Goodbye blockchain, hello ledger

We’ve seen how many bitcoin companies have pivoted away from the digital currency to become blockchain companies. Now, here comes the next pivot: the term “blockchain” is being replaced.

With what? With “distributed ledger”. Not nearly as sexy. But much more accurate, and by that I mean “less confusing”.

We have the bitcoin blockchain. In fact, many insist that the bitcoin blockchain is the only blockchain (“There can be only one”). That is open to fierce debate, and I am in the camp of the many-blockchained universe. I know very smart people who insist that without bitcoin (or other cryptocurrency – and many argue that bitcoin is the only cryptocurrency) as an incentive, the blockchain won’t work. That’s true, if you are operating a blockchain in which the participants don’t know each other. You need a financial incentive to keep it “honest” and to prevent identity-based attempts to control the majority.

But I also know very smart people who insist that blockchains can function well in situations that do not require that level of validation work. If you don’t need the same high level of decentralization and permissionless participation (ie., anyone can join), you don’t need the same incentives. These would be private blockchains, in which the range of participants is limited to a sector or field in which everyone knows each other. While you may not trust everyone in the group, you know who they are and can verify their identity. What you need is a way to allow modifications to the database and the chain of information, while keeping the process transparent.

I’m not going to go into the technical side any more than I already have, at least not today – it’s long-winded and convoluted (and actually only interesting to total geeks like me). To appreciate the trend and the hype, it’s only necessary to grasp the difference between public blockchains such as bitcoin, in which everything is open, transparent and decentralized, and private blockchains, in which participation is limited but which still offers significant business process improvements.

Both systems operate on the same principals, but have slightly different mechanisms. Both technically are “blockchains”. Yet they serve different purposes and have different markets, and calling them both blockchains is generating a lot of confusion. And confusion is not good for new systems struggling to grasp a new concept and explain it to its markets. So, we need to find another name for private blockchains. The obvious choice is “distributed ledger”.  Boring, perhaps. But that’s marketing’s problem. And I’m not sure that the financial sector should sound exciting.

I’m obviously not the only one. Big blockchain players are starting to distance themselves from the “blockchain” label. Some are substituting with “distributed ledger”. Others are not using either. This trend is fascinating to watch, and is just getting started. And in the process, it will bring on a greater clarity of purpose and communication, and foster even more innovation in a sector that really needs it.

Let’s take a look at some of the big names in the blockchain space:

blockchain digital asset holdings

Digital Asset Holdings is arguably one of the biggest. Created as a bridge between the digital currency sector and stuffy Wall Street, it boasts an impressive roster of directors from the financial sector, and deep pockets for blockchain startup acquisitions. Even though its mission is to advance blockchain technology, nowhere on its home page does it mention the word “blockchain”. Nor does the word appear on the explanation of the technology, although “distributed ledger” does.  They do refer to blockchains when talking about their recent acquisitions. But their technology apparently is blockchain-free. Now they call it “Business Logic Engines”. While it’s true that they’re not just focussing on distributed ledgers, it is striking that blockchains are so conspicuously absent from the sales text.

“Our platform can commit transactions to private or public distributed ledgers or traditional databases depending on the requirements of the use case.”

R3CEV has been making headlines recently with its initiative to get big banks to experiment with the blockchain technology. While the press still insists on calling it that, R3CEV has no mention of the blockchain on its home page, not until you get down to the list of press articles about them. They do refer to distributed ledgers, but only once.

Abra, a remittance company that uses the blockchain to send money around the world, has no mention of the blockchain on its home page.  Nor on the “How It Works” page.  If you persist, you can find a well-hidden reference to “modern blockchain technology” on the FAQ section when you click on “What is the technology behind Abra?”.

MoneyCircles is a P2P lending system built on the blockchain, that does not mention blockchain on their home page at all.  When you go to “How it works”, you find it:

“We allow people to create and operate their own credit unions on the Blockchain, which provide savings and lending services to their members without all the usual associated costs and restrictions.”

blockchain safeshare

Safeshare Insurance, which provides insurance for the marketplace economy (sometimes mistakenly called the “sharing economy”) over the blockchain, does not mention blockchains or even ledgers anywhere on their website (that I’ve been able to find, anyway).

BuyCo, which uses the blockchain to make it easier for businesses to get together to buy things, doesn’t mention blockchain anywhere on their home page.

The list goes on…

There’s a whole lot more going on here than a simple re-branding. We’re looking at a clarification, and a step back from the hype. The press will continue to label these companies as “blockchain” players for some time, though. It sounds a lot more interesting than “distributed ledger”, and the press needs a bit of hype to get the clicks. Yet the experimentation on both sides of the bitcoin/not-bitcoin blockchain divide, whatever the system is called, will lead to a greater understanding of the potential, the business models and the economic impact. And we all will get a clearer idea of what the future will look like, with blockchains, distributed ledgers, or whatever the next transformation will be called. Not boring at all.

 

Blockchain and the necessary hype

I was asked this morning if I thought that there was too much hype around the blockchain.

The question, as phrased, is much more complex than it seems. A simple “Yes” or “No” would be completely misleading.

Is there hype? Yes.

Is there too much? No.

And by “no”, I don’t mean that the hype is at just the right amount. By definition, the word “hype” implies “too much”. In other words, I’m not sure that “hype” can be effectively quantified. It’s like saying “I’m a little bit pregnant”. (I’m not, if you were wondering!). You either have hype, or you don’t. From Wikipedia:

“Hype (derived from hyperbole) is promotion, especially promotion consisting of exaggerated claim.”

According to Google Dictionary, hype (verb) means

“To promote or publicize (a product or idea) intensively, often exaggerating its benefits”.

Both definitions, and most of the other ones I found, stress the exaggeration part, without claiming that all hype is inflated. But the implication is there.

So, we don’t have too much hype. However, I am convinced that blockchain technology is not the revolutionary change that the media and even industry experts seem to think. It is a revolutionary change, for sure. And the creative uses emerging across sectors are very, very interesting. But the potential uses are more limited than we are led to believe. And the hurdles in the way of its widespread adoption are much higher.

I’ll happily go into those limitations in more detail in a later post (lots to talk about there). Today I want to explain why I think that the hype, although potentially misplaced, is a good thing. Why we don’t have “too much”.

It’s all about marketing.

Virtually all hyped campaigns promise more than they can deliver. And technological innovation is especially guilty of that. Remember the promise of the paperless office?

To put this into perspective, I thoroughly recommend the paper by Gartner (2011) on hype cycles. You’ll have no difficulty recognizing where the blockchain is. Mass media hype begins? Check. Supplier proliferation? Check. Activity beyond early adopters? Almost.

from "Understanding Gartner's Hype Cycles, 2011" by Jackie Fenn and Mark Raskino
from “Understanding Gartner’s Hype Cycles, 2011” by Jackie Fenn and Mark Raskino

The report goes into much more detail, giving a list of signs that a technology is at the peak (italics = my comments):

  • The trade and business press run frequent stories about the innovation and how early adopters are using it. It’s not exactly correlated, but here’s the number of times “blockchain” has been searched for in Google Trends:

  • A popular name catches on in place of the original, more-academic or specialist engineering terminology; for example, the wireless networking technology called 802.11g became “Wi-Fi.” “Blockchain” is pretty catchy.  
  • Simple, highly exaggerated, nonspecific declarative marketing slogans appear, such as “I have cloud power” and “cloud is the answer.” Uh huh. My favourite so far is “The possibilities for universal disintermediation across all verticals enables [sic] unfathomable, unforeseen opportunities.” I actually find myself saying similar stuff at parties. I don’t get invited to a lot of parties anymore.
  • A surge of suppliers (often 30 or more) offer variations on the innovation. We’re way beyond 30. My preliminary list is up at around 50.
  • Suppliers with products in related markets align their positioning and their marketing with the theme of the innovation. Yes, that’s happened. Non-blockchain technology providers are either pivoting or adding the service.
  • Suppliers can provide one or two references of early adopters. Many early adopters go on to set up their own suppliers.
  • Investors aggressively hunt down a representative supplier for their portfolio. Some early-stage venture capitalists may sell at this point. See the link to “Money keeps pouring into blockchain startups” mentioned above.
  • Toward the end of the peak, one or two early leading suppliers are bought by established companies in expensive, high-profile acquisitions. There has been a ton of M&A activity in the sector. More to come, I imagine. And a list to follow.

So, there is no question that the blockchain world is swimming in hype. Here’s why I don’t think that that’s a bad thing:

One, it’s part of the natural cycle of evolution. Blockchain, as a new technology that has real potential, needs to go through the Gartner cycle. It hasn’t become an industry standard for nothing. The sooner we get through it, the sooner we can put the resulting “trough of disillusionment” behind us and get on with the real work of implementing the efficiencies across sectors.

Two, it’s all about marketing. To get enough industry players interested (and by that I mean all industries), the blockchain needs some powerful marketing. Change is difficult even when it’s obviously needed. The blockchain revolution is not obviously needed. We’ve been getting things done, sending payments, transferring assets and verifying documents just fine for years. When it’s not obviously needed, the resistance to change is very high. In fact, it can probably only be overcome by unrealistic hype. More accurate marketing, along the lines of “this is a new way of structuring distribution that will probably improve efficiency but we don’t really know what the cost or the unintended consequences are going to be and by the way it’s really complicated”, won’t attract the same kind of eager attention that the blockchain needs. The blockchain needs that eager attention because it needs industries in which to test itself. It needs experimentation, exploration and investigation, and without the hype, willing participants will be more difficult to come by.

Now, I’m not advocating reckless exploration. I’m advocating carefully trying things out. R3CEV’s approach to carrying out tests with a consortium of banks seems like a sensible approach, and one that I’m sure (= hoping) many other blockchain service providers will emulate. Would it have managed to convince so many big names to join the experiment if the hype were not at almost peak level? Probably not. But the fact that it did pushes the boundaries of what we know about the possibilities into the realm of practicality, and brings forward eventual implementation. That’s very exciting.

So, yes, there’s hype. And, yes, quite a lot of it is misleading. But it’s a necessary phase for a strong contender for “revolutionary technology of the decade” (no hype there). Without it, we wouldn’t be as far along as we are. And we wouldn’t have the momentum to take us through the next phases and eventually reach practical implementation and successful innovation.

According to the Urban Dictionary, the word “hype” can also mean a lot of other things: a type of drug user, a sarcastic reaction to something that’s not that exciting, and something that’s really cool, fun and noisy. I’m going to go with the last one. Blockchain technology, with all its limitations and upcoming disappointments, is totally hype.

A bouncy bitcoin visualization

Have you seen this? It’s totally hypnotic. You have been warned. It’s also beautifully done. And so over-the-top ridiculous that don’t be surprised if you find yourself laughing. BitBonkers is a physical representation of bitcoin transactions in 3d graphic form. I sat for a while and watched life pass me by, since I wasn’t involved in any of those transactions. And I thoroughly enjoyed myself.

bitbonkers

The balls represent transaction size. The block with the number is the most recent block, and its size. You can move the board around and look at it from any angle (no, you can’t tip all the balls off… although that would be fun!). The attention to detail in this visualization is totally unnecessary. And thoroughly delightful.

Ethereum and Bitcoin

The media seems to relish headlines proclaiming the triumph of a bitcoin rival. And it’s not surprising. Ever since the origins of theatre in ancient Greece we have been fascinated by the inevitable fall of the great and the successful, especially if at the hands of a young competitor. It makes for a very good story, in which we acknowledge the fragility of existence and console ourselves with the knowledge that everything changes. So, the recent headlines will no doubt sound like a compelling combat to the death between Ethereum and Bitcoin, with only one virtual currency emerging victorious.

But it’s not like that. I love a good headline as much as anyone, but positioning the two as competitors does each a disservice. Bitcoin will end up suffering even more blows of misunderstanding and misled scepticism. And Ethereum’s potential will get tarnished with the flimsy “just another virtual currency” brush. The reality is that both can, and should, co-exist, as each targets a different functionality.

ethereum homestead

What is Ethereum, and how is it different from Bitcoin?

It is often labelled an “altcoin” (alternate cryptocurrency), and while that is not inaccurate, it is only a small part of a very big picture. Ethereum does have its own cryptocurrency: ether. But ether is not meant to be a currency as much as it is meant to be used to facilitate Ethereum transactions. It’s complicated, but stick with me.

Glossing over Ethereum’s interesting history and parallels to early computers (which can lead to premature conclusions about its future, I’ll talk about this more another time), the most useful and novel feature is its capacity for complicated instructions. Bitcoin is what they call a “stack” script, which means it executes orders from top to bottom, but it can’t go back a few steps. It can’t loop. Ethereum can include loops, and conditions, and all sorts of cool computing functions that make it flexible and capable of executing relatively complicated sequences. Looping is especially useful for “while this, then that” and “if… then… else” instructions, which contemplate various outcomes and produce different results accordingly. Bitcoin can include “if… then” statements, but if the condition is not met, it simply moves down to the next instruction.

Bitcoin chose to not include “Turing-completeness” (the ability to execute relatively complicated programs) to avoid the possibility of infinite loops. Ethereum gets around this problem by requiring the attachment of a certain amount of “gas”, units of transaction currency which are exchangeable for ether, the official Ethereum currency. Each step in the code packet “spends” a unit of gas. This is what eliminates the problem of infinite loops. Each transaction has a certain amount of gas assigned, each step (including loops) subtracts from the gas available, and when the attached funds run out, the program crashes. End of problem.

Why not just use ether, the official Ethereum currency, to pay for the program execution? Because each function has a set cost in gas units. The exchange rate of ether will fluctuate with the market. By separating the Ethereum currency from the cost of the execution functions, the system strips out the cost volatility, which will make developers’ lives much easier. The cost of an application in gas can remain constant, it won’t need to be frequently updated. What fluctuates is how many gas an ether can buy.

This same system keeps Ethereum light. Running complex code will end up being expensive, not just in computing power and storage, but also in money terms. With each step carrying a cost, developers have a strong incentive to write tight code.

This complexity makes Ethereum ideal for blockchain-based smart contracts. You can issue currency, manage domain registrations, create an identity management system, set up a decentralized social network, program on-blockchain gambling, create Decentralized Autonomous Organizations, file crop insurance, generate financial derivatives, build a blockchain dropbox, run a P2P crowdfunding campaign, set up prediction markets, manage escrow payments, run decentralized auctions, play around with the internet of things, and much more.

A lot of this can also be done on Bitcoin. Theoretically it is possible to do pretty much anything with Bitcoin that you can with Ethereum (note the with Bitcoin, not in Bitcoin). But programming complicated smart contracts in Ethereum is easier.

If Bitcoin can be called “programmable money”, Ethereum is even more so. Only Ethereum is not about “money”. Bitcoin is. And therein lies the main difference. Unlike Bitcoin, ether is not intended to be a universal currency. It is intended to facilitate transactions. Even the Ethereum blog acknowledges the difference: “What Bitcoin does for payments, Ethereum does for anything that can be programmed.”

Ethereum is still new: it only officially launched its development platform last July, with an update released in February 2016, just over a month ago. And as such, it is still relatively untested. Yet that doesn’t seem to dampen enthusiasm. The ecosystem is growing, and includes not only techies but also musicians, artists, politicians, lawyers, sports fans…  I went to an Ethereum event recently in Madrid that ended up standing room only.

The potential of Ethereum as a platform lies in the hands of its developers, very smart people coming up with breathtaking ways of improving efficiency and adding functionality to information transfers. It also lies in the hands of non-developers who want to push the boundaries of what is possible, and to see how far we can reconfigure established ways of doing things. It’s exciting. Both Bitcoin and Ethereum are disruptive and revolutionary. Bitcoin has a longer history (all of six years!), and as a result also has a longer list of problems and obstacles. Ethereum is learning from Bitcoin’s mistakes, and is focussing on a different path, in technical and also in philosophical terms. Both will contribute to a new level of innovation that will have a material and lasting impact on how our society and our economy works. It’s not a competition. It’s a joint project, with the explicit goal of pushing boundaries. Like the Captain said: “To boldly go where no one has gone before.”

ethereum

(For more on how Bitcoin works, see Bitcoin Basics.)