Four predictions for private blockchain in 2016

Preston Byrne is co-founder and COO of Eris and a Fellow of the Adam Smith Institute. Previously he was a securitization and derivatives lawyer at Norton Rose Fulbright in London, where he continues to work in high-end finance.

     It has been said that the only way to win in life is to have your obituary published in The Economist.

    By this measure, blockchain (or more precisely the idea of ​​blockchain as a distributed database, not just the backbone of cryptocurrency) is certainly doing well.

     This year alone, blockchain has been featured in dozens, if not hundreds, of articles in most financial journals and on the cover of The Economist. Even liberal culture hero Lawrence Lessig recently called the technology “the most important innovation in infrastructure since the plumbing of the internet was first developed.”

     Now, it is the same as blockchain.

     While the technology has considerable potential, because so few people actually understand how to build it, there is a risk that we won’t be sufficiently aware of its capabilities and aware of its shortcomings, which will lead to us applying it in ways that don’t demonstrate its potential to the best of our abilities.

     So I’ve taken the liberty of offering up some sober but rather bland predictions for 2016, hoping everyone is in a hype-free mode heading into the new year.

1. No one can own the stack

     I’m often asked by journalists and venture capitalists whether blockchain gaming is a “winner takes all” proposition.

     Asking this question betrays a lack of understanding of what blockchain actually does. Blockchain allows different groups to act on a peer-to-peer basis, and until now they have relied on third parties like IBM, Google or Amazon to do it for them. They cut out the service providers and let the blockchain’s pre-set transaction management rules do the heavy lifting.

     Let’s take Bitcoin as an example.

     Most Bitcoiners, when asked what problems Bitcoin solves, are quick to respond with “trust,” “value,” or “intermediaries.” But if we reread the white paper from a teleological perspective, these aspects of Bitcoin’s solution are means to an end, not the end itself.

     In the most abstract terms, the point of Bitcoin is to provide verification and authentication for a certain type of transaction (cash payments) without requiring any of the participants to provide personal information. In Satoshi's words, the problem Bitcoin can solve is privacy.

     To do this with money, you need to create a new currency (Bitcoin) and a distributed network architecture (blockchain) that doesn’t rely on a central machine. However, to do this with most business data, you don’t need to create a new asset class. What you need is to seize control of the network infrastructure, away from existing data service providers, and allow people to run the infrastructure themselves.

     The point of blockchain is that privacy and verifiability are not just about payments. Currently, free-to-use services, from search engines to email to social networks, rely on advertising revenue to fund their normal operation.

     As a result, the companies that provide these services have to go to great lengths to get users to provide more information than they otherwise would. This necessity has skewed the Internet toward a more centralized infrastructure than originally intended, with more serious consequences for personal liberty and data security.

     Bitcoin was designed to solve the centralization problem of transactions with point-of-sale terminals and banks, private blockchains hold the promise of decentralization. If we can prove who we are and enforce connections with cryptography, then we don’t have to share more data with each other.

     As far as we are concerned, Eris has built distributed Reddit and distributed YouTube (both are open source and can be stolen at will), everything can prove one thing: blockchain plus other new technologies such as IPFS are DIY Internet.

     No one really owns HTTP (Hypertext Transfer Protocol - the most widely used network protocol on the Internet), and no one will own the blockchain either.

2. Blockchain will be accepted as a universal database

     When news broke last week that IBM had developed a free, open-source blockchain and provided the code to the Linux Foundation, the bitcoin community derided the news, including some prominent venture capitalists.

     This lack of enthusiasm is very strange, bearing in mind the “DIY internet” that blockchain technology enables. Although Bitcoin fans argue that the officially recognized database should be named, the white paper explicitly states that Bitcoin and blockchain are clearly not the same thing.

     After all, Bitcoin is “a pure peer-to-peer version of electronic cash,” and blockchain is a four-page technical document that follows the words “pure peer-to-peer version of electronic cash” and describes the database backend that runs the application.

     If we were to summarize these four pages, we might come up with a claim like this: A shared data store for peer-to-peer networks designed to "reliably manage large amounts of data in a multi-user environment, so that many users can access the same data simultaneously."

     Likewise, at Eris, our perspective is simple: if RDBMSs like MySQL were the computing silos of the 1990s and 2000s, blockchains are the distributed networks of the 2010s and 2020s.

     So how do private blockchains innovate compared to existing databases? As Tim Swanson writes about Bitcoin, “While the various elements that make up the Bitcoin blockchain have been around since 2001, it wasn’t until Satoshi Nakamoto’s white paper was published in 2008 that it was demonstrated how the pieces could be put together to work as a whole.”

     Private blockchains simply mix and match new components to better suit specific use cases: Bitcoin requires a timestamp server, hashcash's proof-of-work algorithm, and a digital signature scheme.

     Most commercial chains have front-line management systems to save what we need (time stamped) and replace what we don't need with better components.

     In 2016, this proposition will no longer be controversial.

3. Mining will be relegated to irrelevance

     Mining will probably never be relevant on private blockchains.

     The reason for this is fairly simple: Bitcoin mining is not 'transaction processing' or 'transaction verification', as both are done on an ongoing basis by all nodes, propagating valid transactions to one another on the Bitcoin network (verifying digital signatures).

     Mining is not about validation: it is about branch selection. With the advent of distributed systems, such as Bitcoin, anyone in the world can add a block to the end of the chain. As a result, competitive institutions are needed to punish bad behavior.

     Private blockchains, on the other hand, are designed to fulfill a very specific coordination and communication need for both individuals and groups.

     If you control these nodes or know who is running them, then you can secure the chain with the same digital signatures that secure the balance of Bitcoin.

     Chain security therefore becomes a matter of adequately distributing nodes and efficient key management. These are tough problems, but if done well they are effective and far more flexible than Bitcoin’s approach.

     Of course for Bitcoin itself, mining may continue for a while until a better solution emerges.

4. Don’t talk about code

     In 2015 everyone talked about blockchain, and 2016 will be the year people build on blockchain.

     All that remains to be done is a lot of experimentation, refinement and optimisation. Personally I think we are two budget cycles away from a first production system for finance and I agree with Chris Skinner, Chairman of the Financial Services Club, that we are a decade away from mainstream adoption.

     Of course, “mainstream adoption” means that applications with a blockchain backend are ubiquitous and end users don’t even know they are using a blockchain.

     Yet right now, there are a plethora of distributed web platforms, including our own, OpenChain, Tendermint, MultiChain, and IPFS, that exist, work, are free to use, and are being tested by some of the world’s largest companies to solve business problems, particularly around business process efficiency.

     This means any financial institution or other business looking to take action using the technology.