Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World

by Don Tapscott

Peter Thiel, cofounder of PayPal, wrote in praise of monopolies in his enormously readable and equally controversial book, Zero to One. A Rand Paul supporter, Thiel said, “Competition is for losers. . . . Creative monopolies aren’t just good for the rest of society; they’re powerful engines for making it better.”

three key distinctions between Internet search and blockchain search. First is user privacy.

The second distinction is that search can be multidimensional.

horizontal, a wide search across the Web, and vertical, a deep search of a particular Web site. The third dimension is sequence, to see these in the order of uploading over time.

third distinction is value: where information on the Internet is abundant, unreliable, and perishable, it is scarce, tamperproof, and permanent on the blockchain.

the blockchain, by reducing contracting costs, enables firms to open up and develop new relationships outside their boundaries.

A smart contract is a computerized transaction protocol that executes the terms of a contract. The general objectives of smart contract design are to satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries. Related economic goals include lowering fraud loss, arbitration and enforcement costs, and other transaction costs.

In a multisig transaction, parties agree on the total number of keys generated (N) and how many will be required to complete a transaction (M). This is called an M-of-N signature scheme or security protocol.

So where does blockchain technology come in and how can it change how firms are managed and coordinated internally? With smart contracts and unprecedented transparency, the blockchain should not only reduce transaction costs inside and outside of the firm, but it should also dramatically reduce agency costs at all levels of management. These changes will in turn make it harder to game the system. So firms could go beyond transaction cost to tackle the elephant in the boardroom—agency cost. Yochai Benkler told us, “What’s exciting to me about blockchain technology is that it can enable people to function together with the persistence and stability of an organization, but without the hierarchy.”

With single points of control, companies themselves are vulnerable to catastrophic crashes, fraud, and security breaches. If you were a customer of Target, eBay, JPMorgan Chase, Home Depot, or Anthem, or for that matter Ashley Madison, the U.S. Office of Personnel Management (second breach!), and even Uber, you felt the pain of hacking in 2015.4 Systems of different parts of a company still have big challenges communicating with one another, let alone with systems outside the firm. For us users, it means that we’ve never really had control. Others define our services with their implicit values and goals that may conflict with ours. As we generate reams of valuable data, others own it and are building vast fortunes—perhaps the greatest in history—while most of us receive little benefit or compensation. Worst of all, central powers are using our data to create mirror images of each of us and may use these to sell us stuff or to spy on us.

a new era in the digital revolution where we can program and share software that’s distributed.

These are all components of the blockchain economy because they use blockchain technology and often cryptocurrencies as their foundation. Smart contracts (discussed in the last chapter) are the most basic form: they involve some complexity that requires human involvement, increasingly in the form of multisignature agreements. As smart contracts grow in complexity and interoperate with other contracts, they can contribute to what we call open networked enterprises (ONEs). If we combine ONEs with autonomous agents—software that makes decisions and acts on them without human intervention—we get what we’re calling a distributed autonomous enterprise that requires little or no traditional management or hierarchy to generate customer value and owner wealth. And we think that very large numbers of people, thousands or millions, might be able to collaborate in creating a venture and sharing in the wealth it creates—distributing, rather than redistributing, wealth.

central powers are inefficient because they don’t know exactly what the market wants in real time.

With blockchain technology peers can develop more formal reputations for effective contributions to the community. To discourage bad behavior, members could ante up a small amount of money that either increases or decreases based on contribution. In corporate-owned communities, peers could share in the value they create and receive payment for their contributions as smart contracts drop transaction costs and open up the walls of the firm.

Overall, peer production communities are at the heart of new, networked models of value creation. In most industries, innovation increasingly depends on dense networks of public and private participants and large pools of talent and intellectual property that routinely combine to create end products.

Blockchain technology provides a new platform for creators of intellectual property to get value for it.

so-called sharing economy companies are really service aggregators.

blockchain technology can take us beyond the sharing economy into a metering economy where we can rent out and meter the use of our excess capacity.

Enterprises create platforms when they open up their products and technology infrastructures to outside individuals or communities that can cocreate value or new businesses. One type is prosumers, customers who produce.

Manufacturing-intensive industries can give rise to planetary ecosystems for sourcing, designing, and building physical goods, marking a new phase of peer production.

lead the world in developing a modern, industrialized, open food system with down-to-earth family farm values.

Yochai Benkler spoke about how blockchain technology could facilitate peer-to-peer collaboration within firms, and between firms and peers of all sorts. “I’m excited about the idea that you have a fully distributed mechanism for accounting, for actions, and for digital resources across anything; whether it’s currency, whether it’s social relations and exchange, or whether its an organization.”38 Today, commercial collaboration tools are beginning to change the nature of knowledge work and management inside organizations.39 Products like Jive, IBM Connections, Salesforce Chatter, Cisco Quad, Microsoft Yammer, Google Apps for Work, and Facebook at Work are being used to improve performance and foster innovation. Social software will become a vital tool for transforming virtually every part of business operations, from product development to human resources, marketing, customer service, and sales—in a sense the new operating system for the twenty-first-century organization.

How would you go about designing a distributed autonomous enterprise? Such an entity could have rich functionality—agents executing ranges of tasks or more broadly business functions all based on a preapproved charter. Individuals, organizations, or collectives of potential shareholders or users will design them by defining the following: 1. Conviction: a belief about the world and what needs to be done to create value or change things. 2. Purpose: its reason for existence. Why are we creating this enterprise in the first place? 3. Constitution: outlines the overall objectives of the enterprise and the rules by which it will create value. 4. Modus operandi: for example, how it will go about creating this value. How it will fund itself—through crowdfunding, traditional early-stage investment, or using revenue. How it will acquire resources. 5. Division of labor between humans and technology: for the foreseeable future, perhaps humans should be in charge. 6. Application functions: how the enterprise will sense and respond to changing conditions.

7. Moral guidelines: Google’s promise to “Do No Evil” is not going to be good enough. The DAE needs some clear guidelines about what is and isn’t acceptable behavior.

Using emerging software and technologies associated with the Internet of Things, we can instill intelligence into existing infrastructure such as a power grid by adding smart devices that can communicate with one another. Imagine creating a new flexible and secure network quickly and relatively inexpensively that enables more opportunities for new services, more participants, and greater economic value.

But hacking is just as bad

Blockchain technology is critical. This Internet of Things (IoT) application depends on a Ledger of Things.

Unlike our energy grid, computing power has evolved through several paradigms.

six big obstacles. One is the Rube Goldberg rollout of applications and services.

Another is organizational inertia and the unwillingness or inability of executives, industry associations, and unions to envision new strategies, business models, and roles for people.

A third is fear of malicious hackers or other security breaches that could modify the information and rules of engagement, overriding devices with potentially disastrous consequences. A fourth is the challenge of “future-proofing,” critical for capital things with very long life spans, longer than the life span of a typical application or even a company. Start-ups go bankrupt or sell themselves to larger firms all the time.

A fifth is scalability; to realize the full value of the IoT, we must be able to connect multiple networks together so that they interoperate. Last is the overarching challenge of centralized database technology—it can’t

handle trillions of real-time transactions without ...

Internet of Everything enabled by the Ledger of Everything—distributed, reliable, and secure information sharing, sensing, and automating actions and transactions across the Internet, thanks to blockchain technology.

Blockchain technology enables us to identify smart devices with relevant core information and program them to act under defined circumstances without risk of error, tampering, or shutting down in the Australian outback.

report, “Device Democracy: Saving the Future of the Internet of Things,” IBM identified the value of the blockchain: In our vision of a decentralized IoT, the blockchain is the framework facilitating transaction processing and coordination among interacting devices. Each manages its own roles and behavior, resulting in an “Internet of Decentralized, Autonomous Things”—and thus the democratization of the digital world . . . devices are empowered to autonomously execute digital contracts such as agreements, payments and barters with peer devices by searching for their own software updates, verifying trustworthiness with peers, and paying for and exchanging resources and services. This allows them to function as self-maintaining, self-servicing devices. . . . 14

up, the new Ledger of Everything has nine nifty network features: Resilient Self-corrects; no single point of failure Robust Can handle billions of data points and transactions

Real-time Stays on 24/7/365 and data flows instantly Responsive Reacts to changing conditions Radically open Constantly evolves and changes with new input Renewable Can be multipurpose, reused, and recycled Reductive Minimizes costs and friction, maximizes process efficiency Revenue-generating Enables new business models and opportunities Reliable Ensures integrity of data, trustworthiness of participants

animation of the physical world.

questions for managers, entrepreneurs, and civic leaders: How will you take advantage of these new opportunities to change and grow? How will your organization respond to the inevitable disruption to your existing operational model? How will you compete with the creative new models of start-ups and collaborations?

THE TWELVE DISRUPTIONS: ANIMATING THINGS

1. Transportation

2. Infrastructure Management

3. Energy, Waste, and Water Management

4. Resource Extraction and Farming

5. Environmental Monitoring and Emergency Services

6. Health Care

professionals use digitization to manage assets and medical records, keep inventory, and handle ordering and payments for all equipment and pharmaceuticals.

7. Financial Services and Insurance Financial institutions could use smart devices and the IoT to tag their claims on physical assets, making them trackable and traceable.

8. Document and Other Record Keeping

documentation relating to a particular “thing” can be digitized and carried on the blockchain including patents, ownership, warranties, inspection certification, provenance, insurance, replacement dates, approvals, et cetera, significantly increasing data availability and integrity, reducing paperwork handling, storage, and loss, and other process improvements related to that documentation.