18 October 2017
Samee Zafar

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Samee Zafar - Edgar Dunn Company

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The Bilateralism of Blockchain

06 May 2017  |  7004 views  |  0

Most of us by now have heard, read, and wondered aloud about the idea and impact of blockchain in its various forms and manifestations on how things are done today. Countless commentaries appear in the media. There is detailed analysis by digital pundits every day. There are news and articles about exploratory industry consortiums and pilot projects. A vanguard of startups is already offering various platforms and software solutions.

Most people position blockchain as a change agent so revolutionary that it will, very soon, redefine industries by changing the business models and the underlying business processes. They see immediate and far-reaching consequences especially in banking and payments.

Yet others dismiss it as yet another hyped-up fad, brainchild of ultra-liberal-authority-hating-techno-geeks, with little sense of the pragmatic. It is staple nourishment served at industry conferences, the idea du jour, until it gives way to something more alluring and emblematic.

Is it “disruptive innovation”?
The idea of blockchain cannot, strictly speaking, be classified as disruptive innovation. Strategy theorists, charged with the task of policing the abuse of strategy labels frameworks, and two-by-two matrices, do not classify blockchain as disruptive innovation.

The idea of disruptive innovation in its original sense postulated by Clayton M. Christensen, the famous Harvard Business School professor, who coined the term, and shaped the thinking around it, relates to “a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses”. This is done by meeting the needs of specific customer segments “frequently at a lower price.” These segments are ignored or overlooked by industry incumbents.

Please do not, instruct the strategy police, call it disruptive.

It is a breakthrough
Blockchain may not be disruptive in the strategic sense. But it represents breakthrough strategic thinking as far technology is concerned. If it lives up to its promise, it has the potential of completely rewriting industry business models and rewiring the workflows to put them on solid digital foundations.

Two Harvard Business School professors in a recent article, compared blockchain to something as fundamental as internet messaging.

Traditional messaging worked through the establishment of a dedicated connection between two points. If I wanted to have a voice conversation, send a message, or a fax, my telecommunication company flicked a switch to establish a direct and dedicated connection with the person I want to communicate with. But the internet introduced a different kind of messaging technology called TCP/IP. This did not require a dedicated connection but instead split the content of the message into several smaller digital packets, pumped across over inter-connected networks, and assembled back at the destination. This was how email worked. The technology provided a new “foundational layer” which enabled all the great internet apps and services we use today to be developed.

The “Dao” of blockchain – bilateral applications
Similarly, blockchain provides a new foundational layer for the digital economy.

But blockchain enthusiasts have already identified countless industry applications in every industry sector. Very few have strategic merit and are far from economic realities.

Those who see its potential understand that it will take a long time for business infrastructure to change from what it is today, still highly manual and driven by intermediaries and technical interpreters, to a more inclusive, automated, autonomous, and decentralised infrastructure platform that will allow business to be conducted directly between two transacting parties.
While blockchain can work in many situations with multiple parties and stakeholders, the “dao” (Chinese for the key or the way) of blockchain, so to speak, is “bilateralism” that enables two parties to deal with each other directly without the need for intermediation.

Its first bilateral applications are to be found in finance and payments.

Bilateral payments
Bitcoin is based on blockchain foundational technology. Bank account transfers, credit card payments, PayPal, and all the various payment services that are available across the world require intermediaries to transfer money or exchange value between two parties. Most transactions are completed using clearing and settlement processes. Payments over banking networks, for example, are first cleared (clearing or netting off outgoing against incoming transactions) and then settled (settling the net balance).

Blockchain technology does away with such intermediary-assisted mechanisms of clearing and settlement. Instead of a central processing entity, digital tokens or “coins” that carry intrinsic value are exchanged between the two parties. Like exchanging physical cash or coins this does not involve a third party. Stand-alone or “autonomous” blockchain based eco-systems reward “proof-of-work” generating digital cryptocurrency to reward those who help maintain the system. Coins are “mined” by those who “solve complicated cryptographical puzzles in order to validate transactions and create new blocks” by allocating computer resources to these tasks. Such enormous amounts of computing resources are now dedicated to mining activities and so much power is consumed by these computers that there are now legitimate concerns being raised by environmentalists. Some calculate that by 2020, Bitcoin dedicated computers will consumer as much as energy as a small developed country like Denmark.

There is already discussion of using “proof-of-stake” instead of proof-of-work. Those with greater stake in the system will have better chance of starting a new block. In way of analogies, this approach will “forge” digital wealth rather than “mine” it.

Blockchain technology also ensures that a cryptocurrency unit like a bitcoin cannot be used twice by the same person. It records a payment transaction in an unalterable distributed ledger that can be accessed by anyone so that they can check if the token was transferred legitimately to its present owner and is authentic and valid.

Bilateral stock trades
Stock markets facilitate the purchase and sale of shares that are traded on the exchange. Blockchain technology will not entirely displace conventional stock market processes but can facilitate cheaper and faster execution of trades. Once completed such trades will be available to all those who have access to the system to review. New digital assets created as part of digital platforms including virtual commodities could be listed and traded very quickly. More importantly, stocks and digital assets could be traded and the paperwork completed digitally between individuals from different geographical markets. Currently it is not easy to acquire securities that are listed on exchanges operating in markets other than one’s home market without going through several intermediaries. Blockchain will help automate global stock market deals and can trade in all types of securities or specialise in certain sectors without the need to settle and fulfil security transactions.

Bilateral asset verification and transfer
Blockchain technology can help record transfer of asset ownership whether digital or physical. Again, in today’s analogue world, transfer of an asset, such as property, is usually recorded by third parties, often the government. The process can take an inordinate amount of time and is often riddled with bureaucratic bottlenecks at least in the less efficient economies around the world. Blockchain can be used to record asset transfers and validate ownership which makes it particularly valuable in countries where central government property records are not worth the paper they are written on and loans or mortgages cannot be arranged due to lack of verifiable evidence of ownership.

The world is flat
While blockchain technology facilitates bilateral trade, there is no reason why multilateral contracts or other forms of pre-programmed logic to manage relationships across multiple parties cannot be completed.

These applications, or smart contracts as they are popularly termed, will do the work of lawyers, implementing and executing contracts as and when required. Such platforms will eventually lead to flat-structured widely-distributed organisations that will work by automatic execution of pre-agreed rules. Not all organisations will function like this but such platforms will fit in well with highly collaborative ventures such as software development initiatives where people involved will be able to focus on developing code and content and the platform will take care of the processes and procedures and rewards required to run the venture. There will be issues of-course. Decision making will slow things down as it will be driven by consensus.

It is early days for an autonomous flat organisation to develop and thrive but there are experiments already underway. Ethereum is a platform that provides the foundations of developing such autonomous digital entities. Indeed, one such venture with the generic name of “Digital Autonomous Organisation” or DAO for short was developed by the founders of Ethereum and attracted $150 million in its first fund raising attempt. It has had a bumpy ride with a massive hack that exploited its rules forcing it to divide itself known in blockchain jargon as developing a “hard fork”.

But whether it is “The DAO” or another venture that will truly follow the “dao” of the blockchain remains to be seen, but there is a new birth of bilateralism in the digital world. It provides further proof that the internet continues to bring people together directly making intermediaries redundant or less relevant.

 

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