Software eating the world and crypto eating the Internet
These concepts were explained separately by both Andreesen Horowitz (A16Z) and Saxon Advisors, and they are trully connected.
Public and private blockchain-computers have many similarities:
- Both are peer-to-peer networks, where each participant maintains a replica of a shared database (the append-only ledger of digitally signed transactions).
- Both maintain the replicas in sync through a protocol referred to as consensus.
- Both provide certain guarantees on the immutability of the database, even if some participants are faulty or try to be malicious.
However, many terms have evolved over the years and the terminology is often misconstrued. The sole distinction between public and private blockchain-computers is related to who is allowed to participate in the network, execute the consensus protocol and maintain the shared database.
A public blockchain computing network is completely open, free for anyone to use and free for anyone (with the IT resources) to participate in the consensus protocol. Updates to the code-base or conflict resolutions are managed through democratic procedures involving everyone participating. For those wishing to take part in the consensus, they are incentivised by earning crypto-asset denominated financial rewards. The prospect of making a profit through these financial rewards is what encourages participants to join the network.
A private blockchain computing network, on the other hand, requires an invitation and must be validated by either the network starter or by a set of rules put in place by the network starter. Businesses who set up a private blockchain will generally set up a permissioned network. This places restrictions on who is allowed to participate in the network, and only in certain transactions. Incentives for permissoned members wishing to participate in the consensus protocol involve financial rewards too, however, they are denominated in fiat currency.
If we understand these concepts then we understand when people talk about “Blockchain, not crypto” and that they are referring to private blockchains.
- Scalability problems — Many of the current public blockchain computers are adequate for dealing with simple scalability. However, we believe that in many large-scale use cases, service providers need IT systems that can automatically deal with more demand from gradual or even sudden demand from the users of the service.
- Privacy issues — The business community has a stronger requirement for data privacy than is currently provided by public blockchains. Even though blockchain computers allow users or companies to self-custody their financial assets and private data, their checks & balances and transaction history are open for everyone to see.
- IT integration difficulty — For several decades, enterprises of all sizes have been optimising and transforming their businesses through the use of digital technologies. This has often occurred in waves, resulting in layers upon layers of different systems being tested and implemented. Enterprise infrastructures, therefore, tend to depend on a diverse range of technologies and processes. As such, integrating new technology such as blockchain into a complex system can be very difficult, risky and costly.
- Control — Not having full control of their IT infrastructure raises operational issues for businesses. Public blockchains have been subjected to frequent hard forks. Hard forks are a necessary measure when modifying or upgrading the underlying technology. However, they create a totally separate variant of the original software program. When a public blockchain-computer experiences a hard fork, the applications are meant to continue to operate as usual on the new version of the blockchain computer. When you consider the spider-web like relations between enterprise solutions, a hard fork on a simple user-application could potentially cause critical business failure.
As private blockchains are controlled by a small group of permissoned members, they can easily be adapted to solve some of these technological issues, better aligning themselves with the needs of entrepreneurs and enterprise businesses. And also there would be no need to touch volatile crypto-assets.
But Blockchains without crypto fall short. As many of you may know, the blockchain computer enables everyone in the world to:
- Trust the integrity of the computer thanks to data transparency and open-source code. {TRANSPARENCY}
- Trust the security of the computer thanks to no central points of failure and mathematically-guaranteed consensus. {SECURITY}
- Trust the rule-makers of the computer thanks to community-driven decision making. {GOVERNANCE}
These three drivers form the basis of a concept we introduced, called the Trust Tripod. A tripod manages stability even if there is a difference in the length of the three legs. However, in the absence of a leg, the tripod is completely unstable and it collapses: losing faith in either transparency, security or governance will result in the breakdown of trust. Which would be the heart of the governance problem, for instance? We could talk a lot about it. Things start to get ugly when a company starts to monopolise. Once a company attains considerable market share, they no longer experience significant threats from competition. Neither demand siders or supply siders have a viable opportunity to move to an alternative solution that can offer the same quality of service that the monopoly can, due to the economic moats they have. As private blockchain participants grow beyond the confines of their permissioned members their interests will become more and more misaligned with the users.
Blockchain computers aim to be foundational technological infrastructure for everyone, used as a globally accessible repository for property rights, financial assets, personal data, etc. They will only become truly valuable if everyone opts into the same system. For us to get to that stage, it will mean competitors at the core base layer of the blockchain computing stack will be few and far between. “Monopolisation”, as we know it today, is inevitable. In the context of private blockchain computing platforms, monopolisation destroys trust due to:
- Excessive value extraction and competition — since blockchain computers are platforms on which applications are built, application developers must trust the governors to not shut down their application due to, for example, a conflict of commercial interest. Besides, as the private blockchain monopolises, there is always the risk of the governors changing the rules of the game in a bid to maximise financial returns for the small group of “permissioned” members (plutocracy).
- Unlawful censorship — With the internet companies of today, we’ve only had a mere taste of censorship. Once our valuable assets become digitised and recorded on blockchains, censorship will become significantly more profound. Private blockchains, for example, may become powerful tools for corporations or governments to push their political agendas by giving them the power to easily seize an individual’s assets unlawfully, or shut off their access to the economy.
Why Crypto solves this
Unlike the private blockchain monopoly, the crypto-powered blockchain computer allows us to create a system that maintains trust among all three parties as it scales and attains significant market share. As a result, the balance of power no longer swings towards the capital providers (shareholders).
Therefore, supply siders and demand siders no longer need to fear:
- Unjust price premiums and unfair wealth distribution.
- Competition threats from the platform operators.
- Unlawful censorship from unelected entities trying to push hidden commercial or political agendas.
Eventually, public blockchain technology will evolve to the point where all of the enterprise needs (e.g. privacy, scalability, integration, etc.) will comfortably be fulfilled. Therefore, we believe that in the long term all enterprise applications and cross-company business logic will run on public — privacy-preserving — blockchain computing networks.
In the near-to-mid term, however, we envision hybrid (public and private) blockchain ecosystems forming. This is where private blockchain computers that are tailored to the need of the corporate world will leverage the crypto-powered public blockchain computer for its trust properties.
The “blockchain, not crypto” argument has merit to it, however, it fails to take into account the real innovation with blockchain: the economic innovation, that allows us to build globally accessible technology without trust ever being compromised.
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