“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.

1. Ability to manipulate money
2. Ability to implement trust
3. 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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Blockchain has the potential to do many things, but to achieve these things you need programmability. Programmability is what makes blockchain truly transformational.

Understanding the distinction between programmable and non-programmable blockchains is crucial to understanding their value and business potential. In my precious article I described blockchain’s potential. To get the benefits that I described, you need a programmable blockchain, meaning that a programmer can actually write a program in a high level language that expresses the terms of a smart contract that is being carried out on the blockchain. Programming is a necessary component to realizing the full potential of blockchain.

Blockchain is a history of transactions, stored sequentially, that people can see and contribute to. Although everyone can contribute to the blockchain, nobody can go backwards and change what’s already on the blockchain. It’s immutable. One of the reasons for using math in blockchain is to ensure – with absolute certainty – that the blockchain can not be modified once it’s been established. Once something’s been confirmed on the blockchain it can not be erased.

This is why blockchain is suitable for financial transactions. One example is money transfers. Once the transaction has been made, everyone agrees that the transaction occurred on this date, with this block number, and that the account balances have been adjusted. Once this is confirmed on blockchain it can not be changed or modified – by anyone.

Smart contracts are self-executing contracts with the terms of the agreement between the parties directly written into lines of code.

Smart Contracts

For non-programmable blockchain, there are only a few types of transactions that can be written to the blockchain. With full programmability, there are many many types of transactions that can be written to the blockchain. In fact – it’s completely up to the user. Users can make their own types of transactions that correspond to programs. These programs are called smart contracts. Smart contacts are the software programs that run on a programmable blockchain. These programs enable complex deals, ensuring that person A paid the money, person B did her part, person C did her part and everyone agrees. It’s this level of flexibility that gives programmable blockchain its power, and that enables us to realize the biggest benefits.

The Value of Programmability

Programmable blockchains are potentially much more useful than non-programmable blockchains. Examples of programmable blockchains include Ethereum, Cardano, Tron, and NEO, with Ethereum being the most successful to date. Non-programmable blockchains include Bitcoin, Litecoin, Monero, Dash, and many others. Ethereum is the #1 programmable blockchain, and most new projects that rely on smart contract technology are currently launched on Ethereum.

Smart contracts will let us reengineer and streamline business practices that have been around for centuries. Many types of transactions will become much more efficient, and in some cases will go from being impossible to easy.

Ethereum

Ethereum is fully programmable and has its own programming language called Solidity. A programmable blockchain is essentially a global computer where the results of every computation can be seen by anyone. Blockchain has the potential to do many things, but to achieve these things you need programmability. This shift is enabled by Ethereum and other programmable blockchains. With programmable blockchain, we can create smart contracts that enable peer to peer business transactions. Smart contracts will let us reengineer and streamline business practices that have been around for centuries. Many types of transactions will become much more efficient, and in some cases will go from being impossible to easy. Many businesses in the future will be conducted directly peer to peer via smart contracts. 

What’s new and *incredible* is that these applications can go beyond simply recording events that occurred in the past to actually transacting business in *real time* as dictated by the terms of the smart contracts.

Blockchain has evolved from a payment system using Bitcoin to a decentralized computer using Ethereum. With Ethereum, you can create smart contracts. Smart contracts allow for the creation of any number of automatically governed structures that can be used to transact business. Some interesting areas are financial transactions, business contracts, medical records, wills and trusts, trading, and insurance. What’s new and incredible is that all these applications can go beyond simply recording events that occurred in the past to actually transacting business in real time as dictated by the terms of the smart contracts. Imagine an insurance policy implemented as a smart contract that automatically pays out immediately upon verified proof of the covered loss!

There is still a big missing piece of the puzzle: Exactly how can a programmable blockchain be used to achieve these feats? This will be the topic of my next article where I describe the fundamental components of the architecture needed to build real world solutions based on blockchain.

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The money transfer image was designed by Rakesh Mohan.

“Blockchain is the distributed trust network that the Internet always needed but never had.

Marc Andreessen, Andreessen Horowitz

Blockchain enables a new form of money. It’s a type of money with fundamental advantages over traditional money. These advantages are so huge that this new form of money may eventually supplant all legacy money systems in the world. Blockchain will open up opportunities for more buyers and sellers, and enable transactions and economic activity that want to exist, but can’t under the current money system. This new economic activity may come to dwarf the size of the current economy, yielding tremendous opportunity.

Blockchain is the foundation for the next generation of money, and money is extremely important for civilization. We couldn’t have accomplished everything we have throughout history without money. Without money, transactions would have been much more difficult, especially in multi party transactions (think “barter system”). Although traditional money allows people to transact business with each other, it also creates opportunity for disputes.

Encoding promises on the blockchain

“On one occasion Nietzsche argued that what separates humans from animals is the ability to make promises, because this implies both freedom and constancy of character. For Nietzsche, human society depends upon promises. But we are not constant in fulfilling promises – contracts are often broken, whether by negligence, forgetfulness, or plain villainy. Smart contracts are an interesting tool for enforcing promises because they guarantee their own constancy beyond any desire on our part to subvert them; for that reason smart contracts may play an important role in the organization of our social lives.”

Joshua Broggi PhD, Founder, Woolf University, The First Blockchain University

Blockchain allows people to encode promises on the blockchain giving them an absolute guarantee that they will be paid for their product or service. Blockchain has enormous potential because it gives humans the ability to enforce promises, enabling a level of trust that has never been possible before. The elevation of trust between humans will be one of the most valuable consequences of blockchain. Blockchain will enable new business transactions that we couldn’t previously engage in and will lead to more business activity because people will be able to conduct business with people that they couldn’t have before.

Trust in business is like structural integrity in a building

“What is needed most in architecture today is the very thing that is most needed in life – Integrity. Just as it is in a human being, so integrity is the deepest quality in a building. Stand up for integrity in your building and you stand for integrity not only in the life of those who did the building but socially a reciprocal relationship is inevitable.”

Frank Lloyd Wright, Eminent American Architect

The rock solid trust enabled by blockchain is as important in business as structural integrity in a building. Blockchain solves the problem of trust across networks by enabling complete strangers to transact business without risk. Blockchain enables existing business transactions to be performed much more easily and decreases the friction involved in doing business. Blockchains operate globally, so two people anywhere in the world can transact business with each other with the certainty that the terms of the contract will be kept. Blockchain enables mutual assurance of performance, and gives you a rock solid guarantee. It’s like an escrow system, but in escrow both parties have to trust the escrow company. With blockchain, there’s no intermediary. Blockchain details the specifics of the agreement including offer, acceptance and payment, and provides a record that’s transparent and can’t be tampered with.

We can trust the blockchain because blockchain is designed to leverage the certainty of mathematics. We all agree that 1+1=2. Anyone can review the math that blockchain is built upon. There are two parts of math involved: elliptic curve and cryptographic hashes. With blockchain the guarantee is a mathematical certainty. It’s called a trustless system because the need for a trusted intermediary is eliminated. With blockchain you can do business with anyone on the planet, and you can set requirements that need to be met in order for the transaction to occur. People have assurance that they will receive what they expect, and blockchain provides sophistication in the level of certainty.

Bits – the ultimate ease of use

A bit is a basic unit of information used in computing and digital communications. Multiple bits are represented as bytes. There are eight bits in one byte.

The transition from fiat currency to blockchain based money comes down to bits. Once things are in bits, they can be digitally manipulated by computers. Bits are the ultimate in ease of use. Here are examples of items that have transitioned into bits.

Photography

We transitioned from film based cameras to digital cameras. Once we were able to represent photos with bits, we were able to do all kinds of things like adjust brightness and colors easily. The future of photography is computational not optical.

Mail

We transitioned from physical mail to instant messaging. Once we were able to represent messages with bits, we were able to transmit messages electronically instead of writing messages on paper and mailing physical letters.

Music

We transitioned from records to streaming music. Once we were able to represent music with bits, we mixed music digitally, and delivered it via internet streaming on demand. In digital music sound is represented as numerical values

Books

We transitioned from writing books by hand to using word processing. Once we were able to represent words with bits, we produced books in e-format. E-books are more accessible, less expensive, and searchable.

Money

The transition from fiat currency to digital money also comes down to bits. We have traditionally represented money with coins and paper. With blockchain, we are transitioning to a digital system in which money is represented with bits. Once we make the transition to bits we will be able to conduct business with anyone in the world easily, securely and cheaply. Eventually, just like film cameras, fiat currency may exit the stage.

The Transformative Potential of Blockchain

Blockchain is a broad system with a wide variety of uses. Blockchain could become a basic element in every application where immutability, integrity and security is needed. Trusts and wills on the blockchain could operate in perpetuity protecting people from exploitation. Power of attorney contracts and healthcare advance directives could be on the blockchain safeguarding people’s decisions.

This could all happen now – the technology is available. What’s lagging is people’s understanding of blockchain and its potential. In May 2018 Gartner reported that only 1% of CIOs indicated that their companies have deployed blockchain, only 8% indicated that they were in planning or active experimentation with blockchain, and 34% said they had no interest in blockchain.

Blockchain has the potential to be as big a jump forward as the transition from the barter system to currency. The people who are involved in blockchain now are defining the way the economy of the future will operate. This new economic activity may come to dwarf the size of the legacy economy. Decentralized networks are already more powerful than traditional systems in many ways, and the technology is advancing rapidly. The scale of the opportunity is staggering.

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Thank you to Joshua Broggi, PhD, founder of Woolf University, The First Blockchain University for his comments on Nietzsche. Margaretta Colangelo is on the advisory board of Woolf University. Check out this video on Woolf University.

Frank Lloyd Wright was an eminent American architect who designed more than 1,000 structures. Wright believed in designing structures that were in harmony with humanity and the environment, a philosophy he called organic architecture. This article is the property of Margaretta Colangelo and may not be used without her express written permission.