Breezy Briefings is pleased to present a brand new essay series by Abraham George titled CPaaS, Twilio, Blockchain and Tanla. Special thanks to Amit Mishra and Maneesh Jain for fact-checking and special inputs. Subscribe using the button above or Telegram to receive the latest updates as soon as it is published. This is Part 3 - if you missed the previous parts, check out Part 1 and Part 2.
If you are a CEO or a business leader and want some research-based perspective and insight on how blockchain technology can add value to your business without all the hype and hoopla, I highly recommend ‘The Real Business of Blockchain’. The co-authors are vice presidents at Gartner, a leading tech market research firm. I am going to distill the key learnings from these Gartner experts and give you just the meat and potatoes.
Gartner has estimated that blockchain could generate as much as $3.1 trillion in new business value by 2030.
In layman’s terms, a blockchain allows you to do business with an unknown partner located anywhere and trade any asset at any transaction size and not need a lawyer, bank, insurer or any other third party intermediary (which would take a piece of the value) to verify that both of you follow through on what you have promised to do (or not do).
According to the authors, a fully mature blockchain architecture will have 5 core elements.
Distribution. Connected on a network, each blockchain participant operating a full node maintains a complete copy of the ledger, which updates with new transactions as they occur. Nodes are the machines owned or used by participants and equipped to run the consensus algorithm described below. Any participant can review any part of the ledger but cannot change it except under prescribed circumstances.
Encryption. Blockchain uses technologies such as public and private keys to record the data in the blocks securely and semi-anonymously (participants have pseudonyms). The participants can control their personal identity and other information and share only what they need to in a transaction.
Immutability. Completed transactions are cryptographically signed, time-stamped, and sequentially added to the ledger. Records cannot be corrupted or otherwise changed unless the participants agree on the need to do so. Such an agreement is known as a fork.
Tokenization. Transactions and other interactions on a blockchain involve the secure exchange of value. The value comes in the form of tokens. Digital markets can function more effectively with tokens and need to create them (tokenization) for various reasons. Tokens might function as digital representations of physical assets, as a reward mechanism to incentivize network participants or to enable the creation and exchange of new forms of value. They also allow private and corporate participants to control their data.
Decentralization. Both network information and the rules for how the network operates are maintained by multiple computers, or nodes, on the distributed network. In practice, decentralization means that no single entity controls all the computers or the information or dictates the rules. Every node maintains an identical encrypted copy of the network record. A consensus mechanism operated by each full node verifies and approves transactions. This decentralized, consensus-driven structure removes the need for governance by a central authority and acts as a fail-safe against fraud and bad transactions.
Together, these five core elements of blockchain allow two or more participants who don’t know each other to safely interact in a digital environment. Our insistence on all five elements is not semantics. When a blockchain is missing one or more of these elements, its value is limited or even negated.
The Gartner authors have mapped the blockchain evolution timeline into 3 phases:
Phase 1 - Blockchain-Inspired (2012-early 2020s): These solutions use only three of the five elements — distribution, encryption, and immutability. These solutions often aim to reengineer existing manual processes.
Reasons why the solutions developed during the blockchain-inspired phase will focus on only three of the five elements: maturity of the technology, the enterprises’ readiness to embrace each element, the ease of implementation of each element (internally and externally), regulatory considerations, and the propensity to deal with a limited set of known, and therefore trusted, participants.
According to Gartner’s 2019 CIO survey, only 3 percent of the 2,871 CIOs say they have a live and operational blockchain for their business. Few to none of these implementations use all five elements of blockchain.
Phase 2 - Blockchain-Complete: These solutions deliver the full value proposition of blockchain mainly the game-changers like tokenization and decentralization. Tokenization allows you to create new assets and represent illiquid assets in a form that can be autonomously traded. Decentralization uses consensus to authenticate potentially untrusted users, assets, and transactions and ensures that no central provider can own or control the underlying mechanisms of trade in these assets.
Phase 3: Enhanced Blockchain Sometime after 2025, complementary technologies such as IoT, AI, and decentralized self-sovereign identity (SSI) solutions will converge and become more integrated with blockchain networks turbocharging blockchain’s benefits. Here, autonomous and intelligent ‘things’ will own and trade assets.
The biggest challenge is not technological maturity but organizational resistance and mindsets. The very notion of the consensus-driven decision-making that is inherent in the design of blockchain-complete and enhanced blockchain solutions is antithetical to most organizations and business leaders.
The Gartner authors have classified blockchain-inspired solutions into 5 archetypes reflecting varying degrees of centralization: FOMO-based (most in-house projects), Trojan horse (e.g., Walmart), opportunistic (e.g., ASX), evolutionary (e.g., Sweden’s Lantmäteriet), and blockchain-native (e.g., Woolf University)
Out of the 5 core elements of a fully mature blockchain, decentralization is the beating heart of blockchain while tokenization is the blood coursing through the ecosystem. Decentralization determines whether you and other network participants operate as true peers with equal ability to derive value or whether some actors reap benefits out of proportion to their contribution. If you hope to participate in blockchain-driven digital markets and derive the maximum benefit from blockchain, decentralization is not optional.
Decentralization has 8 components which fall into the 3 main categories of governance, economics, and technology:
Decision making: Participants allow decisions to be codified and executed on the blockchain without a central authority weighing in on them.
Participation: Anyone or anything can act as a full node, assuming the requisite infrastructure and agreement to adhere to the terms of operation.
Commercial ownership and oversight: No single entity or consortium has a majority stake in the value produced on the blockchain. This equitable sharing applies to monetary value and to the currencies of data, access, contracts, and technology.
Financing: No single entity or consortium provides or is responsible for the liquidity of the blockchain; a sound economic model sustains the platform.
Rewards allocation: The blockchain fairly distributes rewards to all the nodes running the consensus according to agreed-on and transparent rules.
Technology architecture: The blockchain relies on a consensus algorithm and a ‘one node, one vote’ policy to authenticate participants and validate transactions.
Protocol development: Inputs to the solution and the source code come from multiple sources, usually through open-source development.
Network governance: No single entity or consortium has majority control over the nodes on the blockchain. Participants can have active or passive roles and the freedom to join and exit.
These 8 components determine how the blockchain defines and executes the business rules for a solution; who gets to participate and their roles in the network; and how to allocate rewards to participants according to their contributions.
I strongly feel that the above frameworks and rubrics - 5 core elements of a mature blockchain; 3 phases of blockchain evolutionary timeline; 5 blockchain-inspired solution archetypes; 8 components and 3 categories of decentralization - will serve as an excellent guide in assessing the claims of various enterprise blockchains, separating the hype from the substance, and extrapolating how much value they will be able to create in the future.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is setting up a hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.