Tas Dienes, EEA Mainnet Interest Group
A recent article by Josh Stark sets up a new framework for understanding the utility of blockchains. He summarized it in a tweet thread here, but it’s worth reading the whole article to fully understand the idea. I will attempt to condense it into one paragraph, but please do read the original.
Blockchains have a property called “hardness,” which means they have the power to make some fact, like the state of a database, very likely to be true in the future. The system is resistant to change outside of predefined rules. The degree of hardness is proportional to the level of decentralization – the more independent operators a blockchain has, and the more economic stake each operator has in the correct operation of a blockchain, the “harder” the blockchain is.
Historically, people have built hardness into systems using matter and institutions. Institutions such as governments, legal systems, central banks, and corporations, create some expectations of predictability or certainty about the future on which one can base one’s decisions and plans. They are not perfectly reliable, but over time they have proven to be a useful way of avoiding chaos and giving people some comfort that certain rules will be followed – the police may arrest you if you break a law, or a court may enforce an agreement between two parties. The physical properties of matter have also been used to provide such predictability or hardness. For example, the supply of gold is hard – it increases at a fairly slow rate which has an upper bound, and you can be pretty sure that there won’t be 10x more gold in circulation next week. Safes in which you can store your gold are also hard – they give you some assurance that your gold will remain in the same place you left it. A fortress (where you may keep your safe) derives hardness from both matter (strong, tall walls) and institutions (the guards or military force which defends it). It gives those in charge some assurance that the bad guys will remain outside, and the goods and people inside will remain unharmed. Blockchains are a new technology for creating hardness in the digital realm: a smart contract deployed on a decentralized blockchain will behave predictably for some time, and its state is resistant to being arbitrarily changed by outside forces. The need for “hard” systems has existed for thousands of years. Such systems have been built from matter and institutions and have evolved over time. But the concept of “hardness” is a new one which enables us to see what these things have in common, and to understand the utility of blockchains more clearly.
Hardness is important to businesses because being able to predict the future state of things is critical to making good business decisions. Who will own a particular asset one year from now? Will the data on which I rely remain unchanged? If I engage in a transaction with another organization, will the terms of our agreement be upheld? Will people with guns interfere with my business? Sometimes these things are taken for granted in western countries, but in many parts of the world there is much less certainty because institutions are less developed, corrupt, or lacking entirely. Lack of certainty creates risks and hinders business, and global companies are keenly aware of this.
Decentralization is critical to blockchain hardness because it means that the system is resistant to change by a small number of entities. The more decentralized it is, the more hardness it can provide. But a blockchain run by just a few entities is more vulnerable to changes that are unanticipated and/or undesired by others. Of course there may be times when it is necessary and appropriate to change some data on a blockchain outside of the usual course of business – for example, to recover stolen property, or lost keys. Optionality for the appropriate people to make such changes can be designed into the system from the start, if the need is anticipated. Blockchain smart contracts can provide flexibility where it is necessary, and hardness where hardness is required.
Decentralized blockchains as a source of hardness have some advantages over institutions and matter. Matter is the oldest way of creating hardness, but it is very limited in what it can do, and often inconvenient to manage. Institutions have the advantages of being highly configurable, customizable, and even programmable (a written contract may be thought of as a program that is executed by a legal system). But institutions are slow and inefficient – resolving a dispute and enforcing an agreement can take years, and is very expensive. There is also a high barrier to entry – building a new legal system or police force is not a simple undertaking. Writing and signing legal contracts is relatively easier, but still involves significant time and cost, which creates friction that impedes business and economic growth. Blockchains are more easily accessible – just about anyone with a little technical knowledge can write and deploy a smart contract. And enforcing the rules with smart contracts can be much faster and cheaper than using written agreements and lawyers and courts. So blockchain hardness can help give businesses a degree of certainty about what will happen in the future, and in certain applications it affords greater speed, lower cost, and more flexibility than matter and institutions.
With this framework in mind, drawing on data from the recent EEA Business Readiness Report and other sources of information on business use of blockchains, I surveyed the field of enterprise blockchain applications to see how well it fits. Here are some of the major categories of business applications involving blockains, and how blockchain creates “hardness” that makes them work.
- Physical asset tokenization and trading: blockchains ensure that asset ownership records behave according to certain rules, and cannot be unilaterally changed. Examples: Agrotoken, RealT, SolidBlock, Kratos, Fasset, Arianee, Vakt, Blockchain for Energy.
- Financial asset tokenization and trading: blockchains ensure that asset ownership and transfer behaves according to certain rules, which cannot be unilaterally changed. In some cases the asset is defined by data on the blockchain. Examples:
- Bond issuance and trading – Santander Bank, Societe Generale, Cadence, European Investment Bank
- Repo trading – Goldman Sachs
- Receivables financing – Tinlake
- Securities – Taurus, BSTX, tZero
- Others – ConsenSys Codefi Assets
- Tamper-resistant ledger applications, such as supply chain traceability and provenance: blockchains ensure that there is a single source of truth which many parties can see and agree upon. Examples:
- Supply chain traceability – Komgo, Covantis, Treum, CargoX, Morpheus Network, MineSpider
- Provenance – Brietling (watches), Perroni (beer), DeBeers (diamonds), LVMH
- Norwegian corporate ownership registry
- B2B procurement and supply chain transactions: blockchains ensure that business rules and terms of agreements are followed and enforced, and that all parties can see and agree on one set of data which represents the state of things. Examples:
- EY OpsChain
- Baseline protocol – uses the blockchain as a common frame of reference and source of truth for coordinating B2B transactions off-chain.
- Supply chain trade documentation: blockchains ensure that documents related to trade and importation are available to government agencies and others as required and cannot be altered. Examples: Transmute
- Parametric insurance: blockchains ensure that insurance purchases and payouts are done quickly and efficiently and accurately, and that the terms of an insurance agreement are upheld. Examples: Etherisc, Arbol.
- Identity, credentials, and certifications: blockchains provide a permanent, public, and tamperproof repository for storing digital identities, credentials, and attestations/certifications (and revocations). Examples:
- Identity – Sign in with Ethereum, Decentralized Identifiers (DIDs)
- Credentials & educational certifications – Verifiable Credentials (VCs), OpenCerts, BlockCerts, SkillTree, Dock
- Tracking advertising impressions and payments through multiple layers of advertising network operators, distributors, publishers, etc: blockchains create a neutral, single system of record which all parties can view and transact with, free from control by any dominant player, eliminating discrepancies in data and ensuring that transaction rules are enforced. Examples: AdLedger, EthereumAds.
- Games: blockchains enable gamers to own in-game assets in a way that is not subject to the whims of the game vendor, which gives them assurance that they will be able to maintain control of those assets and potentially even use them in other games. Examples: Decentraland, Axie Infinity, Gaimin.
- Businesses themselves (corporations, LLCs, etc.) can be thought of as institutions that create hardness for the benefit of shareholders and other stakeholders. DAOs offer a new way of doing that.
In conclusion, there are many ways that blockchains can improve business operations or even enable entirely new businesses. In each case, the essential property that makes blockchains useful and valuable is that they provide certainty about what will happen in the future: ownership of assets, payments, and other business transactions will follow pre-defined rules, and the rules and data in the system are highly resistant to change by outside forces. Previously businesses mainly relied on institutions such as laws and contracts and courts to achieve such predictability, but blockchains can do it better, faster, and cheaper.
Thanks to Josh Stark, Andreas Freund, and Dan Shaw for their input.