Blockchain Poised for Innovation

The buzz around Bitcoin and the broader blockchain ecosystem has been simmering for years, in particular how this technology as an infrastructure will revolutionize / disrupt / and otherwise affect most (all?) transactions conducted today.  However, despite the growing hype (and increasing market value), blockchain has yet to materially affect many areas, save the black market and a few other niche transactional systems.  I believe this is about to change.

Led by Ethereum and others, new code sets are going to production that will (finally) enable real innovation to happen.  Hyplerledger's Fabric goes to production early next year.  R3's Corda is making steady progress.

I view this time as "big data" was in the early 2000s - the promise of the technology was understood by growing numbers, but the effort and expense required to realize any of this promise significantly hindered adoption and further innovation.  Then Hadoop and other infrastructure technologies became available, lessening the effort required to deploy big data applications, while also expanding the pool of engineers capable to get up to speed and deploy functioning applications.

With the rise of Ethereum, the upcoming release of the initial Hyperledger projects, and R3's Corda work, I see that the time is now to begin allocating resources to actually building things using blockchain technology.  The pace of maturation for these and other projects is accelerating, opening up a wealth of infrastructure to enable real application of blockchain technology. It will be fun to watch!

A Different Way to Go to Market in China

When most US persons think of China, they see its vast, authoritarian central apparatus and it's one-party political system.  All roads lead there, and therefore to be successful in China, you must work directly with this apparatus.  This view is wrong in many (most?) cases.

The primary mission of the Chinese central government is stability.  Progress towards economic development, displays of military strength, even the kerfuffle in the South China Sea is boiled down to the continued stability of the system.  (The South China Sea is the primary route for CHina's growing need for energy imports, among other resources integral to their continued growth.)  With such an ardent focus on stability comes a strong disdain for risk, the lifeblood of innovation.

Stating the obvious, the Chinese market is different than most any other.  Cultural norms, economic structures, and paths to execution all make for a steep hill to climb.  Each of these elements (and more) also add risk to even the most proven ideas when brought in to this market from other regions of the world.

Rather than focusing on the central apparatus, instead look to the provincial level to support your go-to-market ambitions, ideally well outside the hubs of Beijing and Shanghai.  There you will find emerging leaders thirsty for risk, to help bolster their credentials for future roles within the national party leadership.

Given the emerging nature of the economy, the leash on what the provincial authorities can and cannot do is long, much longer than the US system.  Leeway can be found to experiment and iterate, especially when the focus is on further developing quality of life for the Chinese people.  Rules can be bent as long as the value is evident.  Time can be given to adapt.  Metrics and case studies can be developed, proving the success of the idea inside the Chinese system.  Once proven, the central apparatus can be approached for a larger rollout.

This is of course not the right path for all.  However, for many US businesses eyeing China, targeting provinces first can offer an optimal path towards accessing this vast and growing market.

American Biases

One of the core issues of working between China and the US is the cultural biases we both impose on our  personal interactions.  As with any bias, these biases are often born from experience, direct or tangential.  Sadly, when it comes to the American media, they are too often willing accomplices in reinforcing such biases, particularly when it comes to China.

In this case, when I refer to the American media, I am referring to the grand idea of great institutions of our day, that have developed a process and a skill to search for the idea of truth.  Objectivity is still the goal, if not always attained.  I know this is idealistic in this political climate, but I have seen first-hand an institution that represents this idea at its core.  Unfortunately, with this same institution, it seems the idea of objectivity is thrown out the window when it comes to China.

Take, for example, this article from today's Washington Post.  The idea that "China" is still conducting government-sanctioned cyber attacks is sexy, and it fits our perception of both an untrustworthy leadership (Xi), and an evil enemy (China).  There are two issues with such a report.  The first is that the decision to halt such attacks was made just a month ago.  To expect the government apparatus of 1.2 billion people to halt activities in such a short time is naive to the challenge of managing any large organization, let alone one such as China's.

The second issue is that the article does not attempt to define "government".  I wonder if Ms. Nakashima even asked her US sources to define the organizations they label as government sources of the attacks?  If she did, she does not report on their answer.  China is a nation of 34 provincial governments, hundreds of state-owned enterprises, among many other government operations.

The idea that the central authority dictates the micro actions of every government-tied organization throughout the land is wrong.  Americans (and the American media it seems) would be surprised to learn that the provincial authorities wield tremendous power, in some instances significantly more than even our state governments.

To assume that a cyber attack happening now is at the behest of the central authority is naive, and to not dissect these questions further as a a journalist is at best lazy, and at worst negligent.

Impact of Finance

I have been following this great multi-part project at The Washington Post on the declining middle class.  The latest piece struck a chord with me.  I lean left - I generally believe people are good, and that many need assistance when times are tough.  Assistance is not only necessary, it is a core component of what makes us human.  Fraud happens, but that should not distract us from helping our fellow neighbor.

I am now in the finance world.  I get more and more exposure each day of the machine that Mr. Tankersley describes in the article above.  So, knowing this, I have a quibble with this article.  It is extremely narrow-minded.  To measure the impact of finance solely by it's contribution to the economy is myopic.  Such an analysis negates all the externalities that occur given the growing investments in finance.

As I marinade on the system that is finance, we are benefiting elsewhere by the development that has occurred over the last few decades.  In particular, I argue that the growth of the internet as a foundational contributor to our economy is directly tied to the learnings, development, and talent cultivated throughout the recent finance evolution as Mr. Tankersley describes.

The metaphor used in the article, that finance is like a plumbing system enabling capital to move from those that have to those that need, is directly akin to how many describe the internet.  The exorbitant growth of the finance system in recent decades has led to new technology discoveries and an emerging talent pool - assets that are rapidly transferring to other industries.

Take data intelligence, for example.  Over the last decade, we have seen hyper growth in the amount of structured data, given the growth of the web and other advancements.  Vast datasets are becoming accessible for analysis in numerous industries, from commerce to education to even government.  Many of the technologies to handle these vast datasets are rooted in finance, as are many of the early people, transferring their knowledge and experience.  And growing the economy...

Structuring the FinTech Disruption: Apple vs. MCX < Apple + MCX

For anyone following the general disruption happening of the electronic payments space, or the Apple Pay / MCX war in particular, this exchange is an interesting data point.  There are two takeaways I see from this.

The first is that "it's on".  The siege by new players / models on the electronic payments ecosystem is starting to impact the conversation, if not the bottom line (yet).  Apple Pay and other technologies are beginning to pierce the fees framework that has long filled the coffers of the existing electronic payments system.  Today the more successful emergents operate as a friend to the existing players (but that will change).

The second takeaway is that the existing players do not yet fully grasp the siege underway.  The war is not Apple vs. MCX; it's Apple + MCX vs the status quo.  In this discussion, Apple Pay is being blocked by retailers because it is "too friendly" to the existing system, perpetuating the existing fee structure rather than attacking it.  MCX and it's parter retailers understand that the existing fees structure is outright robbery given today's technology, and they are taking a stand.

The Apple Pay / MCX battle is one between two armies on the same side, each with different strategies and assets.  Apple doesn't win by taking a portion of the existing fee structure, and neither does MCX.  They and the other disruptors win by decimating the economics of the current system.  Apple is building an army of users before striking.  MCX already enjoys its army of retailers and sees Apple as a threat to this asset.

Battles will be lost, but the war will be won.  This salvo may not strike the death blow, but more attempts are coming.  The existing electronic payments system is bloated with technology that has been displaced with significantly cheaper, more secure options.  Significant value that the current system enjoys will be returned to the consumer (through lower prices), retailers will retain some as will new players within the system (e.g. Apple).  The days of merchants paying 2 - 4% per transaction are numbered.

Blockchain and the Internet of Value

We have seen how the internet of information has transformed the world over the last two decades. More recently, the internet of things has emerged as a new frontier of innovation. Following close behind that is what some call the internet of value. Like its siblings, the internet of value is decentralized, open, and a blue ocean for innovation.

The potential for an internet of value goes beyond just making more efficient the existing trillions of world commerce. Wences Cesares, CEO of Bitcoin startup Xapo, provides themetaphor of phones:

There were never more than 1.2 billion landlines. Then the cellphone came and we’re at 6.3 billion. Why? It’s not because only those people wanted to communicate. The landlines were all post­pay. You need to have credit to get one. The cell phones were pre­paid. Suddenly you could get one with cash. It had nothing to do with technology. It was an economic restriction. Now there are 1.5 billion bank accounts, same threshold as land lines. I think [an internet of value] will allow us to see 6.3 billion people banking on their cell phones. That’s what’s so exciting to me. That’s a much better world than we have today.

Many like Cesares believe an internet of value will lead to a similar improvement in enabling access to more commerce.

The primary technology that will lead to an internet of value is blockchain. For the purpose of this blog post, we use blockchain to refer to any transaction processing engine with no central authority required that allows for contracts and transactions between parties. “It’s a technology that allows data to be stored in a variety of different places while tracking the relationship between different parties to that data." (source)  Blockchain is considered the biggest disrupting force in financial services, according to Oliver Bussmann, CIO of UBS.4 Bitcoin is the most widely known example. Another of note is Ripple.

As noted in the definition, the opportunity of blockchain is not limited to currency­based transactions. The technology can be applied to any transaction or contract where security and trust between participants is needed.

There are two areas of near-­term interest as we work to understand the blockchain impact; blockchain as it relates to digital currency (i.e. Bitcoin), and blockchain as an infrastructure (i.e. Ripple). Most focus on blockchain’s impact on fiat currencies, given the emergence of Bitcoin, and the companies and infrastructure that are required to deliver on such a vision.

Blockchain Currency: Bitcoin

Bitcoin is the most prominent blockchain­-based currency in circulation. Others, often referred to collectively as “altcoins”, have not yet developed significant markets as compared to Bitcoin, taking only 8% of all value stored among blockchain-­based currencies.

Bitcoin is trading at 30% of its high as of late. Despite the recent price decline, many observers suggest that we look at the entire ecosystem emerging around the currency, rather than its market price, to understand its growth trajectory:

As the above metrics indicate, the Bitcoin ecosystem is growing. In addition, an entire startup ecosystem is emerging surrounding the development of Bitcoin as a currency:

Wallets store Bitcoins for future transactions. Payment processors manage the transactions themselves. Exchanges bring together the parties of the transaction ­ the buyers and the sellers. Financial service providers are building services on top of the Bitcoin ecosystem. And Miners operate the underlying technology that maintains the trust within the system.

Bitcoin growth has been particularly significant in China in recent months: 

(slide images via CoinDesk)

As the Bitcoin ecosystem grows and matures, the opportunity evolves beyond its role as a currency. Beyond its role as a currency is what else can and will be done with the system. A concept is known as pegged sidechains, “which enables bitcoins and other ledger assets to be transferred between multiple blockchains (source)” is expected to enable non­currency transactions with the same flexibility and security as the current currency transactions enjoy. Some of the altcoins launched have been developed for other transactions beyond just currency. However, none have managed to develop enough of a market to have impact. Enabling this sort of technology within Bitcoin itself eliminates much of the current impediments to innovation in this area.

Blockchain Infrastructure: Ripple

The currency side of Blockchain is interesting and potentially transformative, but it is still very immature. The more relevant area, however, is blockchain’s potential at revolutionizing any transaction infrastructure, significantly reducing costs and improving system security. Bitcoin and most altcoins are trying to revolutionize the current system, purposely intending to supplant the existing players. A nascent few, however, are working within the system to deliver the economic benefits without the intent of displacing their existence.

Ripple is an example of how blockchain can improve on existing banking infrastructure. First focusing on international money transfers, the Ripple protocol allows banks to transfer value anywhere in the world for the minimal cost of implementing its technology. Transfers themselves are near free, and are transacted in the home currency of both the sending and receiving bank. Exchange rates are made part of the same transaction in real­time, reducing exchange rate risk.

The Ripple protocol is open sourced ­ there are no license or usage fees associated with its implementation. Ripple makes its money off the underlying currency that supports the protocol. As more banks employ the protocol to transact, the value of the underlying currency increases.

So far Ripple is the only startup we have seen that is working within the existing system to implement blockchain technology. They already have representation within China. However, significant opportunity exists to support their efforts, should their intent prove valuable to the banking community.

Phases of Data Intelligence: An Update

A couple of weeks ago, I wrote about the Phases of Data Intelligence.  I just came across Benedict Evans' presentation at GE's Mind + Machines event.  He had a more simple yet similar version of the same idea.

His version is:

• Build the data stream
• Ingest the data within the enterprise
• Do something useful

He has a plethora of "3-bullet" nuggets on the Industrial Internet. Worth a watch if you are in to that sort of thing: