Blockchain Revolution: How the Technology Behind Bitcoin and Other Cryptocurrencies is Changing the World

by Don Tapscott

Natural assets such as water, carbon, and air are foundational to the economy and essential for life on earth. However, with the exception of some nascent carbon trading schemes, these assets have largely remained immune to market-based forces. This has led to overuse and exploitation of these resources, with costs borne by society in the form of what economists call “negative externalities.” Sociologist Garrett Hardin describes this as the tragedy of the commons—a situation where a shared common resource is depleted because there is no system to govern its use or consumption.

Shortly after the book came out, we witnessed the launch of the first such enterprise called the DAO (for decentralized autonomous organization), which crowdfunded a record-breaking $160 million from tens of thousands of global investors. What distinguished the DAO from all other start-ups was the absence of management in the traditional sense. Created by boutique blockchain development firm Slock.it, the DAO was a smart contract for a token with built-in voting rights. Its stakeholders—human beings—could review and vote on proposals curated by a smaller group of stakeholders to determine how the DAO allocated its funds.

The Fourth Industrial Revolution centers not only on blockchain but also on machine learning, robotics, the Internet of Things, and even biotechnology.95 The demands on CIOs and CTOs within an organization will expand from implementing business strategy to formulating it so that it leverages a range of technologies. CIOs and CTOs will need to wear the hats of the visionary and the great communicator so that they can help their peers in the C-suite understand the potential impact of these technologies and move them to action by sharing relevant use cases and suggesting pilot projects.

“Blockchain technology will have a profound impact not only on processes external to the enterprise but also on the architecture stack within the enterprise—generally by moving business logic and processes out of enterprise silos and onto shared blockchains and broader-based ecosystems.”

Andy Spence, founder of Glass Bead Consulting, expects blockchain to transform the HR function in three waves. The first will resolve fundamental issues with recruitment, namely identity management and verification of credentials by querying prospective candidates’ black boxes, and payment in nearly real time for output or time worked. The second will provide benefits in the broader talent ecosystem and reduce the number of full-time employment contracts. In the third, he envisages “technology sourcing and executing work projects by bringing in workers and services autonomously.”101

Spence advises CHROs to “think more in terms of tasks that need to be sourced rather than jobs that need to be filled” and to celebrate portfolio careers, verified career profiles, and the pursuit of digital credentials (aka open badges). He suggests that “HR can be a pioneer in the new technology—not just blockchain but also artificial intelligence, robotics, and the Internet of Things, all of which could eliminate some jobs and create new ones.”

To them, blockchains are more reliable databases than what they already have, databases that enable key stakeholders—buyers, sellers, custodians, and regulators—to keep shared, indelible records, thereby reducing cost, mitigating settlement risk, and eliminating central points of failure.

ACHIEVING TRUST IN THE DIGITAL AGE Trust in business is the expectation that the other party will behave according to the four principles of integrity: honesty, consideration, accountability, and transparency.12

“People have a very simplistic view of identity,”23 said blockchain theorist Andreas Antonopoulos. We use the word identity to describe the self, the projection of that self to the world, and all these attributes that we associate with that self or one of its projections. These may come from nature, from the state, from private organizations. We may have one or more roles and a series of metrics attached to those roles, and the roles may change.

“The central idea to blockchain is that the rights to goods can be transacted, whether they be financial, hard assets or ideas. The goal is not merely to record the plot of land but rather to record the rights involved so that the rights holder cannot be violated.”

Our contemporary Enigma is a tool of freedom and prosperity. Designed at MIT Media Lab by Guy Zyskind and Oz Nathan, the new Enigma combines the virtues of blockchain’s public ledger, the transparency of which “provides strong incentives for honest behavior,” with something known as homomorphic encryption and secure multiparty computation.

Implications for the Blockchain Economy: Rather than trusting big companies and governments to verify people’s identities and vouch for their reputations, we can trust the network. For the first time ever, we have a platform that ensures trust in transactions and much recorded information no matter how the other party acts. The implications for most social, political, and economic activity are staggering. It’s not just about who married whom, who voted for whom, who paid whom, it’s about any endeavor that requires trusted records and assured transactions. Who owns what? Who holds which rights to this intellectual property? Who graduated from medical school? Who bought guns? Who made these Nike shoes, this Apple device, or this baby formula? Where did these diamonds come from? Trust is the sine qua non of the digital economy, and a platform for secure and reliable mass collaboration holds many possibilities for a new kind of organization and society.

Breakthrough: The proof of work required to mint coins also time-stamps transactions, so that only the first spend of a coin would clear and settle. Combined with PKI, the blockchain not only prevents a double spend but also confirms ownership of every coin in circulation, and each transaction is immutable and irrevocable. In other words, we can’t trade what isn’t ours on the blockchain, whether it’s real property, intellectual property, or rights of personhood. Nor can we trade what we aren’t authorized to trade on somebody else’s behalf in an agency role, perhaps as a lawyer or a company manager. And we can’t stifle people’s freedom of expression, assembly, and religion.

According to Masters, blockchain could reduce inefficiencies and costs “by allowing multiple parties to rely on the same information rather than duplicating and replicating it and having to reconcile it.” As a mechanism for shared, decentralized, replicated transaction records, blockchain is the “golden source,” she says.

To Masters, “permissioned ledgers have the advantage of never exposing a regulated financial institution to the risk of either transacting with an unknown party, an unacceptable activity from a regulatory point of view, or creating a dependency upon an unknown service provider such as a transaction processor, also unacceptable from a regulatory point of view.”32 These permissioned blockchains, or private chains, appeal to traditional financial institutions wary of bitcoin and everything associated with it. While Blythe Masters is the CEO of a start-up, her keen interest represents broader involvement of traditional financial actors in this sector. This embrace of new technology reflects a growing concern that tech start-ups can also upend high finance. For Eric Piscini of Deloitte, whose clients have undergone a great awakening over the past year, the “sudden interest in tech was not something that anyone was expecting.”33 The enthusiasm is spreading like a contagion into some of the largest and oldest financial institutions in the world.

Allaire sees financial services as the last holdouts, and perhaps the largest prize, to be fundamentally transformed by technology. “If you look at retail banking, there are three or four things that retail banks do. One is that they provide a place to store value. A second is that they provide some kind of payment utility. Beyond that, they extend credit and provide a place for you to store wealth and generate potential income.”44 His vision: “Within three to five years, a person should be able to download an app, store value digitally in whatever currency they want—dollars, euro, yen, renminbi, as well as digital currency—and be able to make payments instantly or nearly instantly with global interoperability, with a very high level of security and without privacy leakage. Most importantly, it will be free.”45 As the Internet transformed information services, the blockchain will transform financial services, instigating unimagined new categories of capability. According to Allaire, the benefits of blockchain technology—instant settlement, global interoperability, high levels of security, and nearly no-cost transactions—benefit everyone whether you’re a person or a business. And what of his plan to make it all free? Heresy! say the world’s bankers. Surely, Goldman Sachs and the Chinese venture firm IDG did not commit $50 million to create a nonprofit or public benefit company!46 “If we’re successful in building out a global franchise with tens of millions of users and we’r...

Amid the carnage, an enterprise called Augur launched one of the most successful crowdfunding campaigns in history. In the first week, more than 3,500 people from the United States, China, Japan, France, Germany, Spain, the United Kingdom, Korea, Brazil, South Africa, Kenya, and Uganda contributed a total of $4 million. There was no brokerage, no investment bank, no stock exchange, no mandatory filings, no regulator, and no lawyers. There wasn’t even a Kickstarter or Indiegogo. Ladies and gentlemen, welcome to the blockchain IPO. Matching investors with entrepreneurs is one of the eight functions of the financial services industry most likely to be disrupted. The process of raising equity capital—through private placements, initial public offerings, secondary offerings, and private investments in public equities (PIPEs)—has not changed significantly since the 1930s.78 Thanks to new crowdfunding platforms, small companies can access capital using the Internet. The Oculus Rift and the Pebble Watch were early successes of this model. Still, participants couldn’t buy equity directly. Today, the U.S. Jumpstart Our Business Startups Act allows small investors to make direct investments in crowdfunding campaigns, but investors and entrepreneurs still need intermediaries such as Kickstarter or Indiegogo, and a conventional payment method, typically credit cards and PayPal, to participate. The intermediary is the ultimate arbiter of everything, including who owns what.

We believe that the unstoppable force of blockchain technology is barreling down on the entrenched, regulated, and ossified infrastructure of modern finance.87

Ethereum was conceived in 2013 by then-nineteen-year-old Vitalik Buterin, a Canadian of Russian descent. He had argued to the bitcoin core developers that the platform needed a more robust scripting language for developing applications. When they rejected him, he decided to craft his own platform. ConsenSys was first off the block, so to speak, launched to create Ethereum-based apps. Flash-forward a couple of years and the analogy is clear: Linus Torvalds is to Linux what Vitalik Buterin is to Ethereum.

Our story of ConsenSys is not so much about its ambitious blockchain-based products or services. It’s about its efforts to cultivate a company of its own, pioneering important new ground in management science along the lines of holacracy, a collaborative rather than hierarchical process for defining and aligning the work to be done.

Member ownership explicitly incentivizes this behavior. Everyone owns a piece of every project directly or indirectly: the Ethereum platform issues tokens that members can exchange for ether and then convert into any other currency. “Our goal is to achieve a nice balance between independence and interdependence,” Lubin said. “We view ourselves as a collective of closely collaborating entrepreneurlike agents.

We’ve always had social contracts, understandings of relationships in the specialization of roles where some people in the tribe hunted and protected the tribe, and others gathered and sheltered the tribe. People have traded physical objects in real time since the dawn of modern man. Contracts are a more recent phenomenon, as we began trading promises, not property. Oral agreements proved easily manipulated or misremembered, and eyewitnesses were unreliable. Doubt and distrust tempered collaboration with strangers.

A contract is a bargained-for exchange enforceable before the exchange.

In the cartoon, Adams captures one of the marks of hierarchies gone wrong—that managers often rise to a level of power where they lack the knowledge required for effective leadership.

This is not to say that corporate brands or for that matter acting ethically is unimportant or no longer required. Blockchain helps ensure integrity and therefore trust in transactions between peers. It also helps achieve transparency—a critical factor in trust. However, as author and technology theorist David Ticoll says: “Trust and brand are about more than vouchsafing a transaction. They are also about quality, enjoyment, safety of a device or service, cachet and coolness. In today’s COP21 world, the best brands transparently and verifiably signify outcomes that are environmentally, socially, and economically responsible.”

Along comes blockchain technology. Anyone can upload a program onto this platform and leave it to self-execute with a strong cryptoeconomical5 guarantee that the program will continue to perform securely as it was intended. This platform is public, not inside an organization, and it contains a growing set of resources such as digital money to incent and reward certain behavior. We’re moving into a new era in the digital revolution where we can program and share software that’s distributed. Just as the blockchain protocol is distributed, a distributed application or DApp runs across many computing devices rather than on a single server. This is because all the computing resources that are running a blockchain constitute a computer. Blockchain developer Gavin Wood makes this point describing the Ethereum blockchain as a platform for processing. “There is only one Ethereum computer in the world,” he said. “It’s also multiuser—anyone who ever uses it is automatically signed in.” Because Ethereum is distributed and built to the highest standards of cryptosecurity, “all code, processing, and storage exists within its own encapsulated space and no one can ever mess with that data.” He argued that critical rules are built into the computer, comparing it to “virtual silicon.”

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.

AUTONOMOUS AGENTS Imagine a piece of software that could roam the Internet with its own wallet and its own capacity to learn and adapt, in pursuit of its goals determined by a creator, purchasing the resources it requires to survive like computer power, all while selling services to other entities. The term autonomous agent has many definitions.9 For our discussion, it is a device or software system that on behalf of some creator takes information from its environment and is capable of making independent choices.

DISTRIBUTED AUTONOMOUS ENTERPRISES We now suggest you buckle up in your Star Trek captain’s seat for a moment. Imagine BOB 9000—a set of autonomous agents that cooperate in a complex blockchain-based ecosystem according to a mission statement and rules. Together they create a suite of services that they sell to humans or organizations. Humans animate the agents, endowing them with computing power and capital to go about their work. They buy the services they need, hire people or robots, acquire partner resources such as manufacturing capability and branding and marketing expertise, and adapt in real time.

1. The Peer Producers Peer producers are the thousands of dispersed volunteers who brought you open source software and Wikipedia, innovative projects that outperform those of the largest and best-financed enterprises. Community members participate for the fun of it, as a hobby, to network, or because of their values. Now, by enabling reputation systems and other incentives, blockchain technology can improve their efficiency and reward them for the value they create.

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.34 In a dynamic world of customer innovation, a new generation of producer-consumers considers the “right to hack” its birthright. Blockchain technology supercharges prosumption. Nike running shoes could generate and store data on a distributed ledger that, in turn, Nike and the shoe wearer could monetize as agreed in their smart contract. Nike could offer a tiny piece of its shares with every pair it sells, if the customer agrees to activate the smarts in the shoes, or even sync her shoes to other wearables, such as a heart monitor or glucose level calculator or other valuable data for Nike.

Wikinomics introduced the concept of ideagoras—emerging marketplaces for ideas, inventions, and uniquely qualified minds, which enabled companies like P&G to tap global pools of highly skilled talent more than ten times the size of its own workforce. Firms use services like InnoCentive and Inno360 to facilitate holding “Challenges,” “Digital Brainstorms,” and other techniques to find the right temporary talent outside their boundaries to address critical business challenges. It’s about using data to find the right talent to hack your business for the better.

There may not be a distributed autonomous enterprise in your near future, but the thinking behind these new entities can inform your business strategizing today. With the rise of a global peer-to-peer platform for identity, trust, reputation, and transactions, we can finally re-architect the deep structures of the firm for innovation, shared value creation, and perhaps even prosperity for the many, rather than just wealth for the few. Now you have at least seven emerging business models that could help you shake some windows and rattle some doors in your industry while distributing wealth more democratically.

The Internet of Things cannot function without blockchain payment networks, where bitcoin is the universal transactional language.

Thus the blockchain can address the six obstacles to a functioning Internet of Things. To sum 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

Redesigning and automating processes across peer-to-peer networks, rather than through people or centralized intermediary apps, could bring numerous benefits as already identified including: Speed (end-to-end automation) Reduced costs (associated with sending nearly infinite amounts of data to giant central processing facilities; elimination of expensive intermediaries) Increased revenue, efficiency, and/or productivity (freeing up excess capacity for reuse) Improved effectiveness (built-in checklists and other protocols reduce impact of human error) Increased security and integrity (person-to-person trust is not required as trust is designed into the network architecture) Reduced likelihood of system failure (elimination of bottlenecks, built-in resiliency) Reduced energy consumption (energy required by the network itself offset by increased efficiency and reduced wastage, dynamic pricing, and feedback loops) Increased privacy protection (intermediary can’t override or ignore rules defined in the blockchain) Improved understanding of underlying patterns and processes and opportunities to improve them through the collection and analysis of “infinite data” Strengthened predictive capability of various events whether negative (severe weather, earthquakes, failing health) or positive (best time to plant crops, buying patterns). The distributed open model means that IoT networks can be self-sustaining even after a company pulls out or a manufacturer fails.

The Ledger of Things enables “distributed capitalism,” not just redistributed capitalism.

What could this persistent reputation mean for global entrepreneurship? If you have a reliable, unique, and robust identity, and you’re deemed trustworthy, counterparties will feel more comfortable providing you with access to value. This is not redistribution of wealth but a wider distribution of opportunity. Haluk Kulin, CEO of Personal BlackBox, said, “The biggest redistribution that is about to happen is not a redistribution of wealth but a redistribution of value. Wealth is how much money you have. Value is where you participate.”29 Blockchain can enable every person to have a unique and verifiable reputation-based identity that allows them to participate equally in the economy. The implications of this equality are profound.

Democratized Entrepreneurship: Under the right conditions, entrepreneurs are the engines of economic growth in society. They bring fresh thinking to the marketplace and fuel the creative destruction that makes market economies prosper. Blockchain technology bestows individuals and small companies anywhere in the world with many of the same capabilities of larger organizations. Blockchain-based ledgers and smart contracts lower barriers to starting a company, expedite incorporation, and cut red tape particularly in the developing world, where it takes three times longer to incorporate and costs five times as much.

The new communications and data analysis tools have also allowed ideologically driven groups to hijack social and political debates. Both liberals and conservatives are using them to create echo chambers that undermine the potential for compromise, let alone consensus.

In the predigital era, enacting and enforcing policy was less complicated. Policy specialists and presidential advisers had strong command of the issues. Today they can barely keep pace with defining the problems, let alone crafting the solutions or explaining them to the public. So bad is the problem that President Obama signed into law the Plain Writing Act of 2010 requiring federal agencies to use language the public can understand.

If there were a prediction market for innovations, we’d bet on Team Heap. In 2009, she became the first woman to win a Grammy solo for engineering her own album, Ellipse. She took all her Twitter followers to the award ceremony by wearing what has become known as the “Twitter dress.” Her outfit, designed by Moritz Waldemeyer, featured an LED zipper that streamed her fans’ tweets around her shoulders. In 2013, Heap kick-started the nonprofit Mi.Mu to invent a musical glove system. It combines mapping software with motion detection sensors so that performers can control lights, music, and video with user-customized gestures. The invention won top prize at the 2015 Berlin Awards for WearableIT/FashionTech. The gloves are quickly catching on. Pop star Ariana Grande posted this message on YouTube with her video cover of Heap’s “Hide and Seek”: “want to thank my idol @imogenheap for allowing me to use the Mimu gloves on my first ever world tour.”6 If anyone doubts Heap’s ability to rally a community around new technology, think again.

Swan is the founder of the Institute for Blockchain Studies. “There’s the start of a development of an educational infrastructure to support learning about these technologies. Obviously, all the meetups, user groups, and hackathons are tremendously useful,” she said. “Every strategy and accounting consultancy has a blockchain practice group now, and there are education institutions like Blockchain University.”45 Swan herself teaches a blockchain workshop at Singularity University. She talked of an education system where a college student would become what she called an “educational sommelier,” pairing interests or needed skills with accredited courses, potentially massive open online courses (MOOCs).

A seventh dimension is societal change. Money is still a social construct representing what a society values. It is endogenous to that society, it manifests because of human relationships, and it adapts to evolving human needs. “You can’t take the social out of money,” said Izabella Kaminska of the Financial Times. “A lot of these protocols attempt to do that by creating an absolutist and very objectified system. It just doesn’t reflect the world as it is.” She pointed to the euro system as an example of how one size—one set of protocols—doesn’t fit all countries.

Many of our concerns about the first generation of the Internet have come true. Powerful corporations have captured much of the technology and are using it in their vast private empires to extract most of the value. They have closed off opportunity and privatized much of our digital experience. We use proprietary stores to acquire and use new apps on our phones, tablets, and now watches. Search engines and marketing departments alike interrupt our content with advertising.

Big companies that promote and prosper from consumer transparency are notoriously secretive about their activities, plans, technology infrastructures, and information assets.

Ethereum could create new opportunities for value creation and entrepreneurship. “Whereas most technologies tend to automate workers on the periphery doing menial tasks, blockchains automate away the center,” he said. “Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly.” Blockchain doesn’t eliminate jobs so much as it changes the definition of work. Who will suffer from this great upheaval? “I suspect and hope the casualties will be lawyers earning half a million dollars a year more than anyone else.”6 So Buterin knows his Shakespeare: “The first thing we do, let’s kill all the lawyers.”7

“This could be the next Internet,” said Doug Black, the Canadian senator from Calgary, Alberta, and a major contributor to the report. “This could be the next TV, the next telephone. We want to signal both within and outside Canada, we support innovation and entrepreneurship.”37 Like Ben Lawsky, Black is a veteran lawyer.

Josh Fairfield, of Washington and Lee University Law School, said, “We need regulations that act like technology—humble, experimental, and iterative.”

Carolyn Wilkins, deputy governor of the Bank of Canada and a central banking veteran, told us, “We are confident in our paradigm right now, but we understand many paradigms have a shelf life: they’re going to work well for a number of years and then things are going to start to go wrong. You can fix it at the margin first, but eventually you just need to switch to something else.” She believes the blockchain could be that something else. “It’s hard not to be fascinated by something so transformative. This technology is being used in ways that have implications for central banking that span all the functions that we have,” she said.