From private to public: the evolution of distributed ledgers

There is often discussion on distributed ledger technologies and whether they can, or should, operate on a private network. This is clearly not a technological limitation, but the logic generally runs: if it is not fully public, then how does it differ from a database? What I hope to outline in this post is the possible phases through which this technology could evolve, which may lead to the distribution of intelligent infrastructure away from centralized entities.

A fully distributed ledger, or what I like to refer to as distributed infrastructure when smart contracts and autonomous execution are incorporated, requires a shift on a number of fronts.

Firstly, this is technology over which the participants do not have control. Businesses at this point in time are not going to rely on a fully public ledger for any core products if they have no control over the underlying infrastructure, legal or otherwise.

Secondly, tokens on the network, be they Bitcoin, Ether, NXT or Dogecoin, fluctuate in value to an at times significant extent, adding an aspect of risk management which previously did not exist.

Finally, business models based on a public ledger will most likely look quite different to those in today’s world, where many rely on margins made from being an intermediary. The true value in distributed infrastructure is in facilitating the creation of new markets that can grow organically without central intermediaries: consequently, profit opportunities will need to be found elsewhere.

Tackling such fundamental changes to infrastructure, risk management, and business models in one swoop is not something that enterprises typically do. Consequently, it is likely that enterprises will adopt this technology over a number of phases, where familiarity is gained, and the technology and business models are proven.

The first phase in the evolution of distributed ledgers was its creation. Bitcoin’s development in 2008 and release in 2009 had enormous promise: a decentralized currency with near-frictionless transactions, allowing effectively digital cash to be sent around the world without any controlling party. Bitcoin was, however, limited in a number of ways. It ignored, either deliberately or not, the current regulatory environment, which significantly limited the ability for the ecosystem to grow. Additionally, transaction costs are not only the minimal fees taken by miners: the enormous cost spend by mining companies in electricity and capital purchases are also made up for by the generation of bitcoins, leading to an increase in supply and consequently inflation. The potential of the underlying blockchain, however, was not lost on some. If this could be used to transfer tokens considered financially valuable, it could be used to transfer data and computer code in the same decentralized manner.

We are now at the beginning of phase two. The potential of blockchain technology is now recognized by most who have heard of it, and recent press has certainly led to the increase in attention. In this phase, incumbents are investing to identify and implement opportunities that leverage blockchain technology, as well as recognizing that there are many more flavors of the technology, leading to the more broad definition of distributed ledger technology. People “like the blockchain, but not Bitcoin”. Consortiums are forming to leverage the technology, and implement single distributed ledgers, more efficiently managing (in theory) utilities that currently require cumbersome, non-standard processes.

In this phase, incumbents, regulators, and perhaps consumers, will become familiar with the technology and its benefits, which is leading to a recognition that while this technology may improve the efficiency or operation of current utilities, the potential for distributed ledger technology to create markets or products not previously possible may be far more significant. So while current business cases are developed and implemented, these new revenue opportunities are being identified.

In the third phase, the previously identified brand new revenue opportunities will begin being rolled out, where organizations trial new business models in a fully decentralized manner. Additionally, institutions may start looking at moving towards interoperability of their private distributed ledgers. While distributed ledgers have practical use cases through the setting and enforcement of standards and decentralization of certain back office functions such as regulatory reporting, the real strength may come when these are connected and interoperable in an open, publicly authenticated network. This network may be Bitcoin, or it may be an alternative such as Ethereum, or even a technology backed by a central bank. Over time, this may become similar to a series of intranets connected into the Internet – although in this case, there may be more than one. With this maturity and interoperability, the market, which previously held back the adoption of Bitcoin, will begin to warm to a new way of operating.

With this interoperability and development of standard global ledgers would come new business models, and their development and full deployment would be the final phase. With the market now evolved to have built the scaffolding needed to stand up these new business models, the full potential of distributed infrastructure may be realized. This may involve the Internet of Things, decentralized marketplaces, Decentralized Autonomous Organizations, and other businesses that we have not considered. The timing of this phase would change by industry, and financial services may take some time to get to this point. With this evolution however, the existence of a separate financial services sector may itself be challenged.