Blockchain As A Design Principle

By April 22, 2019 Bitcoin Business
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Flow chart or blockchain concept

As one major technology player after another enters the enterprise blockchain arena, each promising some blockchain-based magic bullet such as end-to-end supply chain tracking without fully answering the essential question of how data enters the blockchain in the first place. What is becoming increasingly clear in this emerging technology’s rapid prototyping phase is that to truly harness the potential underpinning blockchain, people should think of it more as a design principle rather than some newfangled technology craze. Doing so would enable a vision beyond the hype and help determine where the use of blockchain, either in a consortium or in single enterprise deployment, is fit for purpose. The hardest part with blockchain and its related technologies, like all digital transformation, is not the tech layer, but rather the lack of expansive thinking in the art of the possible.

If blockchain were a design principle what would its central tenets be? Like all design-based approaches, the first order of business is to parse out goals for a project or effort. All too often, whether it is blockchain or any other technology for that matter, objective-less piloting just for the sake of sounding cool or appeasing management in the “blockchain, we’ve got one boss” response. With blockchain these goals ought to be highly counterintuitive to traditional organizational design and traditional technologies, which are in many ways deployed to maintain or defend status quo, while driving efficiency or increased security for example. All moves aimed at retaining or enhancing control or dependencies for a company’s products or services, rather than ceding control in a distributed manner or enhancing transparency, which are key in blockchain deployments, even among consortia locked in “coopetition.”

An appropriate design objective suitable for blockchain, would be the exact opposite. Rather than centralizing control, blockchain design thinking would call for decentralization and, again in contravention to most organizational norms, a degree of autonomy. In the design of a traditional asymmetrical network, one counterparty typically enjoys an informational advantage over others, which in turn produces excess returns as those informational asymmetries are exploited. An increasing reality is that these asymmetries are not without negative consequences. Consumers just like voters are learning the hard way that bad things happen under the cover of darkness. This is in part how the Wells Fargo customer account duplication scandal was caused. Like other cases of corporate misdeeds an unwitting consumer carries the costs while the company carriers the upside. This erosion of trust is no longer an intangible far off on the horizon issue for organizations to deal with, where numerous examples of corporate reputational risk serve as exhibits A through Z.

While blockchain from a technological point of view does not solve the issue of informational asymmetry, the design principle that every bank account customer should be able to see the same audit trail that the bank sees will only improve trust in banking. This principle would enable consumers to participate in the web of risk management that can stop the string of abuse or corporate misdeeds from happening in the first place. One frequent critique of blockchain and its proof of stake or work processes is that they are computationally intense. As a result, harnessing this feature of blockchain, which is what gives cryptocurrencies like bitcoin their decentralized “trustless” nature, would be in the spirit of reducing transactional friction in traditional business models. The cost of this friction, such as buying a house or commercial real-estate rife with middlemen is prohibitively high - all in the spirit of recording trust and finality between the buyer, the seller and, ultimately, the property register, which itself carries a hefty fee.

On average 10% of home costs in the U.S. stands between the consumer and their dream of home ownership in terms of transactions fees, all to find that they may still fall prey to risks arising from informational asymmetries. In the worst cases, assets are expropriated with the stroke of a pen following a well-placed bribe, or entire parcels of land are striped from their owners due to any manner of large-scale displacement or forced resettlement. In advanced economies this often occurs in the form of eminent domain or following natural disasters, which results in the disaster displaced who must also risk being dispossessed of what is often their most valuable asset, their properties. In the emerging and developing world, property rights, particularly with large swathes of informal housing and slums, are far too fleeting for their occupants to garner any meaningful or transferable equity. For these reasons, blockchain is becoming a favored technology to serve as a veritable backup system or the system of reference for property registries, as in the case of the country Georgia.

Another design principle present in many blockchain consortia, such as R3, which began in the banking sector, or the insurance industry’s riposte, B3i, is the notion of coopetition. Issues that are essentially industry-wide priorities, which for reinsurers might be standardization on reinsurance claim triggers or operating processes, can become more efficient in an environment where all counterparties operate with the same version of the truth, pari passu as it were. This much is what underpins B3i’s promise to the industry and the number of large insurers and reinsurers participating in its network suggests it will have the clout to recommend degrees of standardization and common information sharing using its blockchain platform. The clear drawback of this approach, especially in an industry that faces a digitize or die moment, is that all parties will gain the same net benefits, which in effect could potentially negate any competitive advantages from technology among the risk-averse who opt to not go it alone.

However, that the world’s leading insurers and reinsurers are thinking along these lines could only be good for the world holding the promise that their policies can be liquidated much faster using blockchain-based smart contracts. Indeed, even the great grandfather of the industry, Lloyd’s in its call to future-proof the market following a series of strains on profitability looks a lot like a blockchain solution looking for a problem. The design principle of shared truth or, framed another way, collective witness, is a powerful proposition and can demonstrate for a business, business line, product or service, that a counterparty has nothing to hide. For this design principle to be fully harnessed, at least for population-scale projects, permissioned or private blockchains would miss the mark, since in these instances they would be no better than a typical multi-party ledger or database without the corruption fighting power of sunlight. All true blockchains benefit from tamper-proofing and highly precise audit trails courtesy of the time-stamping features, as well as their distributed nature, which would call for all computer systems to be manipulated simultaneously for a potentially erroneous change to be recorded. This is a much higher burden of trust than most other data systems in use today.

For this, perhaps the most important blockchain design principle is to unleash the art of the possible. If indeed blockchain is a foundational technology like its cousin the internet, then it would stand to reason that merely looking for back office efficiencies (especially with such computationally intense properties such as proof of work, stake or other complex algorithms) may be a fool’s errand. Rather, leaders would be wise in thinking about blockchain as an augmenting technology, one that can push the boundaries of a firm’s reach, derive and deliver value in entirely new ways, while creating a stakeholder lock-in based on trust, transparency and permanence - three things that are in perilously low supply in both private and public enterprises. Arguably, the wave of enterprise blockchain solutions on offer, from IBM’s cybersecurity design center focused on improving cyber hygiene for blockchain deployments, to Oracle’s capabilities, which sit astride the world’s leading database solutions, are designed to enable this type of breakthrough thinking.

In this next movement, it would be wrong to dismiss cryptocurrencies or tokenization (the digital representation of an underlying tangible asset or share, even at the micro level) as gone with deepest cold of crypto winter. Rather, digitizing assets using blockchain-based design principles appears to be in favor among major firms, including its most ardent detractors, such as JP Morgan, which has announced the launch of JPM Coin, ostensibly to find and root out inefficiencies in the sprawling systemic bank and among its millions of customers and counterparties. Herein lies a powerful and oft forgotten distinction between fiat currencies, emblazoned with lofty terms like in god we trust, and their digital twins. Cryptocurrencies and tokens can be coded to perform a specific function, even at the micropayment level, whereas a dollar cannot. That large enterprises with millions if not billions of customers and stakeholders have figured this out, bodes well for the world, provided they get blockchain’s design principles right from the outset.

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