Blockchain and the Promise of an Open, Decentralized Internet

The January 21 issue of the NY Times Magazine included a very good article, Beyond the Bitcoin Bubble, by science writer Steven Johnson.  His article aims to explain what blockchain, cryptocurrencies and related technologies are all about as well as their potential impact on the economy and society.  These are not only complex but esoteric subjects, as nicely illustrated in this funny videoWhile blockchain and Bitcoin have been frequently in the news lately, beyond knowing that they have something to do with money, most people don’t really know what they are or why they should care.

This is not surprising.  In their early years, it’s hard for most people to appreciate the potential of a transformative technology.  There’s generally a considerable time-lag between the time we start reading articles about their exciting potential and their adoption by companies and industries across the marketplace.  This is particularly the case for general purpose technologies, like electricity, the Internet and blockchain, which are the most potentially transformative due to their widespread use.   Their deployment time-lags are longer because attaining their full benefits requires a number of complementary co-inventions and investments, including additional technologies, applications, processes, business models, and regulatory policies.

For example, just about everyone is now familiar with the Internet and the many applications it’s enabled, but that was far from the case in the early-1990s.  At the time, a lot was happening around the Internet, and it was all over the news.  People knew that it was a kind of network originally developed by DARPA, an agency of the US Department of Defense, that was now widely used in universities and research labs.  They probably knew that it made it possible to exchange e-mails with just about anybody in the world with an Internet connection and an e-mail address.  They had also likely heard of something called the World Wide Web that provided access to all kinds of information.  But it was far from clear why Internet true believers felt that a mere network was on its way to transforming the world.

It took a while to sort this out because in its early days there weren’t all that many applications.  But that changed quickly over the next few years.  The Internet’s early applications were not difficult to explain.  The name e-mail was self-explanatory, as was the concept of customer self-service.  It was quite revolutionary how easy it was to now do for yourself so many ordinary activities that previously required a trip to a store or office, or at least a phone call during office hours.  You could track the status of your packages, access the latest sports results, check the weather of any city in the world or buy from an online catalog with nothing more than a browser and an Internet connection.  Companies could provide superior customer service at lower costs, and their clients were happy that they could easily get whatever information they wanted any time of day or night. 

Explaining blockchain and cryptocurrencies at this time is much more difficult for a number of reasons.  By the mid-1990s, the Internet had already made the transition from its leading-edge-users to a mainstream market with a much larger number of users.  This is evident by looking at the standards and governance the Internet had already adopted, as well as by the rapidly growing number of applications.

By the same criteria, - standards, governance and applications, - blockchain hasn’t yet made a similar transition from early adopters to a wider marketplace.  While much progress has been made since someone named Satoshi Nakamoto released the original design in 2009, much remains to be done.  While marketplace and research interest has considerably picked up in the past few years, blockchain is nowhere near as mature as the Internet in the mid-1990s, perhaps more akin to the Internet in the mid-late 1980s.  As Johnson observed in his article, “The only blockchain project that has crossed over into mainstream recognition so far is Bitcoin,” which is of interest to a relatively small number of people.

Companies, financial institutions and governments are the primary target users of blockchain, not consumers.  As a result, the basic concepts and applications for blockchain are not that easy to explain.  The underlying technologies behind blockchain include public and private cryptography, distributed data bases and computing, game-theory based decisions, distributed trust, smart contracts, and permissionless networks.  Appreciating the potential value of digital currencies requires having a good understanding of the nature of money, their potential advantage over traditional currencies, e.g., $, £, €, ¥,₩, as well as exotic concepts like initial coin offeringsThis is quite a challenge, even for a well written article like Johnson’s. 

I really liked how Johnson explained the fundamental problem with the Internet that blockchain is helping us address: identity and security.  Think of the Internet as being composed of two different layers stacked on top of each other, which he calls InternetOne and InternetTwo.

InternetOne includes the open protocols that were defined by academic researchers and standards bodies in the 1970s and 1980s, were then widely embraced in the 1990s and continue to be used today, - e.g., TCP/IP for managing the flow of bits; IMAP, POP and SMTP for email; and HTTP, HTML and URLs for the Web.

InternetOne was designed to be a relatively simple, highly flexible, general purpose data network that would support a wide variety of applications in the InternetTwo layer.  Being general purpose was a fundamental design choice, which has enabled the Internet to keep growing and adapting to widely different applications and become one of, if not, the most prolific innovation platform the world has ever seen.

But, to keep InternetOne as simple and flexible as possible, just about everything else, - especially identity and security management, - became the responsibility of the applications in InternetTwo.  And, unlike InternetOne, there are few universal open-standards in InternetTwo.  It was left to private sector companies to defined such protocols in each of their applications, with the result that there are no general standards or common governance for managing identity and security, - arguably the biggest challenge now facing the Internet.

The lack of standards for identity and security has led to the explosive growth of Google, Facebook, Amazon, Alibaba, Tencent, Uber, Airbnb and a few other very large companies.  Each of them has established defacto standards within their respective proprietary platforms, thanks to the power of network effects - the more products or services a platform offers, the more users it will attract, helping it then attract more offerings, which in turn brings in more users.

Consequently, while the open, decentralized Internet is alive and well in the InternetOne layer, the InternetTwo layer has become highly centralized, dominated by a few huge companies whose primary objectives are financial in nature, - as is the case with any business, - leading to some serious negative consequences.  “Once the inspiration for utopian dreams of infinite libraries and global connectivity, the internet has seemingly become, over the past year, a universal scapegoat: the cause of almost every social ill that confronts us,” writes Johnson.  “Russian trolls destroy the democratic system with fake news on Facebook; hate speech flourishes on Twitter and Reddit; the vast fortunes of the geek elite worsen income equality.  For many of us who participated in the early days of the web, the last few years have felt almost postlapsarian.”

Blockchain technologies have the potential to address these serious Internet problems by enabling the exchange of the critical data required to validate identities in a secure, decentralized manner without the need for a central platform or other intermediaries.  Over time, blockchain-based applications could be used to coordinate the self-organizing activities of large numbers of individuals and institutions, in a secure and decentralized manner, as was the case with the Internet’s early objectives.

“Like the original internet itself, the blockchain is an idea with radical - almost communitarian - possibilities that at the same time has attracted some of the most frivolous and regressive appetites of capitalism,” writes Johnson in conclusion.  “We spent our first years online in a world defined by open protocols and intellectual commons; we spent the second phase in a world increasingly dominated by closed architectures and proprietary databases.  We have learned enough from this history to support the hypothesis that open works better than closed, at least where base-layer issues are concerned…  the beautiful thing about open protocols is that they can be steered in surprising new directions by the people who discover and champion them in their infancy.  Right now, the only real hope for a revival of the open-protocol ethos lies in the blockchain.”

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