Category Archives: Blockchain

Blockchain and the third trust revolution

Blockchain has the potential to sweep away the central trust authorities of governments, banks and corporations as  I discussed in my previous post.

Why? Because blockchain enables virtual communities to re-create the person-to-person trust of small villages and societies at a global scale.

Ancient societies were based on the idea of personal trust: I trust you because I know what you have done. I know the moral and ethical code by which you live.

Blockchain cannot enable people to know a person they have never met, but they can see what that person has done in the community network. Users know the business code which by they live, because it’s encoded into the blockchain as smart contracts.

It’s person-to-person trust at a global scale.

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For example, there is a micro-energy grid in New York which lets people with solar panels sell that power directly to consumers using a blockchain. The grid is run for the mutual benefit of the small-scale generators and their customers. There is no utility company in that model.

Blockchain brings providers and consumers together in a mutually beneficial business network, where everyone agrees the rules in advance and plays by them.

If you doubt that blockchain has the potential to be at least as disruptive as the web, consider this: the web has changed how we live our lives with e-commerce, digital banking, streaming music, TV on demand, social media, Yet it has not fundamentally changed the economic models that our world is built on. We still buy music from a music company. We still book taxis from a taxi company or car service. It might be Spotify and Uber now, but they are still central trust authorities.

Imagine if we could connect providers and consumers directly, for the benefit of everyone, not just corporations. If we could connect passengers and drivers, authors and readers, people who want to lend, with people who want to borrow? What would that world be like?

The third revolution

Blockchain is a new type of database. It has key characteristics which enable participants to have a high degree of trust in the data, and the business network. It allows users to take the person-to-person trust of small groups and scale it globally.

Throughout history, we have had to invent new trust mechanisms. The first real trust revolution was coins, and the second was the intangible monetary system.

Blockchain has the potential to be the third trust revolution, sweeping away the monetary system in the same way that that system swept away coins, relegating them to loose change that we use to pay for coffees.

Just as coins and money helped to accelerate global wealth, the applications which blockchain will enable will drive our economy through 21st century and beyond.

Learn more about IBM Blockchain.

(This post originally appeared on IBM’s Cloud Computing blog)

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Trust revolutions and the need for blockchain

In my previous post, I outlined what makes blockchain a transformative technology. It builds trust in data and business networks, which makes it the latest part of a long history of trust as the basis for economic transactions.

People trust each other based on personal knowledge. I trust you because I know you and what you have done.

That worked for small groups of people; tribes and ancient villages. If your roof leaks and the rains are coming, I will help you to fix it, because I trust that you will provide some reciprocal help at a future date. Sociologists say this type of favor-based personal trust breaks down once a community has more than about 150 people.

Therefore, throughout history, humanity had to invent new trust mechanisms to scale the economy.

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The first real innovation in trust was coins, first minted around 640 BC in Lydia (modern Turkey). They are a universal mechanism of immediate asset exchange that enable someone to sell and olive crop, take the coins to the local market and buy clothes for their family. Coins have no inherent value, but each person trusts them because everyone else does and they are backed by a central trust authority, in the past a king or emperor, with power derived from the gods. As long as the king and his kingdom stood, the coin had value and citizens could trust it.

Coins enabled accumulation of wealth. There are only so many favors you can accumulate, but there is no limit to the number of coins you can have. This enabled villages to gather wealth and become cities, and it enabled cities to levy taxes to build temples, walls, roads and theaters.

Coins also enabled portability of wealth. A professional soldier in a field in England could take coins back to his family in Greece, for example.

This trust in coins, based on central trust authorities, underpinned the classical world, enabled trading networks such as that of the Phoenicians and helped to build the first great empires: Roman, Persian and Han. Human economic activity then stayed roughly the same for the next 2,000 years.

Around 1500 AD, the ‘new world’ was re-discovered by Europeans, creating a demand for exploration and investment. There was also a wave of religious reformation across Europe, which meant that it became acceptable to make money from money (this had been considered a sin).

To build a ship and sail it across the ocean was incredibly expensive and highly risky. Very few individuals could afford that, but groups of people could fund a share in a ship and take a share of the risk and profits, which was more acceptable. The concept of limited liability companies was born.

Insurers such as Lloyd’s of London offered to spread the risk on those ships and banks started to collect money from small investors, buy up the shares and pass on the returns in smaller (but more reliable) amounts.

The real innovation here was intangible money, money which you cannot see but which will come back to you in the future. You can hold a coin in your hand; you can’t hold a share. You can hold a piece of paper which says ‘share’, but you are ultimately trusting in the limited company, the insurers, the banks and the legislation which underpins that. Lawyers call these “legal fictions.”  They don’t actually exist, yet we put our trust in them anyway.

This concept of a monetary system saw an explosion in the amount of capital available for exploration and trade. It underpinned the great commercial empires like the East India Company and the Hudson’s Bay Company, funded the Industrial Revolution and paved the way for Bretton Woods and the modern economic system we have today.

All of that is based on central trust authorities. But we’ve moved on from kings and gods as the basis for currency, in favor of corporations, banks and governments. That’s why we need blockchain, which I’ll discuss in my next post.

(This post originally appeared on IBM’s Cloud Computing blog)

4 characteristics that set blockchain apart

I speak to lots of customers who are using or thinking of using blockchain.

Depending on who you speak to, blockchain is either a new power poised to change the way we do business or the latest IT hype.

I believe blockchain has characteristics which mark it as something transformative, perhaps even more transformative than the web.

At its core, blockchain is just a database, one that is particularly good at dealing with transactions about assets, whether they’re financial assets, physical assets such as cars, or something more abstract like customer data.

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But blockchain has four key characteristics which make it different:

  1. It is designed to be distributed and synchronized across networks, which makes it ideal for multi-organizational business networks such as supply chains or financial consortia. It also encourages organizations to come out from behind their firewalls and share data.
  1. You can’t just do whatever you want to the data. The types of transactions one can carry out are agreed between participants in advance and stored in the blockchain as “smart contracts,” which helps give confidence that everyone is playing by the rules.
  1. Before one can execute a transaction, there must be agreement between all relevant parties that the transaction is valid. For example, if you’re registering the sale of a cow, that cow must belong to you or you won’t get agreement. This process is known as “consensus” and it helps keep inaccurate or potentially fraudulent transactions out of the database.
  1. Immutability of the data. Once you have agreed on a transaction and recorded it, it can never be changed. You can subsequently record another transaction about that asset to change its state, but you can never hide the original transaction. This gives the idea of provenance of assets, which means that for any asset you can tell where it is, where it’s been and what has happened throughout its life.

Taken together, these four characteristics give organizations a high degree of trust in the data and the business network. That level of trust makes blockchain important for the next generation of business applications.

To understand why, one must understand the nature of trust. To do that, I’m going to take a short detour through 25 centuries of human economic history in my next post.

(This post originally appeared on IBM’s Cloud Computing blog)