AUTOMATED NETWORKS AND SMART CONTRACTS
The term used to describe the new forms of organization created by blockchain networks is “decentralized autonomous organizations.” But one could just as well term them “decentralized automated organizations” as the automation of basic organizational procedures will be a central aspect of this new form of economic organization.
Blockchain protocols build upon the capacities of telecommunication networks to interconnect, and of the capacities of the microprocessor to run complex software systems for coordination. But whereas the previous set of information technologies gave us digital platforms for organizing economic production, the blockchain promises to extend this model to fully automated distributed networks.
The promise of the blockchain since its beginnings has been to challenge centralized, top-down decision-making through, distributed consensus, radical transparency, and auto enforceable code.
Smart contracts on the blockchain disintermediate existing institutions and radically reduce transaction costs thus allowing for new forms of decentralized organizational structures that were not feasible before. More specifically, this business model “automates” the governance to a certain degree. It frees up more time to actually spend on getting work done, although it also requires a much larger leap of faith by all parties involved to trust in an automated “trustless system.”
As one commentator noted, we can call private blockchains training wheels for public blockchains and now public blockchains are in many ways just training wheels for these new autonomous decentralized networks, which just work and everyone can trust them. These are gonna be some of the most powerful networks that we have seen because the code is immutable and many functions are automated. In many ways, they will be unstoppable in the way that Bitcoin is automated and likewise in many ways unstoppable.
An enterprise can be defined by its business model as a system that operates within some environment, intercepting resources and processing those into some output of value, while capturing some of that value and redistributing it within the organization.
People work together to create value and then redistribute that value amongst members, what changes with the blockchain model is that we take out the centralized coordination component and replace it with code in the form of smart contracts.
Smart contracts on the blockchain radically reduce transaction costs and automate basic management operations creating the basis for a peer-to-peer economy; allowing for new forms of organizational structures that were not feasible before.
The enterprise can be converted into an automated plug-n-play model where anyone who can deliver a service can plug into the system and provide that service directly through a smart contract receiving tokens in exchange.
Brendan Blumer CEO of Block.one, the makers of the EOS network, describes this evolution in the enterprise when he says “what we’re really moving into is the era of open source companies and the types of innovations that you’re seeing with open source technology, the explosion in development and projects like GitHub… the core of open source allows us to all build on each other’s work. In the future when I wake up I may not even have an employee or employer. I may be able to just work for absolutely any company in the world that I can add value to. Imagine that you wake up and say I have a great idea for Airbnb, you examine the code you start writing something and you put it out there, the public accepts that, forks you into the network, pays you a bounty, now you’ve got a decentralized network a piece of code that has essentially just hired you, that has taken your ideas, that has incorporated them into the organization and you have been paid and they don’t even know who you are.”
When everything is open source and everything is able to be viewed anyone can add value to that business, anyone can connect and say what if we do this, or what if we add that feature. The past decades have shown how open-sourcing software and open-sourcing development can skyrocket the acceleration of technology innovation and service delivery.
Because we’re not reinventing the wheel anymore and anyone can come in and add a good idea and it can be adopted by the greater public. What happens when you do that to a company? When you’re competing with Uber with everybody as your employee? Every bit of your code is auditable, anyone can make suggestions, if those suggestions are good they can be forked right in that’s really what these decentralized autonomous corporations enable.
Blockchain networks will extend the recent development of the on-demand economy and online freelancing platforms that have enabled people to work as freelancers contributing to many different projects without one fix form of employment.
By digitizing everything, automating networks and enabling micro exchanges of value token networks will enable a new mode of production where tasks are modularized and made available for anyone with skills to pick up, perform and receive tokens in exchange. And of course, because token economies are multi-value economies this production process could be of any kind.
The influential blockchain thinker William Mougayar describes this when he says “We are moving from user-generated content that you are familiar with, which is really the cornerstone of social media when you post a picture on Instagram, when you write a few lines on Facebook or Twitter, that is called user-generated content. In the future, we are going to have user-generated work, but this is work that we are going to get paid for by the blockchain by all of these cryptocurrencies that will come into existence.”
A good illustration of this is initial bounty offerings (IBO) which are a more recent development to ICOs. IBOs are “a way to crowdsource human resources, business development, marketing and user acquisition for blockchain technology ecosystems, by offering network tokens in exchange for contributions to the ecosystem.” They represent a limited-time process by which a new cryptocurrency is made public and distributed to people who invest their skills and time to earn rewards in the new cryptocurrency. Unlike an Initial Coin Offering where the coins are sold, an IBO requires an exchange of skills and greater commitment by community members in the development of the technology.
UCash is one project using this method, you can earn UCASH tokens for doing tasks like, writing an article, blog post or producing a video about UCASH or translating the UCASH white paper into different languages.
The technologist Vince Meens talks about the potential at the intersection of virtual reality (VR) and blockchain for enabling these new on-demand token networks. Where anyone could put a bounty on something that they want to see done, whether that is having the lawn mowed in the park or feeding homeless people. With the use of VR goggles, one could walk around and see the digital currency bounties left all around us available for earning by performing valued tasks.
Indeed bounty hunting is a surprisingly general and powerful model which could be used to incentivise people to find and remove any unwanted phenomena. We could have bounty hunters that are going after rewards for finding bad transactions on the blockchain, for finding bad data on the internet, for removing spam messages or for finding violations of some law etc. We just simply post rewards for finding anything that we don’t want and it is a decentralized system anyone can go after the reward. Once again this is the power of being able to now design incentive systems.
Likewise, these smart contract networks will automate the provisioning of services. Entrepreneurs will be able to create an application and release it into the “wild” ready to be employed by anyone and everyone who needs that functionality. The entrepreneur in turn simply observes micro-payments accumulating in their wallet. A designer could release their design into the “wild” and end users could download that design to their 3D printer and have the product almost immediately, paying automatically with their download.
Likewise, music services will follow suit. Currently, music licensing relies heavily on paperwork and trust in a music industry dominated by centralized organizations that take the majority of profits at the expense of producers. These intermediaries between the producer and listener of the music can easily take 80% of the price of the good. Musicians hope and trust that sales of their music and merchandise are properly calculated and reported to them but have no way of really verifying. As streaming and digital downloads eliminate physical sales of media containing songs, the music would appear to be a great candidate for tokenization. If music ownership was represented on a blockchain, the many participants in creating the music could have their shares set electronically. The vision would be to have every listener of their music require “unlocking” the file and paying, with payment then being distributed to the appropriate holders.
This model could though, be generalized to the whole of the economy. Once a product has been turned into a service the terms of that service can be encoded in a smart contract, the contract is put on the blockchain and made publicly accessible through APIs. Tokens are then automatically streamed to a wallet in exchange for the usage of the service. That is a generic model that would apply to any economic good once it has been servitized.
These automated blockchain token networks hold out the possibility to radically improve the efficiency across the supply networks that run our globalized economy. The founder of the Sweetbridge project describes well the role of supply chains in the global economy when he notes, “most people don’t know what supply chains are, but everything you eat everything you wear almost everything you own and everything we use on a day to day basis was processed by, moved, stored or created in a supply chain. Supply chains manage 2/3 of global trade, so that’s about 54 trillion dollars worth of global GDP. Supply chain is the science of managing the creation of something and the construction of it through value chains that have many, many parties involved in them, so the blockchain has an ability to affect the supply chain far more than I think most people recognize.”
Token networks will enable automated coordination and the flow of goods along whole supply chains. Supply chains that currently involve massive amounts of friction, in terms of verification, regulation, financing and various forms of information exchanges. These supply chains may work to a certain extent in developed economies, but 40% of exchanges are now between emerging markets. Take for example a rice farmer who wants to sell rice from Vietnam to Nigeria, this involves an exchange between Vietnamese dong and Nigerian pounds. Just to go from one of those currencies into the dollar – the international exchange currency – and then back into the other currency it may costs up to 20% of the transaction value.
Binkabi, is one blockchain startup that tries to replace this model with a direct peer-to-peer network for agricultural products, which automatically identifies the trades coming from the different countries in different directions and tries to match those of similar size so that the companies can exchange currencies directly between them. This can work to take out the centralized component and remove massive amounts of redundancy in the network.
But going forward we will start to tokenize whole supply chains. As we begin to understand supply chains not in terms of products and companies but instead as service networks or value networks that deliver a service and build token economies around that process of value delivery. Here again whole supply chains, just like enterprises and whole economies, will evolve into service-oriented networks where tokens reflect the service delivered and individuals and organization can plug in to deliver modular capabilities to the network receiving tokens in return.
The important thing to always remember in this respect is that much of the greatest potential of blockchain systems is only possible given the effective interaction between the token network and the physical world. Having highly efficient automated token networks that then bump into very slow, manual, physical procedures would be like driving a super fast Ferrari in rush hour traffic.
Blockchains are protocols for networks, they can only deal with what is inside the network. But for those networks to become the dominant mode for organizing society and economy, they have to interact with the real world of people, organizations, things, and physical environments.
At present virtually all of our newly formed networked systems are dependent upon traditional centralized systems of organization to support their existence in the physical world. The only way that these networks are going to gain their full autonomy is by interacting directly with physical technology and real-world environments. This is now made possible by the Internet of Things and advanced data analytics.
The blockchain and token economies exist within the context of this next generation of web technologies and they have to all be working synergistically.
If the linkage between IoT, big data, and the blockchain is not made then these new systems will remain – like the networks of web 2.0 – dependent upon industrial age institutions and the potential will be lost.
We will end up in the same situation as previously where networks like Twitter and Facebook gave people the tools to connect and start the protests of the Arab spring, but not the physical means to realize that change.
Both the Internet of Things and complex analytics are massive technological changes. If you simply focus on token economies and the blockchain without thinking about those other elements, you are missing the bigger picture. The platforms that manage to use all three effectively and synergistically will likely, for better or worse, dominate the world of tomorrow.