How to Invest in the Institutional Revolution of Blockchain
We’ve all heard that blockchain will revolutionize business. We nod our heads in agreement, but do we really understand it? In an attempt to uncover the significance of blockchain and opportunities for investing, I spoke with one of its leading voices, Richie Etwaru. Etwaru is a chief digital officer, author, keynote speaker, and a repeat TEDx speaker. This is an edited version of our conversation on the phone and over email.
Belbey: For “non-techies” like me, could you provide an overview of blockchain?
Etwaru: Blockchain is a protocol that allows trust, consensus and autonomy. The first use of blockchain was Bitcoin. However, anything that can be represented digitally, such as rights, goods, and property, can use blockchain.
The core of blockchain is a distributed ledger, the opposite of ledgers as we know them today. For example, Bitcoin combined technologies of distributed ledgers, network computing, and cryptography to coordinate the secure and trusted inventory and transfer of money represented digitally.
Organizations (such as governments, corporations, and volunteer groups etc.) currently operate in a trust vacuum. They use some type of double-sided accounting to coordinate the transfer of value between each other via multiple proprietary ledgers. Because they make the assumption that the other party’s ledgers are not to be trusted, they use inefficient middle wo/men to manufacture trust between organizations. However, organizations operating on a blockchain, operate in the abundance of trust. Blockchain transactions are secure, trusted, instantaneous and don’t require a third party for validation.
Belbey: What is the historical perspective of blockchain?
Etwaru: Ledgers stem from the Dutch word legger, meaning “a book laying or remaining in one place.” Early versions of ledgers were physical books kept in a single place in a church where the official representations of scriptures were written and read in sermons. That’s why modern double-sided accounting using financial ledgers, such as sales ledgers and accounts receivables, are known as the principal “book of account.” And, of course, the practice of keeping official representations of assets, liabilities, income, expense and capital is referred to as ”book keeping.”
The actual books are mostly gone. Today’s modern digital ledgers, coupled with debiting and crediting via double-sided accounting, enable the inventory and transfer of goods, services, rights, property and several other types of assets/value. For example, the amount of cameras for sale at any given second on Amazon.com is the result of a ledger with debits and credits between Amazon’s inventory management systems, camera suppliers, and consumer’s shopping carts and shipping partners.
Belbey: Tell us more about the concept of a distributed ledger.
Etwaru: The ledger is about to have an upgrade at epic scale, into a distributed ledger.
A distributed ledger is the digital inventory of value where participants on a network each has a copy of the ledger. Transactions that change inventory are verified by the majority of network participants. Once verified, these transactions are written to all copies of the ledger at the same time as an irrevocable block of transactions chained to prior blocks via a sophisticated set of encryption techniques. The distributed ledger reduces double counting, the need for settlement, the need for double-sided accounting, and dependence on trusted third parties to manufacture trust.
The trust of a single ledger is sacred, like that old book lying in an ancient church. But to trust someone else’s ledger, or thousands of other ledgers at every moment, requires that we operate on a commerce protocol that enables the secure and trusted inventory and transfer of anything that one would ever want to account for.
Belbey: Is blockchain to business what social media is to communications, ie, a great leveler?
Etwaru: Yes, this is like what social media did for communications. Any person or collection of persons or things may be able to organize, govern and corporate as they see fit. Blockchain is a new type of commercial freedom. However, social media was an information technology that drove an information revolution. Blockchain is an institutional technology driving an institutional revolution.
Belbey: How could blockchain bring about an institutional revolution?
Etwaru: The difference between the collaborative and industrial corporation is the incentive model. For the first time, Uber, AirBnB and Wikipedia are showing us that a pure intrinsic motivation model of commerce can work. People can be completely self-motivated to create value in what we can call a common market.
This intrinsic motivational model coupled with the ability to leverage blockchain to design how we organize and govern in groups to create and capture value, gives rise to a model of commerce that much freer than the one we have today. In the future, we may find that the design of the institution we know it today where we are employed, managed, governed, and paid -- with capital invested, boards of directors, shareholders and dividends -- may seem very archaic. Blockchain begins the powering of this institutional revolution.
Belbey: How can blockchain invite more people into commerce and change business structures?
Etwaru: The potential of blockchain extends far beyond new business models. For example, according to the United Nations, over 2 billion people on the planet do not have sufficient identity. This hinders their ability to participate as consumers in commerce. Blockchain can help that. For example, the government of Estonia has been piloting digital identity for citizens on a blockchain. This type of democratization of trusted identity not only lowers identity fraud, but also levels the playing field. It extends the boundaries of commerce to those who have monetary value but no identity to participate in commerce. We can now allow those people who are not trusted as consumers into commerce.
In addition to the impact of blockchain enabling commerce, it also lowers barriers of groups of humans to organize and govern. Until now, that has required incorporating, following written by-laws, governing with boards of directors, installing management layers, and carrying the overhead to “run” an organization and “prove” compliance.
The distributed ledger coupled with smart contracts give rise to an organizational archetype that does not currently have a legal home. Referred to as a Decentralize Autonomous Organization (DAO), a DAO is an organization where the vision, mission, strategy, principles, currencies, assets, and operating model are represented on a blockchain. Abundant trust and sharing leads to transparency. Simple consensus leads to decisiveness. Autonomous execution of smart contracts lead to reduction in managerial overhead and lower the barriers to entry.
The jury is still out on how governments will accommodate these new free form “corporations” as they enter commerce. While governments catch up, the world’s largest DAO (called The DAO) is a crowd-funding project where more than 10,000 people have autonomously poured almost $200 million into an investment pool. The DAO has no shortage of first generation challenges and growing pains, however this $200 million experiment suggests that instead of relying on choosing between an S-Corporation, a C-Corporation, or a Limited Liability Partnership etc., entrepreneurs of the future will be able to “design” their own organizations customized to the optimal needs of their mission, vision, and strategy to change the world.
Belbey: How are businesses and individuals investing in blockchain today?
Etwaru: There are three types of investments into blockchain. First there are those that are still chasing Bitcoin and digital currencies. While viable, these Bitcoin-only investments are typically limited to the fintech sector and are similar to the email gold rush at the boom of the Internet. Bitcoin is to blockchain what email (or AOL chat) were to the Internet. It’s the first instance, but one of the least interesting ones.
Second are those that are building platforms. Ripple, Ethereum, and The HyperLedger Project are all instances of investments into making blockchain platforms. These vary in size, model and sophistication. Ethereum is somewhat crowd sourced and focusing on the consensus and smart contracts layer. The HyperLedger Project is more of a collaboration of large Fortune 500 companies perfecting the trust layer and use cases in trust.
The third are those building on top of the platforms, or ahead of the platforms, in anticipating that the platforms will catch up. These are vertical, very specific use cases to prove digital music/art rights, show ownership of cars/equipment, or to store and share records of sensitive information about persons or things. Many of these are in fintech, the shiny object that first distracted the venture capital and angel investor community, but increasingly, investments are being made beyond fintech into blockchains of rights, non-monetary assets, and property and others.
This blog appeared previously on Forbes: