Blockchain: The Path to Adoption

Dr. Andreas Freund: Like anything, the right value proposition—one that speaks to hundreds of millions of people, not just a few. For me, that’s trust, which is a pillar of all we do as a society.

The blockchain’s ability to automate trust relationships exponentially is, in my opinion, its game- changing super power. Evolution has taught us to be cautious towards those we don’t know. The blockchain enables us to lower our caution barrier because we can know, really know, the identity of the people we’re dealing with. The blockchain enables us to scale trust among a wide swath of people in a way that’s transparent for everyone.

Identity-based use cases are the initial stepping stone that will drive large-scale blockchain adoption, because identity is fundamental in every business vertical: supply chain, cybersecurity, transportation, pharma, manufacturing, travel—you name it. Resolving identity issues in a transparent way also builds trust, enabling entirely new incentive models that align participants.

AF: I mean, incentivizing different groups or individuals to achieve their goals.

Here’s an example from field service in the telecom industry. There are so many complaints about poor quality field service relating to 5G that regulatory agencies have put a stop to fiber optics deployment in some areas. The quality problem is, effectively, an issue of identity plus incentives.

Let me explain. Field service agents, typically, aren’t paid right away. They’re paid, maybe, 30, 60 or even 90 days after the assignment, because there’s no efficient way to quickly and accurately determine whether the work was done. The delay in payment is demotivating and demoralizing, leading to complaints about shoddy work.

But, what if you had a blockchain back-end system enabling claims verification based on identity? You could say to the agent, “Hey, if you certify you completed the installation and the customer verifies this by signing digitally, I’ll pay you 75 percent right away. And, 30 days later, if there aren’t any problems, I’ll pay the rest.”

The agent’s certification prevents reuse of the inventory and the customer’s digital signature ensures that he or she can’t repudiate that the installation was completed—so you can feel secure paying quickly for work done. Service agents buy in because they’re paid right away, which can be a huge deal, especially for smaller ones. Customers are happy because installations are done right. And, you’re still holding 25 percent of the cost of the job as a contingency.

This approach, now in use is some locations, aligns the incentive to be truthful with the completion of high-quality service. Bad actors are punished by not being paid. Good ones are rewarded with prompt payment.

AF: Today, nothing can be done. The blockchain is immutable, which is why we can rely on it without hesitation to confirm identities and to reduce fraud risk in many use cases. But, let me make two points:

First, the blockchain doesn’t create a problem that doesn’t already exist. Let’s be realistic, all your personal data—your Social Security number, date of birth and so on—are out there now in a dark marketplace hosted on the dark web. You can’t take down that information. Blockchain technology doesn’t make you any worse off than you are now.

And second, where we are today is only the start of the story. Current blockchains are the very beginning of the beginning. There are a lot of things that need to be done to make blockchain technology better.

AF: We’ve learned good lessons from early blockchain applications, like bitcoin and Ethereum; specifically, things that should be done and things that shouldn’t be repeated.

We’ve learned, for example, we need more robust governance structures, exchange facilities and reputation built into the protocol level. Right now, these three points of the blockchain typically run through centralized exchanges, and each is a single point of failure. So, that’s a problem that must be addressed.

And, we’ve learned that some use the blockchain for purposes contrary to its foundation as a “we” technology rather than an “I” technology. Some cryptocurrencies, for example, have detoured from their original purpose as actual currencies, becoming get-rich schemes. Take Ethereum, for example: Because of the runup in the price of Ether, it’s hard for the average person to acquire another Ether on which to run a meaningful business. It’s no longer practical to run smart contracts on Ethereum and transaction fees are very high.

Why did these things happen? Because there were no defined interfaces when those platforms were launched, because no one understood the outcomes. Now we know, and the next iteration of those platforms will incorporate the learnings into the platform itself—into the protocol.

AF: I’ll come back to several things I’ve already stated: First, the competitive markets extracted the true value of the blockchain by diverting its initial purpose and, second, these are early days—there’s still a lot to be improved.

Scaling, of course, will help improve pricing, and there are alternative concepts, like Plasma as a framework for smart contracts, that are worth looking at and exploring. And, in ticketing, we’re looking at ways of putting tens of millions of claims into one bitcoin or Litecoin transaction, or anchor them into six different coins simultaneously. So, technical problems—timing and cost—will be addressed and overcome as we get more experience.

When will this happen? Rome wasn’t built in a day, and the Internet took a few decades to get where it is today. It won’t take that long for the blockchain to mature and become part of the technological underpinning of almost all we do, but we need to allow some time. I’d guess if we revisit this conversation in 2020 or 2022, we’d say, “Wow, I can’t believe we were worrying about those things in 2018!”

AF: Regulators have a difficult challenge with the blockchain because the technology is fundamentally different from what they’re used to. They come from a mindset that focuses on making sure no one cheats anyone else. But, as I’ve said, blockchain is a “we” technology, not an “I” technology. Still, there are those who will try to take advantage of fledgling blockchain systems by extracting value for their own personal gain and nothing else. I’ve been clear about what I think of those people and businesses.

I believe, therefore, the regulator’s role is to protect these emerging and fragile blockchain ecosystems and the much-needed innovation they will generate. Some regulators are taking on this role already. The UK, Singapore, UAE and Australia already have established fintech regulatory sandboxes. And, Arizona recently became the first U.S. state to adopt legislation to enact a regulatory sandbox, so businesses can experiment with concepts—blockchain and others—without incurring typical regulatory costs and burdens. So, some regulators are starting to get it.

But most regulators aren’t equipped to understand blockchain, because they have no point of reference. It’s up to us—those who’ve stepped into this world—to guide regulators. We have to say, “Dude, we’ve done the ICOs and we’ve seen the good, the bad and the ugly. Let’s shape this thing together, because it’s coming.” We need to convince regulators that there are sensible people in the blockchain world who want to do things right and want to help them do the right thing, too.

We can do this if we can show them that the blockchain is something positive. It’s not about competing with existing structures. It’s about coexistence and freedom of choice.

We have a common interest to find the right balance to keep the bad actors at bay, while allowing the ecosystem to experiment and grow.

AF: The blockchain isn’t only a technology; it’s a mindset. It’s about collaboration and common assets—not competition. That’s what I want all people to understand—developers, politicians, business people, regulators, consumers—so we can move forward in the right way and all people can benefit.