...by Daniel Szego
"Simplicity is the ultimate sophistication."
Leonardo da Vinci

Thursday, April 19, 2018

Blockchain: the new trust layer of the internet

Cryptocurrencies and blockchain technologies are among the best hyped technologies all around the world. Although the technology first appeared in 2009 first as an initiative of a mysterious person called Satoshi Nakamoto the real strengths of the technology hasn't been recognized for a while. The major reason for the recent hype is that the world is getting aware of the technology and trying to understand which use-cases can be efficiently covered by blockchain apart from cryptocurrencies and Bitcoin.  

To understand the real potential of blockhain, the best was is to compare with an old classical protocol internet protocol, like TCP / IP.. Although it sounds technical pretty technical, the TCP / IP protocol is nothing more than a technical cooperation way between different computers for reliable  data transfer. The protocol appeared around fifty years ago, got a little bit more widespread thirty years ago. At first sight it seemed to be a pure technical game for scientific people or tech geeks to exchange information. However nowadays we can already conclude that the TCP/IP protocol has basically changed the world. It is the basic backbone of the internet itself, practically everything that is regard currently as internet or web is based on this technology. It is important to note from a business or marketing perspective that there are many applications of the technology wasn't foreseen thirty years ago. Examples are Facebook or Twitter that are based on this protocol but no-one could predict previously that the become million dollar industries.

From a practical point of view blockchain or distributed ledger technologies are similar to the TCP/IP. They are simply IT, collaboration protocols but instead of reliable data transfer, they realize a trust protocol between different actors. Let we just imagine the situation that there are several actors throughout the world who want to collaborate with each others and exchange value. As an examples, they want to exchange or transfer a currency. These actors are geographically decentralized, they do not know each other, they do not trust each other and actually they do not want to trust each other. Hence they are not necessarily humans, but for examples different IoT devices communication and transferring value with each other. blockchain protocols simply guarantee from an algorithmic level that these actors can exchange value with each other even with such a circumstances.

Traditionally, trust based services were provided by centralized institutes like banks or insurance companies. They provided a working model for many years, however they suffered from many problems, like inefficiency, slowness or sometimes from censorship. Blockchain technology simply disrupts this institutional business model and provides a much faster, cheaper and fairer way for exchanging value or to realize trust based services on the internet.  

There are two major, a little bit controversy applications of blockchain nowadays: cryptocurrencies and token based platform funding (called ICO at the moment) that are disrupting traditional money transfer and corporate funding. It is important to note however, that they are just applications on the protocol. One of the major reason of the Hype that the world is experimenting currently which other classical trust based services can be realized in a more efficient way with the technology.

Certainly, we are pretty much at the dawn of distributed ledger technologies: there are still many technological drawbacks, due to the lack of regulation many scams, and of course classical institutional trust based industries managing billions of dollars won't adapt so easily. Which fields and use-cases will reach the real mainstream adaptation is something that we will probably see in ten-twenty years.