Earlier this week, I was asked my views on the scalability of blockchain-based cryptocurrencies. Generally, I have avoided being sucked into blockchain discussions, particularly for cryptocurrencies; there is such a cluster of energy and momentum and opportunistic truth-sayers that it is difficult to believe an additional voice will be heard. But the chance to reflect on the issue, and the alternative arguments, produced the following analysis.
Distinguishing the Data Asset in Play
We need to begin by understanding what blockchain technology is trying to accomplish. In my opinion, the true potential for blockchain has absolutely nothing to do with security or overcoming centralized ledgers and their inherent risk-based features. What bitcoin represents is the first formalization of a digital data asset that can be exchanged as property with a value that is mutually agreed upon by the transaction participants.
In 1993, I first understood that the innovations of the time were producing a movement toward creating digital information as property—an asset that can be purchased, sold, transferred, exchanged, licensed, and stolen. If every transaction is, in essence, a barter exchange of assets or services for which the participants have established value, then for data to be an asset in those transactions, there must be a mechanism with which to calculate its value. Admittedly, the parties may assign different values to the same asset (and a key contributor to those calculations is the future utility of the asset to each party for performing other work or other transactions), but the values are calculable with a fair degree of confidence.
I do not really care what a crypto-currency is, or the name by which a unit of that currency is described—a coin or a token, etc. What I care about is that the systems and processes and controls with which that asset has been created, controlled, and secured enable the parties to calculate equivalent values. Those values may be expressed in national money units (dollars, euros, dinars) or units of physical goods or services (a kilo of marijuana or an hour of legal services or 2 minutes of processing time on an AI machine).
The key attributes that enable those calculations are tied to transparency, provenance, and trustworthiness. But there is one more important attribute—a forward-looking calculation of the liquidity of the data asset. When real money is offered in a transaction, issued by a nation state, the acceptance of the money is easily achieved. The receiving party knows they can turn around and use that money as a tradeable asset with reasonably certain value in the next transaction.
The value of any coin or token asset offered in a transaction by a buyer is inherently a function of its liquidity in future transactions. If there is no perceived liquidity, or if the future liquidity of that asset is uncertain, the value of that coin or token in a specific transaction will be calculated at a lower value.
Here is where Bitcoin and Ethereum have achieved such a significant head start—the quality and integrity of what they have built enabled a rapid acceleration in the quantity and diversity of transactions in which the coin or token or ether had predictable liquidity and calculable value. Ironically, while the early advocates claim their systems require no trust, the systems as a whole are only working because they are calculated to be trusted to create digital assets that have liquidity and calculable value.
By design, Bitcoin also has inherent scarcity. There will be only so many bitcoins generated and, in doing so, the original engineers built in another key element for any asset to have transaction value—scarcity and uniqueness. I am not following all of the other crypto-currencies (see disclaimer above), but they are being developed in direct response to the scarcity attribute—the market demand for liquid digital assets with calculable tradeable value is accelerating; an alternative to scarcity (think about gold and its historic role as a tradeable asset) is to create alternatives, in the form of national currencies.
So, what does that have to do with a database of sales activities by retailers of carbon fiber bicycle wheels in the 15 zip codes closest to Durham, North Carolina? Well, that is a digital asset. For that database to have tradeable value (e.g., as something to be licensed and updated every month), the buyer will bring to the calculation of value the same questions, the same rules, and the appetite for similar performance information as any prospective receiver of a crypto-currency may impose.
This is what makes blockchain fascinating—it has accelerated and integrated into a consistent technical architecture the mechanisms for responding to those questions, rules, and information demands. But the data asset in play does not have to be a coin or a token or a unit of ether. It can also be any digital asset record such as the sales database. The receiving party has the same questions, rules and appetite as in any crypto-currency transaction. If the due diligence produces acceptable outcomes, the value of that data asset is more capable of being calculated.
Admittedly, a sales database on bicycle wheels may not have much liquidity in downstream transactions, and there may be requirements imposed by the database owner that prohibit those transactions. But there will be nearly infinite numbers of other data assets which will have liquidity downstream, if there value can be calculated to a level of precision that enables the downstream barters to be made.
The key will be finding the data assets that have calculable value and liquidity. My instinct is to believe that current crypto-currencies will fade from popularity as other data assets emerge that have those attributes. But concerns of scalability are offset by the lack of liquidity any of them may achieve. Crypto-currency visionaries imagined their coins could replace national currencies, notable the US dollar. The theoretical construct is there, but only if the liquidity can be underwritten by the issuers of those national currencies. That will be unlikely.
But once we recognize that blockchain delivers the means of assuring any data asset is secure, trusted, and unique (i.e., having scarcity), it is entirely foreseeable that many different blockchain ecosystems will emerge that will enable specific data assets to become functional assets in digital transactions.
To Decentralize or Not to Decentralize-That is the Question
One of the key attributes of crypto-currency advocates is that the distributed ledger which blockchain enables is decentralized, rendering impossible the ability of a malicious actor to compromise the integrity or functional capability of a centralized registry.
But the glitter of decentralization directs our attention away from the more fundamental issue—existing centralized registries, accessible across existing Internet systems, are not engineered to be trusted nor, to be honest, exceptionally secure. But, putting those truths to the side, centralized registries are enormously efficient mechanisms for placing digital records into a state which serves large ecosystems of users. Banks maintain account registries that serve millions. County recorders maintain property records that serve their entire population (and, in turn, the lenders that invest into their counties from outside the county borders). In turn, most such registries now also maintain backups and other system redundancies in order to minimize the adverse impact of a breach or disaster. One of the untold heroic stories of 9/11 was the recovery of operational status of many financial systems without hours of the collapse of the towers. So, yes, existing central registries are vulnerable, but their weaknesses are reinforced.
Of course, that is the problem noted earlier—the existing reinforcements are patches on infrastructure that was never engineered to be trusted. But the rapid development of permissioned blockchains suggests a different model is emerging. Permissioned blockchains are structured to mimic or reflect existing ecosystems. Supply chains are a great example—everyone is already connected, but they operate redundant ledgers with differing levels of security, creating enormous ineffiencies and costs associated with validating the authenticity of any data records relating to the transactions.
Permissioned blockchains still operate with a centralization of the ledger, contractual networks binding participants to the rules and consequences of the blockchain ledger, and legally enforceable allocations of liability for non-conforming conduct. But the systems are built on a technology (blockchain) engineered to enable trust in both its operations and the ledger records themselves. Full decentralization is not required; not every participant requires a redundant copy of every data asset, though some distribution of redundant copies is strategically useful (and at much lower cost than existing backup mechanisms). But every participant has a level and velocity of access to those assets that is proving to be unprecedented and the assets themselves will have attributes of trust far greater than existing centralized ledgers.
So, I don’t believe decentralization as envisioned by Bitcoin or Ethereum really is scalable. The blockchain technology, when implemented in permissioned blockchains and supported by legal contractual rules, is scalable.
There is one important caveat here: when I reference legal contractual rules, I am not referring to traditional paper agreements or smart contracts. I am referring to automated governance systems built on top of the blockchain that administer automatically self-enforcing controls for non-conforming conduct or the submission of data that is not, itself, authentic or genuine.
I have always admired the Nordic traffic ticket system: a camera or speed sensor records a vehicle’s excessive speed and the traffic fine, calculated based on the net worth of the vehicle’s owner, is automatically withdrawn from their bank account. No court appearance. No defenses. Boom. Justice is served.
Scalable, permissioned blockchains will not scale if there is never any reason to rely on traditional legal enforcement models, whether civil or criminal. The potential for distributed ecosystems (such as an international blockchain) are so enormous that any expectation that disputes will be resolved by litigation, arbitration, or engagement with regulatory authorities are naïve and obstructive. The host of the blockchain will be particularly critical to identify and define; insurance to underwrite residual risks within any system will also be vital.
But an ecosystem (such as an industry supply chain) that operates on a permissioned blockchain with self-enforcing controls will be catastrophically transformative. A singular ledger that documents truth for transaction history will change entire business models and extinguish costs spent on audits, due diligence, dispute resolution, etc. Auditors and lawyers—both professions largely function only as truth-finders about transaction records anyway—will not survive in their traditional roles.
What is intriguing is to recognize how to tie the first observation above (how to establish liquidity of non-coin data) with this vision. As it turns out, there will often be significant overlaps between the ecosystem using the blockchain and the potential downstream market for the data records preserved on a specific blockchain. So, once committed to a specific blockchain, there is incredible incentive to rely on the same ledgers as the source of trusted information that fuels analysis, competitive responsiveness, and future-facing strategies.
Transferability of Ledger Data-Liquidity off the Chain
But the preceding point brings me to my last concern about scalability. Not every consumer of corporate data will be within an existing ecosystem supported by a permissioned blockchain. Indeed, most data analytics are all about mashups of disparate data. There will also always be regulatory actors interested in the ledger data, and they may or may not want to be on a specific chain (or be welcomed!).
That creates a practical problem: how do we take a data asset on ledger A and transfer it into ledger B? This is not a hard fork kind of issue (where a blockchain must sub-divide to accommodate changes in code or operations); rather it goes to the, you guessed it, liquidity of a data asset.
Go back to the bicycle wheels sales database and imagine someone in that system wants to make the database available to a manufacturer of carbon fiber handlebars (yes, those exist!) to enable cross-selling and target marketing. But the handlebar manufacturer is not on the blockchain. Anyone on the existing chain will want assurances that proprietary data for their company is not transferred or accessible, and there may be competitive reasons one or more parties on the existing chain may object to the data sharing transaction.
In addition, the manufacturer wants assurances of the data asset’s integrity and trustworthiness to calculate its appropriate value, which may require disclosure of the specific security architecture, and governance history, relating to the blockchain from which the data is being extracted. That level of transparency may not be welcomed by the ecosystem as a whole or by the host/sponsor of the blockchain. One can readily imagine, in a community built on consensus, how the rules for these types of decisions, and the voting mechanisms, will be challenging to construct.
Here is where the original design of blockchain begins to struggle to align to commercial realities. Digital information will soon be the most liquid asset in commerce, if it has not already achieved that status. But as the marketplace for digital assets mature, the architecture of blockchain still creates barriers, borders, boundaries, and limits on the liquidity of the underlying data assets.
So this is exactly the problem I still hope to solve—can we create data assets that are self-authenticating and self-governing?
Can we bundle, package, or otherwise combine with a digital record or file the data that is responsive to a downstream buyer’s rules and requirements for knowing the provenance of that asset and calculating its authenticity and integrity—where did it begin? who has owned it? what governance has been applied? was the governance effective? what are the records of modifications, edits, alterations, additions, and deletions that prove the governance has been consistent?
Can we also bundle the rules to the data to assure that, wherever located and within whatever system or device, the governance of that data is self-executing, enabling rules on access, modification, and further forward transfers (and so much more) to be functional and effective?
Perhaps the solutions will originate within blockchain; there certainly are attributes of innovations already in existence that are promising foundations for pursuing the answers. But I believe there is a more radical path forward that will be evolve out of the potential of quantum computing. All that blockchain offers is grounded on existing cryptographic technologies, for which quantum is rapidly moving into antiquity. The solutions for data to become truly fungible as property–with calculated values, scarcity, liquidity, and effective governance—are close.
In conclusion, simply, blockchain as a distributed system for enabling digital currencies will not scale, but our current experiments, innovations, successes and failures with blockchain will inform the next truly new platform, one engineered to be trusted and built on quantum.