Fueling the Evolution of Blockchain Technology

From Play to Innovation

The United States Air Force (USAF) was one of the first organizations to chart technological progress. In the early 1950s, the team looked at the development of aerospace technology to determine whether there was a pattern to the speed of innovation. Since aerospace was one of the fastest moving frontiers in technology at the time, and because designing and crafting a plane required decades of development, the USAF wanted to predict what the future of the aerospace industry would look like in order to make strategic competitive investments. On a speed trend curve, the team plotted out the history of the fastest air vehicles. The Wright Brothers’ first flight in 1903 reached 4.2 mph; this speed jumped to 37 mph only two years later. The North American F-100 Super Sabre then broke the speed record four times in 1953, reaching a top speed of 755 mph. All of the data pointed to the inevitable space race that followed.

The speed of technological progress has set the pace for modern life and is shaping a Silicon Valley culture of “more, better, faster.” Since the development of aerospace technology, the speed of technological innovation has continued to accelerate. Today, distributed ledger technologies (DLT s), including blockchain, are the latest wave of technology taking the world by storm. This movement is challenging businesses and industries at large to re-examine their existing business processes and pushing them to reinvent themselves.

Given the infancy of blockchain, however, everyone is still making sense of what it is, what it can do, and what its future holds. As such, businesses and individuals alike are adopting a play mentality around this emerging technological innovation. In this context, to play is to embrace uncertainty, welcome experimentation, and fuel innovation within the ecosystem.

Incentivizing Play

In the natural world, the purpose of play is often to form new relationships, to unleash imagination, or to generate new ideas. Within business contexts, however, play often requires a greater purpose. In particular, it is difficult for organizations to push technological innovations forward without an incentive.

Current valuations of cryptocurrencies are largely speculative and driven predominantly by market perception, which itself is further fueled by media. Travin Keith, founder of Agavon, a blockchain DLT solutions consulting company, believes that although the rapid increase in market capitalization is mirroring that of the dot-com bubble of the late 1990s, the journey has been much more emotional and personal – which has, in turn, magnified its effects. “There’s a cult-like following for some of the cryptocurrency projects,” he says. “With the dot-com bubble, most of the investors were stock portfolio managers, active day traders, and high-net-worth individuals… ones who understood the risk and reward tradeoffs of their investments.” With cryptocurrencies, however, the majority of investors are not regular active participants within the financial markets. This means that the spikes can be higher – but the recovery can also be faster.

Given the limited knowledge that the general market and its investors have regarding DLT s and cryptocurrencies, volatile movements in the value of cryptocurrencies are also sometimes driven by further misconceptions within the market. An example of this is the business adoption of blockchain technology. Travin notes that it is important to make the distinction between an organization adopting uses around blockchain and contributing to the public network versus containing their activities on a private network. Since many blockchain platforms are open source, the code behind them is publicly accessible and shared. When organizations are adopting and experimenting with blockchain, they often build their own private network from the open-source code but conduct activities exclusively on their private network. This means that many of the reported use cases are not affecting the public network at all – which falls in stark contrast to media depictions of blockchain’s rise in popularity and adoption. Consequently, these use cases are adding no effect to the demand for blockchain platforms or tokens, but are instead driving up the speculative value of these platforms.

However, speculative interest and financial bubbles are not always bad; bubbles help fuel technological innovation and adoption. Indeed, the increasing speculative value of cryptocurrencies is the driving force behind value creation within the ecosystem, as the blockchain protocol rewards its contributors directly for growing the network. Cryptocurrencies are a way of providing inherent incentives that push the development of blockchain forward and help bring in value for creators, not just investors. The protocol tokens appreciate in value as the network grows, and because the individuals contributing to the development of blockchain infrastructure are the ones holding the cryptocurrencies, they are inherently motivated to strengthen and further the technological protocol behind blockchain technology to drive up the value of their own investments.

In 1965, the cofounder of Intel, Gordon Moore, observed that the number of transistors in a dense integrated circuit – in other words, the technology affecting processing speeds – would double approximately every two years. In 1975, California Institute of Technology professor Carver Mead coined the term “Moore’s law” to describe the observation. Fifty years later, in a retrospective interview with the Computer History Museum, Mead stated that “Moore’s law is not a law of physics. Moore’s law is a reflection on human nature, and there are two things important about it. People have to know down deep that something’s possible, that it’s physically possible to achieve, and they also have to believe deeply that it’s worth doing.” New technological innovations are often accompanied by volatile activities and values driven by speculation. However, speculative value is also a core building block behind the evolution of new technologies.

Playing Without Limitations

With new budding technologies like DLT s, it is imperative for businesses and industries to cultivate an arena for experimentation and play without limitations. The growing attention and activities within the blockchain space have also warranted the attention of regulators around the world. Initial Coin Offerings (ICOs), a popular means by which funds are raised for a new cryptocurrency venture, are beginning to resemble the form of shares and securities of tomorrow’s financial markets. Legally, an ICO is still currently defined as a digital good rather than a financial asset. However, according to an article in Fortune, there is currently a push to regulate ICO activity given growing concerns around fraud, money laundering, cybersecurity risks, insufficient disclosure, and general violations of securities laws. China and South Korea, for example, are some of the first countries to have outlawed ICOs, with many major countries now following suit.

Governing regulations around new technologies aren’t necessarily always a threat to innovation. Though compliance with regulatory requirements may stifle the potential and level of innovation, achieving just the right amount can also place the appropriate constraints on what is otherwise an open ground for future exploitation. “ICO regulation is rapidly becoming a more existent factor but is one that, if applied correctly, can really help this grow,” Travin states. “You can’t achieve such high market capitalization with the government ignoring it. But the good news is that this is also a signal of strength and growth for the wider public who are not in the cryptocurrency space.”

With growing interest in DLT s and more frequent trading of cryptocurrencies, it will be increasingly important for consumers to learn how to navigate the constraints of regulatory grounds. Similar to the pre-regulatory days of Airbnb and Uber during the rise of the sharing economy, peer-to-peer (P2P) platforms are now facing increasing restrictions as the market has matured and had an opportunity to respond. Currently, the majority of crypto-markets are still exploring in regulatory sandboxes, and influencers within the space are pushing for regulators and private investors to tread carefully around the budding ecosystem. What results from this will dictate the future of DLT s and their applications across industries.

Cooperative Play

The internet enabled the centralization of data and defined how data is delivered. Transmission Control Protocol/Internet Protocol (TCP/IP) and Hypertext Transfer Protocol (HTTP) were the building blocks behind the internet and were designed to be open, common resources. However, it was in the application layer where innovation occurred and where a plethora of applications boomed, as value and return on investment were higher here than at the protocol level.

Most of the advancements made in TCP/IP technologies were contributions made by research institutions and scientists. However, it is household names like Amazon and Google that have become synonymous with the word “internet.” These organizations used the underlying protocols of the internet and developed their own infrastructures and applications on top. Facebook, for example, is a data company that captured value early on by leveraging network effects to build a user base that contributed data within its own respective private applications layer and ecosystem. Since they were able to capture value early on, they gained the resources needed to continue scaling and investing further into supporting protocols and infrastructure. In this type of winner-takes-all situation, market influence and value creation are concentrated in the hands of a number of large organizations. Very few others are able to gain the resources required to innovate at the infrastructure layer with such scale, nor do they have access to the wealth of data that these organizations have gathered.

Similarly, the blockchain technologies being built today are comparable to the early protocol layer of the internet, which allows for permission-less innovation through its open architecture. With DLT s, however, the ecosystem is reversed; much of the concentration of efforts lies within the protocol layer. In a blog post for Union Square Ventures titled “Fat Protocols,” Joel Monegro explains the rationale behind this flipped model: “By replicating and storing user data across an open and decentralized network rather than individual applications controlling access to disparate silos of information, we reduce the barriers to entry for new players and create a more vibrant and competitive ecosystem of products and services on top.”

Instead of large players developing self-contained applications and operating in silos, the open-source nature of blockchain protocols and shared data layer encourage cooperative development of the foundational layer behind the technology. This type of streamlined ecosystem reduces the cost of switching to alternative services while creating the ideal competitive conditions; in the long run, this should increase quality and drive down costs. By making it easy for anyone to contribute to this open permission-less ecosystem and encouraging collaborative play, DLTs are providing a much more powerful force of transformation than that which occurs when innovations are approached on an individual level – and this is translating to wide-scale adoption and renewed business models.

The Evolution of Play: From Exploration to Transformation

The process of play often takes participants through an evolutionary journey. First, we experiment with exploratory abstract ideas; later, we transform them into novel innovations. Similarly, new technologies often evolve from a single use case to become a driving force behind new business models. Bitcoin was the first application of blockchain technology and arguably the one that amassed a heightened interest in DLT s and cryptocurrencies. Now, new blockchains are being launched every month, and everyone is hoping to jump on the bandwagon.

Credit – Thought Catalog

The growing popularity of Bitcoin and its wide-scale adoption has successfully illustrated a single use case for blockchain technology. Since Bitcoin, the industry has seen a growing number of DLT applications, many using blockchain to innovate existing processes and businesses. This is similar to the rise of the internet and the development of online iterations of existing businesses. Consider how Expedia largely replaced traditional brick-and-mortar travel agencies or how online journalism and entertainment sites like Medium or BuzzFeed became one preferred method of media consumption. This eventually led to the introduction of the sharing economy, with companies like Uber and Airbnb entirely reimagining the travel industry and existing business models.

Trust is distributed among different actors across a blockchain. In a public blockchain database, information is stored across its network and not controlled by any single entity. Since decentralization is the core of blockchain’s trustless system, the industries that are most at risk from disruption will also be the ones where the margins for the middleman are highest.

Blockchain’s decentralized systems also mean that exchanges can occur among participants without an intermediary. The introduction of blockchain has paved the way for a new market dynamic: one based on true networks and decentralized business models. Within it, there would be no central authority, and contributions and ownership would be shared among all those involved. Instead of a centralized system of exchange – which has allowed companies like Airbnb and Uber to make a margin by connecting service providers to users – blockchain allows for a marketplace where interactions are automated and the power of the network is distributed to its users.

Bee Token is one example of a blockchain-based sharing startup aimed at revolutionizing the existing sharing economy. A prospective competitor for companies like Airbnb and HomeAway, Bee Token plans to generate the majority of its revenue by licensing its technology to other organizations rather than charging an intermediary fee for every transaction that takes place between a host and guest. The other revenue component is to charge a minimum transaction fee for users who choose to pay for rooms using other cryptocurrencies rather than Bee Token’s own currency. By incentivizing users to purchase Bee Token’s currency, the company will further increase the value of that currency. The company recently raised $15M through its multi-stage ICO and is planning on entirely automating the business through sophisticated self-executing smart contracts.

Similarly, Ethereum and smart contracts are the beginning of new business models within the blockchain ecosystem, but industries will likely see more disruptive use cases with time. The most innovative use cases of DLT s will surface between the convergence of industries and technologies, eventually developing into new business models that leverage the unique capabilities of DLT s rather than overwriting existing technology through blockchain application. Organizations should therefore continue to fuel innovation within the DLT ecosystem and strive to push through projects with strong potential but little direction.

Remembering Amara’s Law

The value and full capabilities of new technological innovations are often uncovered through a period of play and experimentation. Only when there are economic incentives for individuals to contribute to and push forward new ideas, limiting governance and regulations are in place, and a cooperative environment is developed can new technologies evolve from a single use case to a true force of disruption across industries.

Amara’s law states that people tend to overestimate the effect of a technology in the short run and underestimate its effects in the long run. In time, much of the current speculation around cryptocurrencies will dissipate, and many of the existing blockchain platforms will fail. However, every failing alternative cryptocurrency will help push the technology further – creating faster transaction times, reducing the energy required per transaction, and improving its security. It is through this period of play that true value will be uncovered in DLT s and the application of blockchain; in other words, play is fundamental to the progression of new technologies.

the author

Lily Zhang

Lily Zhang is a senior innovation analyst at Idea Couture.