmechanism,anoracle,toconfirmthatthestudentswhosigned

upfortheCourseraclassesactuallycompletedthem,tookthetests,andmasteredthe

material;(2)apaymentmechanism;and(3)smartcontractsthatcouldconstitute

learningplans.Considersmartcontractsforliteracy.“Whydon’twetargetfinancial

aidtowardpersonaldevelopment?LikeKiva,butKivaforliteracy,”Swansaid,

exceptthateverythingwouldbesupertransparentandparticipantswouldbe

accountable.Donorscouldsponsorindividualchildren,putmoneytowardlearning

goals,andpayoutaccordingtoachievement.“SayIwantedtofundaschoolchildin

Kenya’sliteracyprogram.Everyweekthischildwouldneedtoprovideproofof

completionofareadingmodule.Perhapsit’sallautomatedthroughanonlinetest

wheretheblockchainconfirmedthechild’sidentityandrecordedprogressbefore

disbursingthenextweek’sworthoffundingintowhatwemightcallthechild’s‘smart

walletforlearning’sothatthechildcouldcontinuepaymentforschoolwithout

interference.Moneytowardagirl’seducationcouldn’tbedivertedtoherbrother’s

schooling,”shesaid.

CULTUREONTHEBLOCKCHAINANDYOU

Aftertwoworldwarsinasinglegeneration,globalleadersadmittedthatpoliticaland

economicagreementscouldnot—wouldnever—maintainlong-termworldpeace.

Thoseconditionschanged,sometimesfrequently,sometimesdrasticallyso.Peacehad

toberootedinsomethingricher,moreuniversal,inthesharedmoralvaluesand

intellectualfreedomsofsociety.In1945,threedozennationsconvenedtoforman

educationalbodyofsortsthatwouldmodelacultureofpeace.Itbecameknownasthe

UNEducational,Scientific,andCulturalOrganization(UNESCO).Itsmissioninthe

worldtodayis“tocreatetheconditionsfordialogueamongcivilizations,cultures,and

peoples.”

Throughthelensofblockchaintechnologies,musicians,artists,journalists,and

educatorsareseeingthecontoursofaworldthatprotects,cherishes,andrewardstheir

effortsfairly.Allofusshouldcare.Weareaspeciesthatsurvivesbyitsideas,notby

itsinstincts.Weallbenefitwhencreativeindustriesthriveandwhenthecreatives

themselvescanmakealiving.Moreover,thesearethebellwethersofoureconomy—

theyrevealfasterthannearlyanyotherindustryhowbothproducersandconsumers

willadoptandthenadaptatechnologytotheirlives.Musicianshavelongbeen

amongthefirsttoexploitinnovationsforthebenefitofagreatmanyothers,toooften

attheirownexpense.Thesededicatedmembersofoursocietyinspireus,andevery

businessexecutive,governmentofficial,andotherorganizationalleaderhasmuchto

learnfromthemabouttheneweraofthedigitalage.

PARTIII

PROMISEANDPERIL

CHAPTER10



OVERCOMINGSHOWSTOPPERS:

TENIMPLEMENTATIONCHALLENGES

evSergeyevichTermenwasagiftedmusician,buthepreferredplayingwith

physics.BornintoRussianaristocracybeforetheturnofthetwentiethcentury,

TermenjoinedtheBolsheviksindismantlingthetsaristautocracy.Oneofhisearly

missionswastocreateadevicethatcouldmeasuretheelectricalconductivityand

capacityofvariousgases.Hetriedgas-filledlamps,hetriedahigh-frequency

oscillator,andheeventriedhypnosis.

Theoscillatorendedupworkingwell,andso

Termen’sbossencouragedhimtoseekotherapplicationsforit.Twoappswould

becomelegendary.Themorewhimsicalofthetwostartedoutastwometalterminals

withnothingbetweenthem,likealampwithouttheglass.Termendiscoveredthat,if

heinfusedthisvoidwithgas,hecouldgaugethegas’selectricalproperties.His

designwasbrilliant:hesubstitutedheadphonesfordialssothathecouldtakeacoustic

ratherthanvisualreadings,monitoringthepitchofthesignalthateachgasproduced.

Itwaswayaheadofitstime,thestuffofDr.EmmettBrown’sgarageinBacktothe

Future.

DevoteesofTEDtalksandstudentsoftechnologicalhistoryalreadyknowtheend

ofthisstory:Termenstumbleduponameansofmakingmusicoutofthinair.

Wheneverheputhishandsnearthemetalterminals,thepitchofthesignalchanged.

Helearnedthathecouldmanipulatethepitchbytheprecisepositionandmotionof

hishands.Hecalledhisdevicethe“etherphone,”knowntodayasthetheremin,an

anglicizedversionofhisname.Theotherappwasalarger-scaleversionofthis

apparatus,onethatwassensitivetomovementwithinaradiusofseveralmeters.It

wasthefirstmotiondetector—sentryoftheether.Hedemonstratedbothofthese

instrumentsattheKremlin,playinghisetherphonewithabandonforComradeLenin.

WhileLenindelightedintheetherphone,heputthemotiondetectorimmediatelyto

workinwatchingovertheSovietstashesofgold.Ifanyonecrossedthe

electromagneticlinearoundthegold,they’dsetoffasilentalarm.BigBrother

suddenlyhadelectriceyes.

Themoralofthestoryissimple:Termen’sdevicesbroughtbothlightand

darknesstotheworld.Inapoignanttalk,“OurComradetheElectron,”Maciej

CeglowskipointedoutthesetwothemesinallofTermen’sinventions:assoonasthey

gaveshapetoairynothing,theywereusurpedbydarkforces.Leninevenco-opted

electricityinhispropaganda,equatingcommunismwithSovietpowerplusthe

electrificationofthecountry.

ButitwasStalinwhoroundedupTermenandhis

peers,threwthemintotheKolymagulag,andforcedthemtoinventinstrumentsof

tyranny.

We’veheardbitcoinusedwithsimilargrandiosityincampaignsofallstripes.

Likeeveryrevolutionarytechnology,thebitcoinblockchainhasitsupsideandits

downside.Inthepreviouschapters,we’vewalkedyouthroughthemanypromisesof

thistechnology.Thischaptershinesaspotlightontenshowstoppers—problemsand

perils.Forgiveusifsomeofthesearetechnicallycomplicated.Wethinkitimprudent

tosupersimplifytheseissues:weneedacertainlevelofdetailforprecision.

Aswell,afterreadingthissectionyoumaybetemptedtodismissthese

blockchaininnovatorsbecausetheyfaceseriousobstacles.Weencourageyouto

considerwhethertheseareeither“reasonstheblockchainisabadidea”or

“implementationchallengestoovercome.”Wethinkit’sthelatter,andwe’dlike

innovatorstoviewtheseasimportantproblemstosolvecreativelyaswetransitionto

theseconderaoftheInternet.Foreachchallenge,weproposesomesolutions.Inthe

finalchapter,wepresentourthinkingonwhatwecandooveralltoensurethe

fulfillmentoftheblockchain’spromise.

1.THETECHNOLOGYISNOTREADYFORPRIMETIME

Asofthiswriting,mostpeoplehaveonlyavagueunderstandingofbitcointhe

cryptocurrency,andveryfewhaveheardofblockchainthetechnology.Youthereader

areamongtheforward-thinkingfew.Bitcoinconjuresimagesrangingfromapyramid

schemeandamoneyLaundromattoafinancialE-ZPassontheeconomichighwayfor

value.Eitherway,theinfrastructureisn’treadyforprimetime,sogoestheargument.

Thechallengeismultifaceted.Thefirstfacetborrowsfromsciencefictionauthor

WilliamGibson,thatthefutureishere;itsinfrastructureisjustunevenlydistributed.

HadGreekcitizensknownaboutbitcoinduringtheircountry’seconomiccrashin

2015,theystillwould’vebeenhard-pressedtolocateabitcoinexchangeorabitcoin

ATManywhereinAthens.Theywouldn’thavebeenabletotransfertheirdrachmas

intobitcoinstohedgeagainsttheplummetingfiatcurrency.ComputerscientistNick

SzaboandinformationsecurityexpertAndreasAntonopoulosbotharguedthatrobust

infrastructuremattersandcan’tbebootstrappedduringcatastrophes.Antonopoulos

saidthatGreece’sblockchaininfrastructurewaslackingatthetimeofthecrisis,and

therewasinsufficientbitcoinliquidityforanentirepopulationtomoveitstroubled

fiatcurrencyintoit.

Ontheotherhand,thebitcoinblockchainisn’treadyforGreeceeither.That’sthe

secondfacet:itfallsshortonsecuritycontrolsforsuchamassivebumpinusage.

“Thesystemlacksthetransactionalcapacitytoon-boardtenmillionpeople.That

wouldrepresentalmostatenfoldincreaseinuserbaseovernight,”saidAntonopoulos.

“RememberwhathappenedwhenAOLdumped2.3millione-mailaccountsontothe

Internet?WequicklydiscoveredthattheInternetwasn’tready,intermsofspam

protectionandNetetiquette,toabsorb2.3millionnoobswhodidn’thavetheculture.

That’snotgoodforanimmaturetechnology.”

Theblockchainwouldbesusceptible

tocapacityproblems,systemfailures,unanticipatedbugs,andperhapsmost

damaging,thehugedisappointmentoftechnicallyunsophisticatedusers,noneof

whichitneedsatthemoment.

Thatrelatestothethirdfacetofthisshowstopper,itsinaccessibilitytotheaverage

person.There’snotenoughwalletsupport,andmanyinterfacesareuser-unfriendly,

requiringahightoleranceforalphanumericcodeandgeekspeak.Mostbitcoin

addressesaresimplystringsofbetweentwenty-sixandthirty-fivecharacters

beginningwithaoneorathree,quitetedioustotype.AsTylerWinklevosssaid,

“WhenyougotoGoogle.comyoudon’ttypeinastringofnumbers.Youdon’ttypein

anIPaddress.Youtypeinaname,awordthatyoucanremember.Andthesamegoes

withthebitcoinaddresses.Bitcoinaddressesshouldn’tbeexposedtotheaverageuser.

Littlethingslikethatmakeadifference.”

Sothere’smuchworktobedoneinbasic

userinterfaceandexperience.

Criticshavealsoraisedconcernsaboutlong-termilliquiditybecausebitcoinis

finiteinquantity—21millionby2140—andminedatadiminishingrate.It’sarules-

basedmonetarypolicyintendedtopreventinflationtriggeredbyarbitraryand

discretionarymonetarypolicies,aphenomenoncommonplaceformanyfiat

currencies.Satoshiwrote,“It’smoretypicalofapreciousmetal.Insteadofthesupply

changingtokeepthevaluethesame,thesupplyispredeterminedandthevalue

changes.Asthenumberofusersgrows,thevaluepercoinincreases.Ithasthe

potentialforapositivefeedbackloop;asusersincrease,thevaluegoesup,which

couldattractmoreuserstotakeadvantageoftheincreasingvalue.”

Atthemargin,coinsstoredinlostwalletsorsenttoaddresseswhoseownershave

losttheirprivatekeysarenotrecoverable;theyjustsitdormantontheblockchain,and

sotherewillbefewerthan21millionincirculation.Earlyadoptershavetendedto

holdontobitcoinastheyholdontogold,hopingthatitsvaluewillincreaseinthe

longrun,andthereforetreatingbitcoinasanassetratherthanasamediumof

exchange.Accordingtoeconomictheorists,lowornoinflationmotivatesholdersto

hoardratherthanspendtheirbitcoin.Still,ifmoretrustedbitcoinexchangesfacilitate

consumers’movementinandoutofbitcoin,thenthefrequencyandvolumeoftrading

couldincrease.Ifmoremerchantsacceptbitcoinasamediumofpayment,then

peoplewho’vebeensittingonbitcoinsmaystarttousetheirstoreforpurchases,

therebyfreeingupmorebitcoins.Ifmerchantsbegintoissuebitcoin-denominatedgift

cards,thenmorepeopleshouldbeexposedtocryptocurrenciesandbecomemore

comfortabletransactinginbitcoin.Andso,hypothetically,peoplewillhavefewer

reasonstohoardbitcoin.Advocatesofthebitcoinprotocolarguethat,because

bitcoinsaredivisibletoeightdecimalplaces—thesmallestunitiscalledaSatoshi,

worthonehundredthofamillionthofabitcoin—thesmallestdenominationswillbuy

moreifdemandforbitcoinincreases.There’salsothepossibilityoftweakingthe

protocolstoallowforgreaterdivisibility,say,picopayments(trillionthsofabitcoin)

andtoreminestrandedbitcoinafteraperiodofdormancy.

Afifthdimensionishighlatency:forthebitcoinblockchainnetwork,theprocess

ofclearingandsettlingtransactionstakesabouttenminutes,whichisfarfasterendto

endthanmostpaymentmechanisms.Butclearingtransactionsatthepointofsale

instantaneouslyisnottheissue;therealproblemisthattenminutesissimplytoolong

fortheInternetofThingswheredevicesneedtointeractcontinuously.Coredeveloper

GavinAndresensaidsolvingforatrillionconnectedobjectsis“adifferentdesign

spacefrombitcoin,”aspacewherelowlatencyismorecriticalandfraudislessofan

issueorwherepartiescouldestablishanacceptableleveloftrustwithoutthebitcoin

network.Tenminutesisalsotoolongforfinancialtransactionswheretimingmatters

togetanassetataparticularprice,andwherelatencyexposestraderstotime-based

arbitrageweaknessessuchasmarkettimingattacks.

Theimmediatesolutionfor

entrepreneurshasbeentoforkthebitcoincodebase,thatis,tomodifythesourcecode

bytweakingafewparameters,andtolaunchanewblockchainwithanaltcoinin

placeofbitcoinasincentivetoparticipate.Litecoinisapopularaltcoinwithablock

timeof2.5minutes,andRippleandEthereumareentirelyreengineeredblockchain

platformsthathavelatencyofseconds,notminutes.

AsixthdimensionisbehavioralchangeinadeepersensethanNetiquette.Today,

manypeoplecountontheirbankorcreditcardcompany,eventalkingwithareal

person,whentheymakeanaccountingerror,forgettheirpasswords,orlosetheir

walletsorcheckbooks.Mostpeoplewithbankaccountsaren’tinthehabitofbacking

uptheirmoneyonaflashdriveoraseconddevice,securingtheirpasswordssothat

theyneedn’trelyonaserviceprovider’spasswordresetfunction,orkeepingthese

backupsinseparatelocationssothat,iftheylosetheircomputerandallother

possessionsinahousefire,theydon’tlosetheirmoney.Withoutthisdiscipline,they

mightaswellstufftheirmattresswithcash.Withgreaterfreedom—betterprivacy,

strongersecurity,andautonomyfromthird-partycoststructuresandsystemfailures—

comesgreaterresponsibility.Forthoseconsumerswhodon’ttrustthemselvestokeep

safebackupsoftheirprivatekeys,third-partystorageproviderscouldprovidebackup

service.

Aseventhdimensionissocietalchange.Moneyisstillasocialconstruct

representingwhatasocietyvalues.Itisendogenoustothatsociety,itmanifests

becauseofhumanrelationships,anditadaptstoevolvinghumanneeds.“Youcan’t

takethesocialoutofmoney,”saidIzabellaKaminskaoftheFinancialTimes.“Alot

oftheseprotocolsattempttodothatbycreatinganabsolutistandveryobjectified

system.Itjustdoesn’treflecttheworldasitis.”Shepointedtotheeurosystemasan

exampleofhowonesize—onesetofprotocols—doesn’tfitallcountries.

Sheechoed

whatAntonopoulossaidabouttheveryhumanneedforsocietiestoforgiveandforget

inordertomoveon.“There’saverylongtraditioninfinanceofobliteratingrecords,

becauseweasasocietybelievethatit’swrongtopersecuteordiscriminateagainst

individualsforsomethingtheydidtenorfifteenyearsago.Wehavethiswholedebt

jubilee-esquementalitybecausewethinkpeopleshouldbegivenanotherchance.

Creatingasystemthatneverforgetsisslightlysociopathic,”shesaid.

Thatleadsustotheeighthdimension,thelackoflegalrecourseinaworldof

irrevocabletransactionsandunvoidablesmartcontracts.Accordingtolegalscholars

PrimaveraDeFilippiandAaronWright,“Peopleare,indeed,freetodecidethe

particularsetofrulestowhichtheywanttoabide,but—afterthechoicehasbeen

made—cannolongerdeviatefromtheserules,totheextentthatsmartcontractsare

automaticallyenforcedbytheunderlyingcodeofthetechnology,regardlessofthe

willoftheparties.”

Thisveryhighdegreeofcertainty—mathematicalcertainty—as

totheoutcomeofatransactionorasmartcontractisunprecedentedinsociety.It

deliversgreaterefficienciesandeffectivelyeliminatesnonperformanceriskbecause

wehavenochoiceofbreach,nochoiceofdamages.Butthat’salsoadownside.It

allowsnoroomforhumanbeings.ToJoshFairfieldofWashingtonandLee

UniversitySchoolofLaw,thatmeans“moremessiness,notless.We’regoingtosee

morefights.‘Youdidn’tactuallyrenovatemyhouse,Iwantmymoneyback.’We’re

goingtoseemorehumanmessiness,butmorehumanmessinessdoesn’tmeanthe

technologyisbad.”

Butwillpeopleactuallytakethecounterpartytocourt?DeFilippiestimatedthat,

intheanalogworld,80percentofcontractbreachesaren’tenforcedbecausethey’re

toocostlytopursueincourt,tooexpensivetogointoproceedings.Whyshouldthose

numbersimproveinablockchainworld?Whenthecodeindicatesthatthecontract

hasbeenfullyexecutedratherthanbreached,exceptonepartyisdissatisfiedwiththe

outcome,willthedissatisfiedpartyactuallypursuealawsuit?Willthecourts

recognizethecase?Willthesmallbusinessownerbackawayfromthecorporatelegal

teamofDewey,Cheatham,andHoweor—withhismodestresources—evenbeable

toidentifyhisanonymouscounterparty,sothathecouldfilealawsuitinthefirst

place?

2.THEENERGYCONSUMEDISUNSUSTAINABLE

Intheseprimordialdaysofthebitcoinblockchain,theproof-of-workmethod

describedinchapter2hasbeencriticaltobuildingpeople’strust.Yearsfromnow,we

willlookbackandappreciatethegeniusofitsdeployment,frommintingand

allocatingnewbitcoinstoassigningidentityandpreventingdoublespending.Pretty

remarkable.Andprettyunsustainable,accordingtocriticsofcryptocurrenciesthatuse

proofofworktokeepthenetworksafeandpseudonymous.

Hashing,theprocessofrunningpendingtransactionsthroughthesecurehash

algorithm256(SHA-256)tovalidatethemandsolveablock,burnsalotofelectricity.

Somepeopleintheblockchainecosystemaremakingback-of-the-envelope

calculationsthatbecomememesinthecommunity.Estimateslikenthebitcoin

network’senergyconsumptiontothepowerusedbynearlysevenhundredaverage

Americanhomesatthelowendofthespectrumandtotheenergyconsumedbythe

islandofCyprusatthehighend.

That’smorethan4.409billionkilowatt-hours,

a

Godzilla-sizedcarbonfootprint,andit’sbydesign.It’swhatsecuresthenetworkand

keepsnodeshonest.

Inearly2015,TheNewRepublicreportedthatthecombinedprocessingpowerof

thebitcoinnetworkwashundredsoftimesgreaterthantheaggregateoutputofthe

world’stopfivehundredsupercomputers.“Processingandprotectingthemorethan

$3billionworthofbitcoinsincirculationrequiresmorethan$100millionin

electricityeachyear,generatingavolumeofcarbonemissionstomatch.”Thearticle’s

author,NathanSchneider,wrotewhathasbeenonourmindseversince:“Allthat

computingpower,whichcouldbecuringcancerorexploringthestars,islockedupin

machinesthatdonothingbutprocessbitcoin-typetransactions.”

Ascitizenswhocareaboutourplanet,weshouldallbeconcerned.Therearetwo

issues,onearoundtheelectricityusedtorunthemachinesandanotheraroundthe

energyusedtocoolthemsothattheydon’tfail.Here’saruleofthumb:forevery

dollaracomputerburnsupinelectricity,itneedsfiftycentstocooldown.

Theacute

droughtinCaliforniahasraisedseriousconcernsoverusingpreciouswatertocool

datacentersandbitcoinminingoperations.

Asthevalueofbitcoinincreases,thecompetitionforminingnewbitcoin

increases.Asmorecomputingpowerisdirectedatmining,thecomputationalproblem

thatminersneedtosolvebecomesmoredifficult.Onemeasureofthetotalprocessing

powerofthebitcoinnetworkisthehashrate.GavinAndresenexplains:“Let’ssaywe

havemillionsoftransactionsperblock,eachpayinganaverageofadollartransaction

fee.Minerswouldbepaidmillionsofdollarsperblock,andtheywouldspendalittle

lessthanthatinelectricitytodothatwork.That’showtheproof-of-workeconomics

workout.Itreallyisthepriceofbitcoinandhowevermuchrewardisinablockthat

driveshowmuchhashingisdone.”

Thehashratehasbeenincreasingconsiderably

overthelasttwoyears,risingforty-five-foldinlessthanayear.Andthetrendis

towardusingmoreenergy,notless.

“Thecostforhavingnocentralauthorityisthecostofthatenergy,”saidEric

Jennings,CEOofFilament,anindustrialwirelesssensornetwork.

That’sonesideof

theargument.Theenergyiswhatitis,andit’scomparabletothecostincurredin

securingfiatcurrency.“Allformsofmoneyhavearelationshiptoenergy,”said

StephenPairofBitPay.Herevisitedthegoldanalogy.“Goldatomsarerareonearth

becauseanintenseamountofenergyisneededtoformthem.”Goldisprecious

becauseofitsphysicalproperties,andthosepropertiesderivefromenergy.Pair

musedthatartificiallymanufacturinggoldwouldrequirenuclearfusion.

Fromoneperspective,allthiselectricityconsumptionmakessense.Erik

Voorhees,founderofthecoinexchangeShapeShift,saidcriticswereunfairincalling

theenergyspentonbitcoinminingawaste.“Theelectricityisbeingburnedfora

purpose.Thereisarealservicebeingprovided,thesecuringofthesepayments.”He

urgedcriticstocompareitwiththeenergyburnedbythecurrentfinancialsystem.

Thinkofthebigvaults,thebunkerlikearchitecturewithmajesticGrecianfacades,

HVACsystemspushingfrigidairintobrightlobbies,competingbranchesonevery

corner,andATMsinbetween.“ThenexttimeyouseeaBrink’sarmoredtruck

pumpingblacksootintotheair,comparethattotheburningofelectricityin

bitcoining.Itisnotquiteclearwhichisworse,”Voorheessaid.

Thesecondenergy-relatedissueiscomputerarchitectureitself.Forbackward

compatibilitywithslower-changinglegacysystems,yourlaptoporPCislikelyatype

ofcomplexinstructionsetcomputer(CISC)thatcanrunawiderangeofmathapps

thattheaveragepersonwillnevereveruse.Whenengineersrealizedthatthey’d

seriouslyovershotthemarket,theycreatedthereducedinstructionsetcomputer

(RISC).YourmobiledeviceislikelyanadvancedRISCmachine(ARM).What

minersrealizedwasthattheycouldalsoharnesstheirgraphicsprocessingunitto

increaseprocessingspeed.BecausemodernGPUshavethousandsofcomputingcores

oneachchip,theyareidealforcomputationsthatcanbedoneinparallel,suchasthe

hashingdoneinbitcoinmining,Thereweresometrade-offs,andestimatingthe

machine’senergyconsumptiongotslightlymorecomplicated,butforthemostpart

GPUscoulddothework.

“IfIcandesignaRISCcomputertobeoh-so-superfastandmassively,near

insanelyparalleltotrythebillionsofkazillionsofcodessimultaneouslywithlittleor

noelectricity,Iwillmakemoneyoutofthinair,”

saidBobTapscott,Don’sCIO

brother.That’swhattheBitFuryGrouphasdone:builtamassivelyparallelbitcoin

solverwithapplicationspecificintegratedcircuits(ASICs)thatareenergyefficient

anddesignedsolelytominebitcoins.ItsfounderandCEO,ValeryVavilov,arguedthe

viewthatmachinesandminingoperationsoverallwillcontinuetogetmoreenergy

efficientandenvironmentallyfriendly.Someofthatdependsonrelocatingtocold

climateswhereenergyischeapandpreferablyrenewable,suchashydroor

geothermal,andwhereeitherMotherNaturehandlesthecoolingormanufacturers

figureoutanefficientwaytocapturetheheat.BitFury,forexample,hastwodata

centers—oneinIcelandandanotherinthecountryofGeorgia—withplansfor

additionalcentersinNorthAmerica,anditacquiredtheHongKong–basedstart-up

AlliedControl,whichspecializesinimmersioncoolingtechnology.

AndsoBitFury

isworkingtoreducetheecologicalimpactofthebitcoininfrastructure.

Eveniftheseinitiativeslimitmining’scarbonfootprint,westillhavetherapid

consumptionanddisposalofthesecontinuallyupgradeddevices.Minerswhowantto

makeacareerofitmustcontinuallyupgradeandspecializetheirsystems.Most

miningequipmenthasausefullifespanofthreetosixmonths.

BobTapscott

likenedfirmssuchasBitFurytothoseYukonshopkeepersduringthegreatgoldrush:

theymadetheirrealfortunebysellingbetterandbettershovelstotheminers.

We

foundoneminer’sdescriptionofhisCointerraTerraMinerIVbitcoinwithanASIC

chipthatwassoenergyintensivethathishome’selectricalsystemcouldn’thandleit.

“Iamsellingthreeunitsbecausemyhouseisoldandhassubstandardwiring.Idonot

wantafire.”Thestartingbidwasfivethousanddollars.

VendorssuchasMRIof

Australiaareapplyingnewapproachestorecycling,firstdisassemblingratherthan

shreddingallthesecomputingcomponents,andthenmanagingresultingwaste

streams.Suchcreativeprocessesareenablingthemtoreclaimpreciousmetalsand

reuseupto98percentofproductbyweight.

Unfortunately,hardwarerecyclingis

stillnotwidelyavailabletomostconsumers.

Forbitcoin’scoredevelopers,theconcernislegitimateandworthsolving:“If

bitcoinreallydoesbecomeaglobalteamnetwork,Ithinkwewillneedtoslowly

moveawayfromproofofworkastheonlywayit’ssecure,”saidAndresen.“Inthe

verylongrun,maybewewillmoveawayfromproofofworkasthewaythenetwork

issecured,andwe’llcombineitwithsomethingelse.”

That’swhatseveralaltchainshavedone:exploredalternativeconsensus

algorithmssuchasproofofstakeforsecuringthenetworkwhileretaining

decentralization.Theopensourcenatureofthebitcoinprotocolmakesittechnically

easytodo.Remember,thepurposeofconsensusalgorithmsistodistributetherightto

decidewhatthestateoftheblockchainistoadecentralizedsetofusers.Tothemind

ofVitalikButerin,thevisionarybehindEthereum,thereareonlythreesecurely

decentralizedsetsofusers,andeachsetcorrespondstoasetofconsensusalgorithms:

ownersofcomputingpower,withstandardproof-of-workalgorithm;stakeholders,

withvariousproof-of-stakealgorithmsinwalletsoftware;andmembersofasocial

network,witha“federatedstyle”consensusalgorithm.

Notethatonlyoneofthose

consensusmechanismsincludesthewordpower.Ethereumversion2.0willbebuilt

onaproof-of-stakemodel,whereasRippleusesafederatedmodel,asmallcontrolled

groupakintosomethinglikeSWIFT,theglobalproviderofsecurefinancial

messaging,whereauthorizedgroupsreachconsensusonthestateoftheblockchain.

Thosesystemsdon’tburnelectricityasthebitcoinblockchaindoes.BramCohen,

founderofTor,hasintroducedafourthwaytoaddresstheenergywaste,whathecalls

“proofofdisk,”whereownersofdiskstoragespace—peoplewhohavecommitteda

chunkofcomputermemorytomaintaininganetworkandperformingnetwork

functions—definestheeconomicsetofusers.Ofthesealternativestoproofofwork,

Blockstream’sAustinHillcautionedagainstusingalternativemethodsforsecuring

consensus.“Experimentationwithyourproof-of-workalgorithmisdangerous,andit’s

anewareaofcomputerscience.”

Itaddsanadditionaldimensiontoinnovation:not

onlymustdevelopersworryaboutwhethertheirnewfeaturesandfunctionswillwork

intheirownright,buttheymustalsocheckhowthechoiceofconsensusalgorithm

keepsthemsecureanddistributedtothemostappropriateeconomicset.

Overall,theexpression“Ifthereisawill,thereisaway”applies.Thesmartest

technologistsontheplanetareworkingoncreativesolutionstotheenergyproblem,

withmoreefficientdevicesanduseofrenewableenergy.Further,ascomputers

becomeinexorablysmarter,theywillundoubtedlyprovidetheirownsolutions.

BitcoinangelinvestorRogerVer,nicknamedBitcoinJesus,said,“Saythesmartest

humanhasanIQupcloseto200.ImagineartificialintelligenceswithanIQof250,or

say500,or5,000or5million.Therewillbesolutions,ifwehumanswantthem.”

3.GOVERNMENTSWILLSTIFLEORTWISTIT

Tolibertariansandanarchists,SatoshiNakamotowrote,“Youwillnotfindasolution

topoliticalproblemsincryptography.”

Theywouldhavetolookelsewherefora

cure-alltobiggovernment.Satoshiviewedhisexperimentasagaininanewterritory

offreedom,notatotalupheaval.Wheregovernmentshadsucceededinbeheading

centrallycontrollednetworkslikeNapster,purepeer-to-peernetworkslikeTorwere

abletopersist.Couldthebitcoinblockchainnetworkholditsownagainstmighty

centralauthorities?

Thatmightbethebiggestunknown.Whatwilllegislators,regulators,and

adjudicatorsaroundtheworldmakeofblockchaintechnologies?“Thecourtsare

goingtogetitwrong.They’vealreadystartedtogetitwrong,applyingintellectual

propertyrulestoanythingthatisintangible.Theythinkthatphysicalityisthedividing

linebetweenvirtualpropertyandintellectualproperty,andit’snot,”saidJosh

Fairfield.“There’snointellectualpropertyelement,there’snopartofabitcointhatis

intellectualproperty,there’snocreativesparkforcopyright,there’snopatentable

idea,there’snopatent,there’snotrademark.”

AccordingtoStephenPairofBitPay,

“Thebiggestthreattobitcoinisthatitbecomessoheavilyregulatedatsomepoint

thatacompetitorthat’smoreprivateandmoreanonymousshowsupandeverybody

switchestothat.”

Onething’sforsure:“Whatevertheparticularpolicyissueis,if

youdon’tunderstandthetechnologyandyoudon’tunderstandtheimplications,

you’resettingyourselfupforfailure,”saidJerryBritoofthebitcoinpolicythinktank

CoinCenter.“Ifyoudon’tunderstandit,youcanintroducelawandpolicythat’s

goingtoharmthedevelopmentofthetechnology.Wejustwantyoutounderstand

whatyou’redoing.”

Sotheirchallengeisformidable.Theymustoverseetheunforeseeable.Ontheone

hand,theymustavoidstiflinginnovationbyoverreactingtoworstcases—human

trafficking,illicitdrugtrade,gunrunning,childpornography,terrorism,taxevasion,

andcounterfeiting,forinstance.Ontheotherhand,theymustnottwistnewbut

unprovenapplicationssuchasblockchain-basedplatformsforidentitymanagementto

restrictcivilliberties.Theremustbeastableapproachtoregulation,legislation,and

theinternationalnegotiationoftreatiestominimizeregulatoryuncertainty,sothat

investorswillcontinuetosupportthetechnology’sglobaldevelopment.

Jurisdictionalreadymatterswhenitcomestousingbitcoin.Somegovernments

havebanneditorbannedstatebanksfromexchangingit,asChinahasdone.Brito

said,“InatypicallyChineseway,it’snotillegal,butitcouldbeatanymomentand

everybodyknowsit.”

Chinaisallowingaseriousprofessionalminingcommunityto

flourishandthoseminingpoolshavebecomequiteinfluentialindebatesover

upgradestothebitcoinprotocol.WhathappenstoblockchainsecurityifChina

suddenlybansmining,too?Otherjurisdictionshavemovedtodefinebitcoin

narrowly,astheU.S.InternalRevenueServicehasdone.TheIRShaslabeledbitcoin

asanassetforcalculatingtaxesontheappreciationofvalue.

Legalframeworksalsomatter.LegalscholarsDeFilippiandWrightdon’tthink

thecurrentonecanhandlethequestionsraisedbysmartpropertydeployedgloballyat

scale.Smartcontractsbothdefineandmanageownershiprights.Theircodemakesno

assumptionsabouttheassignmentofrights,andcodecan’tarbitrarilyseize,divest,or

transfertheserights.Forexample,ifduringtheprocessoflandregistration,

governmentofficialsassignedtheownershipofaparceloflandtosomeonewhoisn’t

thelegalownerofthatparcel,thatpersonwouldhaveabsolutesovereigntyoverthe

parcel,andthelegalownercouldn’tsimplyreversetheassignment.

JoshFairfieldfocusesmoreonprocess:“Thecommonlawisn’taffecting

technologylaw;thecommonlawistechnologylaw.Thecommonlawistheprocess

ofadaptinghumansystemstotechnologicalchange...therealfightishowdowe

takeoldrulesmeantforoldtechnologyandadaptthemrapidlyandcompetently,”so

thattheyarerecognizablewhenwestartusingthembutiteratedsothatthey’restate

oftheartwhenthetechnologyreallyhits.

Lastbutnotleast,andthisshouldbenosurprise,identitymattersbig-time—orat

leasthowweconstructitontheblockchainmatters.“Peoplehaveaverysimplistic

viewofidentity,”saidAndreasAntonopoulos.“Iamactuallyterrifiedofthe

implicationsofdigitalidentitybecauseIthinkpeoplewilltakeshortcuts....Ifwe

transferidentitytothedigitalworldwhereviewsareinflexible,weactuallyendup

withaconstructthatdoesnotresemblethesocialconstructofidentity,butisa

terrifying,fascistcopyofit.”

Combineapreciselycodedversionofpersonhoodwithapreciselycodedversion

ofsociety,andyougetthestuffofsciencefictionnovelsandArnoldSchwarzenegger

movies.LegalscholarsDeFilippiandWrightconjuredimagesof“self-enforcing

contracts,walledgardensortrustedsystems,ownedandmanagedbyasophisticated

networkofdecentralizedorganizationsthatdictatewhatpeoplecanorcannotdo,

withoutanykindofconstitutionalsafeguardsorconstraints.”Inotherwords,a

machine-driventotalitarianregime.

ArtificialintelligenceexpertSteveOmohundrothrewthisphraseatus:the

dictator’slearningcurve,orhowcavedwellersendupwithspaceagetechnology.

ThinkaboutalltheAIlabsouttherestaffedbytheworld’ssmartestPhDswithaccess

totheworld’smostpowerfulcomputers.PhDsmightforkthebitcoincodeorwritea

smartcontractthatcontrolsadrone’sdeliveryofapackage,wherebitcoinisheldin

escrowuntilthatexactmomentwhenthepackagearrives.Let’ssaythesePhDspost

thatsoftwareasopensourcecodetotheInternet,becausethat’swhattheydotomove

theirideasforward;theyshareideas.SonowISISdoesn’tneedanAIlab,itdoesn’t

needasoftwaredevelopmentteam.Itjustneedstosubstituteagrenadeforthe

package.That’sthedictator’slearningcurve,andit’snotsteep.Butdon’tblamethe

codeorthecultureofsharing.It’snotnecessarilywhatwedowiththecode;it’swhat

wedon’trealizewe’redoingwithit—theunintendedconsequencesofafriction-free

world.

4.POWERFULINCUMBENTSOFTHEOLDPARADIGMWILLUSURPIT

ManyofourconcernsaboutthefirstgenerationoftheInternethavecometrue.

Powerfulcorporationshavecapturedmuchofthetechnologyandareusingitintheir

vastprivateempirestoextractmostofthevalue.Theyhaveclosedoffopportunity

andprivatizedmuchofourdigitalexperience.Weuseproprietarystorestoacquire

andusenewappsonourphones,tablets,andnowwatches.Searchenginesand

marketingdepartmentsalikeinterruptourcontentwithadvertising.Bigcompanies

thatpromoteandprosperfromconsumertransparencyarenotoriouslysecretiveabout

theiractivities,plans,technologyinfrastructures,andinformationassets.Tobesure,

somecompanieshaveopenedupvoluntarily,butmanyothershavemerelyreactedto

thesunlightofwhistleblowersandinvestigativejournalism.Suchdisclosuresare

dwarfedbyeffortstohideoperationsandconcealinformation.

Simplyput,theyhaven’tbeengoodstewardsofthepublictrust.

Caseinpoint:thebankingindustry.“Banksaretraditionallysecretkeepers,”

accordingtoKaminskaoftheFinancialTimes.Sheexplainedthatbanksmakegood

judgmentsaboutwhomtolendtoandhowtoprocesspaymentswhentheyhavegood

accesstoprivateinformation,andtheygetthatinformationbypromisingtokeepthe

secret.Themoresecretstheyhold,thegreatertheinformationasymmetryandthe

greatertheiradvantages,butthoseadvantageshaveharmfulsystemicimplications.

Sowhat’stopreventhugecorporationsorpowerfulnation-statesfromcapturing

blockchaintechnologiesfortheirownnarrowinterests?“Anyconsensusmechanism

thatyouhaveisgoingtobesusceptibletomarketing—wherepowerfulinterestsspend

moneytryingtoconvincepeopletodoacertainthing,”saidPairofBitPay.

Tobeclear,wearenotsuggestingthatcorporationsandgovernmentsshouldleave

thistechnologyalone.Afterall,blockchaintechnologyisemergingasanimportant

globalresourcethatcouldenablenewcapabilities.Moreover,societyneeds

governmentstodeliverservicesfortheircitizenryandcorporationstocreatejobsand

wealth.Butthat’sdifferentfromcapturingadisruptivetechnologyanditslargessein

waysthatlimititsgreaterbenefitstosociety.

Alsoconsiderwhatthecoredevelopersandblockchaincompaniesarealready

doingtosecuretheirnetworks,anticipatingandrespondingquicklytoworst-case

scenarios.Forexample,in2014,thievesstoleeightmillionVeriCoins,aproof-of-

stakecryptocurrency,fromtheMintPalexchange.Withindaysoftheattack,VeriCoin

developersreleasednewcodethatforkedtheVeriCoinblockchainpriortothehack—

inasense,theyrolledbacktime—andcollaboratedwithexchangestomakesureit

wasadopted.

Similarly,“ifmoneyandpowerdotrytocapturethenetwork,the

minerswouldstopthembygoingtotherealversionofbitcoinandinitiatingafork,”

accordingtoKeonneRodriguez,productleadatBlockchain.

What’stopreventChinafromaimingallitsstateprocessingassetsandallits

miningpoolsatthebitcoinblockchaintostagea51percentattackoratminimum

destabilizetheprocess?Let’ssaysomewealthydespothasdecidedthatbitcoin,like

theInternetbeforeit,hasbecomesoinfluentialthatitiserodinghispower.This

despotcouldseizealltheminingpowerwithinreachandpurchasetherestfrom

countriesthatstilltoleratehisbadbehavior,toputhimoverthe50percenthashrate

threshold.Hecouldthendecidewhichtransactionstoincludeinblocksandwhichto

reject.Withcontrollinginterest,hecouldalsodecidewhethertoforkthecodeand

introduceafewprohibitions,maybeblacklistingaddressesassociatedwithgambling

orfreespeech.Sodohonestnodesadoptthiscentrallycontrolledforkordotheyfork

overtoanewcode?AndrewVegetabile,directoroftheLitecoinAssociation,said

therewasnoescapefromsuchascenariobecausethedespotcontrolled51percentof

thenetwork.Andheneedn’trepresentagovernment;hecouldbeoneoftheworld’s

wealthiestpeopleoranexecutiveofahighlyprofitablecompanywithsubstantial

purchasingpower.

Athirdscenarioisthattheincumbentswilldefendtheirterritory,lobbyingto

makesureexistingregulationsforwell-establishedfirmsapplytosmallstart-ups,and

suinganystart-upthatsurvivestheregulatoryinquisition.Thislitigate-not-innovate

strategymaybuythemtimetosortoutastrategy.Oritmaysimplydrainthe

incumbentofwhateverrealvalueitcontains.Thinkofthosetwintyrants—legacy

systemsandactiveinertia.Academicshavewelldocumentedtheeffectsoflock-in

andswitchingcostsandhaveidentifiedthechallengesofpostmergersystems

integration.Organizationswithhugetechnologyinvestmentsintheirinstalledbase

maybemorelikelytothrowmoremoneyattheiroldsystem,sharpeningtheirknives

forthepistolfightratherthanconductingstrategicexperimentsontheblockchain.

5.THEINCENTIVESAREINADEQUATEFORDISTRIBUTEDMASS

COLLABORATION

Minersdohaveanincentivetomaintainthebitcoininfrastructurebecause,ifthe

networkfails,alltheunconvertedbitcointhey’dearned(orcouldearn)through

miningwouldbelostorworthlessorotherwiseatrisk.Beforewedigfurtherinto

incentives,let’sbeclearabouttheservicethatminersprovide:itisnottransaction

validation.Everyfullnodecanvalidatetransactions.Rather,minerspreservethe

distributionofpower—thepowertodecidewhichtransactionstoincludeineach

block,thepowertomintcoins,thepowertovoteonthetruth.

SOYOUWANNABEABITCOINMINER?

spartofourresearch,werecruitedBobTapscott—formerbankCIO,

managementconsultantatlarge,andDon’sbrother—todownloadthe

entirebitcoinblockchainstackandledgerinearly2015.Theexperiment

wasinstructiveintermsoftheelapsedtime,theeffortrequired,theenergy

consumed,andthe(lackof)payoffforhobbyminingofbitcoin.

Bobdedicatedhissparefour-thread,two-coreWindowsPCtothetask.

Downloadingtookafullthreedaysandconsumedonaverageabout20percent

oftheavailableprocessingpower.Miningusesslightlymorethan200MBof

memoryand10percentoftheCPUtostaycurrent.

AlthoughBob’scomputerwashardlyoptimizedforminingbitcoin,he

entereditintoaminingpool.Ina137-hoursession,itmined152.8

microbitcoin(μBTC),roughlythreeandahalfU.S.centsatthetime.Butatten

centsperkilowatt-hour,Bob’scomputerusedaboutfourteencentsof

electricity.Bobconcluded,“ThedaysofminingbitcoinsfromyourPCare

nowover.”

Soanydesignchangetotheoriginalbitcoinprotocol,whetherthroughan

altcoinoranupgrade,mustkeepinmindappropriateeconomicincentivesto

sustainminerdecentralization,sothatthenetworkgetsgoodvaluefrom

minersinexchangeforthelargesumsofbitcoin.BitcoincoredeveloperPeter

Toddlikenedthistasktodesigningarobotthatcanbuymilkatthegrocery

store.“Ifthatrobotdoesn’thaveanose,beforelongstoreownersaregoingto

realizeitcan’ttellthedifferencebetweenunspoiledandspoiledmilk,and

you’regoingtogetrippedoffpayingforabunchofspoiledmilk.”

ToTodd,

thatmeansthatsmallerminersingeographicallydispersedlocationsshouldbe

abletocompetenosetonosewithlargerminersthataregeographically

centralized,thatis,largeminingpoolsinIcelandorChina.

Thequestioniswhetherthat’spossible.Becausethenumberofnew

bitcoinsmintedhalveseveryfouryears,whatwillhappenwhenthereward

dropstozero?Theminingcycledependsonthemarketpriceofbitcoin.When

thepricedrops,somebitcoinminersparktheirsupply,buttheycontinueto

playthelotteryuntilthepriceincreases.Otherminerscan’taffordtoparkand

play;theyjustdry-docktheirminingrigsordiverttheirprocessingpowerto

anotheraltchainthatmightbemoreprofitable.Stillothersjoinminingpools,

poolingtheircomputingpowerwithnodeswiththehopeofincreasingtheir

oddsandatleastgettingsomefractionofthewinningsratherthannothingat

all.Andthenthere’stheindustrialbitcoinminingcomplex.ValeryVavilovof

BitFuryestimatedthathisminingoperationwouldhaveatleast200

megawatts’capacitybytheendof2016.

Oneanswerischargingfees.Satoshiwrote,“Therewillbetransaction

fees,so[mining]nodeswillhaveanincentivetoreceiveandincludeallthe

transactionstheycan.Nodeswilleventuallybecompensatedbytransaction

feesalonewhenthetotalcoinscreatedhitsthepre-determinedceiling.”

So

onceallbitcoinshavebeenminted,afeestructurewilllikelyemerge.Thinkin

termsofbillionsofnanopayments.Becauseeachblockhasafixedmaximum

size,thereisalimittohowmanytransactionsaminercaninclude.Therefore,

minerswilladdtransactionswiththehighestfeesfirst,leavingthosewithlow

orzerofeestofightforwhateverspacemightbeleftover.Ifyourtransaction

feeishighenough,youcanexpectaminertoincludeitinthenextblock;butif

thenetworkisbusyandyourfeeistoolow,itmighttaketwo,three,ormore

blocksbeforeaminereventuallyrecordsintheblockchain.

Whatdoesthatmeanforpeoplewhocan’taffordfeesnow?Won’tlevying

feeslowertheblockchain’sadvantageovertraditionalpaymentmethods?

AccordingtoventurecapitalistPascalBouvier,the“feesreflectthemarginal

costofverifyingatransaction.”Withoutfeestoincentivizeminers,asthe

blockrewardkeepshalving,thehashratewouldlikelydrop.Ifthehashrate

drops,networksecuritydeclines.

Thatleadsusbacktothe51percentattack,whereahugeminingpoolora

carteloflargeminingpoolscontrolled51percentofthehashrate.Withthat

muchfirepower,theywouldconstituteamajorityvoteofminersandcould

hijackblockgenerationandforcetheirversionofthetruthonthebitcoin

network.Theywouldn’tnecessarilygetrich.Farfromit.Alltheycoulddois

toreversetheirowntransactionswithinapreviousblock,ratherlikeacredit

cardchargeback.Let’ssaytheattackersboughtsomebig-ticketitemfromthe

samemerchant,waiteduntilitshipped,thenattackedthenetworktogettheir

moneyback.Thatwouldn’tmeantackingitsownblocktotheendofthe

blockchain.Thatwouldmeangoingbackandredoingtheblockthatcontained

alltheirpurchasesaswellasallsubsequentblocks,evenasthenetwork

continuestogeneratenewblocks.Whenthecartel’sbranchbecamelonger,it

wouldbecomethenewvalidone.Satoshibetonthatbeingwildlymorecostly

thanminingnewcoins.

Where51percentattacksonproof-of-workmodelsstemfrom

concentratedminingpower,attacksonproof-of-stakemodelscomefrom

concentratedcoincontrol,andcoinexchangesaretypicallythebiggest

stakeholders.Insomejurisdictions,exchangesmustbelicensedandareunder

regulatoryscrutiny.Theyalsohavereputationatstake,andsotheyhave

multipleincentivestoprotectthevalueoftheirbrandandthevalueofthecoins

heldinaccountwallets.However,withmorecoinsincirculation,agreater

diversityofvalue,andmorestrategicassetsregisteredonPoWandPoS

blockchains,anattackermaynotcareaboutanyofthesecosts.

6.THEBLOCKCHAINISAJOBKILLER

Atthe2015WorldEconomicForumannualmeetinginDavos,Switzerland,apanelof

technologyexecutivesfromMicrosoft,Facebook,andVodaphonediscussedthe

impactoftechnologyonjobs.Allagreedthat,althoughtechnologicalinnovations

maydisruptlabormarketstemporarily,overalltheygeneratenewandincrementally

morejobs.“Whyshouldthistimebeanydifferent?”saidEricSchmidt,executive

chairofGoogle.

Thedisplacementofworkersthroughautomationisnothingnew.Considerthe

Internet’simpactontravelagentsandmusicretailers.UberandAirbnbhavecreated

incomefordriverswithextratimeandhomeownerswithsparerooms,butneither

provideshealthinsuranceorotheremployeebenefits,andbotharedisplacingbetter-

paidjobsinthetravelandhospitalityindustries.

Theblockchainisanextraordinaryplatformforradicalautomation,where

computercoderatherthanhumansdothework,managingassetsandpeople.What

happenswhenautonomousvehiclesreplaceUberdrivers?Ordigitalcurrencies

obviateWesternUnion’sfivehundredthousandpointsofsalearoundtheworld.

Or

whenasharedblockchainplatformforfinancialserviceseliminatestensofthousands

ofaccountingandITsystemsmanagementjobs?Whiletherewillbemanynew

businessandemploymentopportunitiescreatedthroughtheIoT,willitdrivefurther

unemployment,especiallyintherelativelyunskilledmarketforrelativelyroutine

tasks?

Inthedevelopingworld,theblockchainandcryptocurrenciescouldenable

entrepreneurstoraisecapital,protectassetsandintellectualproperty,andcreatejobs

eveninthepoorestcommunities.Hundredsofmillionscouldbecome

microshareholdersinnewcorporationsandparticipateineconomicexchange.The

technologycouldradicallyimprovethedeliveryanddeploymentofaid,increase

governmenttransparency,reducecorruption,andsettheconditionsforgood

government—apreconditionforjobsinmanypartsoftheworld.

Eveninthedevelopedworldtheeffectsarenotdeterminable.Aglobalplatform

thatdropstransactioncosts,inparticularthecostsofestablishingtrustedcommerce

andwealthcreation,couldresultinmoreparticipants.

Evenifthistechnologyenablesustodomorewithfewerhumanresources,we

stillhavenocasetofear,delay,orhaltitsmarch.Ultimately,whatmattersisnot

whethernewcapabilitiesexistbuttheextenttowhichsocietiesturntheseintosocial

benefit.Ifmachinesarecreatingsomuchwealth,thenmaybeit’stimeforanew

socialcontractthatredefineshumanworkandhowmuchtimeweshouldallspend

makingaliving.

7.GOVERNINGTHEPROTOCOLSISLIKEHERDINGCATS

Howshouldwestewardthisnewresourcetofulfillitspotential?UnliketheInternet,

thebitcoincommunitydoesnotyethaveformaloversightbodiessuchasICANN,the

InternetEngineeringTaskForce,ortheWorldWideWebConsortiumtoanticipate

developmentneedsandguidetheirresolution—andthecommunityprefersitthatway.

Thatpresentsuncertainty.Peoplewhowanttokeeptheblockchaindecentralized,

open,andsecurecan’tagreeonawayforward.Ifwedon’taddressgovernance,then

themovementcouldcollapseonitselfasitdisintegratesintowarringfactions.

Therearecountlessissues.BitcoincoredevelopersGavinAndresenandMike

Hearnhavebeenadvocatingforanincreaseinblocksizefromonemegabyteofdata

toaslargeastwentymegabytes.Bitcoinisnot“atokenforrichpeopletotradeback

andforth....Itisapaymentnetwork,”saidAndresen.

Theyarguethatifbitcoinis

evertocompeteseriouslyasaglobalpaymentmechanism,thenithastopreparefor

mainstreamadoption.Itcouldn’tgrindtoahaltonedaywhentransactionflow

suddenlysurpassedblockchaincapacity.Feeswouldskyrocketforpeoplewhodidn’t

wanttowaitmonthsoryearsfortheirtransactionstosettle.Orperhapssomecentral

powerwouldstepin,intheinterestofconsumerprotection,andprocesstheoverflow.

InAugust2015,theywentaheadandlaunchedBitcoinXT,aforkoftheblockchain

thatallowsforeight-megabyteblocks.Itisstillacontroversialcompromise.

Opponentsarguethatpeopleshouldn’tbeusingbitcointobuytheirventilattesat

Starbucks.“Somedeveloperswanteverysinglepersonintheworldtoberunninga

fullyvalidatingnodethatseeseverysingletransactionandhasabsolutelynotruston

anybodyelse,”saidAndresen.“Thevolunteercontributorswhohavebeenactually

makingthesoftwareworkforthelastfewyearsareworriedthattheypersonallymay

notbeabletohandlelargerblocksiftransactionvolumerampsup....Idon’thavea

wholelotofsympathyforthat.”

Inotherwords,ifthebitcoinblockchainistoscale

andremainsecure,thenwecan’thaveitbothways.Somenodeswillrunfull

protocolsandprocessmoretransactionsintoincreasinglylargerblocks,andothers

willrunsimplifiedpaymentverificationmodelsandtrustthat51percentoffullnodes

getitright.

ThebiggestpushbackagainstBitcoinXTcamefromtheminingpoolsinChina.

Seriousbitcoinminers,likehard-coreonlinegamers,neednotonlyseriously

powerfulcomputerstofindacorrecthashbutalsoseriouslyhigh-speedbandwidthto

broadcastitquicklyacrossthenetwork.ChinaisanexceptiontoNielsen’slawof

Internetbandwidth:bandwidthdoesn’tincreaseby50percenteachyear.Iftheblock

sizeincreaseistoolarge,itwouldputlow-bandwidthChineseminersata

disadvantagecomparedwithminersinotherpartsoftheworld.Receivingnewblocks

tobuilduponwouldtakelonger;andwhentheydidfindanewblock,theywouldtake

longertosenditouttotherestofthenetwork.Thesedelayswouldultimatelyresultin

thenetwork’srejectingsomeoftheirblocks.Theywouldloseouttominerswithmore

bandwidthwhoseblockspropagatedfaster.

“Tryingtobootstraporchangeanetworkprotocolisjustamonumentaltask,”

saidAustinHill.“Youjustdon’twanttobemakingchangesadhocorveryfastonan

ecosystemthat’smanaginganywherefromthreetotenbilliondollars’worthof

people’swealthandassets.”

Attheendoftheday,saidAndresen,“Thatgovernance

modelisdrivenverymuchbywhatcodethepeopleactuallywanttorun,what

standardspeoplewanttoimplementintheequipmenttheysell.”Hesaidthatbitcoin,

liketheInternet,will“haveasimilarmessy,chaoticgovernanceprocessthatwill

eventuallycomedowntowhatcodesthepeoplechoosetorun.”

Again,we’renottalkingaboutregulatingbutaboutstewardingthisresourcefor

viabilityandsuccess.Governanceincludessettingstandards,advocatingandadopting

sensiblepolicies,developingknowledgeaboutthetechnology’spotential,performing

watchdogfunctions,andactuallybuildingouttheglobalinfrastructure.Wediscussa

multistakeholdergovernancemodelinthenextchapter.

8.DISTRIBUTEDAUTONOMOUSAGENTSWILLFORMSKYNET

Therearehighlydistributedenterpriseswitharangeofgoodandbadactors.

Anonymous,adistributedaffinitygroupofvolunteers,consistsofcorporate

saboteurs,whistleblowers,andwatchdogs.Withtheblockchain,Anonymouscould

crowdsourcebitcoinandholdthesefundsinawallet.Let’ssayagroupofFrench

shareholderswouldliketogivethatmoneytoafewassassinswhowouldtrackdown

andkillofftheunaccounted-forterroristsresponsiblefortheParismassacre.They’d

needthousandsofsignatoriestoreachconsensusandreleasethefunds.Inthis

scenario,wholegallycontrolsthosefunds?Whoisresponsiblefortheoutcomeofthat

transaction?Ifyou’vecontributedoneten-thousandthofavote,whatisyourlegal

liability?

Ifvendingmachinesareprogrammedtoorderthemostprofitableproducts,will

theydiscoverasupplierforillegalgoodsordrugs?(Hey,thecandymachineisselling

Ecstasy!)Howshouldthelawhandleanautonomousvehiclethataccidentallykillsa

humanbeing?ForWiredmagazine,twohackersdemonstratedhowtohijackthe

controlsystemsofaJeepCherokeeonthehighway.Chryslerrespondedbyrecalling

1.4millionvehiclesandalarmingdrivers,manufacturers,andpolicymakersalike.

Couldterroristsfigureouthowtohacksmartdevicessothattheyperformed

unwantedactionswithdevastatingconsequences?

Thereareotherchallengeswithdistributedmodelsoftheenterprise.Howdoes

societygoverntheseentities?Howcanownerskeepultimatecontrol?Howdowe

preventhostiletakeoversofpersonlessbusinesses?Let’ssayweownadecentralized

Webhostingcompanywhereeachoftheservershasasayincompanymanagement.

Ahumanhackerorsomemalwarecouldpretendtobeamillionserversandoutvote

thelegitimateserversinthenetwork.Whensuchtakeoversoftraditionalcompanies

occur,theresultscanvary.WithaDAE,theresultswillmostlikelybedisastrous.

OncethatmalevolententitycontrolsourdistributedWebhostingcompany,itcould

cashout.Oritcouldreleasetheprivatedatafromotherserversorholdthedata

hostageuntilwehumanownerspaidaransom.

Oncemachineshaveintelligenceandtheabilitytolearn,howquicklywillthey

becomeautonomous?Willmilitarydronesandrobots,forexample,decidetoturnon

civilians?AccordingtoresearchersinAI,we’reonlyyears,notdecades,awayfrom

therealizationofsuchweapons.InJuly2015,alargegroupofscientistsand

researchers,includingStephenHawking,ElonMusk,andSteveWozniak,issuedan

openlettercallingforabanonthedevelopmentofautonomousoffensiveweapons

beyondmeaningfulhumancontrol.

“Thenightmareheadlineformeis,‘100,000RefrigeratorsAttackBankof

America,’”saidVintCerf,widelyregardedasthefatheroftheInternet.“Thatisgoing

totakesomeseriousthinkingnotonlyaboutbasicsecurityandprivacytechnology,

butalsohowtoconfigureandupgradedevicesatscale,”headded,notingthatnoone

wantstospendtheirentireweekendtypingIPaddressesforeachandeveryhousehold

device.

WedonotrecommendbroadregulationofDAEsandtheIoTorregulatory

approvals.Wedorecommendthatmanagersandentrepreneurswhoaredeveloping

appsidentifyanysignificantpublicimpacts—good,bad,orneutral—andaltersource

codeanddesigns.Wethinktheyshouldconsultwiththoselikelyaffectedbytheir

creationstominimizerisksinadvance,identifyalternativepathsforward,andbuild

support.

9.BIGBROTHERIS(STILL)WATCHINGYOU

“Therewillbemanyattemptstocontrolthenetwork,”saidKeonneRodriguezof

Blockchain.“Bigcompaniesandgovernmentswillbedevotedtobreakingdown

privacy.TheNationalSecurityAgencymustbeactivelyanalyzingdatacoming

throughtheblockchain”evennow.

Whileblockchainsensureadegreeof

anonymity,theyalsoprovideadegreeofopenness.Ifpastbehaviorisanyindication

offutureintent,thenweshouldexpectcorporationsknownforspyingandcountries

knownforwagingcyberwarfaretoredoubletheireffortsbecausevalueisinvolved—

money,patents,accesstomineralrights,thetitlestolandandnationaltreasures.It’s

asifwe’veplacedabigbull’s-eyeontopoftheInternet.Thegoodnewsisthat

everyonewillbeabletoseetheshenanigans.Somemaybehighlymotivatedto“out”

spying,becausetheybetonthelikelihoodofaparticularregime’sattackingthe

blockchaininapredictionmarket.

Whathappenstoprivacywhenthephysicalworldstartscollecting,

communicating,andanalyzinginfinitedatathatcoulddoganindividualforever?Ina

2014presentationatWebstock,MaciejCeglowskirantedaboutGoogle’sacquisition

ofNest,amakerofluxurythermostatswithsensorsthatcollectdataaboutrooms.His

oldthermostatdidn’tcomewithaprivacypolicy.Thissmartthermostatcouldreport

backtoGoogle,maybeeveneathisleftoverpizzalikeasketchyroommate.

Many

ofusarealreadyuncomfortablewithasocialmediaenvironmentthattracksour

whereaboutsandbarragesuswithpersonalizedmarketingmessageswhereverwego.

Intheblockchainworld,we’llhavebettercontroloversuch,butwillwebevigilant

enoughtomanageourmediadiet?

Noneoftheseprivacychallengesaretrueshowstoppers.ContinuedCeglowski:

“Thegoodnewsis,it’sadesignproblem!WecanbuildanInternetthat’sdistributed,

resilient,irritatingtogovernmentseverywhere,andfreeinthebestsenseofthe

word,”aswewantedittobeinthe1990s.AnnCavoukianofthePrivacyandBig

DataInstituteoutlinedsevenprinciplesfordesignthatare“goodforbusiness,good

forgovernment,goodforthepublic.”Thefirstiscritical:makeprivacythedefault

setting.Rejectfalsedichotomiesthatpitprivacyagainstsecurity;everyITsystem,

everybusinesspractice,andallinfrastructureshouldhavefullfunctionality.Leaders

needtopreventratherthanreacttoviolations,maintaintransparencyinalloperations,

andsubjecttheirorganizationstoindependentverification.Brandswillearnpeople’s

trustbyrespectinguserprivacy,keepingusersatthecenterofdesign,andensuring

end-to-endsecurityoftheirdata,destroyingitwhennolongerneeded.Shesaid,“It

reallyisawin-winproposition,rejectingzero-sumandembracingpositive-sum.”

SaidCeglowski,“Butitwilltakeeffortanddetermination.Itwillmeanscrapping

permanentmasssurveillanceasabusinessmodel,whichisgoingtohurt.Itwillmean

pushinglawsthroughascleroticlegalsystem.Therewillhavetobesomenagging.

Butifwedon’tdesignthisInternet,ifwejustcontinuetobuilditout,theneventually

itwillattractsomeremarkable,visionarypeople.Andwe’renotgoingtolikethem,

andit’snotgoingtomatter.”

10.CRIMINALSWILLUSEIT

Initsearlydays,naysayersoftencondemnedbitcoinasatoolforlaunderingmoneyor

buyingillicitgoods.Criticsarguedthat,becausethetechnologyisdecentralized,

lightningquick,andpeertopeer,criminalswouldexploitit.Chancesare,you’ve

heardofSilkRoad,thedarkWebmarketplaceforillegaldrugs.AtitspeakinOctober

2013,SilkRoadhad13,756listingspricedinbitcoin.Productsweredeliveredbymail

withaguidetoavoidingdetectionbyauthorities.WhentheFBIseizedthesite,the

priceofbitcoinplummetedanddigitalcurrenciesbecamesynonymouswithcrime.It

wasbitcoin’sdarkesthour.

Butthereisnothinguniquetobitcoinorblockchaintechnologythatmakesit

moreeffectiveforcriminalsthanothertechnologies.Authoritiesingeneralbelieve

thatdigitalcurrenciescouldhelplawenforcementbyprovidingarecordofsuspicious

activities,maybeevensolvingamultitudeofcybercrimes,fromfinancialservicesto

theInternetofThings.MarcGoodman,authorofFutureCrimes,arguedrecently,

“There’sneverbeenacomputersystemthat’sprovenunhackable.”

Opportunities

forcrimehavescaledwithtechnology.“Theabilityofonetoaffectmanyisscaling

exponentially—andit’sscalingforgoodandit’sscalingforevil.”

Sothisfallsunder

thecategoryofhumanbeingswantingtoharmotherhumanbeings.Criminalswilluse

thelatesttechnologytodoit.

However,bitcoinandblockchaintechnologycoulddiscouragecriminaluse.First,

evencriminalsmustpublishalltheirbitcointransactionsintheblockchain,andsolaw

enforcementcantrackpaymentsinbitcoinmoreeasilythancash,stillthedominant

paymentmediumforcriminals.TheoldWatergateadage,“followthemoney”tofind

thecrook,isactuallymoredoableontheblockchainthanwithotherpayment

methods.Bitcoin’spseudonymousnaturehasregulatorsdubbingbitcoins

“prosecutionfutures”becausetheycanbetrackedandreconciledmoreeasilythan

cash.

AftereachmassshootinginAmerica,U.S.representativeswhoseconstituentsand

campaignfundersarecard-carryingmembersoftheNationalRifleAssociationare

quicktosay,“Don’tblamegunsforallthegunviolenceinAmerica!”Itwouldbe

veryrichindeedifthesesamepeoplebannedblockchaintechnologybecauseofthe

crimessomepeoplemightcommitonit.Technologydoesnothaveagency.Itdoesnot

wantforanythingorhaveaninclinationonewayortheother.Moneyisatechnology,

afterall.Whensomeonerobsabank,wedon’tblamethemoneythatsitsinthevault

fortherobbery.Thefactthatcriminalsusebitcoinspeaksmoretothelackofstrong

governance,regulation,advocacy,andeducationthantoitsunderlyingvirtues.

REASONSBLOCKCHAINWILLFAILORIMPLEMENTATION

CHALLENGES?

Sotheobstaclesareformidable.Loominginthedistanceisquantumcomputing,the

cryptographer’sY2Kproblem.Itcombinesquantummechanicsandtheoretical

computationtosolveproblems—suchascryptographicalgorithms—vastlyfasterthan

today’scomputers.SaidSteveOmohundro,“Quantumcomputers,intheory,can

factorverylargenumbersveryrapidlyandefficiently,andmostofthepublickey

cryptographysystemsarebasedontaskslikethat.Andsoiftheyturnouttobereal,

thenthewholecryptographyinfrastructureoftheworldisgoingtohavetochange

dramatically.”

Thedebateovertechnologicalinnovationandprogressisanancient

one:Isthetoolgoodorbad?Doesitadvancethehumanconditionordegradeit?As

satiristJamesBranchCabellobserved,“Theoptimistproclaimsthatweliveinthe

bestofallpossibleworlds.Thepessimistfearsthisistrue.”

AsthestoryofLevTermenshows,individualsandorganizationscanuse

innovationsforgoodandforevil,andthathasbeentrueacrossabroadrangeof

technologies,fromelectricitytotheInternet.YochaiBenkler,authoroftheseminal

workTheWealthofNetworks,toldus,“Technologyisnotsystematicallybiasedin

favorofinequalityandstructureofemployment;thatisafunctionofsocial,political,

andculturalbattles.”Whiletechnologycanchangebusinessandsocietydramatically

andswiftly,Benklerbelievesitis“notinadeterministicway,onewayortheother.”

Inbalance,thearcoftechnologicalhistoryhasbeenapositiveone.Considerthe

manyadvancesinfoodandmedicine,fromR&Dtotreatmentandprevention:

technologyhasmadeforgreaterhumanequity,productivecapability,andsocial

progress.

Thereisnothingtosuggestblockchaincouldn’tfallintothesametrapasthe

Internetdid.Itmayberesistanttocentralizationandcontrol;butiftheeconomicor

politicalrewardsaregreatenough,powerfulforceswilltrytocaptureit.Leadersof

thisnewdistributedparadigmwillneedtostaketheirclaimandinitiateawaveof

economicandinstitutionalinnovationinordertoensurethateveryonehasthe

opportunity.Thistime,let’sfulfillthepromise.Whichbringsustotheissueof

makingallthishappen.

CHAPTER11



LEADERSHIPFORTHENEXTERA

rolificisanadjectivethatshouldprecedealltitlesusedtodescribetwenty-one-

year-oldVitalikButerin,theRussian-bornCanadianfounderofEthereum.

(Prolificfounder,thatis.)AskhislegionoffollowersaboutEthereum,andthey’lltell

youit’sa“blockchain-based,arbitrary-state,Turing-completescriptingplatform.”

It

hasattractedIBM,Samsung,UBS,Microsoft,andtheChineseautogiantWanxiang,

andanarmyofthesmartestsoftwaredevelopersintheworld,allofwhomthinkthat

Ethereummaybethe“planetaryscalecomputer”thatchangeseverything.

WhenButerinexplained“arbitrary-state,Turing-complete”tous,wegota

glimpseofhismind.Listeningtomusicisverydifferentfromreadingabookor

calculatingtheday’srevenuesandexpenses,andyetyoucandoallthreeonyour

smartphone,becauseyoursmartphone’soperatingsystemisTuringcomplete.That

meansthatitcanaccommodateanyotherlanguagethatisTuringcomplete.So

innovatorscanbuildjustaboutanydigitalappimaginableonEthereum—appsthat

performverydissimilartasks,fromsmartcontractsandcomputationalresource

marketplacestocomplexfinancialinstrumentsanddistributedgovernancemodels.

Buterinisapolyglot.HespeaksEnglish,Russian,French,Cantonese(whichhe

learnedintwomonthsonvacation),ancientLatin,ancientGreek,BASIC,C++,

Pascal,andJava,tonameafew.

“Ispecializeingeneralism,”hesaid.Heisalsoa

polymath,andamodestoneatthat.“Ihadallthesedifferentinterests,andsomehow

bitcoinseemedlikeaperfectconvergence.Ithasitsmath.Ithasitscomputerscience.

Ithasitscryptography.Ithasitseconomics.Ithasitspoliticalandsocialphilosophy.

ItwasthiscommunitythatIwasimmediatelydrawninto,”hesaid.“Ifounditreally

empowering.”Hewentthroughtheonlineforums,lookedforwaystoownsome

bitcoin,anddiscoveredaguywhowasstartingupabitcoinblog.“Itwascalled

BitcoinWeekly,andhewasofferingpeoplefivebitcoinstowritearticlesforhim.That

wasaroundfourdollarsatthetime,”Buterinsaid.“Iwroteafewarticles.Iearned

twentybitcoins.IspenthalfofthemonaT-shirt.Goingthroughthatwholeprocess,it

feltalmostlikeworkingwiththefundamentalbuildingblocksofsociety.”

Allthisfromamanwho,nearlyfiveyearsearlier,haddismissedbitcoin.“Around

February2011,mydadmentionedtome,‘Haveyouheardofbitcoin?It’sthis

currencythatexistsonlyontheInternetandit’snotbackedbyanygovernment.’I

immediatelythought,‘Yes,thisthinghasnointrinsicvalue,there’snowayit’sgoing

towork.’”Likemanyteenagers,Buterin“spentridiculousamountsoftimeonthe

Internet,”readingaboutdifferentideasthatwereheterodox,outofthemainstream.

Askhimwhicheconomistshelikes,andherattlesoffTylerCowen,AlexTabarrok,

RobinHanson,andBryanCaplan.Hecanspeakontheworksofgametheorist

ThomasSchellingandbehavioraleconomistsDanielKahnemanandDanAriely.“It’s

actuallysurprisinglyuseful,howmuchyoucanlearnforyourselfbydebatingideas

likepoliticswithotherpeopleonforums.It’sasurprisingeducationalexperienceall

byitself,”hesaid.Bitcoinkeptcomingup.

Bytheendofthatyear,Buterinwasspendingtentotwentyhoursaweekwriting

foranotherpublication,BitcoinMagazine.“WhenIwasabouteightmonthsinto

university,Irealizedthatithadtakenovermyentirelife,andImightaswellletit

takeovermyentirelife.WaterloowasareallygooduniversityandIreallylikedthe

program.Mydroppingoutwasdefinitelynotacaseoftheuniversitysucking.Itwas

moreamatterof,‘Thatwasfun,andthisismorefun.’Itwasaonce-in-a-lifetime

opportunityandIjustbasicallycouldn’tletitgo.”Hewasonlyseventeenyearsold.

ButerincreatedEthereumasanopensourceprojectwhenherealizedthat

blockchainscouldgofarbeyondcurrencyandthatprogrammersneededamore

flexibleplatformthanthebitcoinblockchainprovided.Ethereumenablesradical

opennessandradicalprivacyonthenetwork.Heviewsthesenotasacontradiction

butas“asortofHegeliansynthesis,”adialecticbetweenthetwothatresultsin

“volunteeredtransparency.”

Ethereum,likesomanytechnologiesthroughouthistory,coulddislocatejobs.

Buterinbelievesthisisanaturalphenomenoncommontomanytechnologiesand

suggestsanovelsolution:“Withinahalfcentury,wewillhaveabandonedthemodel

thatyoushouldhavetoputineighthoursoflaboreverydaytobeallowedtosurvive

andhaveadecentlife.”

However,whenitcomestoblockchain,he’snotconvinced

thatmassivejoblossesareinevitable.Ethereumcouldcreatenewopportunitiesfor

valuecreationandentrepreneurship.“Whereasmosttechnologiestendtoautomate

workersontheperipherydoingmenialtasks,blockchainsautomateawaythecenter,”

hesaid.“Insteadofputtingthetaxidriveroutofajob,blockchainputsUberoutofa

jobandletsthetaxidriversworkwiththecustomerdirectly.”Blockchaindoesn’t

eliminatejobssomuchasitchangesthedefinitionofwork.Whowillsufferfromthis

greatupheaval?“Isuspectandhopethecasualtieswillbelawyersearninghalfa

milliondollarsayearmorethananyoneelse.”

SoButerinknowshisShakespeare:

“Thefirstthingwedo,let’skillallthelawyers.”

Ethereumhasanotherapparentcontradiction.Itisunabashedlyindividualisticand

privateandyetitdependsuponalarge,distributedcommunityactingopenlyin

collectiveself-interest.Indeed,Ethereum’sdesignneatlycapturesbothhisenduring

faiththatindividualswilldotherightthingwhenequippedwiththerighttools,and

hishealthyskepticismofthemotivesoflargeandpowerfulinstitutionsinsociety.

WhileButerin’scritiqueoftheproblemsofcontemporarysocietyisgrave,histoneis

clearlyoneofhope.“Whiletherearemanythingsthatareunjust,Iincreasinglyfind

myselfacceptingtheworldasis,andthinkingofthefutureintermsofopportunities.”

Whenhelearnedthat$3,500wouldenablesomeonetocombatmalariatherestofher

life,hedidn’tbemoanthelackofdonationsfromindividuals,governments,and

corporations.Hethought,“Ohwow,youcansavealifeforonly$3,500?That’sa

reallygoodreturnoninvestment!Ishoulddonatesomerightnow.”

Ethereumishis

tooltoeffectpositivechangeintheworld.“Iseemyselfmoreaspartofthegeneral

trendofimprovingtechnologysothatwecanmakethingsbetterforsociety.”

Buterinisanatural-bornleader,inthathepullspeoplealongwithhisideasand

hisvision.He’sthechiefarchitect,chiefachieverofconsensusintheEthereum

community,andchiefcultivatorofabroadercommunityofbrilliantdeveloperswho

havestrongopinionsaboutanythingtechnical.Whatifhesucceeds?

WHOWILLLEADAREVOLUTION?

In1992,MITcomputerscientistDavidClarksaid,“Werejectkings,presidents,and

voting.Webelieveinroughconsensusandrunningcode.”

Thatwasthemantrafor

stewardsofthefirstgenerationoftheInternet.Itwasvoicedatatimewhenmost

peoplecouldscarcelyimaginehowtheInternetwouldbecomeanewmediumof

humancommunications,onethatwouldarguablysurpasspreviousmediainits

importanceforsocietyanddailylife.Clark’swordsembodiedaphilosophyforthe

leadershipandgovernanceofaglobalresourcethatwasradicallydifferentfromthe

norm,yetonethatengenderedaremarkablyeffectivegovernanceecosystem.

SincetheendofWorldWarII,state-basedinstitutionshavegovernedimportant

globalresources.Twoofthemostpowerful—theInternationalMonetaryFundandthe

WorldTradeOrganization—werebornattheBrettonWoodsConferencein1944.The

UnitedNationsandothergroupsunderitsumbrella,suchastheWorldHealth

Organization,receivedawideberthtoexercisetheirmonopolyonglobalproblem

solving.Theseorganizationswerehierarchicalbydesign,becausehierarchieswere

thedominantparadigmduringthefirsthalfofawar-torncentury.Buttheseindustrial-

scalesolutionsareillsuitedtothechallengesofthedigitalera.TheriseoftheInternet

markedasignificantdeparturefromthetraditionalcultureofgovernance.

In1992,mostInternettrafficwase-mail.ThegraphicalbrowserthatenabledTim

Berners-Lee’sextraordinaryWorldWideWebwastwoyearsaway.Mostpeople

weren’tconnectedanddidn’tunderstandthetechnology.Manyoftheimportant

institutionsthatwouldcometostewardthisimportantglobalresourcewereeither

embryonicornonexistent.BarelyfouryearsoldwastheInternetEngineeringTask

Force,aninternationalcommunitythathandlesmanyaspectsofInternetgovernance.

TheInternationalCorporationforAssignedNamesandNumbers(ICANN),which

deliversessentialservicessuchasdomainnames,wassixyearsawayfromexistence;

andVintCerfandBobKahnwerejustrecruitingpeopleforwhatwouldultimately

becometheInternetSociety.

ThesecondgenerationoftheInternetenjoysmuchofthesamespiritand

enthusiasmforopennessandaversiontohierarchies,manifestedintheethosof

Satoshi,Voorhees,Antonopoulos,Szabo,andVer.Opensourceisagreatorganizing

principlebutit’snotamodusoperandiformovingforward.Asmuchasopensource

hastransformedmanyinstitutionsinsociety,westillneedcoordination,organization,

andleadership.OpensourceprojectslikeWikipediaandLinux,despitetheir

meritocraticprinciples,stillhavebenevolentdictatorsinJimmyWalesandLinus

Torvalds.

Tohiscredit,SatoshiNakamotoalignedstakeholderincentivesbycoding

principlesofdistributedpower,networkedintegrity,indisputablevalue,stakeholder

rights(includingprivacy,security,andownership),andinclusivenessintothe

technology.Asaresult,thetechnologyhasbeenabletothriveintheearlyyears,

blossomingintotheecosystemweknowtoday.Still,thisdeistichands-offapproachis

startingtoshowsignsofstrain.Aswithalldisruptivetechnologies,thereare

competingviewsintheblockchainecosystem.Eventhecoreblockchaincontingent

hassplitintodifferentcryptocamps,eachadvocatingaseparateagenda.

BrianForde,theformerWhiteHouseinsiderandblockchainadvocatewhonow

headsMIT’sDigitalCurrencyInitiative,said,“Ifyoulookattheblock-sizedebate,is

itreallyadebateaboutblocksize?Inthemedia,it’sadebateaboutblocksize,butI

thinkwhatwe’reseeingisthatit’salsoadebateongovernance.”

Whatkindof

governance,andmorespecifically,whatkindofleadershipisneeded?Indeed,Mike

Hearn,aprominentbitcoincoredeveloper,causedquiteastirinJanuary2015,when

hewroteafarewelllettertotheindustryforetellingbitcoin’simminentdemise.Init,

heoutlinedafewpressingchallengesfacingtheindustry;namely,thatimportant

technicalstandardsquestionshadgoneunansweredandthattherewasdiscordand

confusionintheranksofthecommunity.Hearn’sconclusionwasthatthese

challengeswouldcausebitcointofail.Wedisagree.Indeed,whatHearnintendedasa

damningcritiqueofbitcoin’sshortcomingsbecame,inoureyes,oneofthemost

eloquenttreatisesontheimportanceofmultistakeholdergovernance,basedon

transparency,merit,andcollaboration.Codealoneisjustatool.Forthistechnologyto

reachitsnextstageandfulfillitslong-termpromise,humansmustlead.Wenowneed

allconstituents—allstakeholdersinthenetwork—tocometogetherandaddresssome

mission-criticalissues.

We’vealreadyoutlinedsomeoftheshowstoppers.Theyaresignificant.Butthey

arechallengestothisrevolution’ssuccess,notreasonstoopposeit.Todate,many

issuesarestillunsolvedandmanyquestionsunanswered,withlittlecollective

movementtoresolvethem.Howwillthetechnologyscale,andcanwescaleit

withoutdestroyingthephysicalenvironment?Willpowerfulforceschokeinnovation

orco-optit?Howwillweresolvecontroversialstandardsquestionswithoutreverting

tohierarchy?

Howtoanswerthosequestionshasbeenthefocusofourresearchoverthelast

twoyears.Wefoundthat,insteadofstate-basedinstitutions,weneedcollaborationsof

civilsociety,privatesector,government,andindividualstakeholdersinnonstate

networks.Callthemglobalsolutionnetworks(GSNs).TheseWeb-basednetworksare

nowproliferating,achievingnewformsofcooperation,socialchange,andeventhe

productionofglobalpublicvalue.

OneofthemostimportantistheInternetitself—curated,orchestrated,and

otherwisegovernedbyaonce-unthinkablecollectionofindividuals,civilsociety

organizations,andcorporations,withthetacitandsometimesactivesupportofnation-

states.Butnogovernment,country,corporation,orstate-basedinstitutioncontrolsthe

Internet.Itworks.Indoingso,ithasproventhatdiversestakeholderscaneffectively

stewardaglobalresourcebyinclusiveness,consensus,andtransparency.

Thelessonsareclear.Goodgovernanceofsuchcomplexglobalinnovationsisnot

thejobofgovernmentalone.Norcanweleaveittotheprivatesector:commercial

interestsareinsufficienttoensurethatthisresourceservessociety.Rather,weneedall

stakeholdersgloballytocollaborateandprovideleadership.

THEBLOCKCHAINECOSYSTEM:YOUCAN’TTELLTHEPLAYERS

WITHOUTAROSTER

Althoughblockchaintechnologyemergedfromtheopensourcecommunity,itquickly

attractedmanystakeholders,eachwithdifferentbackgrounds,interests,andmotives.

Developers,industryplayers,venturecapitalists,entrepreneurs,governments,and

nongovernmentorganizationshavetheirownperspectives,andeachhasaroletoplay.

Thereareearlysignsthatmanyofthecorestakeholdersseetheneedforleadership

andaresteppingup.Let’sreviewwhotheplayersare:

BlockchainIndustryPioneers

Vanguardsintheindustry,fromErikVoorheestoRogerVer,believeanyformof

formalgovernance,regulation,stewardship,oroversightisnotonlyfoolish,but

antitheticaltotheprinciplesofbitcoin.

SaidVoorhees,“Bitcoinisalreadyverywell

regulatedbymathematics,whicharenotuptothewhimsofgovernments.”

However,astheindustryhasexpanded,manyentrepreneursareseeingahealthy

dialoguewithgovernments,andafocusongovernancemorebroadly,asagoodthing.

CompanieslikeCoinbase,Circle,andGeminihavejoinedtradeorganizations;and

someevenmaintaincloserelationswithemerginggovernanceinstitutions,suchasthe

DigitalCurrencyInitiativeatMIT.

VentureCapitalists

WhatstartedasacliqueofcryptoinsidersquicklysnowballedintoSiliconValley’s

biggestandbrightestVCs,includingthevenerableAndreessenHorowitz.Now

financialservicestitansareplayingventurecapitalist:GoldmanSachs,NYSE,Visa,

Barclays,UBS,andDeloittehavemadedirectinvestmentsinstart-upsorsupported

incubatorsthatnurturenewventures.Pensionfundsareenteringthefray.OMERS

Ventures,thebillion-dollarventurearmofoneofCanada’slargestpublicsector

pensions,madeitsfirstinvestmentin2015.JimOrlando,whorunsthatgroup,is

lookingforthenextkillerappthat“doesforblockchainwhattheWebbrowserdidfor

theInternet.”

Investmenthasexploded—fromtwomilliondollarsin2012tohalfa

billioninthefirsthalfof2015.

Theexcitementispalpable.TimDrapertoldusthat,

ifanything,“financiersareunderestimatingthepotentialofblockchain.”

Vocal

venturecapitalistscanadvocateforthetechnologyandsupportnascentgovernance

institutions,suchasCoinCenter,bankrolledbyAndreessenHorowitz.Digital

CurrencyGroup,aventurefirmfoundedbyBarrySilbert,hasappointedacademics

andothernontraditionaladviserstoitsboardtoacceleratethedevelopmentofabetter

financialsystemthroughbothinvestmentandadvocacy.

BanksandFinancialServices

Perhapsinnootherindustryhaveweseenaswifterchangeofopinion.Forthelongest

time,mostfinancialinstitutionsdismissedbitcoinasthespeculativetoolofgamblers

andcriminals,andbarelyevenregisteredblockchainontheirradars.Todaytheyare

quiteliterally“allin.”Watchingthisunfoldinrealtimein2015wastrulyincredible.

Before2015,fewmajorfinancialinstitutionshadannouncedinvestmentsinthe

sector.TodayCommonwealthBankofAustralia,BankofMontreal,SociétéGénérale,

StateStreet,CIBC,RBC,TDBank,MitsubishiUFJFinancialGroup,BNYMellon,

WellsFargo,MizuhoBank,Nordea,ING,UniCredit,Commerzbank,Macquarie,and

dozensofothersareinvestinginthetechnologyandwadingintotheleadership

discussion.Mostoftheworld’sbiggestbankshavesigneduptotheR3consortium

andmanymorehavepartneredwiththeLinuxFoundationtolaunchtheHyperledger

Project.Banksshouldbeincludedinthediscussionaboutleadership,butother

stakeholdersmustremaincautiousofpowerfulincumbentslookingtocontrolthis

technology,justastheyhadtotreadcautiouslyintheearlydaysoftheInternet.

Developers

Developersinthecommunityaresplitonbasictechnicalissues,andthecommunityis

expressinganeedforcoordinationandleadership.GavinAndresen,thebitcoincore

developeratthecenteroftheblock-sizedebate,toldus,“I’dprefertostayinthe

engineroom,keepingthebitcoinenginegoing”

ratherthanspendingeverywaking

momentadvocatinghisposition.However,giventhelackofclearleadership,

Andresenhasbeeninadvertentlycastinthespotlight.Inthesummerof2015,hetold

us,“Myjoboverthenextsixmonthsistofocusonbitcoin’stechnicallife,making

surebitcoinisstillaroundintwoorthreeyearsforthosebusinessestohappen:

micropayments,stocktrading,orpropertytransfer,alltheseotherthings,”which

involvesalotofadvocatingandlobbying.Tohim,theInternetgovernancenetworkis

ausefulstartingpoint.“Ialwayslookforrolemodels.Thefigurerolemodelisthe

IETF.”

HowtheInternetisgovernedis“kindofchaoticandmessy,”hesaid,butit

worksandit’sreliable.

Academia

Academicinstitutionsarefundinglabsandcenterstostudythistechnologyand

collaboratewithcolleaguesoutsidetheirsilo.BrianFordetoldus,“WestartedDCIto

catalyzesomeofthegreatresourceswehaveatMITtofocusonthistechnology,

becausewethinkit’sgoingtobeoneofthemostimportanttechnological

transformationsoverthenexttenyears.”

JoichiIto,directoroftheMITMediaLab,

sawanopportunityforacademiatostepup:“MITandtheacademiclayercanbea

placewherewecandoassessments,doresearch,andbeabletotalkaboutthingslike

scalabilitywithoutanybiasorspecialinterests.”

JerryBrito,oneofthemost

prominentlegalvoicesinthespace—firstattheMercatusCenteratGeorgeMason

UniversityandnowasdirectorofCoinCenter,anot-for-profitadvocacygroup—said,

“Governancecomesintoplaywherethereareseriousdecisionsthatneedtobemade,

andyouneedaprocessforthattohappen.”

Herecommendedstartingwiththe

Hippocraticoath:first,donoharm.Thecurrentbottom-upapproachthatbitcoin’s

coredevelopersareusing“isshowingalittlebitofitsroughedgesrightnowwiththe

block-sizedebate.It’sgoingtobeverydifficulttogetanyconsensus,”Britosaid.“We

wanttohelpdevelopthatforumandfosteraself-regulatoryorganizationifitcomesto

that.”

NotableuniversitiessuchasStanford,Princeton,NewYorkUniversity,and

Dukealsoteachcoursesonblockchain,bitcoin,andcryptocurrencies.

Governments,Regulators,andLawEnforcement

Governmentsallovertheworldareuncoordinatedintheirapproach—somefavoring

laissez-fairepolicy,othersdivinginwithnewrulesandregulationssuchasthe

BitLicenseinNewYork.Someregimesareopenlyhostile,thoughthisisincreasingly

afringeresponse.Likewise,theindustryissplittingintofactions,thosewhosupport

thenewrulesandthosewhodonot.Eventhosewhoresistgovernmentintervention

acknowledgethattheirenthusiasmtowadeintogovernancedebatesisanetpositive.

AdamDraper,aprolificVCintheindustry,acknowledged,albeitreluctantly,

“Governmentendorsementcreatesinstitutionalendorsement,whichhasvalue.”

Centralbanksgloballyareeachtakingdifferentstepstounderstandthistechnology.

BenjaminLawsky,formersuperintendentoffinancialservicesfortheStateofNew

York,saidstrongregulationsarethefirststeptowardindustrygrowth.

NongovernmentOrganizations

Theyear2015provedtransformativefortheburgeoningconstellationofNGOsand

civilsocietyorganizationsfocusedspecificallyonthistechnology.ThoughForde’s

DCIishousedwithinMIT,weincludeithere.OthersuchgroupsincludeBrito’sCoin

CenterandPerianneBoring’sChamberofDigitalCommerce.Thesegroupsare

gainingtractioninthecommunity.

Users

Thismeansyouandme—peoplewhocareaboutidentity,security,privacy,ourother

rights,long-termviability,fairadjudication,oraforumforrightingwrongsand

fightingcriminalswhousetechnologytodestroywhatwecareabout.Everyone

seemsdividedonbasictaxonomyandcategorization:Doesblockchainrefertothe

bitcoinblockchainorthetechnologyingeneral?Isitbig“B”Blockchainorlittle“b”

blockchain?Isitacurrency,commodity,ortechnology?Isitallofthesethingsor

noneofthesethings?

WomenLeadersinBlockchain

Asmanyhaveobserved,theblockchainmovementisoverpopulatedwithmen.In

technologyandengineering,malesstilloutnumberfemalesbyawidemargin.

However,high-profilewomenarefoundingandmanagingcompaniesinthespace:

BlytheMasters,CEOofDigitalAssetHoldings;CindyMcAdam,presidentofXapo;

MelanieShapiro,CEOofCaseWallet;JoyceKim,executivedirectorofStellar

DevelopmentFoundation;ElizabethRossiello,CEOandfounderofBitPesa;and

PamelaMorgan,CEOofThirdKeySolutions.Manyofthemhavesuggestedthe

industryisverywelcomingtoallvoices,maleandfemalealike.Venturecapitalin

blockchainisalsogainingindiversity.AriannaSimpson,formerheadofbusiness

developmentatBitGo,isnowaninvestorinthesector.JalakJobanputraisaninvestor

whoseVCfundfocusesondecentralizedtechnology.

Whenitcomestogovernanceandstewardshipofthisglobalresource,women

havetakenthelead.

PrimaveraDeFilippi,facultyassociateattheBerkmanCenteratHarvardanda

permanentresearcherattheNationalCenterofScientificResearchinParis,isa

tirelessadvocateofblockchaintechnologyandhasemergedasoneofacademia’s

clearestandmosteloquentvoicesongovernance.Sheisorganizer,instigator,and

promoterofdialoguewithintheecosystem.Withlawyer-turned-entrepreneur

ConstanceChoi,anothervocalproponentintheindustry,DeFilippihasledaseriesof

blockchainworkshopsatHarvard,MIT,andStanford,aswellasinLondon,Hong

Kong,andSydney.Theyhavebroughttogetherdiversestakeholdersfromtheindustry

andbeyondtodebatebigissues.Nothingisofflimits,andtheeventsoftenmashup

peopleofdifferentbackgrounds,persuasions,andbeliefs.

ElizabethStarkisanotheremergingstaringovernance.TheYaleLawSchool

professorhastakenupthemantleofconvener-in-chieffortheindustry.Likeanother

prominentwoman—DawnSong,MacArthurfellowandcomputerscienceprofessorat

Berkeley,andanexpertincybersecurity—Starkcomesfromadistinctlyacademic

backgroundbuthasotherambitions.SheorganizedScalingBitcoin,convening

developers,industryplayers,thoughtleaders,governmentofficials,andother

stakeholdersinMontreal.A“constitutionalmoment”forthesector,ScalingBitcoin

wascreditedwithclearinglogjamsintheblock-sizedebate.Todaysheisalsoleading

asanentrepreneur,collaboratingonthedevelopmentoftheBitcoinLightning

Networktosolvetheblockchain’sscalabilityissue.

PerianneBoring,aformerjournalistandTVreporter,isthefounderofthe

ChamberforDigitalCommerce,atrade-basedassociationinWashington,D.C.

Withinayear,CDChasattractedahigh-profileboard(e.g.,BlytheMasters,James

Newsome,GeorgeGilder).Themovementneeded“bootsonthegroundin

Washingtontoopenadialoguewithgovernment,”shesaid.Withherbackgroundin

journalism,Boringfocusedonmessaging,positioning,andpolish.Herorganizationis

“opentoanyonewhoiscommittedtogrowingthiscommunity,”shesaid,andisnow

aleadingvoiceinpolicy,advocacy,andknowledgeintheburgeoningblockchain

governanceecosystem.

Thisgrowingchorusofleaderslobbyingforgovernanceisasprescientasitis

urgent.Whenwetalkaboutgoverningblockchaintechnology,wearenottalking

aboutregulation,atleastnotexclusively.Forone,thereareseriouslimitationsto

usingregulationsformanaginganimportantglobalresource.AsJoichiItosaid,“You

canregulatenetworks,youcanregulateoperations,butyoucan’tregulate

software.”

Soregulationswillbeoneofseveralimportantcomponents.Blockchain

isnotliketheInternetbecausemoneyisdifferentfrominformation.BlytheMasters,

consummateWall-Street-insider-turned-blockchain-pioneer,expressedherconcern:

“Newcomersaresimplyabletodothingsthatregulatedinstitutionsarenotabletodo,

butoneneedstothinkverycarefullyaboutwhythoseregulationsexist,andwhat

purposetheyserve,beforeonecanconcludethatexposingconsumerstounregulated

financialactivitiesisagoodthing.”

Ultimately,thedebateisnotaboutthekindof

societywewantbutabouttheopportunitiesforleaderstostewardanimportantglobal

resource.

ACAUTIONARYTALEOFBLOCKCHAINREGULATION

BenjaminLawsky,theformersuperintendentoffinancialservicesfortheStateof

NewYork(NYDFS),wasoncethemostpowerfulbankregulatorintheUnitedStates.

ToWashingtoninsiders,Lawskywasknownforhisearlymorningselfiesonhisdaily

jogsaroundthecity.ButtothetitansofWallStreet,hewasagutsy,ambitious(notto

mentionoverzealous)scrapperwhowouldroutinelytakethefighttoanybankhe

thoughtwasmisbehavingandseekhisjustdeserts.

AppointedbyfriendandlongtimepoliticalallyGovernorAndrewCuomo,

Lawskywasthefirstevertoholdtheofficeoftopwatchdogofthestate’schartered

banks.In2012,onlyoneyearintothejob,hemadeheadlineswhenNYDFSreacheda

$340millionsettlementwithU.K.bankStandardCharteredPLCforitshandlingof

morethan$250millionintransactionsfromIran,prohibitedatthetimebyU.S.and

E.U.sanctions.Intheprocess,NYDFSscoopedtheJusticeDepartment,whichwas

seekingasimilarpenalty.

Tothosewhothoughtbankregulationsweretoolax,he

wasthenewsheriffintown,afearlessleaderandreformerofanindustryrunamok.

Tothebanks,hewasquicklybecomingPublicEnemyNumberOne.Lawskywasjust

gettingstarted.

Itwasmid-2013Lawskywasathisdesk,probablyworkingonanother

blockbustercaseagainstthebigbanks,whenaneconomistonhisstaffknockedonhis

doortodiscusssomeunusualinquiries.Accordingtoafewlawyersonthestreet,

severalclientfirmsweretransactinginsomestrangenewvirtualcurrencycalled

bitcoin.Lawsky’sfirstreactionwas“Whattheheckisbitcoin?”

Theeconomist

wentontoexplainthatthesecompanieshadcustomerswhowerebuying,selling,

trading,andpayingforgoodsandserviceswiththisdigitaldollarandthatthelawyers,

evercautious,wantedtoknowwhetherthiskindofactivityqualifiedasmoney

transmission,andifso,whattodoaboutit.InNewYork,moneytransmissionsare

typicallyregulatedatthestatelevel;andsotheNYDFS,asthestateregulatorinNew

York,hadadutytoregulateanyentityengagedinmoneytransmission.Buthow?

Lawskyhadn’tevenheardaboutthetechnology,andhehadasneakingsuspicionthis

wouldbeaverydifferentkindofchallenge.

Almostimmediately,Lawskywasconfrontedwithaproblemthathasbecomeall

toocommonplace,thatdisruptivetechnologydoesnotfitneatlyintoexisting

regulatoryboxes,ahallmarkofthedigitalage.Inhismind,bitcoindidn’tfitatall.

Bitcoinisglobalinreach;federalandstategovernmentswouldbelimitedinthescope

ofwhattheycandotogovernandregulateit.Moreover,thetechnologyispeerto

peeranddecentralized.Regulatorsmakealivingmonitoringlargeintermediaries.

Theircentralizedledgerscontaintrovesofdata,idealforbuildingcases.Andinthe

digitalage,officialsingovernmentarerarely,ifever,inpossessionofallthe

informationneededtomakedecisionsinthepublicinterest.Often,theylackresources

togoverniteffectivelyandcanbeillinformedaboutinnovation.Lawskywascoming

totermswithsomethingthatgovernmentsandregulatorsofdigitaltechnologieshad

wrestledwithfortwentyyears.Thankstoluck,foresight,andadifferentregulatory

framework,theInternetwasabletogrowandthrive.Cryptocurrencieswereanother

exampleofhowdigitaltechnologyiswrestingcontrolfromtraditionaldecision

makers,includinggovernments.

Still,Lawskyhadajobtodo.Uponreviewingtheexistingstatutes,hefoundthem

woefullyinadequate.Thedepartmentinitiallywantedtoregulatethistechnologyby

enforcingruleswrittenaroundthetimeoftheCivilWar.Thosemoneytransmission

lawscouldn’tpossiblyaddressanykindofdigitaltechnologyliketheInternet,let

alonedigitalcurrenciesorcybersecurity.“ThemoreIlearned,themoreinterestedI

gotinhowpowerfulthistechnologyis,andIsawallthevariousapplicationsand

platformsthatweregoingtobebuilt,overtime,”hesaid.Ifhe“couldgetregulation

right,tomakesurethebadstuffwedidn’twanttoseehappeningintheecosystem

wasavoided,andatthesametimenothaveregulationbetoooverbearing,thenwe

hadarealchanceofhelpingaverypowerfultechnologymakeseriousimprovements

tooursystem.”

Lawskyconcluded,“Maybeweneedanewtypeofregulatory

frameworktodealwithsomethingthatisjustqualitativelydifferent?”

Hisproposal,

theBitLicense,wasthefirstseriousattempttoprovidearegulatorylensontothis

industry.Acontroversialpieceoflaw,itrevealedhowevenwell-intentioned

regulationscanproduceunintendedconsequences.WhentheBitLicensewentinto

effect,therewasamassexodusofcompaniessuchasBitfinex,GoCoin,andKraken

fromNewYork;theycitedtheprohibitivecostofthelicenseasamaincause.Thefew

thatstayedarewell-capitalizedandmorematurebusinesses.

Thebenefits,suchasimprovedoversightandconsumerprotection,are

significant.Licensedexchanges,suchasGemini,havegainedground,perhaps

becausetheirinstitutionalclienteleknowthey’renowasregulatedasbanks.Butwith

fewercompetitors,willtheBitLicensestifleinnovationandcripplegrowth?Brito

arguedthattheBitLicensemissesthemarkbyapplyingoldsolutionstonew

problems.HecitedtheBitLicenserulethatifyoutakecustodyofconsumerfunds,

youneedtogetalicense.“Withsomethinglikebitcoinandotherdigitalcurrencies,

youhavetechnologieslikemultisig[multisignature]that,forthefirsttime,introduce

theconceptofdividedcontrol.Soifthethreeofuseachhaveakeytoamultisig

addressthatneedstwooutofthree,whohascustodyofthefunds?”

Inthiscase,the

conceptofcustody,onceveryclearinthelaw,isnowambiguous.

“Mybeliefisthenextfivetotenyearswillbeoneofthemostdynamicand

interestingtimesinhistoryforourfinancialsystem,”Lawskysaid.

Heresigned

fromNYDFStokeepworkingonimportantissuesattheheartofthisdynamic

environment.“IwouldenjoymycareerifIgottospendmytimeworkinginthe

middleofwhatIbelieveisgoingtobeanenormouslytransformative,dynamic,

interestingtime...youhavethisworldoftechnology,whichisusuallylargely

unregulated,collidingwithprobablythemostregulatedsystemintheworld,the

financialsystem.Noonereallyknowswhatcomesofthatcollision,”hesaid.“It’sall

goingtoworkoutoverthenextfivetotenyearsandIwanttobeinthemiddleofthat

collision.”

THESENATORWHOWOULDCHANGETHEWORLD

TheCanadianSenatesurprisedmanywhen,inJune2015,itsCommitteeonBanking,

Trade,andCommercereleasedanunambiguouslypositiveandthoughtfulreport,

“DigitalCurrency:YouCan’tFlipThisCoin.”

Incorporatingfeedbackfrom

multiplestakeholdersintheblockchainecosystem,thereportdetailedwhy

governmentsshouldembraceblockchaintechnology.

“ThiscouldbethenextInternet,”saidDougBlack,theCanadiansenatorfrom

Calgary,Alberta,andamajorcontributortothereport.“ThiscouldbethenextTV,

thenexttelephone.WewanttosignalbothwithinandoutsideCanada,wesupport

innovationandentrepreneurship.”

LikeBenLawsky,Blackisaveteranlawyer.He

madehiscareerinthecountry’soilpatch,workingonbehalfofoilandgasproducers

asapartneratoneofthecountry’smostprestigiouslawfirms.SenatorBlackdiffers

fromMr.Lawsky,however,inhisreluctancetorushnewregulationsoutthedoor.

“Governmentshouldgetoutoftheway!”Blacktoldus.

Asmembersofthe

CanadianSenate,SenatorBlackandhiscolleagueshavenoformallegislativerole,

butcanmovetheneedleonimportantissuesbyissuingguidanceormaking

recommendationstothegovernment.Still,withanaverageageofsixty-six,the

CanadianSenatewouldn’tbetheodds-onfavoritetoembracethiscutting-edge

technology.Butthat’sexactlywhattheydid.

Reflectingontheprocess,Blackrecalledthinking,“Howdowecreatean

environmentthatencouragesinnovationasopposedtostiflesinnovation?...That’s

unusualforagovernmenttotakethatpointofviewfromtheget-go.”Accordingto

Black,governments“tendtobeconcernedaboutmaintainingcontrolandminimizing

risk.”

Whileacknowledgingtheriskanynewtechnologyposestoconsumersand

businessalike,Blackexplained,“There’sriskinanything;there’sriskinfiatcurrency.

Wecanmanageriskatsomelevel,butlet’salsocreateanenvironmentwhere

innovationcanbefostered.”

Withthisreport,Blackbelievesthey’vehitthemark.

Thereportmakesanumberofrecommendations,buttwostandout.First,the

governmentshouldstartusingtheblockchaininitsinteractionswithCanadians.Black

said,“Theblockchainisamoreconfidentialvehicletoprotectdata”;therefore,

“governmentshouldbelookingtostartutilizingthistechnology,whichwouldbea

powerfulmessage.”

Thisisapowerfulstatement:ifyouwanttobethehubfor

innovationandapioneerinthesector,putyourmoneywhereyourmouthis,andstart

innovatingyourself.

Thesecondrecommendationisperhapsevenmoresurprising:thegovernment

shouldtakealighttouchonregulation.Anumberofrespectedfiguresinthelegal

professionwhofocusonblockchaintechnologyhavemadethisargument.Aaron

WrightofCardozoSchoolofLaw,YeshivaUniversity,advocatesfor“safeharbor”

lawsthatallowinnovatorstokeepinnovatingwhileminimizinggovernment

regulationsuntilthetechnologymatures.

JoshFairfield,ofWashingtonandLee

UniversityLawSchool,said,“Weneedregulationsthatactliketechnology—humble,

experimental,anditerative.”

CENTRALBANKSINADECENTRALIZEDECONOMY

Financemaybethesecond-oldestprofession,butcentralbankingisarelatively

modernphenomenon.TheU.S.FederalReserve(theFed),theworld’smostpowerful

centralbank,celebrateditscentennialin2013.

Centralbanks,intheirrelatively

shorthistory,havegonethroughmultiplereincarnations,thelastoneabigshiftfrom

thegoldstandardtoafloating-ratesystemoffiatcurrencies.Becausedigital

currencieschallengetheroleofcentralbanksinaneconomy,wemightexpectcentral

bankerstoopposeblockchaintechnology.However,overtheyears,thesebankers

haveshownawillingnesstoinnovate.TheFedpioneeredelectronicclearingoffunds

bychampioningtheAutomatedClearingHouse(ACH)systemwhenallcheckswere

settledandclearedmanually.Likecentralbankselsewhere,theFedhassavored

experimentation.Ithasembracedunorthodoxanduntestedpolicies,mostfamously

(orinfamously)thequantitativeeasingprograminthewakeofthe2008financial

crisis,whenitusednewlymintedmoneytobuyfinancialassetssuchasgovernment

bondsatanunprecedentedscale.

Notsurprisingly,centralbankershavebeenforwardthinkinginunderstanding

blockchaintechnology’simportancetotheirrespectiveeconomies.Therearetwo

reasonsforthisleadership.First,thistechnologyrepresentsapowerfulnewtoolfor

improvingfinancialservices,potentiallydisruptingmanyfinancialinstitutionsand

enhancingtheperformanceofcentralbanksintheglobaleconomy.

Second,andthisisthebigone,blockchainraisesexistentialquestionsforcentral

banks.Howdotheyperformtheirroleeffectivelyinaglobalmarketwithoneor

manycryptocurrenciesoutsidetheircontrol?Afterall,monetarypolicyisakeylever

inacentralbanker’stoolboxtomanagetheeconomy,particularlyintimesofcrisis.

Whathappenswhenthatcurrencyisnotissuedbyagovernmentbutexistsgloballyas

partofadistributednetwork?

Centralbankerseverywhereareexploringthesequestions.CarolynWilkins,

deputygovernoroftheBankofCanadaandacentralbankingveteran,toldus,“We

areconfidentinourparadigmrightnow,butweunderstandmanyparadigmshavea

shelflife:they’regoingtoworkwellforanumberofyearsandthenthingsaregoing

tostarttogowrong.Youcanfixitatthemarginfirst,buteventuallyyoujustneedto

switchtosomethingelse.”Shebelievestheblockchaincouldbethatsomethingelse.

“It’shardnottobefascinatedbysomethingsotransformative.Thistechnologyis

beingusedinwaysthathaveimplicationsforcentralbankingthatspanallthe

functionsthatwehave,”shesaid.

BenBernanke,formerchairoftheFed,saidin2013thatblockchaintechnology

could“promoteafaster,moresecure,andmoreefficientpaymentsystem.”

Today,

boththeFedandtheBankofEngland(andlikelyothercentralbankerswhohavenot

beenasvocal)haveteamsdedicatedtothistechnology.

Tounderstandwhycentralbanksaresointerested,let’sfirstaddresswhatcentral

banksdo.Broadlyspeaking,theseaugustinstitutionsperformthreeroles.First,they

managemonetarypolicybysettinginterestratesandcontrollingthemoneysupply

andinexceptionalcircumstancesbyinjectingcapitaldirectlyintothesystem.Second,

theyattempttomaintainfinancialstability.Thismeanstheyactasthebankerfor

governmentandforthebanksinthefinancialsystem;theyarethelenderoflast

resort.Finally,centralbanksoftensharetheresponsibilitywithothergovernment

entitiesofregulatingandmonitoringthefinancialsystem,particularlytheactivitiesof

banksthatdealwithsavingsandloanstoaverageconsumers.

Invariably,allofthese

rolesareintertwinedandcodependent.

Let’sstartwithfinancialstability.“Asacentralbank,ourroleisasaliquidity

provideroflastresort.WedothatinCanadiandollars.Therefore,Canadiandollars

areimportantasasourceofliquidityfortheCanadianfinancialsystem,”Wilkinssaid.

Whatiftransactionsareinanothercurrencylikebitcoin?“Ourabilitytoprovide

lenderoflastresortserviceswouldbelimited.”

Thesolution?Centralbankscould

simplybeginholdingreservesinbitcoin,astheydoinothercurrencies,andassets

suchasgold.Theycouldalsorequirefinancialinstitutionstoholdreservesatthe

centralbankinthesenonstatecurrencies.Theseholdingswouldenableacentralbank

toperformtheirmonetaryroleinbothfiatandcryptocurrencies.Soundsprudent,

right?

Whenconsideringfinancialstabilityrelativetomonetarypolicy,Wilkinssaid,

“Theimplications[formonetarypolicy]ofelectronicmoneydependonhowit’s

denominated.”Shesuggestedinarecentspeechthat“e-money,”asshecalledit,could

bedenominatedbyagovernmentinanationalcurrencyorasacryptocurrency.

A

digitalcurrencydenominatedinCanadiandollarswouldbeeasytomanage,shesaid.

Ifanything,itwouldhelpacentralbanktorespondmorequickly.Mostlikely,wewill

seeacombinationofthetwo:centralbankswillholdandmanagealternative

blockchain-basedcurrenciesastheydoforeignreservesandwillexploreconverting

fiatcurrencytoso-callede-moneythroughablockchain-basedledger.Thisnewworld

willlookalotdifferent.

Whataboutcentralbanksasregulatorsandwatchdogs?Theyhaveconsiderable

regulatorypowerintheirrespectivecountries,buttheydonotoperateinsilos.They

coordinateandcollaboratewithothercentralbanksandwithglobalinstitutionslike

theFinancialStabilityBoard,theBankforInternationalSettlements,theInternational

MonetaryFund,theWorldBank,andothers.Weneedstrongerglobalcoordinationto

addressblockchainissues.Today,centralbankersareaskingimportantquestions.

CarolynWilkinssaid,“It’seasytosaythatregulationshouldbeproportionatetothe

problem,butwhatistheproblem?Andwhataretheinnovationsthatwewant?”

Thesearegreatquestionsthatwecouldaddressmoreeffectivelyinaninclusive

environment.

BrettonWoodsisagoodmodel.Howaboutasecondmeetingoftheminds,not

conductedinsmokyroomsbehindcloseddoors,butinanopenforumwherevarious

stakeholders,includingtheprivatesector,thetechnologycommunity,andgovernance

institutionscouldparticipate?Wilkinssaid,“TheBankofCanadaworkswithother

centralbanksonunderstandingthistechnologyandwhatitmeans.We’vehad

conferencesthatinvitedavarietyofcentralbanksandacademicsandpeoplefromthe

privatesector.”

Indeed,thestoryofcentralbanksrevealsabiggerissue:governmentsoftenlack

theknow-howtorespondinafast-changingworld.Centralbankerscertainlyhave

viewsthatmatterprofoundlytothisdiscussion,buttheyshouldlooktoother

stakeholdersinthenetworkandothercentralbanksgloballytoshareideas,

collaborateonsubstantiveleadershipissues,andmovetheagendaforward.

REGULATIONVERSUSGOVERNANCE

Tobesure,valueandmoneyaredifferentfromtraditionalinformation.We’retalking

aboutsavings,apension,aperson’slivelihood,hercompany,herstockportfolio,her

economy,andthataffectseveryone.Don’tweneedregulation,andfast?Canand

shouldgovernmentshowrestraintinthefaceoftheseismicshiftstocome?

Importantshiftsarerevealingthelimitsofgovernmentinanageofaccelerating

innovation.Forexample,the2008financialcrisisshowedhowthespeedand

complexityoftheglobaleconomicsystemrenderstraditionalcentralizedrulemaking

andenforcementincreasinglyineffective.Butstrongerregulationisn’ttheantidote.

Governmentscannothopetooverseeandregulateeverycornerofthefinancial

market,technology,ortheeconomy,becausetherearesimplytoomanyactors,

innovations,andproducts.Ifanything,theexperienceillustratesthatgovernmentscan

atleastforcetransparencytoshedlightonbehaviorandcreatechange.Governments

candemandthattheactionsofbanks,forexample,betransparentontheWebandlet

citizensandotherpartiescontributetheirowndataandobservations.Citizenscan

evenhelpenforceregulations,too,perhapsbychangingtheirbuyingbehavioror,

armedwithinformation,byorganizingpubliccampaignsthatnameandshame

offenders.

Ofcourse,governmentsmustbekeystakeholdersandleadersingovernance.

Theymustalsoacknowledgethattheirroleingoverningtheblockchainwillbe

fundamentallydifferentfromtheirhistoricalroleinmonetarypolicyandfinancial

regulation.Formillennia,stateshavehadamonopolyonmoney.Whathappenswhen

“money”isnotissuedexclusivelybyacentralauthoritybutinsteadis(atleastinpart)

createdbyadistributedglobalpeer-to-peernetwork?

Whilegenerallypositive,theU.S.responsehasseemedattimescontradictory.“In

theU.S.thereisarealizationfromCongresstotheexecutivebranchtodifferent

agenciesincludinglawenforcementthatthistechnologyhasserious,legitimateuses,”

saidJerryBrito.

Indeed,theInternethasshownusthat,bytemperamentand

institutionaldesign,theUnitedStatesnotonlytoleratesbutwelcomesinnovationsthat

pushtheboundaries.Italsofencesoffinnovationthroughregulations—someof

whichmaybemisguidedandarealmostcertainlypremature.

Therisksofregulatingprematurely—beforefirmlygraspingtheimplications—

canhaveprofoundconsequences.DuringVictorianeraEngland,so-calledself-driving

locomotives(i.e.,automobiles)weremandatedbylawtobeaccompaniedbyaman

walkinginfrontwavingaredflagtoalertbystandersandhorsesofthecomingarrival

ofthisstrangecontraption.SteveBeauregard,CEOofGoCoin,aleadingcompanyin

theindustry,describedthepitfallsofregulatingtoosoon:“WhenWebpageswere

firstgoingup,regulatorsweretryingtodeterminewhatregulatoryregimetheyshould

belongunder.OneideasurfacedrequiringpeoplewhobuiltandhostedWebsitesto

getacitizen’sbandradiolicensebecauseyou’rebroadcasting.Canyouimagine

havingtohaveaCBradiolicensesoyoucouldputaWebsiteup?”

Thankfully,this

nevercametopass.

Let’sbeclear:regulationdiffersfromgovernance.Regulationisaboutlaws

designedtocontrolbehavior.Governanceisaboutstewardship,collaboration,and

incentivestoactoncommoninterests.Butexperiencesuggestsgovernmentsshould

approachregulatingtechnologiescautiously,actingasacollaborativepeertoother

sectorsofsociety,ratherthanastheheavyhandofthelaw.Theymustparticipateas

playersinabottom-upgovernanceecosystemratherthanasenforcersofatop-down

regimeofcontrol.

BritoofCoinCenterarguedthereisaroleforgovernments,buttheyshould

exercisecaution.Headvocatesforamultistakeholdersolution,whichstartswith

education:“briefingfolksinCongress,attheagencies,inthemedia,andanswering

anyoftheirquestionsorputtingthemintouchwiththepeoplewhocanintelligently

answertheirquestions.”

ANEWFRAMEWORKFORBLOCKCHAINGOVERNANCE

Ratherthansimplyregulating,governmentscanimprovethebehaviorofindustriesby

makingthemmoretransparentandboostingcivicengagement—notasasubstitutefor

betterregulationbutasacomplementtotheexistingsystems.Webelieveeffective

regulationand,byextension,effectivegovernancecomefromamultistakeholder

approachwheretransparencyandpublicparticipationarevaluedmorehighlyand

weighmoreheavilyindecisionmaking.Forthefirsttimeinhumanhistory,nonstate,

multistakeholdernetworksareformingtosolveglobalproblems.

Inrecentdecades,twomajordevelopmentshaveprovidedthebasisforanew

model.First,theadventoftheInternethascreatedthemeansforstakeholdersofall

sizes,downtoindividuals,tocommunicate,contributeresources,andcoordinate

action.Wenolongerneedgovernmentofficialstoconvenefortherestofustoalign

ourgoalsandefforts.Second,businesses,academia,NGOs,andothernonstate

stakeholdershavegainedtheabilitytoplayanimportantroleinglobalcooperative

efforts.Therewerenobusinesses,NGOs,ornonstatestakeholdersatthetableat

BrettonWoods.Today,thesestakeholdersroutinelyengagewithgovernmentsto

addressissuesinallfacetsofsociety—fromthegovernanceofaglobalresourcelike

theInternettoaddressingglobalproblemslikeclimatechangeandhumantrafficking.

Thecombinationofthesedevelopmentsenablesthenewmodel.Foragrowing

listofglobalchallenges,self-organizingcollaborationscannowachieveglobal

cooperation,governance,andproblemsolving—andmakefaster,strongerprogress

thantraditionalstate-basedinstitutions.

Inconsideringthefoundationforablockchaingovernancenetwork,weposea

numberofcriticalquestionsanddevelopaframeworkforansweringthem:

Howdowedesignsuchagovernancenetwork?

Dowecreateanewnetworkfromscratchorbuildaroundanexisting

institutionthatalreadyhasaconstituencythatdealswithinternational

financialissues?

Whatwillbethemandateforthisnetworkandwillithavethepowerto

implementandenforcepolicy?

Inwhoseinterestswillablockchaingovernancenetworkactandtowhomis

itaccountable?

Andcritically,willnation-statesactuallycedeanyauthoritytoaglobal

network?

Overall,theecosystemthatgovernstheInternetisrichwithlessons.Thatithas

becomeaglobalresourceinsoshortatimeisastounding,innosmallpartthanksto

strongleadershipandgovernanceanddespitethepowerfulforcesagainstit.

Sowhogovernsthefirst-generationInternetandhow?Avastecosystemof

companies,civilsocietyorganizations,softwaredevelopers,academics,and

governments,namelytheU.S.government,inanopen,distributed,andcollaborative

mannerthatwecannotmeasurebytraditionalcommand-and-controlhierarchiesand

frameworks.NogovernmentsorgroupofgovernmentscontroltheInternetorits

standards,thoughseveralU.S.governmentagenciesoncefundedit.

IntheearlydaysoftheInternet,governmentsshowedbothrestraintandforesight.

TheyshowedrestraintbylimitingregulationandcontrolthroughouttheInternet’s

evolutionandtheyshowedforesightbyallowingtheecosystemtoflourishbefore

tryingtoimposerulesandregulations.Thismultistakeholdernetworkworkedforthe

Internet,butweneedtorecognizethattherewillbeagreaterroleforregulationof

blockchaintechnologies.WhereastheInternetdemocratizedinformation,the

blockchaindemocratizesvalueandcutstothecoreoftraditionalindustrieslike

banking.Clearlytherewillbearegulatoryroletoensurethatconsumersandcitizens

areprotected.YetourresearchsuggeststhattheInternetgovernancemodelisagood

template.

QuestionspersistoverhowmuchnewleadershipwillcomefromtheoldInternet

governancecommunity.VintCerf,whocoinventedtheInternetitselfandledthe

creationoftheInternetSocietyandtheInternetEngineeringTaskForce,whichhas

createdvirtuallyalltheimportantInternetstandards,suggestedthatagoodstarting

pointforblockchainwouldbetocreateaBOF(BirdsofaFeather)interestgroup

withintheIETF.

Initially,manyorganizationsinvolvedinInternetgovernance

vieweddigitalcurrenciesandblockchaintechnologiesasoutsidetheirpurview,but

thatischanging.TheWorldWideWebConsortium,W3C,hasmadeWebpaymentsa

priority,andblockchainiscentraltothatdiscussion.

Additionally,theInternet

GovernanceForum(IGF)hashostedsessionsaboutblockchainandbitcoin,where

participantshaveexplorednewdecentralizedgovernanceframeworksenabledbythis

technology.

Boundariesbetweenoldandnewarefluid,andmanyleadersinthe

Internetgovernancenetwork,suchasPindarWong,theInternetpioneer,formervice-

chairofICANNandtrusteeoftheInternetSociety,havebeenthemosteffective

leadersinblockchaingovernanceaswell.

Whatdoesthenewgovernancenetworklooklike?TherearetentypesofGSNs.

Eachinvolvessomecombinationofcompanies,governments,NGOs,academics,

developers,andindividuals.Noneofthemarecontrolledbystatesorstate-based

institutionsliketheUN,IMF,WorldBank,ortheG8.Allwillplayanimportantrole

intheleadershipandgovernanceofblockchaintechnology.

1.KnowledgeNetworks

Theprimaryfunctionofknowledgenetworksistodevelopnewthinking,research,

ideas,andpoliciesthatcanhelpsolveglobalproblems.Moreinformedandsavvy

userscanbetterprotectthemselvesfromfraudandtheftandprotecttheirprivacy.

Theycanalsorealizethefullvalueofthisdisruptivetechnology,creating

opportunitiesforagreatershareinglobalprosperityandgreaterfinancial

connectivity.

Knowledgenetworksmustfosteracultureofopennessandinclusion,

betransparent,andinvolvemultiplestakeholders.

BlockchainImplications:Knowledgenetworksaretheoriginationpointsfor

disseminatingnewideastootherGSNsandthebroaderworld.Theyarethekeyto

avoidingpitfallsandshowstoppers.Knowledgewillpreparestakeholderstoadvocate

moreeffectively,createorcocreatepolicy,andspreadcriticalinformationtousers.

Knowledgesharinginstigatesafruitfuldialoguewithgovernment.AccordingtoJerry

BritoofCoinCenter,whatevertheparticularpolicyissueis,ifgovernments“don’t

understandthetechnologyanddon’tunderstandtheimplications,they’resetting

themselvesupforfailure.”

Manyvoicetheneedtocreatespacesforideasand

informationtobesharedanddebated.“Thereshouldbeaforumtopresentproposals

orideas,”TylerWinklevosssaid.

MIT’sDigitalCurrencyInitiativeisaleading

knowledgenetwork,tryingtouniteandexciteacademicsanduniversitiesglobally.

Belowtheradar,informalmeetups,liketheSanFranciscodevelopermeetupandthe

NewYorkdevelopermeetup,arealsomakingknowledgeapriority.

Blockchainworkshops.orgisanothergroupthathasconvenedstakeholderstospread

knowledgeandkeylessons.Reddit,theonlineforumandcommunity,isalsoa

breedinggroundfornewknowledgeinthespace.

2.DeliveryNetworks

Thisclassofnetworksactuallydeliversthechangeitseeks,supplementingoreven

bypassingtheeffortsoftraditionalinstitutions.Forexample,ICANNperformsan

essentialroleintheInternetgovernancenetwork,deliveringsolutionsintheformof

domainnames.

BlockchainImplications:Howdoweensurethattheincentivesareadequatefor

distributedmasscollaboration,makingthetechnologyreadyforprimetime?Wewill

likelyhavean“ICANNmoment”forblockchain,whereorganizationswillformto

deliveressentialfunctions.However,whereasICANNandmanyotherGSNtypesin

theInternetgovernancenetworkaredistinctlyAmerican,blockchainleadersshould

pushtomaketheseorganizationsinternational.JoichiItosaid,“Idothinkthere’s

alreadyabigpushtomakegovernancenon-Americanandinternationalfromthe

beginningbecausethat’sonethingwelearnedfromICANN,thatit’shardtogetout

fromunderAmericaonceyougetstartedaspartofAmerica.”

TheCoalitionfor

AutomatedLegalApplications(COALA)isaglobalorganizationthatperformsafew

keyroles:Itdisseminatesknowledge,influencespolicy,andadvocatesforblockchain

technology,andsupportsthedevelopmentanddeploymentofblockchain-based

applications,allcriticaltoovercomingmajorpotentialshowstoppers.

3.PolicyNetworks

Sometimesnetworkscreategovernmentpolicy,eventhoughtheymayconsistof

nongovernmentalplayers.Policynetworkssupportpolicydevelopmentorcreatean

alternativeforpolicy,whethergovernmentssupportthemornot.Thegoalofpolicy

networksisnottowrestcontrolofthepolicy-makingprocessfromgovernments.

Instead,theirgoalistoturndecisionmakingfromthetraditionalhierarchical

broadcastmodeltooneofconsultationandcollaboration.

BlockchainImplications:Today,anascentpolicynetworkisemerging.Coin

Center,anot-for-profitpolicygroupinWashington,D.C.,focusesonfivecore

verticals:innovation,consumerprotection,privacy,licensing,andAML/KYC(anti–

moneylaundering/knowyourcustomer).TheChamberofDigitalCommerce,atrade

organization,focusesonpromotingtheacceptanceanduseofdigitalcurrencies.

The

UnitedKingdomhasitsownDigitalCurrencyAssociation,asdoAustraliaand

Canada,thatspeaksforindustry.WiththehiringofJohnCollins,aformersenior

advisertotheU.S.government,Coinbasebecamethefirstcompanytoinstalla

permanentpolicyadvocate.

Promotingandunitingmanystrongvoicesinthepolicy

arenawillensurethatblockchainhasabetterchanceoffulfillingitspotential.For

example,weknowminingconsumesalotofenergyandthatclimatechangeisabig

problem.Responsiblepolicywillgoalongwaytowardbuildingasustainablefuture,

andgovernmentcan’tdoitalone.

4.AdvocacyNetworks

Advocacynetworksseektochangetheagendaorpoliciesofgovernments,

corporations,andotherinstitutions.TheInternethasloweredthecostofcollaboration,

andtodaytheworldiswitnessingthedramaticriseofincreasinglypowerfuladvocacy

networksthataremoreglobal,widelydistributed,andtechnologicallysophisticated

thananythingwe’veseen.

BlockchainImplications:Advocacynetworksarisewiththedisillusionmentwith

traditionalpoliticalandcivicinstitutions,makingthemalogicalfitfortheblockchain

community,whichistryingtoupendhowthosetraditionalinstitutionssolve

problems.However,intheseearlydays,advocacynetworksmustworkwith

governmentasapartner.Advocacynetworksarecloselytiedtopolicynetworks,so

it’sunsurprisingthatCoinCenterandtheChamberofDigitalCommercearetaking

theleadinthisarea.WecouldalsoincludehereCOALA,MIT’sDigitalCurrency

Initiative,andothers.Advocacyiscriticaltoscalingblockchaintechnology.Inthe

absenceofstrongadvocateswhostandupforstakeholdersandstakeholderrights,

governmentsandotherpowerfulinstitutionscouldtrytostifle,twist,orusurpthis

powerfulopennetworktotheirexclusiveadvantage,anotherdangerouspotential

showstopper.

5.WatchdogNetworks

Thesenetworksscrutinizeinstitutionstoensurethattheybehaveappropriately.Topics

rangefromhumanrights,corruption,andtheenvironmenttofinancialservices.Inthe

process,theydrivepublicdebate,boosttransparency,andignitemovementsfor

change.Theroleofwatchdogsisinherentlyintertwinedwiththatofadvocacy

networksandpolicynetworks.Policynetworkscollaboratewithgovernmenttoshape

policythatworks.Watchdogsensurethatindustrycomplieswithpoliciesand

effectivelymonitorsandenforcescompliance.Governmentsthatabusethepublic

trustcanalsobescrutinizedandheldaccountable.

BlockchainImplications:TheBlockchainAllianceisapartnershipbetweenlaw

enforcement,NGOs,tradeorganizations,andtheprivatesectorandisthefirsttrue

advocacynetworktoforminthespace.CoinCenterandtheChamberofDigital

Commerce,withsupportfromBitFury,Bitfinex,BitGo,Bitnet,Bitstamp,Blockchain,

Circle,Coinbase,andothers,havepartneredwithlawenforcementagenciessuchas

theU.S.JusticeDepartment,theFBI,theSecretService,andtheDepartmentof

HomelandSecurity.Aswehighlightedinthepreviouschapter,blockchainbeingco-

optedbycriminalsonawidespreadscaleisashowstopper.Thesewatchdogshavean

importantadvocacyroleaswell.IntheaftermathoftheParisterroristattacks,some

Europeanlawmakers,regulators,andlawenforcementblamedbitcoinasthesourceof

terrorismfinancing.TheBlockchainAlliancecalledforpatience:Let’snotregulate

outoffear,

theysaid.Asofthiswriting,wedon’tknowhoweffectivetheywere,but

surelyintheirabsencethingswouldhaveturnedoutworse,withgovernment

approachingthejobunilaterally.Otherthantheself-policingroleofcommunity

memberswhoconvene,collaborate,anddebateonforumsandonReddit,fewother

watchdognetworkshavesteppedup.Partnershipswithlawenforcementareahelpful

start,buttheblockchainecosystemneedsfullyindependentorganizations,perhaps

liketraditionalwatchdogssuchasAmnestyInternationalandHumanRightsWatch,to

monitorgovernments,corporations,andotherlargeinstitutions.Otherwise,werisk

fallingvictimtoanothershowstopper:thatblockchainbecomesanewandpowerful

surveillancetoolusedbycorruptandunscrupulousgovernments.

6.Platforms

Thedigitalageallowedorganizationstobemuchmorethanclosed,siloed

institutions;theycanalsobeplatformsforvaluecreation,innovation,andglobal

problemsolving.OrganizationslikeChange.orgempowerindividualstoinitiate

campaignsinsupportofsocialcausesfromhumanrightstoclimatechange.A

“petitionplatform”harnessesthecollectiveforceofmillionsofpeopleandcatalyzes

theirpassionintolastingimpact.Opendataplatformscanapplytomanyissues—

fromclimatechangetotheblockchain.

BlockchainImplications:Asblockchaintechnologygainsinsystemic

importance,stakeholdersmustaggregateandscrutinizedata.Thebitcoinblockchain

mayberadicallyopen,transparent,andreconcilable,butclosedblockchainsusedin

everythingfromfinancialservicestotheInternetofThingsmightnotbe.Imaginea

platformthatallowedregularcitizenstoaggregateandscrutinizedata,provinga

strongbulwarkagainstcreepingshowstoppersofscalability,government

encroachment,orunsustainableenergyuse.Theywouldenablewatchdogsand

advocatesamongustoholdinstitutionsandcorporationsmoreaccountableanddrive

constructivediscussion.

7.StandardsNetworks

Standardsnetworksarenon-state-basedorganizationsthatdeveloptechnical

specificationsandstandardsforvirtuallyanything,includingstandardsfortheInternet

itself.Theydeterminethestandardsthatformthefundamentalbuildingblocksfor

productdevelopmentandallowapromisinginnovationtomaketheleaptomass

adoption.Forglobalstandardsnetworkstowork,theymustengagetheexpertiseof

individuals,institutions,civilsocietyorganizations,and,mostofall,privatesector

enterprise.TheInternetEngineeringTaskForce,oneoftheprimarystandardsbodies

fortheInternetgovernancenetwork,excelsatincorporatingthemanyviewsof

diversestakeholders.

BlockchainImplications:Originally,theBitcoinFoundationfunded

developmentofthebitcoincoreprotocol,thecommonstandardsusedbythe

community.However,thenear-collapseofthefoundation(precipitatedby

mismanagementandwaste)provedtheneedfornetworkedgovernancesolutions.

Recognizingtheprofoundimportanceofthistechnologyandtheneedforcareful

stewardshipandnurturing,MITcreatedtheDigitalCurrencyInitiative,whichhas

sincebankrolledthebitcoincoredeveloperssotheycancontinuetheirwork.“We

steppedinimmediatelyandprovidedthemwithpositionsattheMITmedialab,so

theycouldcontinuetoindependentlyworkonsupportingthecoredevelopmentof

bitcoin,”saidBrianForde.

Forthecoredevelopers,theirabilitytowork

autonomouslywascentraltothedesign.

GavinAndresenisamongthecoredevelopersworkingatMIT.Hebelieves

leadershipisrequiredtomovetheagendaforwardoncommonstandards,suchasthe

much-debatedblock-sizequestion.“Maybeyoucandesignlightsocketsetwavesby

committee,butyoucan’tdesignsoftwarestandardsthatway,”hesuggested.Pointing

totheearlydaysoftheWeb,Andresensaid,“TheInternetmodelshowsthatyoucan

havetechnologieswhereconsensusdoesarise,eventhoughthere’snooneclear

leader,”butthat“youcaneitherhaveapersonoraprocessthatendsinaperson.You

definitelyneedoneortheother.”

Consensusmechanismsalonecan’tsupport

standardsdevelopments.

Scalingbitcoin.orgisanorganizationthatconvenesengineersandacademicsto

addressmajortechnicalissues,includingstandardsquestions.PindarWong,who

chairstheplanningcommitteeforScalingbitcoin.org(amonghismanyother

importantleadershiproles),hasbeenakeyleaderinconveningkeystakeholdersand

clearingtechnicallogjamsinthesector.Infinancialservices,bothR3andthe

HyperledgerProjectaretacklingcriticalstandardsissues.Invariably,therewillhave

tobestandardsnetworksonavarietyofthings,fromtheblockchainprotocolthat

formsthebasisofthefinancialservicesindustryofthefuture,tocommonstandards

forprivacyandpaymentsintheInternetofThings.

Whileeachofthesegroupsattackstheproblemfromdifferentanglesandwith

differentagendas,eachsharesacommongoaltomakethistechnologyreadyfor

primetime—bybuildinginfrastructure,developingstandards,andmakingitscalable.

8.NetworkedInstitutions

Somenetworksprovidesuchawiderangeofcapabilitiesthatwedescribethemas

“networkedinstitutions.”Theyarenotstate-basedbuttruemultistakeholdernetworks.

Thevaluetheygeneratecanrangefromknowledge,advocacy,andpolicytoactual

deliveryofsolutions.

BlockchainImplications:TheWorldEconomicForum(WEF),aleading

networkedinstitution,hasbeenavocalproponentofblockchaintechnology.The

blockchainwasfrontandcenteratDavosinJanuary2016.JesseMcWaters,financial

innovationleadattheWEF,believesblockchaintechnologyisageneral-purpose

technology,liketheInternet,whichwecanusetomakemarketsradicallymore

efficientandimproveaccesstofinancialservices.TheWEFpredictedthatwithina

decade,wecouldstore10percentofglobalGDPonblockchains.

Asan

organization,theWEFhaschampionedandadvancedbigissues,suchasincome

inequality,climatechange,andevenremittances.Othernetworkedinstitutions,from

thesmallestgroupstothebiggestfoundationsintheworld,suchastheClinton

FoundationandtheBillandMelindaGatesFoundation,wouldbewisetochampion

thistechnologytoadvancesuchbigissuesasfinancialinclusionandhealthcare

delivery.Networkedinstitutionsoftenhavearoletoplayininfluencinggovernment

policymaking,makingthemacriticallinkandstrategicpartnerinovercominga

numberofmajorshowstoppers.

9.Diasporas

Diasporasareglobalcommunitiesformedbypeopledispersedfromtheirancestral

landsandunitedbycultureandidentitywiththeirhomeland.ThankstotheInternet,

thesepeopleandaffiliatedorganizationscancollaborateinmultistakeholder

networks.Oneofthefunctionsofmanyoftoday’sdiasporasistoaddressandhelp

solvecommonglobalproblems.

BlockchainImplications:Diasporasarecriticaltoblockchain’sfuture.Forone,

blockchainmakestheprocessofsendingremittancessimpleandaffordable.Farfrom

beingajobkiller,blockchainactuallycreatestimeandresourcesforthesepeopleto

pursueotherwage-earningopportunitiesorentrepreneurialendeavors.Whileafew

companieshaveoriginatedinplacessuchasthePhilippinesandKenya,diasporas

mustdomoretoaccelerateknowledge,adoption,andacceptanceofblockchain

paymentmethods.Today,themajorityofcompaniestargetingtheopportunity,suchas

AbraandPaycase,areU.S.,U.K.,Canada,orChinabased.

10.GovernanceNetworks

Theblockchaingovernancenetworkwillcombineallthefeaturesandattributesofthe

nineotherGSNtypes.Ultimately,ablockchaingovernancenetworkshouldstriveto

beinclusiveandwelcomeparticipationfromallrelevantstakeholdergroups.The

networkshouldbeameritocracy,meaningthatthecommunitywouldchampion

viableproposalsregardlessoftherankandstatusoftheproposer.Thenetworkshould

betransparent,releasingallofitsdata,documentation,andmeetingminutesfor

publicscrutiny.Finally,decisionsshouldbereached,asmuchaspossible,by

consensusinordertogainlegitimacyfortheoutcomes.

ANEWAGENDAFORTHENEXTDIGITALAGE

Ablockchaingovernancenetworkiscriticaltostewardshipofthisglobalresource.

ButhowcanweensurethatthisnextgenerationoftheInternetfulfillsitspromise?

Thenexteraofthedigitalageisdeliveringunlimitedpossibilities,significant

dangers,unknownroadblocks,formidablechallenges,andafuturethatisfarfrom

certain.Technology,especiallythedistributedkind,createsopportunitiesfor

everyone,butinexorablyhumansdeterminetheoutcome.InthewordsofConstance

Choi,“Thistechnologyholdsbothpromiseandperil.It’showwewieldit.”

Asthis

chapterhasdiscussed,thereisaroleforeveryonetoplayinachievingthenew

promiseofthedigitalage.

Inpreviousepochaltransitions,societiestookactiontoimplementnew

understandings,laws,andinstitutions.Thesetransformationsofcivilizationtooktime,

usuallycenturies,andwereoftenpunctuatedbystrifeorevenrevolutions.

Todaythesituationisdifferent.Changeishappeninginfinitelyfaster.More

important,Moore’slawindicatesthattherateofchangeisacceleratingexponentially.

We’removingtotheproverbial“secondhalfofthechessboard”whereexponential

growthuponexponentialgrowthcreatestheincomprehensible.

Theupshotisthat

ourregulatoryandpolicyinfrastructuresarewoefullyinadequateandadaptingtoo

slowlyornotatalltotherequirementsofthedigitalage.Thedisruptionsoftodayare

movingsofasttheyaregettingbeyondthecapacityofindividualsandinstitutionsto

comprehendthem,letalonemanagetheirimpact.Ourdemocraticinstitutionsand

instrumentsweredesignedfortheindustrialage—infacttheyoriginatedpreciselyin

thetransformationfromagrarianfeudalsocietiesintoindustrialcapitaliststates.

Howcanweacceleratethehumantransformationrequiredtokeeppacewith

acceleratingtechnologicalinnovationanddisruption?Howcanweavoidmassive

socialdislocation,orworse?Lestwebeaccusedofbeingtechnologydeterministsor

utopians,mayweproposethatit’stimeforanewsocialcontractforthedigitalage.

Governments,theprivatesector,thecivilsociety,andindividualsneedtocollaborate

toforgenewcommonunderstandings.

AsweenterthissecondgenerationoftheInternet,it’stimeforaManifestoforthe

DigitalAge.CallitaDeclarationofInterdependence.DigitalagecitizenshaveRights

—accesstodigitalinfrastructures,literacy,medialiteracy,lifelonglearning,and

renewedfreedomofspeechonlinewithoutthefearofsurveillance.

ThedigitaleconomyandsocietyshouldbegovernedaccordingtoPrinciples.

Surely,thosewhoworkshouldshareinthewealththeycreate.Ifcomputerscando

thework,thentheworkweek,notourstandardofliving,shouldbereduced.Infact,

Satoshi’simplicitdesignprinciplesfortheblockchainrevolutionshouldserveuswell

—weneedinstitutionsthatactwithintegrity,security,privacy,inclusion,rights

protection,anddistributedpower.Let’sworktodistributeopportunityandprosperity

atthepointoforigin,ratherthansimplyredistributingwealthafterit’sbeencreated

bytraditionalclassstructures.

Blockchaintechnologymayreducethecostsandsizeofgovernment,butwe’ll

stillneednewLawsinmanyareas.Therearetechnologicalandbusinessmodel

solutionstothechallengesofintellectualpropertyandrightsownership.Soweshould

berewritingortrashingoldlawsthatstifleinnovationthroughoverprotectionof

patents.Betterantitrustactionmuststemthetrendtowardmonopoliessothatnoone

overpaysfor,say,basicInternetorfinancialservices.EightypercentofAmericans

havenochoicewhenitcomestoInternetserviceproviders,whichmighthelpexplain

whybandwidthisoneoftheslowestandmostexpensiveinthedevelopedworld.

Criminalfixerswhomanipulateeverythingfromforeignexchangetodieselemissions

shouldbeprosecutedandpunishedappropriately.

We’llneedInstitutionalTransformationacrosstheboard.Centralbankswillneed

tochangetheirroleincurrencymanagementandmonetarypolicyandcollaborate

multilaterallywithmorestakeholdersintheeconomyandsociety.Weneedschools

anduniversitieswithstudent-focused,customizedcollaborativemasteryof

informationontheblockchain,freeingupstudentsandteachersaliketoparticipatein

smallgroupdiscussionandprojects.Weneedauniversalpatientrecordonthe

blockchain,toensurecollaborativehealthwhenwecanmanageourownwellness

outsideofthesystem.Whenweenterthehealthcaresystem,weshouldnotsuffer

becauseofignorance-inspireddruginteractionsormedicinenotbasedonevidence.

Politicianswillneedtoadapttoatransparentworldwheresmartcontractsensuretheir

accountabilitytoelectorates.Howdowemanagethedisruptionafterdigital

currenciesupendthe$500billionremittancesmarket?

BlockchaintechnologycanenablenewPhysicalInfrastructuresrequiringnew

partnershipsandunderstandingsamongstakeholders.Whathappenstothemillionsof

UberdriverswhenSUberwipesouttheirjobs?Whatcancitiesdotoensurethatin

2025citizensthinkpositivelyaboutintelligenttransportationsystems?Howdowe

effectivelymovetoadistributedblockchain-enabledelectricalpowergridwhere

homeownersarecontributorsratherthanjustcustomersofelectricity?Howwillwe

findtheleadershiptoimplementablockchain-enabledpersonalcarbontrading

system?

THETRUSTPROTOCOLANDYOU

Willthelawofparadigmskickintoeffect—thatleadersoftheoldhavethegreatest

difficultyembracingthenew?ConsidertheleaderswhoendorsedDon’s1994book

TheDigitalEconomy:theCEOsofNortelNetworks,MCI,Nynex,Ameritech,and

GEInformationServices,allofwhicharegone.Atleasthedidn’tincludetheCEOs

fromKodak,Borders,Blockbuster,orCircuitCity.(Anothercautionarynoteforthe

kindjacketendorsersofBlockchainRevolution.)

Whydidn’tRupertMurdochcreateTheHuffingtonPost?Whydidn’tAT&T

launchSkype,orVisacreatePayPal?CNNcouldhavebuiltTwitter,asitisallabout

thesoundbite,no?GMorHertzcouldhavelaunchedUber,andMarriott,Airbnb.

GannettcouldhavecreatedCraigslistorKijiji.eBaywouldhavebeenanaturalplay

fortheYellowPages.MicrosofthadtheresourcestocreateGoogleoranynumberof

businessmodelsbasedontheInternetratherthanthepersonalcomputer.Whydidn’t

NBCinventYouTube?SonycouldhavepreemptedApple’siTunes.Wherewas

KodakwhenitwastimeforInstagramorPinteresttobeinvented?WhatifPeopleor

NewsweekhadcomeupwithBuzzFeedorMashable?

Aswewroteatthebeginningofthistome,“Itappearsthatonceagainthe

technologicalgeniehasbeenunleashedfromitsbottle...nowatourservicefor

anotherkickatthecan—totransformtheeconomicpowergridandtheoldorderof

humanaffairs.Ifwewillit.”LikethefirstgenerationoftheInternet,theBlockchain

Revolutionpromisestoupendbusinessmodelsandtransformindustries.Butthatis

justthestart.Blockchaintechnologyispushingusinexorablyintoanewera,

predicatedonopenness,merit,decentralization,andglobalparticipation.

Weexpectaperiodofvolatility,speculation,andmisuse.Wealsoexpectastrong

andsteadybarrelingforward,aplowingasideofthesacredcowsonthetracks.No

oneknowsyetwhatimpactthistrainwillhaveonfinancialservices.IsBenLawsky

right—thattheindustrycouldbeunrecognizableinfivetotenyears?TimDrapersaid,

“BitcoinistothedollarastheInternetistopaper.”

Coulditbethatblockchain’s

mostardentsupportersareactuallyunderestimatingthelong-termpotentialhere?Will

theblockchainbethebiggestboontoindustryefficiencyandvaluesincetheinvention

ofdouble-entryaccountingorthejoint-stockcorporation?HernandodeSotosaid

blockchainholdsthepotentialtobringfivebillionpeopleintotheglobaleconomy,

changetherelationshipbetweenthestateandcitizens(forthebetter),andbecomea

powerfulnewplatformforglobalprosperityandaguarantorofindividualrights.To

him,“thewholeideaofpeacethroughlaw,thewholeideaofonefamilyhumankindis

thatwereachagreementoncommonstandards.Weshouldconsiderhowthe

UniversalDeclarationofHumanRightscouldbebetterservedwithblockchain.”

Howcanweachievethisbetterfuture?

Mostofthepeopleleadingtherevolutionarestillunknowns,exceptforveterans

likeNetscape’sprogenitorMarcAndreessen.You’velikelyneverheardofmostofthe

peoplequotedinthisbook.Thenagain,who’dheardofIranianimmigrantPierre

OmidyarorWallStreetprogrammerJeffBezosin1994?Muchdependsonhowthe

leadersoftheindustrygetonboard.IsablockchainalternativetoFacebookorTwitter

reallyachievableorwilltheincumbentsrespondbyaddressinguserconcernsabout

dataownershipandprivacy?Doesn’tmatter.Consumerswineitherway.WillVisa

witherorwillitchangeitsbusinessmodeltoembracethepowerofblockchain?How

willApplerespondtoanartist-centeredmusicindustry?Whatwilltin-potdictators

thinkaboutadecentralizedInternetthattheycan’tturnofforcontrol?Canthe

blockchainmaketechnologyaccessibletotheworld’stwobillionunbankedpeople?

Thefailurerateofstart-upsishigh,andsoweexpectagoodnumberofourcase

studiestofallbythewayside,notbecauseblockchaintechnologyisabadidea,but

because—foreachoneofourexamples—therearemanycompetingstart-ups.Allof

themcan’tsurvive.WebelievethosethatfollowSatoshi’sprincipleshaveabetter

shotthanthosethatdon’t.

Theseareexcitingandperiloustimes.Asabusinessleader,useBlockchain

Revolutionasyourplaybook,sure,butrealizealsothattherulesofthegame

themselvesarechanging.Thinkaboutyourbusiness,yourindustry,andyourjob:

HowwillIbeaffectedandwhatcanbedone?Donotfallintothetrapbroughtabout

bymanyparadigmshiftsthroughouthistory.Today’sleaderscannotaffordtobe

tomorrow’slosers.Toomuchisatstakeandweneedyourhelp.Pleasejoinus.

NOTES
Chapter1:TheTrustProtocol
1.https://www.technologyreview.com/s/419452/moores-outlaws/.
2.https://cryptome.org/jya/digicrash.htm.
3.“HowDigiCashBlewEverything,”translatedfromDutchintoEnglishbyIanGriggandcolleaguesande-
mailedtoRobertHettingamailinglist,February10,1999.Cryptome.org.JohnYoungArchitects.Web.July19,
2015.https://cryptome.org/jya/digicash.htm.“HowDigiCashAllesVerknalde”
www.nextmagazine.nl/ecash.htm.Next!Magazine,January1999.Web.July19,2015.
https://web.archive.org/web/19990427/http://nextmagazine.nl/ecash.htm.
4.http://nakamotoinstitute.org/the-god-protocols/.
5.BrianFung,“MarcAndreessen:In20Years,We’llTalkAboutBitcoinLikeWeTalkAbouttheInternetToday,”
TheWashingtonPost,May21,2014;www.washingtonpost.com/blogs/the-switch/wp/2014/05/21/marc-
andreessen-in-20-years-well-talk-about-bitcoin-like-we-talk-about-the-internet-today/,accessedJanuary21,
2015.
6.InterviewwithBenLawsky,July2,2015.
7.www.economist.com/news/leaders/21677198-technology-behind-bitcoin-could-transform-how-economy-
works-trust-machine.
8.www.coindesk.com/bitcoin-venture-capital/.
9.Fung,“MarcAndreessen.”
10.www.coindesk.com/bank-of-england-economist-digital-currency/.
11.LeighBuchananreportsontheKauffmanFoundationresearchin“AmericanEntrepreneurshipIsActually
Vanishing,”www.businessinsider.com/927-people-own-half-of-the-bitcoins-2013-12.
12.ThisdefinitionwasdevelopedinDonTapscottandDavidTicoll,TheNakedCorporation(NewYork:Free
Press,2003).
13.www.edelman.com/news/trust-institutions-drops-level-great-recession/.
14.www.gallup.com/poll/1597/confidence-institutions.aspx.
15.InterviewwithCarlosMoreira,September3,2015.
16.DonTapscottisamemberoftheWISeKeyAdvisoryBoard.
17.DonTapscotthasbeenoneofmanyauthorstowriteaboutthedarksidepotentialofthedigitalage,for
exampleinTheDigitalEconomy:PromiseandPerilintheAgeofNetworkedIntelligence(NewYork:McGraw
Hill,1995).
18.InterviewwithCarlosMoreira,September3,2015.
19.TomPeters,“TheWowProject,”FastCompany,MansuetoVenturesLLC,April30,1999;
http://www.fastcompany.com/36831/wow-project.
20.InterviewwithCarlosMoreira,September3,2015.
21.“TheVirtualYou”isatermpopularizedbyAnnCavoukianandDonTapscottinWhoKnows:Safeguarding
YourPrivacyinaNetworkedWorld(NewYork:McGraw-Hill,1997).
22.ScottMcNealy,thenCEOofSunMicrosystems,wasthefirstin1999.
23.InterviewwithAndreasAntonopoulos,July20,2015.
24.InterviewwithJoeLubin,July30,2015.

25.Eventuallysophisticatedpersonaldataqueryserviceswillnotevenbeabletoreadthatdatabecauseitwillbe
giventothemencrypted.Stilltheywillbeabletoanswerquestionsregardingthatdatabyaskingthosequestions
oftheencrypteddataitselfusinghomomorphicencryptiontechniques.
26.LeadingthinkershaveabroadviewofprosperitythatgoesbeyondGDPgrowth.Harvard’sMichaelPorterhas
createdasocialprogressimperativehttp://www.socialprogressimperative.org.EconomistJosephStiglitzand
othershaveresearchedmeasuresbeyondGDP—http://www.insee.fr/fr/publications-et-
services/dossiers_web/stiglitz/doc-commission/RAPPORT_anglais.pdf.Thereareothereffortsthattryto
improveGDPbutstayclosertohome—http://www.forbes.com/sites/realspin/2013/11/29/beyond-gdp-get-ready-
for-a-new-way-to-measure-the-economy/.
27.InterviewwithVitalikButerin,September30,2015.
28.LuigiMarcoBassani,“Life,Libertyand...:JeffersononPropertyRights,”JournalofLibertarianStudies
18(1)(Winter2004):58.
29.InterviewwithHernandodeSoto,November27,2015.
30.Ibid.
31.www.theguardian.com/music/2013/feb/24/napster-music-free-file-sharing,accessedAugust12,2015.
32.www.inc.com/magazine/201505/leigh-buchanan/the-vanishing-startups-in-decline.html.
33.NakedCitywasapolicedramaseriesthatairedfrom1958to1963ontheABCtelevisionnetwork.
34.AnOctober2015WorldEconomicForumreportsuggestsitwillnotbecomemainstreamuntil2027.
35.InterviewwithDavidTicoll,December12,2015.
Chapter2:BootstrappingtheFuture:SevenDesignPrinciplesofthe
BlockchainEconomy
1.InterviewwithAnnCavoukian,September2,2015.
2.GuyZyskind,OzNathan,andAlex“Sandy”Pentland,“Enigma:DecentralizedComputationPlatformwith
GuaranteedPrivacy,”whitepaper,MassachusettsInstituteofTechnology,2015.June10,2015.Web.October3,
2015,arxiv.org/pdf/1506.03471.pdf.
3.InterviewwithAnnCavoukian,September2,2015.
4.Ibid.
5.InterviewwithAustinHill,July22,2015.
6.InterviewwithAnnCavoukian,September2,2015.
7.VitalikButerin,“ProofofStake:HowILearnedtoLoveWeakSubjectivity,”Ethereumblog,Ethereum
Foundation,November25,2014.Web.October3,2015,blog.ethereum.org/2014/11/25/proof-stake-learned-
love-weak-subjectivity.
8.DinoMarkAngaritis,e-mailattachment,November27,2015.Hearrivedathiscalculationby“assuming
hashrateof583,000,000Gh/s.(Gh/s=billionhashes/s).Thereare600secondsin10minutes.600*583,000,000
=349,800,000,000billionhashesin10minutes.That’s350Quintillion/350,000,000,000,000,000,000/350
millionmillionbillion.”
9.Proofofburncallsforminerstosendtheircoinstoadead-endaddresswheretheybecomeunredeemable.In
exchangeforburningthesecoins,minersgainentrancetoalotterywhere,presumably,theywinbackmorethan
theyburned.It’snotaconsensusmechanismbutatrustmechanism.
10.InterviewwithPaulBrody,July7,2015.
11.FranklinDelanoRoosevelt,“ExecutiveOrder6102—RequiringGoldCoin,GoldBullionandGold
CertificatestoBeDeliveredtotheGovernment,”TheAmericanPresidencyProject,ed.GerhardPetersandJohn
T.Woolley,April5,1933,www.presidency.ucsb.edu/ws/?pid=14611,accessedDecember2,2015.
12.InterviewwithJoshFairfield,June1,2015.
13.AllusiontoBandai’sdigitaltoydesignedsothatuserswouldtakecareofitandprotectit.Itdiedifnoone
tendedtoit.
14.JosephE.Stiglitz,“LessonsfromtheGlobalFinancialCrisisof2008,”SeoulJournalofEconomics23(3)
(2010).

15.Ernst&YoungLLP,“TheBigDataBacklash,”December2013,www.ey.com/UK/en/Services/Specialty-
Services/Big-Data-Backlash;http://tinyurl.com/ptfm4ax.
16.Thetypeofattackwasnamedafter“Sybil,”apseudonymofawomandiagnosedwithdissociativeidentity
disorderdescribedina1973bookofthatname.Cat-lovingcomputerscientistJohn“JD”Douceurpopularized
thenameina2002paper.
17.SatoshiNakamoto,“Bitcoin:APeer-to-PeerElectronicCashSystem,”www.bitcoin.org,November1,2008;
www.bitcoin.org/bitcoin.pdf,section6,“Incentive.”
18.NickSzabo.“Bitgold.”Unenumerated.NickSzabo.December27,2008.Web.October3,2015.
http://unenumerated.blogspot.com/2005/12/bit-gold.html.
19.InterviewwithAustinHill,July22,2015.
20.NealStephenson,SnowCrash(1992).AnallusiontoSnowCrash’svirtualworld,ofwhichHiroProtagonistis
theprotagonistandhero.HirowasoneofthetophackersoftheMetaverse.Kongbucksarelikebitcoin:the
franchulates(corporatestates,fromthecombinationoffranchiseandconsulate)issuetheirownmoney.
21.ErnestCline,ReadyPlayerOne(NewYork:Crown,2011).
22.InterviewwithAustinHill,July22,2015.
23.JohnLennon.“Imagine.”Imagine.ProducersJohnLennon,YokoOno,andPhilSpector.October11,1971.
www.lyrics007.com/John%20Lennon%20Lyrics/Imagine%20Lyrics.html.
24.AndyGreenberg.“Banking’sDataSecurityCrisis.”Forbes.November2008.Web.October3,2015.
www.forbes.com/2008/11/21/data-breaches-cybertheft-identity08-tech-cx_ag_1121breaches.html.
25.PonemonInstituteLLC,“2015CostofDataBreachStudy:GlobalAnalysis,”sponsoredbyIBM,May2015,
www-03.ibm.com/security/data-breach.
26.PonemonInstituteLLC,“2014FifthAnnualStudyonMedicalIdentityTheft,”sponsoredbyMedicalIdentity
FraudAlliance,February23,2015,Medidfraud.org/2014-fifth-annual-study-on-medical-identity-theft.
27.InterviewwithAndreasAntonopoulos,July20,2015.
28.MichaelMelone,“BasicsandHistoryofPKI,”MikeMelone’sblog,MicrosoftCorporation,March10,2012.
Web.October3,2015.http://tinyurl.com/ngxuupl.
29.“WhyAren’tMorePeopleUsingEncryptedEmail?,”Virtrublog,VirtruCorporation,January24,2015.Web.
August8,2015.www.virtru.com/blog/aren’t-people-using-email-encryption,August8,2015.
30.InterviewwithAndreasAntonopoulos,July20,2015.
31.InterviewwithAustinHill,July22,2015.
32.Ibid.
33.InterviewwithAnnCavoukian,September2,2015.
34.Ibid.
35.DavidMcCandless,“WorldsBiggestDataBreaches,”InformationIsBeautiful,DavidMcCandless,October2,
2015.Web.October3,2015.www.informationisbeautiful.net/visualizations/worlds-biggest-data-breaches-
hacks/.
36.InterviewwithHalukKulin,June9,2015.
37.InterviewwithAustinHill,July22,2015.
38.Coinbaseprivacypolicy,www.coinbase.com/legal/privacy,November17,2014,accessedJuly15,2015.
39.SeeDonTapscottandDavidTicoll,TheNakedCorporation:HowtheAgeofTransparencyWillRevolutionize
Business(NewYork:Simon&Schuster,2003).
40.InterviewwithHalukKulin,June9,2015.
41.ProofofExistence.com,September2,2015;www.proofofexistence.com/about/.
42.InterviewwithSteveOmohundro,May28,2015.
43.InterviewwithAndreasAntonopoulos,July20,2015.
44.Ibid.
45.InterviewwithStephenPair,June11,2015.
46.EdellaSchlargerandElinorOstrom,“Property-RightsRegimesandNaturalResources:AConceptual
Analysis,”LandEconomics68(3)(August1992):249–62;www.jstor.org/stable/3146375.
47.InterviewwithHalukKulin,June9,2015.
48.JohnPaulTitlow,“FireYourBoss:Holacracy’sFounderontheFlatterFutureofWork,”FastCompany,
MansuetoVenturesLLC,July9,2015;www.fastcompany.com/3048338/the-future-of-work/fire-your-boss-

holacracys-founder-on-the-flatter-future-of-work.
WorldBank,September2,2015;www.worldbank.org/en/news/press-release/2015/04/15/massive-drop-in-
number-of-unbanked-says-new-report.
“BitcoinPowersNewWorldwideCellphoneTop-UpService,”CoinDesk,February15,2015;
www.coindesk.com/bitcoin-powers-new-worldwide-cellphone-top-service/,accessedAugust26,2015.FAQs,
BitMoby.com,mHITsLtd.,n.d.;www.bitmoby.com/faq.html,accessedNovember14,2015.
InterviewwithGavinAndresen,June8,2015.
InterviewwithAustinHill,July22,2015.
JakobNielsen,“Nielsen’sLawofInternetBandwidth,”NielsenNormanGroup,April5,1998;
www.nngroup.com/articles/law-of-bandwidth/,accessedAugust26,2015.
MatthewWeaver,“WorldLeadersPayTributeatAuschwitzAnniversaryCeremony,”TheGuardian,Guardian
NewsandMediaLimited,January27,2015.Web.September5,2015,
http://www.theguardian.com/world/2015/jan/27/-sp-watch-the-auschwitz-70th-anniversary-ceremony-unfold.
Chapter3:ReinventingFinancialServices
Estimatesrangefrom$87.5millionto$112million(IMF).
https://ripple.com/blog/the-true-cost-of-moving-money/.
InterviewwithVikramPandit,August24,2015.
www.nytimes.com/2015/07/12/business/mutfund/putting-the-public-back-in-public-finance.html.
www.worldbank.org/en/topic/poverty/overview.
http://hbswk.hbs.edu/item/6729.html.
InterviewwithHernandodeSoto,November27,2015.
http://corporate.westernunion.com/About_Us.html.
InterviewwithErikVoorhees,June16,2015.
PaulA.David,“TheDynamoandtheComputer:AnHistoricalPerspectiveontheModernProductivity
Paradox,”EconomicHistoryofTechnology80(2)(May1990):355–61.
JosephStiglitz,“LessonsfromtheGlobalFinancialCrisis,”revisedversionofalecturepresentedatSeoul
NationalUniversity,October27,2009.
www.finextra.com/finextra-downloads/newsdocs/The%20Fintech%202%200%20Paper.pdf.
www.bloomberg.com/news/articles/2015-07-22/the-blockchain-revolution-gets-endorsement-in-wall-street-
survey.
www.swift.com/assets/swift_com/documents/about_swift/SIF_201501.pdf.
https://lightning.network/.
InterviewwithChrisLarsen,July27,2015.
InterviewwithAustinHill,July22,2015.
InterviewwithBlytheMasters,July27,2015.
Ibid.
Ibid.
Ibid.
https://bitcoinmagazine.com/21007/nasdaq-selects-bitcoin-startup-chain-run-pilot-private-market-arm/.
InterviewwithAustinHill,July22,2015.
July2015byGreenwichAssociates;www.bloomberg.com/news/articles/2015-07-22/the-blockchain-
revolution-gets-endorsement-in-wall-street-survey.
BlytheMasters,fromExponentialFinancekeynotepresentation:www.youtube.com/watch?
v=PZ6WR2R1MnM.
https://bitcoinmagazine.com/21007/nasdaq-selects-bitcoin-startup-chain-run-pilot-private-market-arm/.
InterviewwithJesseMcWaters,August13,2015.
InterviewwithAustinHill,July22,2015.
https://blog.ethereum.org/2015/08/07/on-public-and-private-blockchains/.
InterviewwithChrisLarsen,July27,2015.
InterviewwithAdamLudwin,August26,2015.

InterviewwithBlytheMasters,July27,2015.
InterviewwithEricPiscini,July13,2015.
InterviewwithDerekWhite,July13,2015.
Ibid.
Later,BankofAmerica,BNYMellon,Citi,Commerzbank,DeutscheBank,HSBC,MitsubishiUFJFinancial
Group,MorganStanley,NationalAustraliaBank,RoyalBankofCanada,SEB,SociétéGénérale,andToronto
DominionBank;www.ft.com/intl/cms/s/0/f358ed6c-5ae0-11e5-9846-de406ccb37f2.html#axzz3mf3orbRX;
www.coindesk.com/citi-hsbc-partner-with-r3cev-as-blockchain-project-adds-13-banks/.
http://bitcoinnewsy.com/bitcoin-news-mike-hearn-bitcoin-core-developer-joins-r3cev-with-5-global-banks-
including-wells-fargo/.
http://www.linuxfoundation.org/news-media/announcements/2015/12/linux-foundation-unites-industry-
leaders-advance-blockchain.
www.ifrasia.com/blockchain-will-make-dodd-frank-obsolete-bankers-say/21216014.article.
http://appft.uspto.gov/netacgi/nph-Parser?
Sect1=PTO2&Sect2=HITOFF&p=1&u=%2Fnetahtml%2FPTO%2Fsearch-
bool.html&r=1&f=G&l=50&co1=AND&d=PG01&s1=20150332395&OS=20150332395&RS=20150332395?
p=cite_Brian_Cohen_or_Bitcoin_Magazine.
www.youtube.com/watch?v=A6kJfvuNqtg.
InterviewwithJeremyAllaire,June30,2015.
Ibid.
Ibid.
Ibid.
Heraldedasanothersigntheindustrywas“growingup”;www.wsj.com/articles/goldman-a-lead-investor-in-
funding-round-for-bitcoin-startup-circle-1430363042.
InterviewwithJeremyAllaire,June30,2015.
InterviewwithStephenPair,June11,2015.
AlexTapscotthasconsultedtoVogogoInc.
InterviewwithSureshRamamurthi,September28,2015.
E-mailcorrespondencewithBlytheMasters,December14,2015.
InterviewwithTomMornini,July20,2015.
TheseideaswereoriginallyexploredinTheNakedCorporationbyDonTapscottandDavidTicoll.
Ibid.
www.accountingweb.com/aa/auditing/human-errors-the-top-corporate-tax-and-accounting-mistakes.
Ibid.
InterviewwithSimonTaylor,July13,2015.
Ibid.
InterviewwithJeremyAllaire,June30,2015.
InterviewwithChristianLundkvist,July6,2015.
InterviewwithAustinHill,July22,2015.
InterviewwithEricPiscini,July13,2015.
www2.deloitte.com/us/en/pages/about-deloitte/articles/facts-and-figures.html.
InterviewwithEricPiscini,July13,2015.
Ibid.
InterviewwithTomMornini,July20,2015.
Ibid.
www.calpers.ca.gov/docs/forms-publications/global-principles-corporate-governance.pdf.
InterviewwithIzabellaKaminska,August5,2015.
http://listedmag.com/2013/06/robert-monks-its-broke-lets-fix-it/.
TheRighttoBeForgottenMovementisgainingsteam,particularlyinEurope:http://ec.europa.eu/justice/data-
protection/files/factsheets/factsheet_data_protection_en.pdf.
www.bloomberg.com/news/articles/2014-10-07/andreessen-on-finance-we-can-reinvent-the-entire-thing.

73.http://www.nytimes.com/2015/12/24/business/dealbook/banks-reject-new-york-city-ids-leaving-unbanked-on-
sidelines.html.
74.InterviewwithPatrickDeegan,June6,2015.
75.Ibid.
76.https://btcjam.com/.
77.InterviewwithErikVoorhees,June16,2015.
78.www.sec.gov/about/laws/sa33.pdf.
79.http://www.wired.com/2015/12/sec-approves-plan-to-issue-company-stock-via-the-bitcoin-blockchain/.
80.http://investors.overstock.com/mobile.view?c=131091&v=203&d=1&id=2073583.
81.https://bitcoinmagazine.com/21007/nasdaq-selects-bitcoin-startup-chain-run-pilot-private-market-arm/.
82.JamesSurowiecki,TheWisdomofCrowds:WhytheManyAreSmarterThantheFewandHowCollective
WisdomShapesBusiness,Economies,SocietiesandNations(NewYork:Doubleday,2014).
83.www.augur.net.
84.Frome-mailexchangewiththeAugurteam:JackPeterson,CoreDeveloper;JoeyKrug,CoreDeveloper;
PeronetDespeignes,SpecialOps.
85.InterviewwithAndreasAntonopoulos,December8,2014.
86.InterviewwithBarrySilbert,September22,2015.
87.InterviewwithBenjaminLawsky,July2,2015.
Chapter4:Re-architectingtheFirm:TheCoreandtheEdges
1.InterviewwithJoeLubin,July13,2015.
2.CompanieslikeAppleandSpotifywillbeabletousethenewplatformaswell.Thegoalisthatitwillbeowned
bymanyentitiesinthemusicindustry,especiallyartists.Itwilllikelybeeasiertoearntokensifyoucreate
contentthanifyoujustresellsomeoneelse’scontent.
3.https://slack.com/is.
4.https://github.com.
5.Coasewrote:“Afirmhasaroletoplayintheeconomicsystemif...[t]ransactionscanbeorganizedwithinthe
firmatlesscostthanifthesametransactionswerecarriedoutthroughthemarket.Thelimittothesizeofthe
firm[isreached]whenthecostsoforganizingadditionaltransactionswithinthefirm[exceed]thecostsof
carryingthesametransactionsinthemarket.”AscitedinOliverWilliamsonandSydneyG.Winter,eds.,The
NatureoftheFirm(NewYorkandOxford:OxfordUniversityPress,1993),90.
6.OliverWilliamson,“TheTheoryoftheFirmasGovernanceStructure:FromChoicetoContract,”TheJournal
ofEconomicPerspectives16(3)(Summer2002)171–95.
7.Ibid.
8.PeterThielwithBlakeMasters,ZerotoOne:NotesonStartups,orHowtoBuildtheFuture(NewYork:Crown
Business,2014).
9.LordWilberforce,TheLawofRestrictiveTradePracticesandMonopolies(Sweet&Maxwell,1966),22.
10.InterviewwithYochaiBenkler,August26,2015.
11.JohnHagelandJohnSeelyBrown,“EmbracetheEdgeorPerish,”Bloomberg,November28,2007;
www.bloomberg.com/bw/stories/2007-11-28/embrace-the-edge-or-perishbusinessweek-business-news-stock-
market-and-financial-advice.
12.InterviewwithVitalikButerin,September30,2015.
13.InterviewwithAndreasAntonopoulos,July20,2015.
14.TheoneexceptionistheWayBackMachine,whichallowsyoutogetadeeperhistory.
15.OliverE.Williamson,“TheTheoryoftheFirmasGovernanceStructure:FromChoicetoContract,”Journal
ofEconomicPerspectives16(3),Summer2002.
16.Ibid.
17.MichaelC.JensenandWilliamH.Meckling,“TheoryoftheFirm:ManagerialBehavior,AgencyCostsand
OwnershipStructure,”JournalofFinancialEconomics305(1976):310–11(arguingthatthecorporation—or,
moregenerally,afirm—isacollectionofconsensualrelationshipsamongshareholders,creditors,managers,and

perhapsothers);seealsogenerally,FrankH.EasterbrookandDanielR.Fischel,TheEconomicStructureof
CorporateLaw(Cambridge,Mass.:HarvardUniversityPress,1991).
18.VitalikButerin,“BootstrappingaDecentralizedAutonomousCorporation:PartI,”BitcoinMagazine,
September19,2013;https://bitcoinmagazine.com/7050/bootstrapping-a-decentralized-autonomous-corporation-
part-i/.
19.NickSzabo,“FormalizingandSecuringRelationshipsonPublicNetworks,”
http://szabo.best.vwh.net/formalize.html.
20.http://szabo.best.vwh.net/smart.contracts.html.
21.InterviewwithAaronWright,August10,2015.
22.Cryptographersstartedusing“Alice”and“Bob”insteadof“PartyA”and“PartyB”asaconvenientwayto
describeexchangesbetweenthem,lendingsomeclarityandfamiliaritytodiscussionsaboutcomputational
encryption.ThepracticeissaidtodatefromRonRivest’s1978work,“Security’sInseparableCouple,”
CommunicationsoftheACM.NetworkWorld,February7,2005;
www.networkworld.com/news/2005/020705widernetaliceandbob.html.
23.GitHub.com,January3,2012;https://github.com/bitcoin/bips/blob/master/bip-0016.mediawiki,accessed
September30,2015.
24.www.coindesk.com/hedgy-hopes-tackle-bitcoin-volatility-using-multi-signature-technolog/.
25.https://books.google.ca/books?id=VXIDgGjLHVgC&pg=PA19&lpg=PA19&
dq=a+workman+moves+from+department+Y+to+department+X&source=bl&ots=RHb0qrpLz_&sig=LaZFqatLYllrBW8ikPn4PEZ9_7U&hl=en&sa=X&ved=0ahUKEwjgyuO2gKfKAhUDpB4KHb0JDcAQ6AEIITAB#v=onepage&q=a
%20workman%20moves%20from%20department%20Y%20to%20department%20X&f=false.
26.ElliotJaques,“InPraiseofHierarchy,”HarvardBusinessReview,January–February1990.
27.InterviewwithYochaiBenkler,August26,2015.
28.TapscottandTicoll,TheNakedCorporation.
29.WernerErhardandMichaelC.Jensen,“PuttingIntegrityintoFinance:APurelyPositiveApproach,”
November27,2015,HarvardBusinessSchoolNOMUnitWorkingPaperNo.12-074;BarbadosGroupWorking
PaperNo.12-01;EuropeanCorporateGovernanceInstitute(ECGI)—FinanceWorkingPaperNo.417/2014.
30.BankofAmerica’sAverageReturnonEquitysinceDecember31,2009,islessthan2percent;
https://ycharts.com/companies/BAC/return_on_equity.
31.InterviewwithSteveOmohundro,May28,2015.
32.E-mailinterviewwithDavidTicoll,December9,2015.
33.InterviewwithMelanieSwan,September14,2015.
34.https://hbr.org/1990/05/the-core-competence-of-the-corporation.
35.MichaelPorter,“WhatIsStrategy?,”HarvardBusinessReview,November–December1996.
36.InterviewwithSusanAthey,November20,2015.
Chapter5:NewBusinessModels:MakingItRainontheBlockchain
1.Topreventspam,it’spossiblethatnewpublickeys(personas)withlowreputationwillhavetopayacertainfee
tolist.Thefeecanbemovedtoanescrowcontractandbereturnedoncethepersonahassuccessfullyrented
theirpropertyout,orperhapsaftersomeperiodoftimeelapsesandtheydecidetodeletetheirlisting.Largedata
itemslikepictureswillbekeptonIPFSorSwarm,butthehashofthedataandtheinformationidentifyingthe
personathatownsthedatawillbekeptontheblockchaininsidethebAirbnbcontract.
2.PerhapsusingtheWhisperprotocol.
3.FormattedandannotatedwiththeHypertextMarkupLanguage(HTML).
4.DavidMcCandless,“World’sBiggestDataBreaches,”InformationIsBeautiful,October2,2015;
www.informationisbeautiful.net/visualizations/worlds-biggest-data-breaches-hacks/,accessedNovember27,
2015.
5.AsdefinedbyVitalikButerin:“Cryptoeconomicsisatechnicaltermroughlymeaning‘it’sdecentralized,ituses
publickeycryptographyforauthentication,andituseseconomicincentivestoensurethatitkeepsgoingand
doesn’tgobackintimeorincuranyotherglitch.’”From“TheValueofBlockchainTechnology,PartI,”
https://blog.ethereum.org/2015/04/13/visions-part-1-the-value-of-blockchain-technology/.
6.www.youtube.com/watch?v=K2fhwMKk2Eg.

http://variety.com/2015/digital/news/netflix-bandwidth-usage-internet-traffic-1201507187/.
InterviewwithBramCohen,August17,2015.
StanFranklinandArtGraesser,“IsItanAgent,orJustaProgram?ATaxonomyforAutonomousAgents,”
www.inf.ufrgs.br/~alvares/CMP124SMA/IsItAnAgentOrJustAProgram.pdf.
Ibid.,5.
VitalikButerin,https://blog.ethereum.org/2014/05/06/daos-dacs-das-and-more-an-incomplete-terminology-
guide/.“Autonomousagentsareontheothersideoftheautomationspectrum;inanautonomousagent,thereis
nonecessaryspecifichumaninvolvementatall;thatistosay,whilesomedegreeofhumaneffortmightbe
necessarytobuildthehardwarethattheagentrunson,thereisnoneedforanyhumanstoexistthatareawareof
theagent’sexistence.”
Ibid.
Technicaldetail:Becausestoringdatadirectlyonblockchainsisveryexpensive,it’smorelikelythatthereisa
hashofthedata,andthedataitselfwillbeonsomeotherdecentralizeddatastoragenetworklikeSwarmor
IPFS.
InterviewwithVitalikButerin,September30,2015.
InterviewwithAndreasAntonopoulos,July20,2015.
Ibid.
DonTapscottandAnthonyD.Williams,Wikinomics:HowMassCollaborationChangesEverything(New
York:Portfolio/Penguin,2007).Wikinomicsdefinedsevensuchbusinessmodels.Thelisthasbeenextended
here.
Commons-basedPeerProductionisatermdevelopedbyHarvardLawprofessorYochaiBenklerinthe
seminalarticle“Coase’sPenguin,”TheYaleLawJournal,2002;www.yale.edu/yalelj/112/BenklerWEB.pdf.
http://fortune.com/2009/07/20/information-wants-to-be-free-and-expensive/.
InterviewwithYochaiBenkler,August26,2015.
InterviewwithDinoMarkAngaritis,August7,2015.
AndrewLih,“CanWikipediaSurvive?,”TheNewYorkTimes,June20,2015;
www.nytimes.com/2015/06/21/opinion/can-wikipedia-survive.html.
http://techcrunch.com/2014/05/09/monegraph/.
http://techcrunch.com/2015/06/24/ascribe-raises-2-million-to-ensure-you-get-credit-for-your-art/.
www.nytimes.com/2010/04/15/technology/15twitter.html?_r=0.
http://techcrunch.com/2014/05/09/monegraph/.
www.verisart.com/.
http://techcrunch.com/2015/07/07/verisart-plans-to-use-the-blockchain-to-verify-the-authencity-of-artworks/.
InterviewwithYochaiBenkler,August26,2015.
InterviewwithDavidTicoll,August7,2015.
InterviewwithYochaiBenkler,August26,2015.
www.nytimes.com/2013/07/21/opinion/sunday/friedman-welcome-to-the-sharing-economy.html?
pagewanted=1&_r=2&partner=rss&emc=rss&.
SarahKessler,“TheSharingEconomyIsDeadandWeKilledIt,”FastCompany,September14,2015;
www.fastcompany.com/3050775/the-sharing-economy-is-dead-and-we-killed-it#1.
“Prosumers”isaterminventedbyAlvinTofflerinFutureShock(1980).InTheDigitalEconomy(1994)Don
Tapscottdevelopedtheconceptandnotionof“prosumption.”
InterviewwithRobinChase,September2,2015.
https://news.ycombinator.com/item?id=9437095.
ThisscenariowasoriginallyexplainedbyDonTapscottin“TheTransparentBurger,”Wired,March2004;
http://archive.wired.com/wired/archive/12.03/start.html?pg=2%3ftw=wn_tophead_7.
InterviewwithYochaiBenkler,August26,2015.
Called“thewikiworkplace”inWikinomics.
CAPTCHAstandsfor“CompletelyAutomatedPublicTuringTesttoTellComputersandHumansApart.”
InterviewwithJoeLubin,July13,2015.
Ibid.

Chapter6:TheLedgerofThings:AnimatingthePhysicalWorld
1.Nottheirrealnames.Thisstoryisbasedondiscussionswithindividualsfamiliarwiththesituation.
2.PrimaveraDeFilippi,“It’sTimetoTakeMeshNetworksSeriously(andNotJustfortheReasonsYouThink),”
Wired,January2,2014.
3.InterviewwithEricJennings,July10,2015.
4.Ibid.
5.InterviewwithLawrenceOrsini,July30,2015.
6.DonpredictedthedevelopmentofsuchnetworksinDonTapscottandAnthonyWilliams,Macrowikinomics:
NewSolutionsforaConnectedPlanet(NewYork:Portfolio/Penguin,2010,updated2012).
7.InterviewwithLawrenceOrsini,July30,2015.
8.PujaMondal,“WhatIsDesertification?Desertification:Causes,EffectsandControlofDesertification,”UNEP:
Desertifcation,UnitedNationsEnvironmentProgramme,n.d.;
https://desertification.wordpress.com/category/ecology-environment/unep/,accessedSeptember29,2015.
9.www.internetlivestats.com/internet-users/,asofDecember1,2015.
10.CadieThompson,“ElectronicPillsMayBetheFutureofMedicine,”CNBC,April21,2013;
www.cnbc.com/id/100653909;andNattGarun,“FDAApprovesEdibleElectronicPillsThatSenseWhenYou
TakeYourMedication,”DigitalTrends,August1,2012;www.digitaltrends.com/home/fda-approves-edible-
electronic-pills/.
11.MarkJaffe,“IOTWon’tWorkWithoutArtificialIntelligence,”Wired,November2014;
www.wired.com/insights/2014/11/iot-wont-work-without-artificial-intelligence/.
12.IBM,“DeviceDemocracy,”2015,4.
13.AllisonArieff,“TheInternetofWayTooManyThings,”TheNewYorkTimes,September5,2015.
14.IBM,“DeviceDemocracy,”10.
15.InterviewwithDinoMarkAngaritis,August11,2015.
16.InterviewwithCarlosMoreira,September3,2015.
17.Ibid.
18.InterviewwithMichelleTinsley,June25,2015.
19.Ibid.
20.McKinseyGlobalInstitute,“TheInternetofThings:MappingtheValueBeyondtheHype,”June2015.
21.InterviewwithEricJennings,July10,2015.
22.IBMInstituteforBusinessValue,“TheEconomyofThings:ExtractingNewValuefromtheInternetof
Things,”2015.
23.CadieThompson,“AppleHasaSmartHomeProblem:PeopleDon’tKnowTheyWantItYet,”Business
Insider,June4,2015;www.businessinsider.com/apple-homekit-adoption-2015-6.
24.McKinseyGlobalInstitute,“TheInternetofThings.”
25.InterviewwithEricJennings,July10,2015.
26.IBM,“DeviceDemocracy,”9.
27.Ibid.,13.
28.McKinseyGlobalInstitute,“TheInternetofThings.”MGIdefinedninesettingswithvaluepotential.
29.www.wikihow.com/Use-Uber.
30.http://consumerist.com/tag/uber/page/2/.
31.MikeHearn,“FutureofMoney,”TuringFestival,Edinburgh,Scotland,August23,2013,postedSeptember
28,2013;www.youtube.com/watch?v=Pu4PAMFPo5Y&feature=youtu.be.
32.McKinsey,“AnExecutive’sGuidetotheInternetofThings,”August2015;
www.mckinsey.com/Insights/Business_Technology/An_executives_guide_to_the_Internet_of_Things?
cid=digital-eml-alt-mip-mck-oth-1508.
Chapter7:SolvingtheProsperityParadox:EconomicInclusionand
Entrepreneurship

http://datatopics.worldbank.org/financialinclusion/country/nicaragua.
www.budde.com.au/Research/Nicaragua-Telecoms-Mobile-and-Broadband-Market-Insights-and-Statistics.html.
“PropertyDisputesinNicaragua,”U.S.Embassy,
http://nicaragua.usembassy.gov/property_disputes_in_nicaragua.html.Thereareanestimatedthirtythousand
propertiesindispute.
InterviewwithJoyceKim,June12,2015.
Ibid.
Ibid.
www.worldbank.org/en/news/press-release/2015/04/15/massive-drop-in-number-of-unbanked-says-new-report;
andC.K.Prahalad,TheFortuneattheBottomofthePyramid:EradicatingPovertyThroughProfits
(Philadelphia:WhartonSchoolPublishing,2009).Thisfigureisanestimate.
InterviewwithJoyceKim,June12,2015.
www.ilo.org/global/topics/youth-employment/lang—en/index.htm.
ThomasPiketty,CapitalintheTwenty-FirstCentury(Cambridge,Mass.:BelknapPress,2014).

www.brookings.edu/~/media/research/files/papers/2014/05/declining%20business%20dynamism%20litan/declining_business_dynamism_hathaway_litan.pdf.
RuthSimonandCaelainnBarr,“EndangeredSpecies:YoungU.S.Entrepreneurs,”TheWallStreetJournal,
January2,2015;www.wsj.com/articles/endangered-species-young-u-s-entrepreneurs-1420246116.
WorldBankGroup,DoingBusiness,www.doingbusiness.org/data/exploretopics/starting-a-business.
InterviewwithHernandodeSoto,November27,2015.
www.tamimi.com/en/magazine/law-update/section-6/june-4/dishonoured-cheques-in-the-uae-a-criminal-law-
perspective.html.
www.worldbank.org/en/topic/poverty/overview.Tobeprecise,itwas1.91billionin1990.
http://digitalcommons.georgefox.edu/cgi/viewcontent.cgi?article=1003&context=gfsb.
http://reports.weforum.org/outlook-global-agenda-2015/top-10-trends-of-2015/1-deepening-income-
inequality/.
Ibid.
InterviewwithTylerWinklevoss,June9,2015.
Congo,Chad,CentralAfricanRepublic,SouthSudan,Niger,Madagascar,Guinea,Cameroon,BurkinaFaso,
Tanzania;http://data.worldbank.org/indicator/FB.CBK.BRCH.P5?
order=wbapi_data_value_2013+wbapi_data_value+wbapi_data_value-last&sort=asc.
www.aba.com/Products/bankcompliance/Documents/SeptOct11CoverStory.pdf.
http://www.nytimes.com/2015/12/24/business/dealbook/banks-reject-new-york-city-ids-leaving-unbanked-on-
sidelines.html.
E-mailcorrespondencewithJoeLubin,August6,2015.
DavidBirch,IdentityIstheNewMoney(London:LondonPublishingPartnership,2014),1.
E-mailcorrespondencewithJoeLubin,August6,2015.
InterviewwithJoyceKim,June12,2015.
InterviewwithHernandodeSoto,November27,2015.
InterviewwithHalukKulin,June9,2015.
E-mailcorrespondencewithJoeLubin,August6,2015.
InterviewwithBalajiSrinivasan,May29,2014.
www.doingbusiness.org/data/exploretopics/starting-a-business.
InterviewwithHalukKulin,June9,2015.
AnalieDomingoagreedtoletusshadowherasshewentthroughhernormalroutineofsendingmoneyhome
tohermotherinthePhilippines.AnaliehasbeenanemployeeofDonTapscottandAnaLopesfortwentyyears
andisalsoaclosefriend.
www12.statcan.gc.ca/nhs-enm/2011/dp-pd/prof/details/page.cfm?
Lang=E&Geo1=PR&Code1=01&Data=Count&SearchText=canada&SearchType=Begins&SearchPR=01&A1=All&B1=All&Custom=&TABID=1.
https://remittanceprices.worldbank.org/sites/default/files/rpw_report_june_2015.pdf.
Theremittancemarketis$500billion;averagefeesof7.7percenttranslateto$38.5billioninfees.

38.DilipRatha,“TheImpactofRemittancesonEconomicGrowthandPovertyReduction,”MigrationPolicy
Institute8(September2013).
39.AdolfBarajas,etal.,“DoWorkers’RemittancesPromoteEconomicGrowth?,”IMFWorkingPaper,
www10.iadb.org/intal/intalcdi/pe/2009/03935.pdf.
40.“AidandRemittancesfromCanadatoSelectCountries,”CanadianInternationalDevelopmentPlatform,
http://cidpnsi.ca/blog/portfolio/aid-and-remittances-from-canada/.
41.WorldBankRemittancePriceIndex,https://remittanceprices.worldbank.org/en.
42.2011NationalHouseholdSurveyHighlights,CanadianCensusBureau,
www.fin.gov.on.ca/en/economy/demographics/census/nhshi11-1.html.
43.https://support.skype.com/en/faq/FA1417/how-much-bandwidth-does-skype-need.
44.InterviewwithEricPiscini,July13,2015.
45.http://corporate.westernunion.com/Corporate_Fact_Sheet.html.
46.Atthetimeofwriting,AbrahadnotopeneditsdoorsinCanada.However,wewereabletotestAbra’s
technologywithAnalieandhermothersuccessfullywithAbra’shelp.
47.InterviewwithBillBarhydt,August25,2015.
48.Ibid.
49.Ibid.
50.“ForeignAidandRent-Seeking,TheJournalofInternationalEconomics,2000,438;
http://conferences.wcfia.harvard.edu/sites/projects.iq.harvard.edu/files/gov2126/files/1632.pdf.
51.Ibid.
52.www.propublica.org/article/how-the-red-cross-raised-half-a-billion-dollars-for-haiti-and-built-6-homes.
53.“Mortality,CrimeandAccesstoBasicNeedsBeforeandAftertheHaitiEarthquake,”Medicine,Conflictand
Survival26(4)(2010).
54.http://unicoins.org/.
55.JeffreyAshewithKylaJaggerNeilan,InTheirOwnHands:HowSavingsGroupsAreRevolutionizing
Development(SanFrancisco:Berrett-KoehlerPublishers,2014).
56.E.KumarSharma,“FounderFalls,”BusinessToday(India),December25,2011;
www.businesstoday.in/magazine/features/vikram-akula-quits-sks-microfiance-loses-or-gains/story/20680.html.
57.NingWang,“MeasuringTransactionCosts:AnIncompleteSurvey,”RonaldCoaseInstituteWorkingPapers2
(February2003);www.coase.org/workingpapers/wp-2.pdf.
58.www.telesurtv.net/english/news/Honduran-Movements-Slam-Repression-of-Campesinos-in-Land-Fight-
20150625-0011.html.
59.USAID,theMillenniumChallengeCorporation,andtheUNFoodandAgricultureOrganization.
60.PaulB.Siegel,MalcolmD.Childress,andBradfordL.Barham,“ReflectionsonTwentyYearsofLand-
RelatedDevelopmentProjectsinCentralAmerica:TenThingsYouMightNotExpect,andFutureDirections,”
KnowledgeforChangeSeries,InternationalLandCoalition(ILC),Rome,2013;http://tinyurl.com/oekhzos,
accessedAugust26,2015.
61.Ibid.
62.AmbassadorMichaelB.G.Froman,USOfficeoftheTradeRepresentative,“2015NationalTradeEstimate
ReportonForeignTradeBarriers,”USTR.gov,April1,2015;
https://ustr.gov/sites/default/files/files/reports/2015/NTE/2015%20NTE%20Honduras.pdf.
63.InterviewwithHernandodeSoto,November27,2015.
64.http://in.reuters.com/article/2015/05/15/usa-honduras-technology-idINKBN0O01V720150515.
65.InterviewwithKausikRajgopal,August10,2015.
66.WorldBank,“DoingBusiness2015:GoingBeyondEfficiencies,”Washington,D.C.:WorldBank,2014;DOI:
10.1596/978-1-4648-0351-2,LicenseCreativeCommonsAttributionCCBY3.0IGO.
67.“ITUReleases2014ICTFigures,”www.itu.int/net/pressoffice/press_releases/2014/23.aspx#.VEfalovF_Kg.
68.www.cdc.gov/healthliteracy/learn/understandingliteracy.html.
69.www.proliteracy.org/the-crisis/adult-literacy-facts.
70.CIAWorldFactbook,literacystatistics,www.cia.gov/library/publications/the-world-
factbook/fields/2103.html#136.

Chapter8:RebuildingGovernmentandDemocracy
1.http://europa.eu/about-eu/countries/member-countries/estonia/index_en.htm;
http://www.citypopulation.de/Canada-MetroEst.html.
2.In-personconversationbetweenEstonianpresidentToomasHendrikIlvesandDonTapscottattheWorld
EconomicForum’sGlobalAgendaCouncilmeetinginAbuDhabi,UnitedArabEmirates,October2015.
3.
www.socialprogressimperative.org/data/spi#data_table/countries/com6/dim1,dim2,dim3,com9,idr35,com6,idr16,idr34.
4.https://e-estonia.com/the-story/the-story-about-estonia/.Estoniaisveryproudofitse-Estoniainitiativesandhas
publishedalotofinformationontheWeb.Alloftheinformationandstatisticsusedinthissectioncamefrom
theGovernmentofEstoniaWebsite.
5.“ElectronicHealthRecord,”e-Estonia.com,n.d.;https://e-estonia.com/component/electronic-health-record/,
accessedNovember29,2015.
6.“e-Cabinet,”e-Estonia.com,n.d.;https://e-estonia.com/component/e-cabinet/,accessedNovember29,2015.
7.“ElectronicLandRegister,”e-Estonia.com,n.d.;https://e-estonia.com/component/electronic-land-register/,
accessedNovember29,2015.
8.CharlesBrett,“MyLifeUnderEstonia’sDigitalGovernment,”TheRegister,
www.theregister.co.uk/2015/06/02/estonia/.
9.InterviewwithMikeGault,August28,2015.
10.“KeylessSignatureInfrastructure,”e-Estonia.com,n.d.;https://e-estonia.com/component/keyless-signature-
infrastructure/,accessedNovember29,2015.
11.OlgaKharif,“BitcoinNotJustforLibertariansandAnarchistsAnymore,”BloombergBusiness,October9,
2014;www.bloomberg.com/bw/articles/2014-10-09/bitcoin-not-just-for-libertarians-and-anarchists-anymore.To
besure,thereisastronglibertariantrendintheAmericanpopulationasawhole.AccordingtothePew
ResearchCenter,11percentofAmericansdescribethemselvesaslibertarianandknowthedefinitionofthe
term.“InSearchofLibertarians,”www.pewresearch.org/fact-tank/2014/08/25/in-search-of-libertarians/.
12.“BitcoinProvestheLibertarianIdeaofParadiseWouldBeHellonEarth,”BusinessInsider,
www.businessinsider.com/bitcoin-libertarian-paradise-would-be-hell-on-earth-2013-12#ixzz3kQqSap00.
13.HumanRightsWatch,“WorldReport2015:Eventsof2014,”
www.hrw.org/sites/default/files/wr2015_web.pdf.
14.InterviewwithHernandodeSoto,November27,2015.
15.SeymourMartinLipset,PoliticalMan:TheSocialBasesofPolitics,2nded.(London:Heinemann,1983),64.
16.InterviewwithHernandodeSoto,November27,2015.
17.HernandodeSoto,“TheCapitalistCureforTerrorism,”TheWallStreetJournal,October10,2014;
www.wsj.com/articles/the-capitalist-cure-for-terrorism-1412973796,accessedNovember27,2015.
18.InterviewwithHernandodeSoto,November27,2015.
19.InterviewwithCarlosMoreira,September3,2015.
20.MelanieSwan,Blockchain:BlueprintforaNewEconomy(Sebastopol,Calif.:O’ReillyMedia,January2015),
45.
21.EmilySpaven,“UKGovernmentExploringUseofBlockchainRecordkeeping,”CoinDesk,September1,
2015;www.coindesk.com/uk-government-exploring-use-of-blockchain-recordkeeping/.
22.J.P.Buntinx,“‘BlockchainTechnology’IsBringingBitcointotheMainstream,”Bitcoinist.net,August29,
2015;http://bitcoinist.net/blockchain-technology-bringing-bitcoin-mainstream/.
23.MelanieSwan,quotedinAdamStone,“UnchainingInnovation:CouldBitcoin’sUnderlyingTechBea
PowerfulToolforGovernment?,”GovernmentTechnology,July10,2015;www.govtech.com/state/Unchaining-
Innovation-Could-Bitcoins-Underlying-Tech-be-a-Powerful-Tool-for-Government.html.
24.Seeforexamplewww.partnerships.org.au/andwww.in-control.org.uk/what-we-do.aspx.
25.InterviewwithPerianneBoring,August7,2015.SeealsoJosephYoung,“8WaysGovernmentsCouldUsethe
BlockchaintoAchieve‘RadicalTransparency,’”CoinTelegraph,July13,2015;
http://cointelegraph.com/news/114833/8-ways-governments-could-use-the-blockchain-to-achieve-radical-
transparency.
26.www.data.gov.

27.www.data.gov.uk.
28.BenSchiller,“ARevolutionofOutcomes:HowPay-for-SuccessContractsAreChangingPublicServices,”
Co.Exist,www.fastcoexist.com/3047219/a-revolution-of-outcomes-how-pay-for-success-contracts-are-
changing-public-services.Alsosee:www.whitehouse.gov/blog/2013/11/20/building-smarter-more-efficient-
government-through-pay-success.
29.R.C.Porter,“CanYou‘Snowden-Proof’theNSA?:HowtheTechnologyBehindtheDigitalCurrency—
Bitcoin—CouldStoptheNextEdwardSnowden,”Fortuna’sCorner,June3,2015;
http://fortunascorner.com/2015/06/03/can-you-snowden-proof-the-nsa-how-the-technology-behind-the-digital-
currency-bitcoin-could-stop-the-next-edward-snowden/.
30.ElliotMaras,“LondonMayoralCandidateGeorgeGallowayCallsforCityGovernmenttoUseBlockChain
forPublicAccountability,”BitcoinNews,July2,2015;www.cryptocoinsnews.com/london-mayoral-candidate-
george-galloway-calls-city-government-use-block-chain-public-accountability/.
31.Tapscott,TheDigitalEconomy,304.
32.AlGore,speechtotheWeMediaconference,October6,2005;
www.fpp.co.uk/online/05/10/Gore_speech.html.
33.Ibid.
34.“ThePersistenceofConspiracyTheories,”TheNewYorkTimes,April30,2011;
www.nytimes.com/2011/05/01/weekinreview/01conspiracy.html?pagewanted=all&_r=0.
35.www.nytimes.com/2014/07/06/upshot/when-beliefs-and-facts-collide.html?
module=Search&mabReward=relbias:w;%201RI:6%20%3C{:}%3E.
36.“PlainLanguage:It’stheLaw,”PlainLanguageActionandInformationNetwork,n.d.:
www.plainlanguage.gov/plLaw/,accessedNovember30,2015.
37.https://globalclimateconvergence.org/news/nyt-north-carolinas-election-machine-blunder.
38.http://users.encs.concordia.ca/~clark/papers/2012_fc.pdf.
39.http://link.springer.com/chapter/10.1007%2F978-3-662-46803-6_16.
40.http://blogs.wsj.com/digits/2015/07/29/scientists-in-greece-design-cryptographic-e-voting-platform/.
41.http://nvbloc.org/.
42.http://cointelegraph.com/news/114404/true-democracy-worlds-first-political-app-blockchain-party-launches-
in-australia.
43.www.techinasia.com/southeast-asia-blockchain-technology-bitcoin-insights/.
44.Ibid.
45.www.washingtonpost.com/news/wonkblog/wp/2014/08/06/a-comprehensive-investigation-of-voter-
impersonation-finds-31-credible-incidents-out-of-one-billion-ballots-cast/.
46.www.eac.gov/research/election_administration_and_voting_survey.aspx.
47.http://america.aljazeera.com/opinions/2015/7/most-americans-dont-vote-in-elections-heres-why.html.
48.InterviewwithEduardoRoblesElvira,September10,2015.
49.www.chozabu.net/blog/?p=78.
50.https://agoravoting.com/.
51.InterviewwithEduardoRoblesElvira,September10,2015.
52.http://cointelegraph.com/news/111599/blockchain_technology_smart_contracts_and_p2p_law.
53.PatentApplicationofDavidChaum,“RandomSampleElections,”June19,2014;
http://patents.justia.com/patent/20140172517.
54.https://blog.ethereum.org/2014/08/21/introduction-futarchy/.
55.FedericoAst(@federicoast)andAlejandroSewrjugin(@asewrjugin),“TheCrowdJury,aCrowdsourced
JusticeSystemfortheCollaborationEra,”https://medium.com/@federicoast/the-crowdjury-a-crowdsourced-
court-system-for-the-collaboration-era-66da002750d8#.e8yynqipo.
56.http://crowdjury.org/en/.
57.TheentireprocessisdescribedinAstandSewrjugin,“TheCrowdJury.”
58.AbriefdescriptionofthejuryselectionprocessinearlyAthensisdescribedat
www.agathe.gr/democracy/the_jury.html.
59.Seefullreportandrecommendationshere,includingadescriptionofmodelsworldwide:
www.judiciary.gov.uk/reviews/online-dispute-resolution/.

60.http://blog.counter-strike.net/index.php/overwatch/.
61.EnvironmentalDefenseFund,www.edf.org/climate/how-cap-and-trade-works.
62.Swan,Blockchain:BlueprintforaNewEconomy.
63.InterviewwithAndreasAntonopoulos,July20,2015.
Chapter9:FreeingCultureontheBlockchain:MusictoOurEars
1.“2015WomeninMusicHonoursAnnounced,”MOnline,PRSforMusic,October22,2015;www.m-
magazine.co.uk/news/2015-women-in-music-honours-announced/,accessedNovember21,2015.
2.InterviewwithImogenHeap,September16,2015.
3.DavidByrne,“TheInternetWillSuckAllCreativeContentOutoftheWorld,”TheGuardian,June20,2014;
www.theguardian.com/music/2013/oct/11/david-byrne-internet-content-world,accessedSeptember20,2015.
4.InterviewwithImogenHeap,September16,2015.
5.In-personconversationbetweenPaulPacificoandDonTapscottatthehomeofImogenHeap,November8,
2015.
6.“HideandSeek,”performedbyArianaGrande,YouTube,LoveArianaGrandeChannel,October17,2015;
www.youtube.com/watch?v=2SDVDd2VpP0,accessedNovember21,2015.
7.InterviewwithImogenHeap,September16,2015.
8.DavidByrne,etal.,“OnceinaLifetime,”RemaininLight,TalkingHeads,February2,1981.
9.InterviewwithImogenHeap,September16,2015.
10.JohanNylander,“RecordLabelsPartOwnerofSpotify,”TheSwedishWire,n.d.;
www.swedishwire.com/jobs/680-record-labels-part-owner-of-spotify,accessedSeptember23,2015.According
toNylander,Sonyhad5.8percent,Universal4.8percent,andWarner3.8percent.Beforeitssell-off,EMIhada
1.9percentstake.
11.InterviewwithImogenHeap,September16,2015.
12.DavidJohnson,“SeeHowMuchEveryTopArtistMakesonSpotify,”Time,November18,2014;
http://time.com/3590670/spotify-calculator/,accessedSeptember25,2015.
13.MicahSingleton,“ThisWasSonyMusic’sContractwithSpotify,”TheVerge,May19,2015;
www.theverge.com/2015/5/19/8621581/sony-music-spotify-contract,accessedSeptember25,2015.
14.StuartDredge,“StreamingMusic:WhatNextforApple,YouTube,Spotify...andMusicians?,”The
Guardian,August29,2014;www.theguardian.com/technology/2014/aug/29/streaming-music-apple-youtube-
spotify-musicians,accessedAugust14,2015.
15.EdChristman,“UniversalMusicPublishing’sRoyaltyPortalNowAllowsWriterstoRequestAdvance,”
Billboard,July20,2015;www.billboard.com/articles/business/6634741/universal-music-publishing-royalty-
window-updates,accessedNovember24,2015.
16.RobertLevine,“DataMiningtheDigitalGoldRush:FourCompaniesThatGetIt,”Billboard127(10)(2015):
14–15.
17.InterviewwithImogenHeap,September16,2015.
18.ImogenHeap,“PanelSession,”GuardianLive,“LiveStream:ImogenHeapReleasesTinyHumanUsing
BlockchainTechnology,SonosStudioLondon,”October2,2015;
www.theguardian.com/membership/2015/oct/02/live-stream-imogen-heap-releases-tiny-human-using-
blockchain-technology.PassageeditedbyImogenHeap,e-mail,November27,2015.
19.Ibid.
20.InterviewwithAndreasAntonopoulos,July20,2015.
21.InterviewwithImogenHeap,September16,2015.
22.Ibid.
23.StuartDredge,“HowSpotifyandItsDigitalMusicRivalsCanWinOverArtists:‘JustIncludeUs,’”The
Guardian,October29,2013;www.theguardian.com/technology/2013/oct/29/spotify-amanda-palmer-songkick-
vevo,accessedAugust14,2015.
24.GeorgeHoward,“BitcoinandtheArts:AnInterviewwithArtistandComposer,ZoeKeating,”Forbes,June5,
2015;www.forbes.com/sites/georgehoward/2015/06/05/bitcoin-and-the-arts-and-interview-with-artist-and-
composer-zoe-keating/,accessedAugust14,2015.

25.Ibid.
26.JosephYoung,“MusicCopyrightsStoredontheBitcoinBlockChain:RockBand22HERTZLeadstheWay,”
CoinTelegraph,May6,2015;http://cointelegraph.com/news/114172/music-copyrights-stored-on-the-bitcoin-
blockchain-rock-band-22hertz-leads-the-way,accessedAugust14,2015.
27.Pressrelease,“ColuAnnouncesBetaLaunchandCollaborationwithRevelatortoBringBlockchain
TechnologytotheMusicIndustry,”BusinessWire,August12,2015.
28.GideonGottfried,“How‘theBlockchain’CouldActuallyChangetheMusicIndustry,Billboard,August5,
2015;www.billboard.com/articles/business/6655915/how-the-blockchain-could-actually-change-the-music-
industry.
29.PeerTracksInc.,September24,2015;http://peertracks.com/.
30.“AboutUs,”Artlery:ModernArtAppreciation,September3,2015;https://artlery.com.
31.EllenNakashima,“TechGiantsDon’tWantObamatoGivePoliceAccesstoEncryptedPhoneData,”
WashingtonPost,WPCompanyLLC,May19,2015;www.washingtonpost.com/world/national-security/tech-
giants-urge-obama-to-resist-backdoors-into-encrypted-communications/2015/05/18/11781b4a-fd69-11e4-833c-
a2de05b6b2a4_story.html.
32.DavidKaye,“ReportoftheSpecialRapporteuronthePromotionandProtectionoftheRighttoFreedomof
OpinionandExpression,”HumanRightsCouncil,UnitedNations,Twenty-ninthsession,Agendaitem3,
advanceeditedversion,May22,2015;
www.ohchr.org/EN/Issues/FreedomOpinion/Pages/CallForSubmission.aspx,accessedSeptember25,2015.
33.TheUNreportrefersreaderstotheCentreforInternationalGovernanceInnovationandChathamHouse,
TowardaSocialCompactforDigitalPrivacyandSecurity:StatementbytheGlobalCommissiononInternet
Governance(2015).
34.TheSocialProgressImperative,SocialProgressIndex2015,April14,2015;
www.socialprogressimperative.org/data/spi#data_table/countries/com9/dim1,dim2,dim3,com9,accessed
September24,2015.Ourrankingisderivedfromthecomponentscores,notfromtheoverallopportunityscore.
35.“RegimesSeekingEverMoreInformationControl,”2015WorldPressFreedomIndex,ReportersWithout
Borders,2015;http://index.rsf.org/#!/themes/regimes-seeking-more-control.
36.ReportersWithoutBorders,“HasRussiaGoneSoFarastoBlockWikipedia?,”August24,2015;
https://en.rsf.org/russia-has-russia-gone-so-far-as-to-block-24-08-2015,48253.html,accessedSeptember25,
2015.
37.ScottNeuman,“ChinaArrestsNearly200over‘OnlineRumors,’”August30,2015;
www.npr.org/sections/thetwo-way/2015/08/30/436097645/china-arrests-nearly-200-over-online-rumors.
38.GetGems.org,September2,2015;http://getgems.org/.
39.“Factom:BusinessProcessesSecuredbyImmutableAuditTrailsontheBlockchain,”www.factom.org/faq.
40.InterviewwithStephenPair,June11,2015.
41.MiguelFreitas,AboutTwister.http://twister.net.co/?page_id=25.
42.MarkHenricks,“TheBillionaireDropoutClub,”CBSMarketWatch,CBSInteractiveInc.,January24,2011,
updatedJanuary26,2011;www.cbsnews.com/news/the-billionaire-dropout-club/,accessedSeptember20,2015.
43.InterviewwithJoichiIto,August24,2015.
44.Ibid.
45.InterviewwithMelanieSwan,September14,2015.
46.Ibid.
47.“IntroducingUNESCO:WhatWeAre.”Web.AccessedNovember28,2015;
http://www.unesco.org/new/en/unesco/about-us/who-we-are/introducing-unesco.
Chapter10:OvercomingShowstoppers:TenImplementationChallenges
1.LevSergeyevichTermen,“ErhöhungderSinneswahrnehmungdurchHypnose[IncreaseofSensePerception
ThroughHypnosis],”ErinnerungenanA.F.Joffe,1970.“Theremin,Léon,”EncyclopediaofWorldBiography,
2005,Encyclopedia.com,www.encyclopedia.com,accessedAugust26,2015.
2.MaciejCeglowski,“OurComradetheElectron,”speechgivenatWebstock2014,St.JamesTheatre,
Wellington,NewZealand,February14,2014;www.webstock.org.nz/talks/our-comrade-the-electron/,accessed

August26,2015.Ceglowski’stalkinspiredtheopeningofthischapter.
InterviewwithAndreasAntonopoulos,July20,2015.
InterviewwithTylerWinklevoss,June9,2015.
SatoshiNakamoto,P2pfoundation.ning.com,February18,2009.
KenGriffithandIanGrigg,“BitcoinVerificationLatency:TheAchillesHeelforTimeSensitiveTransactions,”
whitepaper,February3,2014;http://iang.org/papers/BitcoinLatency.pdf,accessedJuly20,2015.
InterviewwithIzabellaKaminska,August5,2015.
Ibid.
PrimaveraDeFilippiandAaronWright,“DecentralizedBlockchainTechnologyandtheRiseofLex
Cryptographia,”SocialSciencesResearchNetwork,March10,2015,43.
InterviewwithJoshFairfield,June1,2015.
IzabellaKaminska,“Bitcoin’sWastedPower—andHowItCouldBeUsedtoHeatHomes,”FTAlphaville,
FinancialTimes,September5,2014.
CIA,“TheWorldFactbook,”www.cia.gov,2012;http://tinyurl.com/noxwvle,accessedAugust28,2015.Note
thatCyprus’scarbongasemissionsinthesameperiodwere8.801millionmetricmegatons(2012).
“AftertheBitcoinGoldRush,”TheNewRepublic,February24,2015;
www.newrepublic.com/article/121089/how-small-bitcoin-miners-lose-crypto-currency-boom-bust-cycle,
accessedMay15,2015.
InterviewwithBobTapscott,July28,2015.
InterviewwithGavinAndresen,June8,2015.
InterviewwithEricJennings,July10,2015.
InterviewwithStephenPair,June11,2015.
InterviewwithErikVoorhees,June16,2015.
SangjinHan,“OnFairComparisonBetweenCPUandGPU,”blog,February12,2013;
www.eecs.berkeley.edu/~sangjin/2013/02/12/CPU-GPU-comparison.html,accessedAugust28,2015.
InterviewwithBobTapscott,July28,2015.
InterviewwithValeryVavilov,July24,2015.
HassMcCook,“UndertheMicroscope:EconomicandEnvironmentalCostsofBitcoinMining,”CoinDesk
Ltd.,June21,2014;www.coindesk.com/microscope-economic-environmental-costs-bitcoin-mining/,accessed
August28,2015.
InterviewwithBobTapscott,July28,2015.
my-mr-wanky,eBay.com,May8,2014;www.ebay.com/itm/3-Cointerra-TerraMiner-IV-Bitcoin-Miner-1-6-
TH-s-ASIC-Working-Units-in-Hand-/331192098368,accessedJuly25,2015.
“PCRecycling,”MRIofAustralia,MRI(Aust)PtyLtd.Web.August28,2015;http://www.mri.com.au/pc-
recycling.shtml.
InterviewwithGavinAndresen,June8,2015.
VitalikButerin,“ProofofStake:HowILearnedtoLoveWeakSubjectivity,”Ethereumblog,November25,
2014;https://blog.ethereum.org/2014/11/25/proof-stake-learned-love-weak-subjectivity/.
StefanThomasandEvanSchwartz,“RippleLabs’W3CWebPayments,”positionpaper,March18,2014;
www.w3.org/2013/10/payments/papers/webpayments2014-submission_25.pdf.
InterviewwithAustinHill,July22,2015.
InterviewwithRogerVer,April30,2015.
SatoshiNakamoto,“Re:BitcoinP2PE-cashPaper,”TheMailArchive,November7,2008;www.mail-
archive.com/,http://tinyurl.com/oofvok7,accessedJuly13,2015.
InterviewwithJoshFairfield,June1,2015.
InterviewwithStephenPair,June11,2015.
InterviewwithJerryBrito,June29,2015.
Ibid.
InterviewwithJoshFairfield,June1,2015.
InterviewwithAndreasAntonopoulos,July20,2015.
InterviewwithIzabellaKaminska,August5,2015.
InterviewwithStephenPair,June11,2015.

AndrewVegetabile,“AnObjectiveLookintotheImpactsofForkingBlockchainsDuetoMaliciousActors,”
TheDigitalCurrencyCouncil,July9,2015;www.digitalcurrencycouncil.com/professional/an-objective-look-
into-the-impacts-of-forking-blockchains-due-to-malicious-actors/.
InterviewwithKeonneRodriguez,May11,2015.
Vegetabile,“AnObjectiveLook.”
PeterTodd,“Re:[Bitcoin-development]Fwd:BlockSizeIncreaseRequirements,”TheMailArchive,June1,
2015;www.mail-archive.com/,http://tinyurl.com/pk4ordw,accessedAugust26,2015.
SatoshiNakamoto,“Re:BitcoinP2PE-cashPaper,”MailingList,Cryptography,Metzger,Dowdeswell&Co.
LLC,November11,2008.Web.July13,2015,www.metzdowd.com/mailman/listinfo/cryptography.
PascalBouvier,“DistributedLedgersPartI:BitcoinIsDead,”FiniCultureblog,August4,2015;
http://finiculture.com/distributed-ledgers-part-i-bitcoin-is-dead/,accessedAugust28,2015.
WesternUnion,“CompanyFacts,”WesternUnion,WesternUnionHoldings,Inc.,December31,2014.Web.
January13,2016;http://corporate.westernunion.com/Corporate_Fact_Sheet.html.
InterviewwithGavinAndresen,June8,2015.
Ibid.
InterviewwithAustinHill,July22,2015.
InterviewwithGavinAndresen,June8,2015.
AndreasAntonopoulos,“BitcoinasaDistributedConsensusPlatformandtheBlockchainasaLedgerof
ConsensusStates,”interviewwithAndreasAntonopoulos,December9,2014.
AndyGreenberg,“HackersRemotelyKillaJeepontheHighway—withMeinIt,”Wired,July21,2015.
InternationalJointConferenceonArtificialIntelligence,July28,2015,BuenosAires,Argentina;
http://futureoflife.org/AI/open_letter_autonomous_weapons#signatories.
LisaSingh,“FatheroftheInternetVintCerf’sForecastfor‘InternetofThings,’”WashingtonExec,August17,

InterviewwithKeonneRodriguez,May11,2015.
Ceglowski,“OurComradetheElectron.”
InterviewwithAnnCavoukian,September2,2015.
Ceglowski,“OurComradetheElectron.”
http://www.lightspeedmagazine.com/nonfiction/interview-marc-goodman/.
MarcGoodman,FutureCrimes:EverythingIsConnected,EveryoneIsVulnerable,andWhatWeCanDo
AboutIt(NewYork,Doubleday,2015).
InterviewwithSteveOmohundro,May28,2015.
TheSilverStallion,chapter26;www.cadaeic.net/cabell.htm,accessedOctober2,2015.
InterviewwithYochaiBenkler,August26,2015.
Chapter11:LeadershipfortheNextEra
StephanTual,“AnnouncingtheNewFoundationBoardandExecutiveDirector,”Ethereumblog,Ethereum
Foundation,July30,2015;https://blog.ethereum.org/2015/07/30/announcing-new-foundation-board-executive-
director/,accessedDecember1,2015.
Ethereum:TheWorldComputer,producedbyEthereum,YouTube,July30,2015;www.youtube.com/watch?
v=j23HnORQXvs,accessedDecember1,2015.
InterviewwithVitalikButerin,September30,2015.
Ibid.
Ibid.
Ibid.
HenryVI,part2,act4,scene2.
E-mailcorrespondencewithVitalikButerin,October1,2015.
DavidD.Clark,“ACloudyCrystalBall,”presentation,IETF,July16,1992;
http://groups.csail.mit.edu/ana/People/DDC/future_ietf_92.pdf.
InterviewwithBrianForde,June26,2015.
InterviewwithErikVoorhees,June16,2015;interviewwithAndreasAntonopolous,July20,2015.

InterviewwithErikVoorhees,June16,2015.
InterviewwithJimOrlando,September28,2015.
http://www.coindesk.com/bitcoin-venture-capital/.
E-mailcorrespondencewithTimDraper,August3,2015.
InterviewwithGavinAndresen,June8,2015.
Ibid.
InterviewwithBrianForde,June26,2015.
InterviewwithJoichiIto,August24,2015.
InterviewwithJerryBrito,June29,2015.
Ibid.
www.cryptocoinsnews.com/us-colleges-universities-offering-bitcoin-courses-fall/.
InterviewwithAdamDraper,May31,2015.
InterviewwithBenjaminLawsky,July2,2015.
InterviewwithPerianneBoringatMoney2020,October26,2015.
InterviewwithJoichiIto,August24,2015.
InterviewwithBlytheMasters,July29,2015.
ForafulllistofallthemajorvictoriesLawskyachievedwhilesuperintendentofNYDFS,pleasevisit
www.dfs.ny.gov/reportpub/2014_annualrep_summ_mea.htm.
InterviewwithBenjaminLawsky,July2,2015.
Ibid.
Ibid.
InterviewwithJerryBrito,June29,2015.
InterviewwithBenjaminLawsky,July2,2015.
Ibid.
Requiredreadingforanyonelookingforafreshtakebyatypicallyconservativegovernmentbody:
www.parl.gc.ca/Content/SEN/Committee/412/banc/rep/rep12jun15-e.pdf.
Ibid.
InterviewwithSenatorDougBlackofCanada,July8,2015.
Ibid.
Ibid.
Ibid.
Ibid.
InterviewwithAaronWright,August10,2015.
InterviewwithJoshFairfield,June1,2015.
TheFederalReservewasnotthefirstnationalbankintheUnitedStates.TheFirstNationalBank,broughtinto
existencebyCongressin1791,andarchitectedbytheUnitedStates’firstsecretaryofthetreasury,Alexander
Hamilton,wasfarmorelimitedinscopeandPresidentAndrewJacksonultimatelydismantleditssuccessor,the
SecondNationalBank,in1836.
InterviewwithCarolynWilkins,August27,2015.
http://qz.com/148399/ben-bernanke-bitcoin-may-hold-long-term-promise/.
InCanada:www.bankofcanada.ca/wpcontent/uploads/2010/11/regulation_canadian_financial.pdf;inthe
UnitedStates:www.federalreserve.gov/pf/pdf/pf_5.pdf.
InterviewwithCarolynWilkins,August27,2015.
“MoneyinaDigitalWorld,”remarksbyCarolynWilkins,SeniorDeputyGovernoroftheBankofCanada,
WilfredLaurierUniversity,Waterloo,Ontario,November13,2014.
InterviewwithCarolynWilkins,August27,2015.
Ibid.
InterviewwithJerryBrito,June29,2015.
InterviewwithSteveBeauregard,April30,2015.
InterviewwithJerryBrito,June29,2015.
DonTapscottandLynneSt.Amour,“TheRemarkableInternetGovernanceNetwork—PartI,”GlobalSolution
NetworksProgram,MartinProsperityInstitute,UniversityofToronto,2014.

56.E-mailcorrespondencewithVintCerf,June12,2015.
57.www.w3.org/Payments/.
58.www.intgovforum.org/cms/wks2015/index.php/proposal/view_public/239.
59.www.internetsociety.org/inet-bangkok/speakers/mr-pindar-wong.
60.AdamKillick,“KnowledgeNetworks,”GlobalSolutionNetworksProgram,MartinProsperityInstitute,
UniversityofToronto,2014.
61.InterviewwithJerryBrito,June29,2015.
62.InterviewwithTylerWinklevoss,June9,2015.
63.InterviewwithJoichiIto,August24,2015.
64.http://coala.global/?page_id=13396.
65.www.digitalchamber.org/.
66.https://blog.coinbase.com/2014/10/13/welcome-john-collins-to-coinbase/.
67.http://www.digitalchamber.org/assets/press-release---g7---for-website.pdf.
68.AnthonyWilliams,“PlatformsforGlobalProblemSolving,”GlobalSolutionNetworksProgram,Martin
ProsperityInstitute,UniversityofToronto2013.
69.InterviewwithBrianForde,June26,2015.
70.InterviewwithGavinAndresen,June8,2015.
71.www3.weforum.org/docs/WEF_GAC15_Technological_Tipping_Points_report_2015.pdf,7.
72.InterviewwithConstanceChoi,April10,2015.
73.Thedigitalrevolutionhasmovedonto“thesecondhalfofthechessboard”—acleverphrasecoinedbythe
AmericaninventorandauthorRayKurzweil.HetellsastoryoftheemperorofChinabeingsodelightedwith
thegameofchessthatheofferedthegame’sinventoranyrewardhedesired.Theinventoraskedforrice.“I
wouldlikeonegrainofriceonthefirstsquareofthechessboard,twograinsofriceonthesecondsquare,four
grainsofriceonthethirdsquare,andsoon,allthewaytothelastsquare,”hesaid.Thinkingthiswouldaddup
toacouplebagsofrice,theemperorhappilyagreed.Hewasmisguided.Whilesmallattheoutset,theamountof
riceescalatestomorethantwobilliongrainshalfwaythroughthechessboard.Thefinalsquarewouldrequire
ninebillionbilliongrainsofrice—enoughtocoverallofEarth.
74.E-mailinterviewwithTimothyDraper,August3,2015.
75.InterviewwithHernandodeSoto,November27,2015.

INDEX
Thepagenumbersinthisindexrefertotheprintedversionofthisbook.Thelinkprovidedwilltakeyoutothe
beginningofthatprintpage.Youmayneedtoscrollforwardfromthatlocationtofindthecorrespondingreference
onyoure-reader.
Abra,20,186–88,325n
Academicinstitutions
asplayersinblockchainecosystem,286
roleinculture,246–49
Accenture,69,70
Accessibility,256–57
Accountability,10,30,108–9,303
inforeignaid,20–21,190–91
ingovernment,23,199,202,207–9,309
inmicrofinance,192
Accounting,63,64,73–79
double-entry,7,74,75,310
triple-entry,77,78–79,180
WorldWideLedger,6–8,75–77,142
Accountingfraud,74,76
AccountingWEB,74
Adams,Scott,106
Advocacynetworks,302–3
Agencycosts,107
Agencyrisk,60
Agenda,fornextdigitalage,307–9
Aggregatingeconomy,17–18,134–35,164–65
AgoraVoting,218–19
Agriculture,138–39,157–58
Airbnb,17,18,115–17,134,135,270
Allaire,Jeremy,71–72,75–76
Allianz,156
AlliedControl,261
Altcoins,60,257
Amazon,13,72–73,118,122,123
AmericanAssociationofIndependentMusic,230
AmericanSocietyofComposers,AuthorsandPublishers(ASCAP),229
Andreessen,Marc,5,9,80,311
AndreessenHorowitz,178–79,284
Andresen,Gavin,51,104,285,305
implementationchallenges,257,260,262,271–72

Angaritis,DinoMark,31–32,115,131,153
Animatingobjects,22,155,156–61
Anti–moneylaundering/knowyourcustomer(AML/KYC),42,44,302
Antonopoulos,Andreas,70,125,128,225,233,255
designprinciples,40,47–48
digitalidentity,15,264–65
re-architectingthefirm,86,96,97,98,102
AOL,255
Apple,13,118,150,161,229,235
Applicationspecificintegratedcircuits(ASICs),261
ArabSpring,200
Ariely,Dan,279
Art(artists),21,239–43
buyingthroughbitcoinblockchain,240–42
ownershiprights,45–49,132–33
profileofnext-genpatron,242–43
Artificialintelligence(AI),91,123,265,274
Artist-centricmusicmodel,231–35
Artistsandrepertoire(A&R),238–39
Artlery,239–43
Ascribe,132–33,243
Assetownership,19–20,193–95
Asymmetriccryptography,39–40
Athey,Susan,111
Attentionmarkets,140–41
Attestation,infinancialservices,56,57,58
Auction/dynamicpricingmechanisms,234
Audits,6–7,63,75–77,78
Augur,82,83,84–85,181,220,224
Australianoutback,powerpoles,145,146–47
Authenticatingidentityandvalue,infinancialservices,61,64
AutomatedClearingHouse(ACH),59,293
Automatedsubsidiaryrightsmanagement,234
Autonomousagents,22,120,121,122–25,126,321–22n
Autonomousvehicles,156–57,165–67
Back,Adam,34,41
“Backdooraccess,”244
Backgroundchecks,176
bAirbnb,115–17
Balanc3,76,178
Bandcamp,235
BankofCanada,9,294,296
BankofEngland,9,294
Bankruptcylaws,174
Banks.SeealsoCentralbanks;Financialservices
unbankedandunderbanked,170–72,175–78
Barclays,68–69,75
BarclaysAccelerator,68–69
Barhydt,Bill,187–88
Beauregard,Steve,297
Behavioralchange,257

Bengloff,Rich,230
Benkler,Yochai,94,107,277
newbusinessmodels,129–30,134,135,139
Bernanke,Ben,294
Berners-Lee,Tim,281
BigBrother,244,274–75
Bigdata,44,151,225
BigSeven,128–42
Birch,David,177
Bitcoin,5–10,278–79
buyingartthroughblockchain,240–43
designprinciples.SeeDesignprinciples
implementationchallenges.SeeImplementationchallenges
theplayers,283–89
BitcoinFoundation,305
BitcoinLightningNetwork,59,288
BitcoinMagazine,279
BitcoinWeekly,279
BitcoinXT,271–72
BitFury,261
BitGo,287,303
BitLicense,286,291
BitMoby,50–51
BitPay,48,72,246,260,263,266
BitTorrent,34,119,246
Black,Doug,292–93
BlackBerry,150
Blackboxmarketing,97
Blackboxofidentity,14–16
Blockapedia,131,224
Blockchain
distributedledgertechnology,6–8,18
governancenetwork,298–308
howitworks,6–8
implementationchallenges.SeeImplementationchallenges
planforprosperity,17–23
playersinecosystem,283–89
promiseandperilof,24–26
rationalexuberancefor,8–10
sevendesignprinciples.SeeDesignprinciples
BlockchainAlliance,303–4
Blockchaincooperatives,134–35
BlockchainIPOs,82–84,127,180,181
Blockchainjudiciary,220–21
Blockchainmakers,138–39
Blockchainvoting,215–17
Blockcom,90,127
BlockingWebsites,244–45
Blockstream,28,38,65–66
Blocktime,255–57
Bootstrapping,34
Boring,Perianne,208,287,288

Boundarychanges,92–109
Boundarydecisions,109–14
Bouvier,Pascal,269
Brand,Stewart,129
BrettonWoodssystem,281,295–96,298
Brito,Jerry,263,264,286,287,291,297,301
BroadcastMusic,Inc.(BMI),229
Brody,Paul,33
Brown,JohnSeely,94
Brown,RichardGendal,69
BTCjam,81
Buildingmanagement,inIoTs,159–60
Businessbuilding,componentsof,179–80
Businessmodels,115–44,168
autonomousagents,122–25
bAirbnbvs.Airbnb,115–17
BigSeven,128–42
distributedapplications,117–22
distributedautonomousenterprises,126–28
hackingyourfuture,142–44
Buterin,Vitalik,87–88,262,278–80
autonomousagents,123,125
consensusmechanisms,31
futarchy,220
re-architectingthefirm,18,87–88,96,100–101
Buzzcar,137
Byrne,David,227
Byrne,Patrick,83
ByzantineGenerals’Problem,241
Cabell,JamesBranch,277
CaliforniaPublicEmployees’RetirementSystem,77
Campusmicrogrids,148
“Canonicalpersona,”16,140
Cap-and-tradesystem,222–23
CapitalintheTwenty-FirstCentury(Piketty),173,175
Carlyle,James,69
Cars,137,164–67,165–67
Cavoukian,Ann,27,28,41,42,51–52,275
CBWBank,73
Ceglowski,Maciej,254,275
Centralbanks(banking),9,31,57,286–87,293–96,309
Cerf,Vint,274,281,299
Chain(company),67–68
ChamberofDigitalCommerce,208,287,288,302,303
Change.org,304
Chase,Robin,137
Chaum,David,4,219
Chesky,Brian,135
China,13,56,174,243–45,264,266–67,272
Choi,Constance,288,307
Christie,Chris,98

Circle,83,284
CircleInternetFinancial,71–72
CiscoQuad,139
CivilJusticeCouncil,U.K.,221
Clark,David,281
Clark,Jeremy,215
Climatechange,149,221–23
Cloudcomputing,118,122
CoalitionforAutomatedLegalApplications(COALA),301–2,303
Coase,Ronald,74,92–93,100,105,121,142,319n
Cohen,Bram,119,262
Coinbase,44,83–84,284,302
CoinCenter,286,287,302,303
CoinPip,217
Collaboration,139–42
Collins,John,302
Colu,238
CommitCoin,215
“Commons-basedpeerproduction,”129
Competitiveadvantage,64,66,110–11,140
Complexinstructionsetcomputer(CISC),260–61
CompuServe,118
Computerviruses,122,123
Computing,evolutionof,150–52
Conflictadjudication,100,105,219,221
Conflictsofinterest,100,125
Consensusmechanisms,30–33,36–37,95,98,262,266,305
ConsensusSystems(ConsenSys),15,87–92,99,101,112–14,130
Consideration,10,30
Conspiracytheories,213
ContentID,235
Contractbreaches,104,258
Contractingcosts,99–101
Contracts.SeeSmartcontracts
Coordinationcosts,92,93,105–7,121,142,166
Copyright,45–49,132–33,228–31,234,236,237–38
Corecompetencies,110–12
Corporateboundaries
changing,92–109
determining,109–14
Corporategovernance,infinancialservices,73–79
Corporations,reconfiguringasengineofcapitalism,21–22.SeealsoNewbusinessmodels;Re-architectingthe
firm
Corruption,19,20–21,50,188–89,193–94,195–96
Counterpartyrisk,59
Coursera,248–49
Creativeindustries.SeeArt;Music
Creditcards,4,36,42–43,62,79
Creditscores,62,79–82,177
Criminaluses,4,9,128,275–76,303
CrisisCommons,189
Crowdfunding,82–83,128,181,245–46

CrowdJury,220–21
Cryptocurrencies,5,9–10
Cryptoeconomics,119,321n
Culture,21,226–50.SeealsoArt;Music
ontheblockchain,249–50
privacy,freespeechandfreepress,243–46
roleofeducation,246–49
Cuomo,Andrew,289
Cyberclones,42
Dataanalytics,233–34
Databreaches,39,43,92,118,151–52
Datamining,36
David,Paul,57
Decentralization,91–92,106–7,117–18,162–63,293–96
DeclarationofIndependence,19
DeclarationofInterdependence,308–9
Deegan,Patrick,81
DeFilippi,Primavera,258,264,265,288
Delegativedemocracy,218–19
Deliberativepolling,223
Deliverynetworks,301–2
Deloitte,68,76–77,78
Democracy,9,13,23.SeealsoGovernments;Voting
alternativemodelsofpoliticsandjustice,218–21
ontheblockchain,214–15
engagingcitizenstosolvebigproblems,221–23
seconderaof,211–15
toolsoftwenty-first-century,223–25
Democratizedentrepreneurship,179–81
DEMOS,215–16
Desertification,149–50
Designprinciples,29–52
distributedpower,33–35
ingovernment,201–3
inclusion,49–51
networkedintegrity,30–33
privacy,41–56
rightspreserved,45–49
security,39–41
valueasincentive,35–39
DeSoto,Hernando
citizenrights,200,201,310
economicrights,19–20,56,174,178,193,194,310
Developers,asplayersinblockchainecosystem,285
Diasporas,306–7
Dictator’slearningcurve,265
DigiCash,4,247
DigitalAssetHoldings,63,65
Digitalbrainstorming,223
Digitalcertificates,40
Digitalcontentmanagementsystem,238

DigitalCurrencyAssociation,U.K.,302
DigitalCurrencyGroup,86,284
DigitalCurrencyInitiative(DCI),247,282,284,286,301,303,305
DigitalEconomy,The(Tapscott),164,212,309
Digitalidentity,15–16,140,176,177–78,197–98,203–4,264–65
Digitalregistryofartwork,132–33,242–43
Digitalrightsmanagement(DRM),132,234
DilbertPrinciple,The(Adams),106
Directdemocracy,214,218
Diseasemanagement,151,158
Disney,Walt,246
Disputeresolution,100,105,193,219,221
Distributedapplications(DApps),117–22
bAirbnb,115–17
Distributedautonomousenterprises(DAEs),22,120,121,126–28,143–44,273–74
Distributedcapitalism,25,49,163
Distributedledgers,6–8,18,64,65,156,181,208–9
Distributedpower,33–35,202
Distributeduseraccounts,37
Documentkeeping,159,205
Domingo,Analie,182–83,186–87,325n
Double-entryaccounting,7,74,75,310
Double-spendproblem,30–31,132
Downey,Paul,205
Draper,Adam,286–87
Draper,Tim,284,310
Drugtherapies,151,158
Dylan,Bob,110
ECash,4
Economicpower,12–13,172–75
Economicrights,19–20,45–49,132–34,172,175
Edelman’sTrustBarometer,10
Education
playersinblockchainecosystem,286
roleinculture,246–49
Edwards,Jim,200
Electricityconsumptionofblockchain,24,259–63
Electronicvoting(e-voting),198,215–17
Ellipse(album),227–28
Emergencyservices,inIoTs,158
Empowerment,107,208
Encryption,28,40,243–44,314n
End-to-end(E2E)e-votingsystems,215–16
Energyconsumptionofblockchain,24,259–63
Energygrids,145–50
Energymanagement,inIoT,157
Enigma,27–28
Enterprisecollaborators,139–42
Entrepreneurship,22–23,179–81
EnvironmentalDefenseFund,222
Environmentalmonitoring,inIoTs,158

Epigraph,194
Ernst&Young,33,36
Essex,Aleks,215
Estonia,197–99,203,204,206–7
Ethereum,37,83,87–88,119,262,278,279–80
Exchangingvalue,infinancialservices,62,64
ExecutiveOrder6102,258
Facebook,13,81,118,140,180,246
Factom,94,194,245–46
FactoryofThings,160
Faircompetition,93–94
Fairfield,Josh,34,263,264,293
Fairtrademusic,227–39
Farming,157–58
FeaturedArtistsCoalition,226
FederalReserve,U.S.,57,174,293,294
FedEx,147
Fiatcurrencies,217,255,292,293–96
cryptocurrenciesvs.,5,38,256,260
FICOscore,80,82
51percentattack,67,266–67,269
Filament,146–48,157,260
Financialaidforstudents,248–49
Financialcrisisof2008,5,10,56,108,193,293,296
Financialidentity,15–16,140,176,177–78,179
Financialinclusion,asfundamentalright,19–20,172,175
Financialintermediaries,56,57,58,61
Financialleverage,56
Financialrisk,59–60,63,64
Financialservices,55–86.SeealsoMicrofinance
blockchainIPOs,82–84
blockchaintransformationsof,8,18–19,58–63,64,128
frameworksforaccountingandcorporategovernance,73–79
GoldenEightof,61–63,64,86
identityissues,61,64,78–79
paradoxesoftraditionalfinance,55–57
playersinblockchainecosystem,285
predictionmarkets,84–85
reputationandcreditscore,79–82
retailservices,71–73
smartdevicesandIoT,159
fromstockexchangestoblockexchanges,63,65–66
Financialstability,295
Financialutility,69–70
FirefoxWeb,129
FirsteraoftheInternet,3–4,12–14,15,39,49,92,95,106,124,265,281–82,299–300
“Float,”45
FNYCapital,83
Foodindustry,138–39,157–58
Ford,Henry,246
Forde,Brian,247,282,286,287,305

Foreignaid,20–21,188–92
Formationcosts,179
Fragmentingpublicdiscourse,212–13
Freeagentnation,110
FreedomofInformationlaws,208–9
Freepress,243–46
Freespeech,243–46
Freitas,Miguel,246
Funding,infinancialservices,62–63,64
Fund-raising,179
Futarchy,220
FutureCrimes(Goodman),276
Future-proofing,152,197
GalaxyZoo,12
Gauck,Joachim,52
Gault,Mike,199
Gemini,284,291
Gems,94–95
Genderdifferences,inbankingaccess,178,192
Germany,27,51–52
GetGems,245
Gibson,William,255
GitHub,89,138
Globalsolutionnetworks(GSNs),283,300–307
Globalstandardsnetworks,304–6
“GodProtocol,The”(Szabo),4–5
Gold,34,95,199,254,260
GoldcorpChallenge,223
GoldenEight,61–63,64,86
GoldmanSachs,66,70,71,284
Goodman,Marc,276
Google,13,96,118,140,143,161,180,255,270,275
Gore,Al,212
Governance,24,283,288–89,307
distributedpower,33–35,273
infinancialservices,73–79
newframeworkforblockchain,298–307
regulationsvs.,296–97
GovernmentDigitalService,U.K.,205
Governments,9,13,23,197–225
alternativemodelsofpoliticsandjustice,218–21
BigBrother,244,274–75
blockchainvoting,215–17
designprinciplesin,201–3
empoweringpeopletoserveselvesandothers,207–11
engagingcitizenstosolvebigproblems,221–23
Estoniaexample,197–99,203,204,206–7
infinancialservicesindustry,70
high-performanceservicesandoperations,203–7
playersinblockchainecosystem,286–87
seconderaofdemocracy,211–15

stiflingortwistingbitcoin,263–65
toolsoftwenty-first-century,223–25
Grande,Ariana,228
Greifeld,Bob,65,66,84
Guardtime,199
Guez,Bruno,238
Gunrights,200–201,276
Gupta,Vinay,226,227
Hacking,39,40,41,118–19,138,151–52,243–44
boundarydecisions,112–14
businessmodelinnovation,142–44
DAEs,273–74
smartthings,168–69
Hagel,John,94
Haiti
earthquakeof2010,20–21,188–89
remittances,183
Haldane,Andrew,9
Hamel,Gary,110
Hanks,Tom,78
Hanson,Robin,220
Hashcash,34
Hashrate,241,260
Hashvalue,32
Hawking,Stephen,274
Healthcare,151,158
Heap,Imogen,21,226,227–28,229,231–35
Hearn,Mike,69,164–65,271,282
HedgeStreet,84
Hedgy,105
Herstattrisk,59–60
Hewlett-Packard,150
Hierarchies,12,88,93–101,105–6
Highlatency,256–57
Hill,Austin,28
designprinciples,38,40–41,43,51
financialservices,63,65–67,76
implementationchallenges,262,272
Holacracy,48–49,88
HollywoodStockExchange,84
Homemanagement,161,275
Homomorphicencryption,28
Honduras,193–95
Honesty,10,11
Horizontalsearch,97
Humanitarianaid,20–21,188–92
HumanRightsWatch,200
HyperledgerProject,69–70,285,305
IBM,39,111,118,129–30,150,153
IBMConnections,139

IBMInstituteforBusinessValue,163
Ideagoras,137,138
Identity,3–4,14–16,264–65.SeealsoDigitalidentity
inbAirbnb,116
forcitizens,197–98,203–4
economicinclusionand,176,177–78
infinancialservices,61,64,78–79
forIoTs,147–48
personalavatars,14–16,45,99,204
privacyand,41–45
Ilves,ToomasHendrik,197
Implementationchallenges,24,195–96,253–77
BigBrotherwatchingyou,274–75
criminaluse,275–76
DAEsformingSkynet,273–74
energyconsumptionunsustainable,259–63
governingprotocols,271–72
governmentsstifleortwistit,263–65
incentivesinadequatefordistributedmasscollaboration,267
jobkiller,270–71
powerfulincumbentsusurpingit,265–67
technologynotreadyforprimetime,254–58
Inaccessibility,256–57
Incentives,35–39,130–31,202,267
Inclusion,49–51,202–3,308
economic,asfundamentalright,19–20,175
Incumbency,265–67
Independentcontractors,103–4,137–38
Industrialblockchain,154,160
Inequality,12–13,173,174,175
Infinitedata,151,162,274–75
Inflation,37–38,256
Infrastructuremanagement,157,206–7
InnoCentive,95,137–38
Inno360,95,137
In-OutMatrix,111–12,112
InstituteforBlockchainStudies,110,204,224,248
InstituteforLibertyandDemocracy,19
Insurance,63,64,116–17,159,181
Insuringvalue,infinancialservices,63,64
Integratedgovernment,203–5
Integrity,10,30–33,74,76,108,199,201–2
Intel,38,155
Intellectualpropertyrights,21
art,239–43
music,226–39
InternationalCorporationforAssignedNamesandNumbers(ICANN),271,281,300,301
InternationalLabourOrganization,172–73
InternationalMonetaryFund,183,281,295
InternationalTelecommunicationsUnion,195
Internet,firstera.SeeFirsteraoftheInternet
InternetEngineeringTaskForce(IETF),271,281,299,305

InternetGovernanceForum(IGF),300
InternetofThings(IoT),3,38,146,147–48,152–55
economicpayoffs,161–64
futuredevelopments,164–67
hackingyourfuture,168–69
publicsectoruseof,206–7
twelvedisruptions,156–61
InternetSociety,281,300
Intrade,84
Investing,infinancialservices,62–63,64
IPOs(initialpublicofferings),82–84,127,180,181
Iran,13
Ito,Joichi,246–49,286,289,301
Jaques,Elliot,106
Jennings,Eric,147–48,157,162–63,260
Jensen,Michael,100,108
Jive,139
Jobanputra,Jalak,287
Jobkiller,270–71
JPMorganChase,8,43,63
JumpstartOurBusinessStartupsAct,82–83
Jurisdictionissues,264
Justicesystem,220–21,223
Kahn,Bob,281
Kahneman,Daniel,279
Kaminska,Izabella,78,257–58,266
Karpeles,Mark,247
Kaye,David,244
Kaye,Max,216
Keating,Zoë,21,235–36,237
Kessler,Sarah,135
Keylesssignatureinfrastructure(KSI),199
Kidder,Tracy,150
Kim,Joyce,170–72,177,287
Kirby,Peter,194
Knowledgenetworks,300–301
Kulin,Haluk,43,46,48,178
Kurzweil,Ray,336n
Labormarkets,270–71
Landtitleregistration,8,19–20,51,188–89,193–95,198
Larsen,Chris,59,67
Lawenforcement,286–87
Lawprofession,102–3
Lawsky,Benjamin,8,287,289–92
Leadership,24,281–309
frameworkforgovernance,298–307
newagendafornextdigitalage,307–9
theplayers,283–89
regulationand,289–93,296–97

Lederman,Leon,4–5
LedgerofEverything,152
LedgerofThings,145–69
economicpayoffs,161–64
evolutionofcomputing,150–52
futuredevelopments,164–67
hackingyourfuture,168–69
InternetofThings,152–55
powertothepeople,146–50
twelvedisruptions,156–61
Legaldisputes,100,105,193,219,221
Legalframeworks,264
Legalrecourse,lackof,258
Lendingvalue,infinancialservices,62,64
Libertarianism,199–200,201,327n
LibraryofCongress,133
Licensedexchanges,291
Lightfoot,Gordon,29
Lighthouse,94
Lih,Andrew,131
Lincoln,Abraham,199
LinkedIn,99
Linux,12,88,129–30,141,282
LinuxFoundation,69,285
Lipset,SeymourMartin,201
Liquiddemocracy,218–19
Liquidity,256,295
Litecoin,257
LitecoinAssociation,267
Literacy,172,195,249
LiveNation,229
Livingstandards,172
Locallygeneratedpower,148,149–50
LondonSchoolofEconomics,74
LO3Energy,148,149
Lubin,Joseph,15–16,88–91,112–13,141,177–78
Ludwin,Adam,68
Lundkvist,Christian,76
Lyft,134,164
MaidSafe,95
Mainframes,150
MalaysiaAirlinesFlightMH370,213
Managers(management)
ConsenSys,89–91
publicsector,206–7
smartdevicesandIoT,157,159–60,161
ManifestofortheDigitalAge,308–9
Manila,remittances,182–83,186
Manufacturing,160,174
Marketing,searchcosts,97
Massiveopenonlinecourses(MOOCs),248–49

Masters,Blythe,8,63,65,66,68,73,287,289
McAdam,Cindy,287
McKinsey,156,163–64,169,194
McLuhan,Marshall,14
McWaters,Jesse,66,306
Meckling,William,100
Medicalrecords,158
Medici,83
Memberownership,89–91
Membersofasocialnetwork,262
Meshnetworks,123,146–47
Metaverse,38
Meteringeconomy,135–36,180,233
MHITs,50–51
Microblogging,246
Microfinance,56,170–72,191–92
currentissueswith,191–92
inclusiondesignprinciple,49–51
Nicaraguaexample,170–72,176
prosperitypassport,177,178
Microgrids,148–50
Micromonetizing,180–81,233
Microsoft,4,150,270,310
MicrosoftYammer,139–40
Millennials,174
Mi.Mu,228
Miners,30–32,240–41,260,267,268–69
Mining,240–41,259–60,268–69
Miningrate,38
MintPal,266
MITBitcoinProject,247
MITDigitalCurrencyInitiative,247,282,284,286,301,303,305
MITMediaLab,27,246–47,286,305
M-of-Nsignature,104
Monegraph,133
Monetarypolicy,37–38,56,294–95,309
Moneylaundering,176,275–76
Monks,Robert,78
Monopolies,57,93–95
Moore’slaw,4,51,307–8
Moreira,Carlos,11,14,15,154,204
Morgan,Pamela,219,287
Mornini,Tom,73–74,77
Morris,Gilbert,173
Motiondetectors,254
Movingvalue,infinancialservices,61,64
M-Pesa,176
Mt.Gox,9,247
Mugabe,Robert,216–17
Muller,Ralf,237–38
Mulligan,Mark,230
Multisignature(multisig),103–5

Multistakeholders,282,297,298–99
Murdoch,Rupert,310
Music,21,226–39
A&R,238–39
basiccopyrightregistration,236,237–38
businesscomplexity,228–31
digitalcontentmanagementsystem,238
emergenceofnewbusinessmodel,231–35
ownershiprights,45–49,132–33
self-launchedartists,235–37
smartcontracts,47,231
Musiccopyright,45–49,132–33,228–31,234,236,237–38
MusicKey,236
Musk,Elon,274
MyBarackObama.com,224
Nadex,84
Napster,21,263
NASDAQ,83–84
NASDAQLinq,65
Nathan,Oz,27–28
NationalInstituteofStandardsandTechnology,40
NationalRifleAssociation,200–201,276
NationalSecurityAgency,42,274
Naturaldisasterrelief,20–21,188–89,190–91
“NatureoftheFirm,The”(Coase),92–93
Nest,275
Networkedinstitutions,306
Networkedintegrity,10,30–33
Networkedintelligence,164
Networkeffects,51,67,175
Networkprotocol,271–72
NeutralVotingBloc(NVB),216
Newbusinessformation,rateof,173–74
Newbusinessmodels,115–44,168
autonomousagents,122–25
bAirbnbvs.Airbnb,115–17
BigSeven,128–42
distributedapplications,117–22
distributedautonomousenterprises,126–28
hackingyourfuture,142–44
NewYorkIDcards,80,176
NewYorkStateDepartmentofFinancialServices(NYDFS),287,289–92
NewYorkStockExchange(NYSE),83–84
Ng,Andrew,248
Nicaraguanmicrofinance,170–72,176
Nielsen,Jakob,51
Nielsen’slawofInternetbandwidth,51,272
Nike,136,180–81
Nodes,32,240–41
Nonces,241
Nondisclosureagreements,235

Nongovernmentorganizations(NGOs),191,287
Norton,Robert,133
OASIS,38
Obama,Barack,213,224–25
OMERSVentures,284
Omohundro,Steve,46–47,109,265,277
Onlinecitizenjuriesandpanels,223
OpenGovernment,209
Opennetworkedenterprises(ONEs),22,120,121–22,128–42
blockchaincooperatives,134–35
blockchainmakers,138–39
enterprisecollaborators,139–42
meteringeconomy,135–36
peerproducers,129–32
platformbuilders,136–38
rightscreators,132–34
Opensource,60,64,69–70,129,262,281–82
OP_RETURN,237–38
Oralagreements,99
Orlando,Jim,284
Orsini,Lawrence,148,149
Ostrom,Elinor,48
Outsourcing,12,93,95,174
Overstock,83
Ownershiprights,45–49,132–34,234
Ownersofcoin,37
Ownersofcomputingpower,37,262
Ownersofdiskstoragespace,262
Pacifico,Paul,226,227
Pacioli,Luca,74,75
Pair,Stephen,48,72,246,260,263,266
Pandit,Vikram,55,59–60
Passingrate,156
Passivecitizenry,211–12
Paul,Rand,199
“Payforsuccess”models,209–10
PayPal,6,80,94,310
Paytoscripthash(P2SH),104
Peercollaborators,139–42
Peerproducers,129–32
PeersInc.(Chase),137
Peer-to-peersharingeconomy,17–18
PeerTracks,238–39
Performancerightsorganizations(PROs),229
PermaRec,76–77
Permissionedblockchains,67–68,86
Personalavatars,14–16,45,99,204
PersonalBlackBoxCompany,43,46,48,49,81,178
Picopayments,191–92,233
Piketty,Thomas,173,175

Piscini,Eric,68,76,185
PlainWritingActof2010,213
Platformbuilders,136–38,304
Poissonprocess,32
Policingcosts,230–31
Policynetworks,302
Politicalbalkanization,212–13
Politicalparties,210–11
Politicalreputations,210–11
Porter,Michael,110–11,314n
Powergrids,145–50
Prahalad,C.K.,110
Predictionmarkets,84–85,98,220,224–25
PrettyGoodPrivacy(PGP),40
Privacy,27–28,41–45,141
bAirbnband,116
BigBrother,244,274–75
breakthrough,42–44
freespeechandfreepress,243–46
governmentand,202,204,274–75
implications,44–45
preservingrightof,48–49,202
principleof,41
problemtobesolved,41–42
PrivacyandBigDataInstitute,27,275
Privateblockchains,67–68
Procter&Gamble,95
Productivity,93,108,110,155,162
Productivityparadox,57
Proofofactivity,32
Proofofasset,38
Proofofburn,315n
Proofofcapacity,32
Proofofdisk,262
ProofofExistence(PoE),46
Proofofproperty,38
Proofofstake,32,40–41,262
Proofofstorage,32–33
Proofofwork(PoW),31,32,35,41,46,241,259,262
51percentattack,67,266–67,269
Propertymanagement,inIoTs,159–60
Propertyrecords,8,19–20,51,188–89,193–95,198
Propertyrights,19–20,48–49,188–90
Prosperity,4,17–23,182–88.SeealsoMicrofinance;Remittances
assetownership,193–95
humanitarianaid,20–21,188–92
implementationchallengesandleadershipopportunities,195–96
roadmapto,178–81
Prosperityparadox,51,172–75
Prosperitypassport,177–78
Prosperitypurgatory,175–76
Prosumers,136–37,180–81

Protocols,271–72
Publicdiscourse,212–13
Publicityrights,48–49
Publickeyinfrastructure(PKI),39–40,43
Publicledgers,242
Publicpolicyandimplementation,213–14,302
Publicvalue,partneringtocreate,209–10
Putin,Vladimir,244
Pyramidofrights,48
Quantumcomputing,277
Rajgopal,Kausik,194
Ramamurthi,Suresh,73
Random-sampleelections,219
Reagan,Ronald,199
Realestate,159–60
Re-architectingthefirm,21–22,87–114.SeealsoNewbusinessmodels
buildingConsenSys,87–92,112–14
changingboundariesofthefirm,92–109
determiningcorporateboundaries,109–14
Recordkeeping,159,205
Recordlabels,228–31,234–35,236
Recruitingprocess,searchcosts,96–97,98
Recyclingequipment,261–62
RedCross,20–21,188–90
Reddit,88,129,130,248,301
Redistributedcapitalism,25,49,163
Reducedinstructionsetcomputer(RISC),260–61
Regulation(regulators),9,174,289–93,295
governancevs.,296–97
playersinblockchainecosystem,286–87
roleinfinancialservicesindustry,70
WorldWideLedger,75–76
Remittances,20,59,182–88
Analie’sstory,182–83,186–87
Renewableenergy,148,149–50
ReportersWithoutBorders,244
Representativedemocracy,211–12,214–15
Reputation,12,16,37
bAirbnband,116
creditscoreand,79–82
fairmusicindustry,234
financialservices,63,64,79–82,84
networkedintegrityand,30–33
peerproductionand,130–31
political,210–11
Requestforproposal(RFP),160
Resiliency,84,148–49,154
Resourceextraction,157–58
Retailbankingservices,71–73
Retailoperationsandsales,inIoTs,161

Revelator,238
Richdatabases,233
Rightscreators,132–34,234
Rightspreservation,45–49,202
“Righttobeforgotten,”78
Ripple,32,37,94,257,262
RippleLabs,59,67
Riskmanagement,59–60,63,64,116
Rivest,Ron,320n
RoblesElvira,Eduardo,218,219
Rodriguez,Keonne,266,274
RonenV,132–33
Roosevelt,FranklinDelano,34
Rossiello,Elizabeth,287
Roth,Kenneth,200
Royalties,229–31,232,233
R3Consortium,69–70,305
Russia,9,243–44,253–54
Safaricom,176
Sales,161,179
SalesforceChatter,139
Salesforce.com,118
Santander,58
Sarbanes-OxleyAct,74
SatoshiNakamoto,5,6,133
designprinciples,29–31,34–37,39–42,50,152,282,308
implementationchallenges,256,263,269
Scalability,152,285,288
ScalingBitcoin,288
Scalingbitcoin.org,305
Scalingignorance,213
Scenarioplanning,223
Schelling,Thomas,279
Scherbius,Arthur,27
Schmidt,Eric,270
Schneider,Nathan,259
Searchcosts,95–99,121–22,142
Securehashalgorithm(SHA-256),32,40,259
Securemultipartycomputation,28
SecuritiesandExchangeCommission(SEC),83
Security,39–41,141,314n
bAirbnband,116
breakthrough,39–41
governmentand,202
implications,41
principleof,39
problemtobesolved,39,255
Self-AwareSystems,46
Self-launchedmusicians,235–37
Self-service,207–11
Sequencesearch,97

Serialexpropriation,200
Serviceaggregators,17–18,134–35,164–65
SETLcoin,70
Settlementrisk,59
Sevendesignprinciples.SeeDesignprinciples
ShapeShift,260
Shapiro,Melanie,287
Shareholders,11,78–79,100,107,125–28
Sharingeconomy,17–18,134–35,187
Sidechains,60
Silbert,Barry,86,284
SilkRoad,9,276
Simplifiedpaymentverification(SPV),50
Simpson,Arianna,287
Skogstad,Anselm,240
Skynet,273
Slack,89
Smartcontracts,101–3,109,126,142,219
aidgroupsand,190
DApps,120,121
definitionof,101–2
MFIsand,192
multisigauthentication,103–5
ownershiprightsand,46–48
forpoliticalreputations,210–11
Smartdevices,150–54
economicpayoffs,161–64
futuredevelopments,164–67
hackingyourfuture,168–69
twelvedisruptions,156–61
Smarthomes,161,275
Smartlocks,117
Smartpills,151,158
Smartwallet,83,131,153
SnowCrash(Stephenson),38,315n
Snowden,Edward,243
Socialcontracts,99
Socialenergy,148–50
Socialproduction,129–32
SocialSecurity,80,176
Societalchange,257–58
SocietyforWorldwideInterbankFinancialTelecommunication(SWIFT),42,59,262
SocietyofEuropeanStageAuthorsandComposers(SESAC),229
Song,Dawn,288
SonyMusicEntertainment,229,230
SoulofaNewMachine,The(Kidder),150
Spain,AgoraVoting,218–19
Spam,34,39,255,321n
Spotify,88,229,230,239,319n
Srinivasan,Balaji,178–79
Stakeholders,262
Standardsnetworks,304–6

Stark,Elizabeth,288
Steiner,Peter,3
Stellar,32,37,170–71
StellarDevelopmentFoundation,170–71
Stephenson,Neal,315
Stiglitz,Joseph,35–36,57,107
Storingvalue,infinancialservices,61–62,64
Storj,95,120
Streamingmusic,229,230
Streamingopenandtrusteddata,208–9
Streamium,233
Studentdebt,248–49
SUber,165–67
Subledger,73–74
Surveillance,25,42,44–45,212,243–44,274–75
Swan,Melanie,110,204,224,247–49
Sybilattacks,36,37,315n
Systemicrisk,59
Szabo,Nick,4–5,37,101–2,255
TalkingHeads,227,228
“Taps,”146–47
Tapscott,Bob,261,268
Taylor,Simon,75
TCP/IP(TransmissionControlProtocol/InternetProtocol),43,50
Technology
democracyand,212–14
asimplementationchallenge,254–58
Termen,LevSergeyevich,253–54,277
Termsofthird-partyengagement,234
Tezos,95
Theoryofthefirm,92–93,100,105–6,121,319n
Theremin,253–54
Thiel,Peter,93–94
360-degreedeals,229
Ticoll,David,25,109,134
Tinsley,Michelle,155
Titleregistration,8,19–20,51,188–89,193–95,198
Todd,Peter,133,268
Toolsofabundance,178–79
Top-downmanagement,89,92,106
Tor,263
Torvalds,Linus,88,282
Totalitarianism,34,52,141,145
TradeNet,165
Tradingvolume,256
Transactionalcapacity,255
Transactioncosts,92–93,95–101,107,142,193,269
Transparency,10,11,298
aidgroupsand,190–91
designprinciplesand,30,39,41,44,45
financialservicesand,66–67,77

governmentandpoliticalinstitutions,205,210,296
MFIsand,192
musicand,232–33,236
Transportation,137,156–57,164–67,206
Treat,David,70
Triple-entryaccounting,77,78–79,180
Trump,Donald,210
Trust
achievinginthedigitalage,10–11
costsof(re-)building,107–9,143
networkedintegrity,30–33
inpoliticalinstitutions,201–2
TrustBarometer,10
Trusteddata,208–9
Trustedsystems.SeeWalledgardens
Trustprotocol,4–6,58,309–11
Turingcompleteness,278
22Hertz,237–38
Twister,246
Twowaypeg,60
Uber,17,118,134,135,164–65,270
Ulbricht,RossWilliam,9
Unbankedandunderbanked,170–72,175–78
Unemployment,173
UNESCO,249
UNICEF,189–90
Unicoin,190
Uniquenodelist,32
UniversalMusic,229,230
Usagedataanalytics,233–34
Utilitygrids,145–50
Valueasincentive,35–39,202
Valueinnovation,60
Valuetemplates,232
Vavilov,Valery,261,268
“Vectorsofdisruption,”163
Vegetabile,Andrew,267
Venturecapitalists(VCs),284,287
Ver,Roger,263,284
VeriCoin,266
VerifyID,116
Verisart,133
Verticalsearch,97
VirtruCorporation,40
Virtualprivatenetworks(VPNs),118
Visa,187–88
Vogogo,72
Voorhees,Erik,56,81–82,260,284
VoterIDfraud,217
Voterintimidation,216–17

Voterturnout,200–201
Voting,198,202,214–15,218–19
electronic(e-voting),198,215–17
Waldemeyer,Moritz,228
Wales,Jimmy,282
Walledgardens,13,70,265
WarnerMusicGroup,229
WassenaarArrangement,243–44
Wastemanagement,inIoTs,157
Watchdognetworks,303–4
Watermanagement,inIoTs,157
WealthofNetworks,The(Benkler),277
Wealthtax,173
WeatherDApp,124–25
Weathernet,123–24
WeatherNodes,123–25,147,158
WesternUnion,20,56,115,185–86,187–88
WhatsApp,184
White,Derek,68–69
Wikinomics,128,137
Wikipedia,12,129,130–32,282
Wilkins,Carolyn,9,294,295–96
Williamson,Oliver,93–94,100,105–6,320n
Windowingstrategy,235–36
Winklevoss,Tyler,175,255–56,301
Winter,Alex,21
Wisdomofthecrowds,84–85,221
WISeKey,11,14,154,204
Womenleadersinblockchain,287–89
Wong,Pindar,300,305
Wood,Gavin,119
WorldBank,193,295,300
WorldEconomicForum(WEF),175,270,306
WorldHealthOrganization,281
WorldTradeOrganization,281
WorldWideLedger,6–8,75–77,95–96,142
WorldWideWebConsortium,271,299
Wozniak,Steve,129,274
Wright,Aaron,103,258,264,265,293
YouTube,230,234,235,236
Zeall,Anson,217
Zelaya,Manuel,193
ZerotoOne(Thiel),94
Zimbabwe,voterintimidation,216–17
Zipcar,134,137,187
Zyskind,Guy,27–28

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