A business model emerges

Actually, IBM’s business model was never really in doubt (unlike some other players in the sector), but it’s worth looking at anyway, for what it says about consortiums and open-source development.

Just under a year ago, IBM announced plans to develop a suite of blockchain services for enterprise clients. Today it revealed the first commercial applications: IBM Blockchain.

Housed in the IBM BlueMix cloud computing store, it differs from the Hyperledger Fabric codebase mainly in the extra security layers.

There’s the business model: while the underlying code is open source (ie. free), IBM will charge for access to the extra secure version.

It makes sense. The target clients are mainly large enterprises, such as financial institutions or conglomerates. They are not going to want even the slightest hint of a risk that their information might not remain secure, or that the processes may get interrupted. Paying extra for access to a blockchain service with additional security features – that is going to save them a lot of money in operation costs – is likely to seem a winning proposition.

Other businesses, such as Microsoft, Intel, Ripple, Chain and R3, have followed the same pattern. The underlying code is free, and the revenue comes from the development of additional services, from consulting fees and in some cases from the sale of specialized hardware and other security precautions.

Why make the underlying code free? To generate a vibrant developer community. If it’s out there for people to tinker with, tinker they will. And while they’re at it, they’ll find bugs, help to fix them, and probably invent some curious use cases that could lead to grand innovations.

It’s curious to think that we live in a time in which proprietary information is no longer the advantage it once was. In the blockchain world, for now at least, success seems to stem from giving your product away, and then charging for the value-added layers. Freemium meets the blockchain.

Whether that will remain the case when blockchain is no longer a “new” technology remains to be seen.

 

 

What trade-oriented blockchains can enable

by Dana Critchlow via StockSnap
by Dana Critchlow via StockSnap

More thoughts on blockchain and trade:

Continuing from yesterday’s post, one aspect I find particularly intriguing about the potential role of the blockchain in international trade is the possibility of linking up the different parts, and what that implies for the future of commerce.

In the shipping trial mentioned yesterday, goods from Schneider Electric were transported on a Maersk Line container vessel from the Port of Rotterdam to the Port of Newark. The Customs Administration of the Netherlands, the US Department of Homeland Security and the US Customs and Border Protection also participated.

And that’s just scratching the surface. Maersk discovered in 2014 that a simple shipment of refrigerated goods from East Africa to Europe can go through 30 different stages, involving more than 200 separate interactions and ‘messages’.

Even if not all of the 30 participants are distinct entities (maybe some work for the same organization but in different departments), that’s a lot of different systems interacting. Setting up a database for all to share is possible on a programming level, but virtually impossible on a governance level. Who decides the format and function? Who controls it? Do all the participants trust that entity?

With a blockchain-based platform, the trust issue becomes less relevant, as all participants will be able to see the information they need and verify that it has not been altered. While the system will need to trust that the data entered is correct (for instance, that the amount in the container coincides with what’s in the document), checks at each stage will pick up errors or attempts at fraud.

Beyond the trust issue, a system that allows verified sharing of information can significantly reduce redundancies. The shipment process consists largely of a sequence of documents, each relying on part of what was in the previous one, and adding new information. This implies a lot of duplicated data. Convert that data into bits and parse it into a shareable format, and duplication – if necessary – is no longer a time-consuming burden.

However, it’s not the added efficiency that most intrigues me.

This is about more than streamlining. It is the beginning of a rethinking of business structures.

We are accustomed to a vertical business world. Enterprises have vertical structures, with parent company at the top and subsidiaries underneath. And each are governed by a combination of rules from the parent domicile and the local jurisdiction.

A blockchain-based system for commerce, on the other hand, is horizontal. It unites not only different participants in different geographical locations, but also in different sectors. There needs to be someone deciding who gets to participate (after all, we are talking about ‘permissioned’ blockchains), but beyond that, it creates a new ‘entity’ with its own set of rules.

This ‘entity’ has a new type of boundary – not corporate, not sectorial, not geographical, and as such, difficult to regulate.

What we are witnessing could be the beginning of a new type of commercial structure, accompanied by a rethinking of legislation.

The result could be a reinforcement of the underlying principles of global commerce: the fair exchange of goods for mutual benefit. With horizontal structures and a changing attitude towards cooperation, emphasis could start to shift from “exchange” to “fair”.

Fraud and the jitters

by Jean-Pierre Brungs for Unsplash
by Jean-Pierre Brungs for Unsplash

All is far from well in the Chinese bond market. And the implications for blockchain technology are deep.

December was not a good month for bond traders. As if the deep slump in bond prices after the US Fed raised rates wasn’t enough, the market was also shaken by two major incidents of fraud.

In one case, the forgery involved papers in which a bank guaranteed a bond that subsequently defaulted. The bank said “not my problem” and refused to honor that guarantee.

In another case, it emerged that two rogue employees of a trading house called Sealand Securities had used a forged company seal to purchase, on behalf of other financial institutions, over 16 billion RMB (almost $2.4bn) worth of bonds. You read that right, “billion”. The bond prices fell, and someone had to make up the loss. Sealand said “not my problem”, the blame lay with the perpetrators, and why not, also with the correspondent financial institutions who “should have checked”.

In the end, Sealand agreed to honour the bond contracts, but the fright did not help market jitters. At least 29 bonds defaulted in 2016, up from 7 the year before. Over 117 billion RMB of sales were canceled or postponed in December, almost four times the amount in November. A government bond index fell 1.7% in December, the steepest monthly decline since October 2013. And with interest rates heading higher and economic difficulties ahead as leverage is reigned in and global trade becomes more, um, complicated, it looks like defaults will continue to increase in 2017.

Tighter regulation and controls could help to calm fears that fraud is making the system more vulnerable. Local media has reported that the government is contemplating the creation of a regulatory body just to focus on systemic risks.

Or, financial institutions could step up their investigations of blockchain technology applications.

On the blockchain, transactions cannot be tampered with, and fraudulent use of signing keys is instantly visible to network participants. An unalterable ledger of events would make accountability more transparent, authorizations can be more tightly controlled, and the falsification of ownership documents ceases to be an issue.

In other words, with financial settlement supported by blockchain technology, fraud would be much more complicated. The incentive would not just be for corporations. With enhanced transparency, government officials would be under greater pressure to clamp down on irregularities, especially given President Xi Jinping’s anti-corruption drive.

China’s financial institutions, tech enterprises, universities and startup community are active in blockchain innovation. The central bank recently announced that it was testing a blockchain-backed digital currency, with a view to using the platform for bank bill transactions.

The government, perhaps aware of the need for speed, is encouraging blockchain research and adoption. In October, the Ministry of Industry and Information released a white paper that explored blockchain applications, particularly in finance, and encouraged businesses to be more active in global experimentation. The same month, the government hosted a forum aimed at fostering cooperation in blockchain development.

Given the obvious need for a lasting solution, we can expect these efforts to intensify over the next few months. But will it be fast enough?

While blockchain-based solutions could restore confidence in the integrity of the bond market and open up channels of financing to a broader range of businesses, it is unlikely that any would be ready for the market in the short term.

The situation is verging on urgent, though, as a rapid build-up of leverage has made firms increasingly vulnerable to an economic downturn or even to a change in market sentiment. A looming trade war with the US, or even military conflict in the South China Seas, could be enough to trigger a string of defaults, which are likely to uncover even more fraud and misappropriated leverage.

The damage could be harsh, in an environment that would already be suffering from economic and geopolitical factors.

Blockchain and IoT examples

The Internet of Things is such a broad and confusing space, with so much potential impact in business, society and home life, that talking about it feels a bit like talking about the universe. After all, what isn’t a “thing” that can be connected to the Internet? When we’re referring to the Internet of Things, do we include our smartphones? Our cars? Our televisions? What about our satellites and our aeroplanes? Our 3d printers and our factory robots? And getting metaphysical on the issue, what about Facebook pages? Video games? Bank accounts? They’re things too, right? But to bring the discussion of the impact of the Internet of Things into the realm of practicality, most studies and businesses focus on gadgets, either big or small. The smartphone is so obviously a thing connected to the Internet that it is usually not featured in the sector studies, except as a conduit for information from other things. The same goes for computers and sensors. Those obviously-connected devices are what we embed in physical things to get them talking to us and to each other. So, when we refer to the “Internet of Things”, or IoT, we’re really talking about things connected via other things. Sensors, computers and phones talking to each other is the backbone of today’s development. But it’s not new and it’s not news. It’s what those sensors, computers and phones are talking about, what data they are transmitting and what objects they represent, that is of interest.

by Todd Quackenbush for Unsplash - blockchain and IoT
by Todd Quackenbush for Unsplash

For this discussion, I’m just focussing on physical gadgets not related to transport, the supply chain or to the energy sector (there’s so much going on there that we have the basis for a separate series of studies). While IoT is already a reality, its impact so far has been useful but fragmented, more an indication of what’s possible tomorrow than what we can change today. Blockchain technology is increasingly looking like a potential unifier for the different device-specific, manufacturer-specific and sector-specific networks currently in operation or under development. Yet its application is still fraught with obstacles and issues, most of which will be overcome with experimentation and creativity. Here I look at some of the more advanced projects participating in this journey – I fully expect that we’ll be hearing more from them in the months to come, as well as adding interesting newcomers to the list.

As with most blockchain activity these days, experimentation in the Internet of Things space is not limited to startups. In one of the first major papers on the subject, at the beginning of 2015 IBM revealed ADEPT (Autonomous Decentralized Peer-to-Peer Telemetry), a proof-of-concept of a universal IoT blockchain platform that combines P2P messaging, BitTorrent and Ethereum. Two interesting case studies were included: a washing machine that can manage its supply of detergent, self-diagnose and solve maintenance issues, and “negotiate” with other household devices the optimum time for an energy-consuming cycle run; and electronic billboards that manage, allocate and automatically charge for ad display. The proof-of-concept code was supposed to be shared on GitHub, although as far as I can tell it hasn’t yet, perhaps because the project leader left IBM at around the time of the paper release. IBM have certainly not been idle, though, and a few months ago revealed that they are working on combining the blockchain with Artificial Intelligence to manage IoT ownership, access and diagnostics. This is part of IBM’s commitment, announced in March 2015, to invest $3bn in the Internet of Things. Yes, that’s billion with a b. This should be fascinating.

One of the best-funded startups in the blockchain + IoT area is US-based Filament, which has received $7.35m in investment from VCs such as Bullpen, Pantera, Verizon, Crosslink, Samsung, Digital Currency Group and others. Its focus is long-range wireless networks, and its main product is the Tap, a device registered on the blockchain with environmental sensors that can integrate with other sensors, and which has a wireless range of over 15km that does not depend on wifi or cellular networks. These sensors help farmers to monitor soil quality, cities to control outdoor lighting, and vending machine operators to optimize inventory, among a host of other potential applications. While most uses at the moment do not need universal registry, the blockchain base will enable connectivity in the future, which will encourage the development of additional efficiencies and possibilities. Running on the bitcoin blockchain allows for micro-transactions, which will open up the project to a wide range of new business models. And if things are going to talk to and transact with each other, they’re going to need Filament’s blockchain-based help with decentralized identity creation for inanimate objects. The Patch, their other main product, is an embeddable version of the Tap that adds wireless connectivity to any hardware. Filament is one of the most advanced IoT and blockchain companies, in that it actually has paying clients and a seemingly viable business model: it owns the sensors, and charges for the configuration, the data, the maintenance and the updates.

IOTA approaches the issue from the other direction. Instead of focussing on the devices, it has created a cryptocurrency to facilitate micro-transactions between devices. Rather than a heavy blockchain, though, it runs on a lightweight “Tangle”, a “block-less” distributed ledger that makes it possible to transact without fees. Tangle doesn’t have miners that need incentivizing, but “verifiers” that are also users. They process transactions as they use the network, which allows for transactions at no cost, ideal for the high-frequency, low-value, light and constant transactions of the Internet of Things. Technically IOTA does not use a blockchain, but I include it here for its decentralized, trust-less approach to the exchange of value, and its innovative approach to the sticky problem of micro-transactions (still relatively expensive, even on the blockchain), both of which could put the goal of a viable and efficient Machine Economy within reach.

Chainofthings focusses on the security of the data collected and uploaded by the Internet of Things. Run as a consortium composed of several startups and established businesses active in the IoT and blockchain space, it supports and collates research and organizes events designed to promote solutions-based exploration. Participants and supporters include blockchains Ethereum, Lisk and Emercoin; IoT startups Filament and IOTA (mentioned above); blockchain businesses Skuchain and Everstore; bitcoin node hardware manufacturer Bitseed; solar power startups SolCrypto, SolarCoin and ElectriCChain; advisory businesses such as Zerado and Neuroware; and large international conglomerates such as electricity company RWE. Its first case study, revealed at a recent Chainofthings event in London, looked at the application of distributed ledgers to solar power generation, and the next one will focus on sensor mobility.

UniquID is a young project that was first presented at the Consensus conference in May 2016. Based in the US and in Italy, it allows users (still in beta) to create a private blockchain which acts like a sort of “wallet”, on which they can register their devices. All devices registered on that blockchain can communicate with each other, without the need for external authentication. Access to these “wallets” could be from a range of configured devices, which would give flexibility to the format and the deployment of these “local” IoT networks. Unlike other efforts in the sector, UniquID’s idea seems to be to maintain the separation of IoT networks, and it remains to be seen how this is better than a simpler database approach.

Riddle&Code is another young project in development, with an interesting twist. According to its website, the platform “connects blockchain technology to real world objects”, which is what most participants in the sector want to do. The twist is that it uses NFC technology that permits the secret exchange of data and of the cryptographic keys that determine who can access that data.

As you can see, the intersection of blockchain and the Internet of Things is attracting attention, but not yet at the scale the potential warrants, and not yet with a “success story” business model (Filament seems to be on the right track, but there is little public information, and it’s still early days). The ideal balance between hardware and software, centralization and decentralization, complexity and convenience will be difficult to find. But it will emerge as the sector gets more competition and as the businesses move along the timeline from idea to implementation to revenues. This progress is worth encouraging, as the end results will not only open up new potential Internet of Things business models. They will also teach us even more about the potential and actual real-world applications of blockchain technology and its derivatives, which will lead to more innovation and creativity. It won’t be easy – there are many conceptual issues revolving around identity and data that will need to be addressed – but the most important things in history never are.

(If I’ve gotten anything wrong on any of the businesses mentioned, please let me know! I don’t ever want to mis-represent a company or an individual, ever. A similar version of this post was published on LinkedIn. I twitter away at @NoelleInMadrid, come and say hi!)

How can the blockchain save the Internet of Things?

Have you ever been to one of those parties in which everyone is talking really loudly at the same time because the noise is such that they can’t tell that the other person’s talking? Let alone hear what they’re saying? Everyone is just shouting into the cacophonic mess of sound and pointlessness?

This isn’t the beginning of a bleak novel about contemporary society, but an apt metaphor for the Internet of Things (IoT). We’re seeing more and more items promising greater smartness all around. And yet we’re not really seeing the benefits of this smartness. I speak as someone who has found it easy to resist the pull of the smart wristband since I really don’t want someone telling me how many steps I need to take before lunch. And knowing how many I have taken wouldn’t make me smarter, just more burdened with guilt, or triumphant with empty victory, depending on the day.

While some gadgets may be useful, many do not compensate the additional hassle with enough additional information to really make a difference. I love the idea of smart lightbulbs. But turning the light on and off was never really very taxing. I wouldn’t say no to a smart toaster. But burnt toast is not the bane of my life. And for a good chuckle, check out WePutAChipInIt.

weputachipinit

A large part of the pointlessness and the noise is due to the limitations of current IoT platforms. We hear a lot about how the Internet of Things will change our daily lives, change our relationship with things, change society… Your connected humidity detector, door lock, refrigerator and mattress not only try to fit into your lifestyle, they also try to feed you (and others) information about that lifestyle. More information than you can possibly absorb (unless you are obsessed with self-quantification, I suppose), and delivered via a multitude of apps in a multitude of formats. Today’s gadgets don’t really talk to each other. The sector is built around hundreds of different systems, each with different interfaces and data sets. And your wristband knows that you’ve had a really hard day but it can’t transmit that information to your stereo so that it can pipe relaxing music through the connected speakers. Your refrigerator knows that you’re low on milk but it can’t coordinate that purchase with your washing machine’s need for detergent.

The Internet of Things is full of efficient if slightly obsessed potential. But until we can start to unify systems and coordinate value, it’s not going to give us the revolution that it promises. APIs and sharing agreements that connect affiliated products are convenient patches, but will always be platform-specific and vertically integrated, rather than universal and horizontal. We end up with atomized services in which we eventually lose interest when something even more compelling and colourful comes along.

We need to figure out how the devices and the gadgets can coordinate, compare and collate the information that we actually can use to improve our productivity and quality of life. We need to find a way to unite the various systems into a compelling web of services that seamlessly runs in the background while we enjoy our enhanced performance and time management. We need to find a way to get our things to talk to each other more than they talk to us. Only then will they work for us, rather than us for them.

Enter: the blockchain.

By now you probably know how the blockchain works (if not, see here). How can the blockchain help with IoT?

In standard IoT devices, embedded sensors track activity, and relay the relevant information through wireless connections to the relevant database or file system, where it is then parsed, formatted and either presented or enacted upon. But the information stays within the device’s network. What if the information could be relayed to the blockchain, where it is combined with information from all the other devices in your life? As well as information from other devices in other people’s lives?

by Tracy Thomas for Unsplash
by Tracy Thomas for Unsplash

Before you cry “Privacy!”, the collective information shared does not have to belong to a personal identity. It could instead be associated with certain parameters (male, young, lives in Frankfurt) that could help to decipher aspects of human behaviour. Collective information about our lifestyle combined with data about our interaction with products and services would enable businesses and institutions to improve design and processes, especially if that information could be shared (again, without “full identity” attached). The economic value of this data exchange and the redistribution of that value could form the basis of a re-thinking of business models and even public finances, but that’s a topic for a different debate.

Back to the blockchain… The technology allows for decentralized sharing of data between participants. It also ensures that the data cannot be falsified or changed. Both of these factors are crucial to the development of a useful IoT network. Decentralized distribution will mean greater engagement, lower costs, greater efficiency and a broader application. And immutable data implies trust, a base requirement for effective use of that data. Machine-to-machine communication could start to replace some human-to-machine communication. That is not as scary as it might seem. Do you really need to be the one to call the dishwasher maintenance guy? Or could your dishwasher do it for you? With decentralization, and no need for trust, you would have a choice of maintenance options, or you could let your machine choose the most economical or fastest option.

Decentralized sharing and immutable data combined with algorithmic options could also lead to a more efficient usage of excess capacity. Driverless cars automatically re-routing according to need. Airplane parts being 3d-printed and shipped directly to where they are needed, rather than sitting in a warehouse. Containers on ships sharing space with other manufacturers, lowering the price of transport.

With distributed data, the end use would be up to the participants. We could have a mixture of private and public entities, each with different objectives, pulling the information that they need for their purposes. A wider choice of information available, with greater applicability and personalization, at a lower overall cost.

And since sensors are much better at multitasking than us humans are, the gain in efficiency would not be a one-time thing, but an exponential improvement in productivity. Sensors embedded in products could also multi-task as tracking devices, ensuring that the microwave, car or computer moves from assembly to final client with a smoother blockchain-based exchange of bills of trade, shipping documentation and sales slips. Fewer delays, less cost overhead and greater transparency… The retailer and the final client would know where the purchase was at any given time, as well as where it was put together and where its components were sourced from.

Imagine sensors embedded into containers of non-IoT items, offering the same trade efficiencies and transparencies by making the containers easy to track and process. Payments could become automatic upon sensor confirmation that the container had reached a certain destination, removing uncertainty, the need for collateral and potential delays. The cost savings of lower overhead and faster delivery could be shared between the manufacturers, the facilitators and the final client, improving economic activity and generating even more trade.

Municipal sensors are already starting to make the concept of smart cities a reality, although the adoption is so far limited and slow. Imagine the impact a blockchain system could have on this potential. Imagine a network of closed data silos opening up to developers from both the public and private sector, as well as to city planners, academics, economists and entrepreneurs, accessible to all but corruptible by no-one, with no single point of failure. Real-time data from real life collective activity, being applied in practical and creative ways.

The potential of IoT technology is exciting, but so far has shown no signs of being able to live up to the hype. Brilliant minds have been and are still coming up with ingenious applications, and the innovation is, well, a lot of fun. But simply enabling connectivity does not necessarily make a device smarter, or us, for that matter. And the noise and overcrowding in our already overloaded attention spans is already starting to drown out the possibility of IoT achieving its full promise. With the application of blockchain technology, however, not only could it start to do so, but it could open up areas of opportunity that even the optimists have not yet seen. New marketplaces, new efficiencies, new business models and economies of scale… Decentralized, distributed networks that allow collaboration and communication between machines, with benefits enjoyed by humans, would create a base from which we could amplify the content and transaction networks of today and reach new levels of productivity. So, it’s not so much a question of the blockchain helping IoT. We need the blockchain to step in and save it.

(This post was originally published on LinkedIn.)

Bitcoin and governments… Wait, what??

Wasn’t bitcoin about evading the control of governments? Weren’t we at the dawn of a truly global currency that knew no politics? What happened to freedom from boundaries? Won’t governments moving in take out all the fun?

No. Bitcoin was and still is about evading the control of governments. But that doesn’t mean that governments can’t also benefit from bitcoin’s advantages. And the official entities aren’t interested in bitcoin as much as in its underlying technology, the blockchain. Governments, both national and local, as well as central banks, are sniffing around, speaking at conferences, writing papers and trying to figure out how this new financial development can extend their reach and reduce their costs. It makes sense.

by Thomas Brault for Unsplash - bitcoin and governments
by Thomas Brault for Unsplash

But how, exactly, can governments use the blockchain? Leaving aside the potential as a currency and the impact on monetary policy, the list of possible uses is long, and includes archive management, welfare distribution, budget allocation, voting mechanisms… A respectable roster of sovereign organizations are officially “investigating the technology”, which sounds very much like a me-too policy. But more and more concrete use-case studies are emerging, with powerful public backing.

The UK government has been particularly active in the sector. Late last year it pledged funding of £10 million to investigate blockchain technology, and has been coming up with interesting applications. From record keeping to tracking financial movements such as student loans and international aid, the Cabinet Office has been running trials on and investigating practical solutions to bureaucracy-heavy processes.

Just a few days ago, the UK government revealed that it is experimenting with distributing welfare payments on the blockchain, through a digital “benefit coin” which could replace welfare payments. This has raised significant privacy concerns, which in turn is generating healthy focus on the technology and debate on the advantages and drawbacks.

Tomorrow the House of Lords is holding a hearing to debate potential governance applications, which you can watch live at this link if you’re interested.

The US government is not quite as proactive in applying blockchain efficiencies, but is stepping up its funding for research projects. In June, it awarded $600,000 in grants to six projects investigating the application of blockchain technology to the issue of identity, privacy and security. And last week it issued a call for papers on blockchain research relating to the healthcare industry.

The US defense and research agency DARPA wants to look at ways to use the blockchain for secure messaging. The Department of Homeland Security is funding research into blockchain authentication of IoT devices. And the initiatives are not just federal: in May the State of Delaware launched an initiative that includes the blockchain trial to store and secure government archives.

Estonia is often held up as an example of blockchain governance. Over a decade ago it launched an e-residency program (not blockchain-based) which allows anyone to establish “fiscal” residence in the nation, to set up companies and administer their finances. Late last year it announced a collaboration with BitNation to offer a blockchain notary service to these e-residents, which would not just cover company documents but also marriage licenses, birth certificates, etc.  Earlier this year it started the process of storing all of its health records on the blockchain.

Ukraine announced a few days ago that it would start to use eAuction, a blockchain-based auction platform, to sell government assets, eliminating the possibility of official interference. A few weeks ago Sweden revealed that it is testing the blockchain for land registration, and the Republic of Georgia has been trialling blockchain-based land titling since April. The city of Zug, in Switzerland, allows its residents to pay for public services with bitcoin. The Finnish city of Kouvola has just received €2.4m of public funding for a blockchain-based smart container shipping system.

In spite of the huge potential scope, it does look like the most advanced initial projects are the relatively “easy” ones of managing documents. Which is, of course, totally understandable, as well as efficient and necessary. The problem in most cases is not that the systems are not digital. The problem is more one of inter-communication between different systems, and the portability of data. A file on one system in this day and age still needs to be replicated on another, even if the end use is similar, and even if the end owner of that information is the same. The blockchain gives governments the opportunity to streamline processes, optimize storage, and extract and share more useful information while keeping it private and secure. The integrity of public registries is fundamental, not only as a matter of trust in authority, but because the information they contain – property and automobile ownership, passports, birth certificates, marriage certificates, business licenses, penal records, and a long etc. – is often the base of a democracy and an economy.

A few intrepid initiatives are looking at the sticky problem of voting, an issue which fundamentally affects most sovereign nations in this day and age. The current process is cumbersome, inefficient and often subject to tampering. But since this revolves around the even sticker problem of online identity, few initiatives have progressed much beyond the initial stage.

The will is there, though, and it is only a matter of time. Most governments have moved from rejecting the frivolous notion of a universal and immutable digital currency, to realizing that bitcoin is just a certain type of information, and that the blockchain can be used for other types of information as well. We have seen some practical applications, and will see many more emerge over the coming months. And we will all of us, soon, be enjoying greater blockchain-enhanced bureaucratic efficiency, without even noticing the technology that makes it work.

Identity and the blockchain: what are we looking for, anyway?

Identity theft and falsification has been a problem ever since, well, since identities were identities. And it’s easy to understand why. Apart from political necessity (the need to escape persecution), there’s criminal intent (I’m harder to catch if you don’t know who I really am), and the frivolous desire for fun (so I’m not really responsible for what I do). Most of us have seen those movies, read those books and played the game of fantasizing about being someone else for a while.

And as the headlines and the police constantly remind us, online it is so easy to become someone else. Pseudo Twitter accounts, fake Facebook profiles and anonymous chat room IDs are the tip of the iceberg when it comes to assuming the personalities of others. You’ve probably seen the famous New Yorker cartoon:

Internet_dog - identity

So far we have not yet found a way to get around the problem. And the more we think about it, the less clear the problem becomes.

Is it one of identity verification? Is it one of identity portability? Or is it more a question of showing the right things to the right people at the right time? What exactly is it that we’re looking for?

We haven’t found an ideal solution yet, but we seem to be getting close. The technology of the blockchain – the public, decentralized database that is hard to hack and modify but easy to distribute – has opened up new possibilities that could solve some of the stubborn barriers that online identity has been coming up against.

The advantage of the blockchain is that just about anything can be digitized, hashed (compressed) and stored. Because the ledger is public, the information can be accessed from anywhere, and sent to anyone. It can only be modified by the holder(s) of the private keys. And because the ledger is decentralized, no one person or entity can stop it from being used.

You’re no doubt asking yourself, “in what way would that stop falsification?”. Obviously just putting information on the blockchain doesn’t make it true.

by Kantemir Kertiev for Unsplash
by Kantemir Kertiev for Unsplash

Several blockchain business have emerged, hoping to make identities easier to create and use. And yet most focus on identity management rather than verification. Netki announced a funding round of $3.5 million a few days ago, to develop a digital certificate of identity, piggybacking on an official US identity program and making it usable on any blockchain. ShoCard wants to use the bitcoin blockchain for identity tokens that can not only be used by banks to identify transactors, but can also change the way we travel by holding our passport details, photo, airline tickets, hotel reservation… It can be pulled from the blockchain for confirmation by any airline or airport official, anywhere in the world.

Object-Collab is a research and proof-of-concept project working with banks and regulators around the world to design a global ID that is individual, secure and accessible from anywhere. Cambridge Blockchain offers a platform that allows transacting parties to learn certain types of information about one another without compromising their full privacy. BitID wants to convert your bitcoin wallet into a unique and universal ID that would allow you to pay for goods online, check in to hotels, authenticate identity on websites… Trunomi makes KYC easier for financial institutions, and facilitates consent-based sharing of financial data. Cryptid uploads your official ID onto the blockchain, and assigns you a card along with a QR code that makes the ID more portable and more secure. Civic’s goal is not to issue nor to manage your identity, but to protect it by letting you know every time it is used online. Identifi combines identity with reputation.

And thinking big, BitNation offers a global ID that accompanies your passport, allowing you to become a “world citizen”. For those without a passport, it can issue a Blockchain Emergency ID to facilitate refugee access to aid and donations. These are just some of the ideas and businesses tackling the identity issue, and we will no doubt be hearing more about these and others in the months to come.

Big tech companies are also very interested in the field. A few days ago IBM completed a blockchain identity trial with French bank Crédit Mutuel that would allow banks to securely share their customers’ identities with third parties such as utility companies and online businesses. A few weeks ago Microsoft announced a collaboration with Ethereum developer Consensys and Blockstack to build an open-source identity platform that bridges Bitcoin and Ethereum.

With so much brain power and money behind the search for a solution, why is it proving so elusive? Some say that it’s because the solutions are too fragmented. I believe that it’s because we’re asking too much of the solution.

What is identity, anyway? I’m currently reading Richard Morgan’s Altered Carbon. In it, the protagonist is digitally sent back to Earth and assigned a “sleeve” (someone else’s body). But he’s himself, using his own name, and carrying around his own complicated past. His body is just a garment. Given that we can’t disassociate ourselves from our bodies, what are we? Are we our past? Our thoughts? Our abilities? Or are we something more solid? Perhaps an amalgam of our history and our qualifications, represented by a set of physical features. Given that both our past and our physiques are constantly changing, how can these relatively fluid concepts irrefutably identify us?

And, why do we need it? For transactions? Access? Privileges? Each “need” requires proof of different aspects of our self. My passport alone won’t get me a job, or a discount at the college bookstore. My job title is not enough to allow me into a country, or entitle me to a tax rebate. The fact that I’m a CFA won’t let me open a bank account, or get me treated at the local hospital.

We live in a world of fragmented identity, with different organizations issuing different validations for different requirements. As we have seen above, many blockchain services are trying to find a solution of unification and portability. But is this even possible? We can upload our identity (or identities) online, adapt them for many uses, send them around the world. But what identity? Who issues that which we upload? And how does anyone know that it is correct? Identity documents, after all, are only as trustworthy as the issuer. My British passport carries more weight than my coupon card from Val’s Laundromat.

It is also much more useful, and much, much harder to fake. But it can be done. Getting a passport is not easy, but as we know, false ones are available to those with the right connections and resources. Which highlights the difficulty, if not impossibility, of truly verified identities online. If identities can be faked offline, it’s even easier when you can’t look the person in the eye. Photos of smiling faces holding identity documents to prove physical similarities can be doctored. Scans of official documents can be manipulated. Signatures can be forged. Links can be diverted. Identity creation, validation (which is not the same as verification), dissemination and protection are all fundamental for secure online transactions. But they don’t address the issue of what identity is, and how we can be sure that it’s real.

Maybe there is no “one identity” that will do. And maybe that is just fine. Maybe we need to rethink at the concept of identity for this new, hyper-connected and multi-layered world. Online it’s easy to be many different people. Offline, it’s harder. So, maybe we need to forget about the search for how to represent one true identity, and focus on what that identity is needed for. What characteristics does it need to have?

In “Identity is the New Money”, David Birch proposes fragmenting our identities and offering the part that is needed according to the situation. Notice the plural – online, most of us have more than one identity, often without realising it. We sign in to services using different avatars. We use different platforms for different reasons. And while the superficial identities are easy to set-up and destroy, that doesn’t make them any less real.

“All of the identities we exchange are virtual, and while these virtual identities are of course linked to our mundane identities, they should not be confused. None of them is ‘real’.”

So the search for the “real identity solution” is looking for something that doesn’t exist, because there is no one particular universal format or need. Maybe the answer lies not in finding the solution that fulfils all needs, but in finding a multi-format but coherent solution that adapts to whatever the need is. A solution that is secure but updatable, easy to share but difficult to steal, decentralized but universal, adaptable but compact… This sounds complex, as are the issues around who would create such a system and how it would be maintained. But well designed and implemented, on a public blockchain, with official involvement and creative leeway for businesses and services, its use could end up being simple. And if it works, and if users, businesses, regulators and governments learn to trust it, the opportunities it opens up for efficiency, safety, wealth creation and freedom are immense.

(This article was first published on LinkedIn. I’m not sure which is more efficient, to post there or here first. Advice welcome.)

What is Proof of Stake?

Bitcoin relies on a system called Proof of Work to ensure consensus and security on a blockchain. So do other cryptocurrencies such as Peercoin, NXT, Nubits, Qora and Bitshares,  But some strongly believe that Proof of Work is wasteful and unreliable, and instead implement an alternative system called Proof of Stake.

by Len de la Cruz for Unsplash
by Len de la Cruz for Unsplash

How does Proof of Stake work? By offering the chance to validate a block of transactions, and to receive the corresponding reward, to holders of the currency in question.

In Proof of Work, those most likely to validate a block are those with the most computing power. Taking control of the blockchain is, then, a question of churning computations, and would be prohibitively expensive. Work = cost. That is how Proof of Work secures the blockchain, by making it too expensive to retroactively change, and too difficult to control going forward. Consensus is understood to be the chain with the most work behind it, ie. with the greatest number of validated blocks (technically it is possible to have a sequence of blocks with a relatively low level of work behind them, but it is rare).

In Proof of Stake, holders of the underlying currency “deposit”, “pledge” or “bond” an amount, in exchange for the right to validate blocks. Generally, the likelihood that they will successfully validate a block is in proportion to the amount deposited. Security is achieved by the high cost required to control the majority of the network (a validator would have to hold over half of the market capitalization!). Consensus is achieved by the assumption that stakeholders have a strong interest in the health of the network. If trust disappears because of suspected bad behaviour, the value of the currency will crash and the manipulator’s holdings will be worthless. With Proof of Stake, trust becomes a self-fulfilling prophecy.

Also, Proof of Stake in theory is more democratic. With Proof of Work, influence tends to concentrate in the hands of those with the most powerful computers. Not everyone has the wealth to purchase or the skill to maintain that level of equipment. With Proof of Stake, the validation can be done on any computer. The investment required is in the actual currency itself.

Yet Proof of Stake in its simplest form is not conducive to reaching a consensus, since there is no cost associated with mining on a chain. In Proof of Work, if you mine on the wrong chain, you lose the amount that you invested in doing that work (= the cost). In Proof of Stake, it doesn’t matter which chain you try to mine on. You’re depositing an amount of currency, not incurring a cost. If it turns out that you’re trying to mine on the wrong one, you lose very little. In fact, you could theoretically mine on several chains at the same time, since there is no additional cost for doing so. This makes consensus harder to achieve.

And it will obviously lead to increasing concentration, not ideal for a decentralized concept. Why increasing concentration? Because if those that have the highest stakes are more likely to receive the newly issued coins, then their stakes will become even greater, which will make them even likelier to receive the newly issued coins, etc.

So, the currencies that use it have solved these weaknesses by tweaking and adding features, often ending up with a hybrid system that includes some Proof of Work characteristics.

For instance:

One of the earliest examples of Proof of Stake was PPCoin, subsequently called PeerCoin, in which miners process blocks by submitting a stake. They do this by sending to themselves a chunk of their own coins. Only PeerCoins that have been held for at least 30 days can be used for this, and the longer they have been held without being used (up until 90 days), the higher the chance that block production process has of being successful. Once used, the stake has to sit idle for 520 days. This system ensures that the minting of new coins does not concentrate in the hands of a few participants. The consensus chain is the one with the highest “consumed coin age” behind it. Peercoin also allows for Proof of Work mining as an alternative, but this is being phased out as Proof of Stake becomes more important to the network.

NXT was the first 100% Proof of Stake currency. Block validators are selected at random based on the amount of the currency they hold, and everyone knows who the next miner is going to be. This makes double-spending very difficult, as it the whole network will be able to see if a transaction occurred or not. NXT does not offer fresh coins as a reward for validation – all 1bn coins were created at launch. Block validators focus on maintaining a healthy network, which will increase the value of their stake.

Bitshares uses a derivative called Delegated Proof of Stake, in which wallet holders elect 101 delegates who carry out the voting on which transactions get validated. These delegates take turns producing a block every 10 seconds, in a random manner. This is a less decentralized system than simple Proof of Stake, but more manageable.

Ethereum, the second largest cryptocurrency by market capitalization, currently uses Proof of Work, but plans to move over to a Proof of Stake variation some time in 2017. The twist that Ethereum plans to put on the concept is that validators have a “stake” in the outcome. They stand to lose out if they mine on the wrong chain. To earn the right to try to mine, participants submit a deposit, and are then invited to “bet” on which block will be validated next. Yes, you heard right, you “guess” (presumably in an experienced and insightful way) which block will be the next one to be included in the chain. If you guess right (= if you bet well), you get a reward. If not, you lose your bet. This will make consensus naturally easy to achieve – everyone sees where everyone else is concentrating, and converges on that chain.

As you’ve probably noticed, securing a network and identifying consensus in a decentralized public network that is not controlled by any one entity, is not at all simple. Both systems – Proof of Work and Proof of Stake – are totally ingenious, even though they both have their flaws. Will one turn out to be much better than the others? It’s way too soon to tell. Proof of Work has served Bitcoin well over the past seven years, but the cost and the centralization are becoming serious issues as the profitability of mining falls. Will it withstand the test of time? Proof of Stake has yet to find the magic formula that combines efficiency, security and decentralization. But that doesn’t mean that it won’t happen. We are still in the experimentation phase, launching ideas into the wild and seeing what adaptations and unexpected consequences the users come up with. And the cryptocurrency sector may well end up converging on something totally different. What is most likely, though, is that we will end up with an ecosystem that supports and nurtures combinations of what we have now. And it will be very interesting to see if we can reach a consensus on consensus.

Blockchain electricity

I’ve been doing some research recently into the role that blockchains could play in the management of supply chains. The fit seems obvious (one chain on top of another… geddit?), but it’s actually complex, and the potential impact is huge. In brief (and I’ll go into more detail in other posts), the blockchain could be used to track the progress of a good as it passes from one development stage to another. From design through to production through to shipping, with components’ information verified and embedded. Less bureaucracy, fewer middlemen, less chance of corruption, contamination or substitution. Greater transparency, lower costs. There’s a lot to talk about here.

But let’s step to one side for a moment and look at a supply chain that doesn’t move physical goods, or even digital goods. A supply chain that moves energy. The electricity grid. How can the blockchain help there?

From distributed generation to micro-supply, innovators both large and small are coming up with unusual ideas. Here are some examples:

RWE, a large German electricity producer, is working on a prototype (together with Ethereum Internet of Things specialist Slock.it) for an electric car charging station that communicates directly with your car. Your car downloads the electricity it needs, either at a plug-in station or while stationary over an induction point (such as at traffic lights), and pays exactly the right amount via its digital wallet on the blockchain. The contract is between the charging station and your car. Neither you nor the energy company need to get involved.  This system, if extended, would not only make it possible to keep your car charged in any country, since a contract with an electricity company is not needed. It also would make fleets of driverless cars more economically and logistically feasible, since responsibility for charging would fall to the car, not the owner.

Taking a huge distributed step forward, TransActive Grid (a joint venture between distributed tech company L03 Energy and Ethereum developer Consensys) can set up solar panels on your roof, and enable you to sell any excess electricity you generate to your neighbours through a “microgrid”. The aim isn’t to replace the big electricity companies, but to see if a peer-to-peer electricity network is technologically possible. At the moment the main obstacle is that these exchanges have to happen off the electricity grid, which puts physical barriers (distance) in the way of their potential spread. But if the exchange turns out to be practical, grid regulation could in the future allow adaptation of the existing electricity network. This experiment is already underway in Brooklyn, NY, and the first transaction took place successfully just a couple of weeks ago.

On the quirky end of the spectrum, SolarChange was created to reward generators of solar power, via the blockchain. For every 1Mw of green electricity produced, the producer is awarded 1 SolarCoin, which can be stored in a SolarCoin wallet and held for value appreciation, or converted into bitcoin (the current exchange rate is 0.00010001 BTC, or about 5 cents – a year ago it was a tenth of that).

solarcoin

Not as much for decentralized supply as for decentralized funding, South-Africa based Bankymoon – which develops bitcoin payment gateways for smart electricity meters – has set up Usizo, a crowdfunding platform for electricity supply. Schools are equipped with a smart meter, and donors are invited to contribute to the school’s electricity supply by sending bitcoin to the meter’s bitcoin address. Talk about a feel-good application.

Usizo - blockchain electricity

They are supported in this project by Vienna-based Grid Singularity, cofounded and led by some of Ethereum’s core team (and Bankymoon’s founder Lorien Gamaroff is a “Vision Partner”). Grid Singularity is developing a platform to use blockchain technology to connect power companies, and is exploring how to use the blockchain for smart grid management, energy trade verification and other applications. Their focus is use in developing countries, to help develop their solar energy deployment.

And as if to prove that things are warming up in the sector (there are so many opportunities for puns in this topic), just last week a potential new entrant emerged. Consensus 2016, a big bitcoin and blockchain conference organized by CoinDesk, was in full swing in New York. One of their features is a hackathon, in which ideas using the blockchain to improve lives compete for a $5,000 prize. Not a lot of money, true, but the PR isn’t bad. The winner this year is, drumroll, Decentralized Energy Utility, which aims to enable a network of smart meters and blockchain-based payments.

So, while the current electricity grid system is not about to be disrupted tomorrow, the talk about the blockchain disrupting the power supply seems to be passing from the theoretical to the practical. The potential is huge. Decentralized energy is more secure (less likelihood of power outages), involves less wastage (the power goes to where it’s needed), and once scale is reached, will save money (lower generation, distribution and maintenance costs). It also puts efficient electricity within reach of those without a bank account, even those without access to the power grid. Could we be witnessing the beginning of a fragmentation of the electricity market? How will this play out with the regulators? Could it be that the blockchain will reverse the centralization tendency of capitalism? With the stage set for the first act of a suspenseful disruption, the pre-show performance looks promising, and the cast of characters looks hopeful.

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.