Will block supersede stack?

Don’t be fooled by Bitcoin. It’s an early incarnation, an experiment, of something much bigger. Maybe even a new era.

As of very recently – less than a generation - 100% of world wealth has a smart device. And those devices are always on, and always interconnected. That is a radically different environment from the one that begat our current architectures, designs, business practices. It may be the start of a second generation of computing.

Those of us experienced in the first great age of computers are mostly still wedded to the stack. We were taught the OSI seven layer diagram; communications protocols at the bottom, user interfaces at the top. We had to design around long, slow pipes; limited CPU and RAM. Multiple concurrent sessions could be counted on one hand. Some things have improved - where once we could only use 18 bits to carry reference material in a payment, we’ve now got 140 in SEPA –but most of these innovations are sustaining, not disruptive.

One of the natural design consequences of the ‘stack’ was the single ‘gold’ data record. The amount of money you have is the amount the bank’s systems stack says you have. No argument. Stacks ruled.

Blockchain changes that. ‘The open public ledger with distributed proof of work, is a genuinely new way of solving a problem in the digital world and solving it in a way that has no physical analogue at scale.’ Once more than half the other participants agree the new truth, that’s the new truth. Consensus rules.

The consensus model is still in its early stages; nobody knows how it will develop. Regulators worry about the possibilities:

'it is conceivable in time that there could be an asset price crash among free-floating digital currencies that had the potential to affect financial stability' 

implying perhaps that a consensus model supported and trusted by a large number of disparate people from many nation-states is more vulnerable than a fiat currency supported by a government; an uncertain hypothesis at best.

The regulatory environment established for the ‘stack’ world may inhibit ‘block’ innovation. Whilst the law’s the law, bankers want to create space to see if we can solve old problems in new and better ways. The EBA has recommended that market participants should become ‘obliged entities’, so they can ‘innovate and develop outside of the financial services sector’.

That may help to identify and thus perhaps overcome issues and weaknesses. The Bitcoin experiment has already highlighted at least 3:

1. Identity. The blockchain provides a detailed audit of every transaction, but not of senders and beneficiaries. To some, that makes it an ideal mechanism for anonymous transactions;  at best a niche market. The mainstream market, and its regulators, require direct linkage with the legal entities trading. Technology can provide solutions for that business requirement; for example BitPesa is seeking to exploit Bitcoin as the settlement mechanism between identified and KYC’d actors.  Identity may well be the new money.
2. Settlement costs. In the growth stage, miners are rewarded for their investment in technology and commensurate consumption of electricity with newly-minted Bitcoins; but in the steady state, there are too few new coins available to cost-justify the effort to verify the proof-of-work. Income will then have to come from fees; so one of the oft-quoted key benefits, ‘free’ settlement, won’t sustain.
3. The Rs and the ilities. Not very exciting, but fundamentally important. Returns, recalls, reconciliations. Security, scalability, recoverability. A distributed ledger may reduce, or change, some of this; but it doesn’t obviate it. To establish trust, the keystone of a transactional system, systems and processes have to be bank-grade. Mt Gox didn’t fail because of Bitcoin; it failed because of too little attention to the basics.  That costs; and requires engineers with big-system skills and experience.

Without these, a shiny new thing may soar through the early-stage tests of excitement and innovation, but will struggle with the harder and less press-worthy challenge of commercial scalability. We are fixated with ‘disruptive’ start-ups;  we often ignore the next stage. Few startups survive and prosper beyond the funding rounds.

But there is a fundamental reason why Blockchain, or distributed autonomous computing, or something very like it, is here to stay.

Today’s consumers each have more computing power than space agencies, banks, telcos, research agencies, security agencies, weather forecasters – each had late last century. And all smart devices are interconnected, 24 x 7; so in aggregate, consumers today have far, far more computing power than any other group ever had. Or ever will.

That is a new computing environment. Virtual currencies are unlikely to be the only category for which it provides fertile soil.

Disruptive innovation is invisible when sought out through the norms and standards of today – though it is starkly obvious through hindsight.