“Blockchain isn’t just a more efficient way to settle securities. It will fundamentally change market structures, and maybe even the architecture of the Internet itself.”
Abigail Johnson, CEO, Fidelity Investments
Although people understand blockchain as a theoretical solution, many haven’t understood the impact that blockchain is going to have. There’s an engineering gap that needs to be filled, but there’s also an understanding gap. And people want to know how we will get to the point where blockchain is actually implemented solving real world problems. There are three key capabilities which together provide the foundation.
- Ability to manipulate money
- Ability to implement trust
- Ability to import real world information onto the blockchain with high confidence of its accuracy. (This is critical)
1. Ability to Manipulate Money
Programmable blockchain has some form of money built in. In the case of Ethereum the currency is Ether. A smart contract has the ability to manipulate money. With the appropriate authorization, a smart contact can transfer money from one party to another. A smart contract can actually effect the transaction itself and implement the transfer of money between people or between entities. This means that you can write a program which can actually carry out business transactions involving the transfer of money (or other tokens representing value). The ability to manipulate money is already in place and is fairly mature. This is the capability that most people are familiar with when it comes to blockchain.
Blockchain allows varying degrees of trust to be built in at the transaction and communication level of the infrastructure itself. As trust becomes part of the infrastructure it will seem to disappear from the perspective of the end user.
2. Ability to Implement Trust
The second capability is the ability to implement trust. Since blockchains are programmable in a high level language, we have the full resources of all of the thinking that programmers have done on the topic of trust that we can apply to solving the problem. Some very deep thinking has already been applied to this problem, and there are many proof of concept implementations that show that we can solve this problem.
We are currently at a point that’s analogous to the mid-1960s before we sent humans to the moon. Before we actually landed on the moon, we spent years making observations and conducted tests. We understood the principles of how rockets worked. We made small rockets and sent them up into space, and sure enough they worked like we expected. We had a detailed roadmap of exactly how we were going to get people to the moon and back to earth. Some people were skeptical because they weren’t privy to the details of the roadmap (that had already been diligently worked out) detailing how we we were going to do it. Years of deep thinking, testing and gradual breakthroughs led to humans walking on the moon. (And we’re still working on asteroid mining and building bases on the moon and Mars.)
We are in a similar situation with blockchain and trust. Because the blockchain is programmable, we can use existing solutions now, and in the future we can implement new solutions (some that we haven’t even imagined yet) to solve trust problems. And we can solve them in multiple ways in parallel. In the real world, if something is very important, we validate it in multiple ways so that we can have confidence that things check out. These approaches are going to be carried over into the world of blockchain, but on the blockchain they’re going to be automated and programatic.
Verification and Validation of Identity
One very important category in this area is verification and validation of identity. The reason this is so important is that it’s codified into US law that in certain types of business transactions, you must know who the other party is on the other end of the deal, otherwise you’re not allowed to do the transaction. This is true in banking in particular. KYC (know your customer) and AML (anti money laundering) are part of US law and almost all countries in the world have signed on to enforcing these rules. Some people have been thinking of blockchain as a means to evade these rules, but in fact blockchain is a powerful tool for ensuring compliance with these (and other) regulations, because compliance can be built into the protocols of the smart contracts.
A Bridge between the the Real World and the Blockchain
One important thing that we need to do is to build a bidirectionalbridge between the real world and the blockchain. Validated information from the real world will be continually added to the blockchain, and information on the blockchain will be continually accessed by authorized people in the real world. Smart contracts will authenticate and validate users and manage access control. This will be the first time in history that we will be able to access so much information so efficiently without having to rely on humans. This will be a big improvement over traditional methods and have a huge impact on business. People will be able to conduct business on the blockchain with an unprecedented level of confidence, but since it will take no effort (and close to zero cost) to achieve this level of confidence, people won’t even notice it. This is why many deals will be enabled that could never have occurred without blockchain.
Implementing KYC Capabilities
The first pass at implementing KYC capabilities is to build a bidirectional bridge between the blockchain and existing KYC provider companies, so that these KYC companies will have a presence on the blockchain. These companies will have a validated address on the blockchain and an associated smart contract. This is a big piece of the puzzle because KYC is required by law if you are going to sell equities or do banking transactions. This piece of the puzzle is already solved. We already have proof of concept KYC using smart contracts that are already running on the blockchain.
“Blockchain is only self-sufficient as a ‘promise keeping’ system when all of the interactions between parties are carried out against assets native to the platform, and, at the same time, the interaction is an atomic swap. Anything else that requires input from an external party (price of goods, temperature reading, etc) will require additional trust and is subject to manipulation.”
Vasiliy Suvorov, VP Technology Strategy, Luxoft
3. Ability to Import Real World Information
This is the part that most people don’t understand, and it’s a really important part. It’s also the final piece of the puzzle that is needed to start building real world solutions. Here are some real world examples of information that will be imported into the blockchain:
- Who owns a specific property?
- How do you know that a deed has been transferred to the named party?
- How do you know that a will has been filed?
- How do you know that a person with an insurance policy actually suffered a loss?
- Who won a basketball game?
Right now this information is not available on the blockchain and there’s currently no way to check this type of information from inside a smart contract. The blockchain is completely disconnected from the external world. It’s like a robot without sensors. We need to be able to write smart contracts that can access accurate information about the real world. This is the first problem that any enterprise will face when they attempt to migrate their business to a blockchain based implementation.
Recording a document at the office of the assessor-recorder is a similar concept to the blockchain itself. The office of the assessor-recorder is a pre-computer age version of the blockchain, and the closest historical analog to blockchain. The office of the assessor-recorder is responsible for recording documents and maintaining public records. The assessor-recorder records over 400 different types of documents including deeds of trust, reconveyances, liens, and public marriage licenses
For example, when we buy or sell real estate, we file deeds with the recorder’s office, and they record who owns specific property. They have a very specific protocol of steps that need to be followed when a property is being transferred from one party to another party. Once the transfer happens the recorder’s office stamps it and certifies it. That becomes, in theory, the immutable record of who owns that property.
Every business that wishes to run on the blockchain will need a way to get their critical information onto the blockchain. (We also need to get information out of the blockchain, but that part is relatively easy.) Fortunately the blockchain’s ability to implement Trust provides the foundation needed to import information in a reliable way. The identity validation methods of KYC in particular will be key to attributing imported information to the source of that information. Other Trust validation algorithms can be applied as well, and together can provide a high level of confidence in a given piece of information on the blockchain.
For example, imagine a sports betting application that accepts bets on the outcome of basketball games. Odds are computed transparently via a smart contract, and all funds are held in trust by the contract until the results of the game are verified, at which point payout to the winners is automatic.
How can the smart contract know who won the game? And how can we be sure that the information is correct? One method to obtain the information would be to rely on reports from authenticated sources. Sports reporting networks and well known individuals could sign transactions attesting to the outcome of the game. If the major networks and the coaches of both teams sign transactions indicating the outcome, then we can have a fairly high level of trust. If we want an even higher level of trust, we could implement a 24 hour waiting period before we accept such reports as authoritative.
There are multiple techniques that can be applied to solve the problem of importing data onto the blockchain accurately, and this is the final missing piece needed to use blockchain to solve real world problems.
As a final example, imagine an insurance company that is completely implemented as a smart contract. The insurance company holds funds in trust (on the blockchain) to cover claim payments. When a policy holder suffers a loss, once the confirmation of that loss has been imported into the blockchain in a trusted way (as described above), the contract will automatically pay out on the claim. This type of insurance company would be far more efficient then a legacy type company. This new type of insurance company could provide higher profits to it’s owners, and at the same time offer clients both lower premiums and higher confidence that claims will be paid as agreed.
With these three pieces of the puzzle in place, companies can start migrating business activities to the blockchain. Soon, proof of concept implementations will give way to actual profitable business applications, and we may see another blockchain gold rush. But this time the gold rush will be based on using blockchain to solve real problems, rather than just speculation on future crypto-coin valuations.
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