What Mass Media Gets Wrong About Cryptocurrency: Blockchain Beyond Bitcoin (w/ Ash Benington)
Ash Bennington: Over the last few years, the only thing more impressive than the skyrocketing surge in cryptocurrency prices is the media attention they've attracted. But what if in this tsunami of media coverage of digital currencies, we're missing the big story? What if the real revolution isn't the shortterm surge in the valuation of these coins, but in the business applications of blockchain, the technology that powers cryptocurrency. My name is Ash Bennington. I'm going to talk to entrepreneurs, consultants, and theorists to find out what's happening in the world of business blockchain. I'm in midtown Manhattan heading to Hudson Malone to meet with my old colleague, Forbes crypto staff writer-- Michael Dell Castillo-- to discuss the issues and to put my conversation with the other experts into context. The words enterprise blockchain, what do they mean to you? Michael del Castillo: To me, enterprise blockchain is the adoption of this distributed ledger technology that was first popularized by Bitcoin by companies that are already generating revenue using the old centralized model. AB: Michael and I met when we were both reporters at CoinDesk. While I was finance and markets lead, Michael was delving into exactly these issues running corporate blockchain coverage. MC: In a lot of ways, the distributed ledger the technology behind Bitcoin, it was designed to make middlemen unnecessary. And when we talk about enterprise adoption of this very same technology, sometimes it's actually those very same middlemen that some people are imagining no longer need to exist. So it's striking that balance between staying on the cutting edge of what technology enables, while still holding onto a strong revenue stream is really at the core of what makes enterprise adoption of blockchain so interesting. AB: So what exactly is a blockchain? Blockchain is a distributed database that stores information in blocks, what you can think of as a kind of virtual container for data. As new data gets added, additional blocks are created. The blocks are then linked together chronologically to form a sequence of blocks called a chain. As new information gets added, the chains get longer. This method of data storage is called nondestructive, meaning old data never gets erased or overwritten because the previous blocks in the chain remain unchanged. Each new block that is written contains something called a cryptographic hash, a small mathematical fingerprint of the blocks that came before it in the chain, making it extremely difficult to tamper with the data that resides inside the blocks. We spoke to some very interesting people in this space, people at top consulting firms, people at sort of hipster Brooklyn startups across the board. This is going to be really interesting to get your view on what they're thinking about this. First, we went downtown to IBM's Watson Global Headquarters and spoke to Jason Kelly, General Manager for IBM's blockchain services. Jason Kelly: When you think of core value, it's back to what's the core outcome. And blockchain really is-- as bright and shiny and exciting as it is-- it's really simple. It reaches two elusive objectives that have been there for years. First, we know that businesses and the outcome of businesses run on data. There's been two things we've always tried to get with data. First, access, shared and permissioned access. The other is that once you get to that data, is that data quality there? Is it what you think it is? Are you sure? Those two things are now the biggest outcomes that you have with this bright, shiny technologies. One of the things that makes blockchain so powerful is its distributed nature. Distributed in this case means that data isn't just stored in one centralized database controlled by a single account or administrator, but across a wide-ranging network of computers called nodes. In fact, the capacity for global networking itself is the very core of how blockchain works. Modern distributed computer networks began in the late 1960s with ARPANET, a precursor of the modern internet, which connected computers at research universities out West. But peer-to-peer networks, which power block train's communication and are so central to its functionality, are a much more recent invention. The first well-known peer-to-peer network was Napster, which appeared in the late 1990s. Napster-- as you probably remember-- allowed users to share music files between their personal computers. Each node-- or independent computer on the network-- has the ability to share data with all of the others without being coordinated by a central computer. Really, the value that you get in this transparency and trust, and this thought that you have transactions that are happening across different stages with people, paper, and process. Well, if you think of that, people tend to go supply chain. And it's an easy one, because you have these transactions that go from point A to Z, or in some cases, this thought of farm to fork. There's many people who consume organic food. However, there's more organic food consumed than is produced. Wouldn't it be great if you could confirm right there before you consume or at point of purchase that this is organic? Food, as soon as you say, oh, there could be an illness, that food is presumed guilty until it's proven innocent. So you're going to throw it away. So working with Walmart-- who is world class, world class-- seven days in finding a point of origin of their food. You'd say, seven days? That's a lot of food to be throwing away. How can we take IBM Food Trust and use this blockchain network and figure this out? And in doing that, they went from seven days-- world class-- to 2.2 seconds. Trust is going to be part of each transaction. MC: IBM has been far and away one of the earliest enterprise blockchain adopters in the world. But then something really interesting happened in November of 2017, which is that IBM became the first global enterprise to publicly talk about embracing cryptocurrency in a real application. Slowly, we've seen this shift where enterprises-- who are in a lot of ways the definition of these middlemen-- are experimenting with the technology. AB: It's almost like as though they've gotten to the point where they decide if someone's going to intermediate them, they might as well disintermediate themselves, right? But that ties in very nicely to the point that they were making that it's about transparency and trust. How do they do that though? MC: Yeah, It's a great question. When we see enterprises looking at using blockchain technology, we're not actually talking about self-disintermediation. We're not talking about a sort of a Trojan horse that makes the company unnecessary What we're talking about has increased efficiency of the middle and the back office level. AB: That must be frightening for enterprises to even have that conversation, right? MC: I'll tell you who I think it's frightening for are the employees. For now, what enterprise blockchain adoption looks like is really reimagining middle and back office operations with fewer employees to help make it happen. AB: Then we went uptown to Park Avenue to KPMG's US headquarters and spoke to Eamonn Maguire, managing director, advisory at KPMG. How is the mortgage industry structured today? And specifically, if you could touch on some of the pain points. Eamonn Maguire: Yeah, so the mortgage industry is incredibly complex. It's one of the most diverse ecosystems that I can think of. There are multiple providers who are involved in making a mortgage happen. So for a customer, it's a pretty awful process. It takes somewhere between 60 and 90 days in the United States to get a mortgage. AB: What is it about this technology that's so unique? EM: The data aspect to blockchain, as well as the smart contract aspect of blockchain, which is about executing automated processes, are the two things that make blockchain be particularly useful or good for people. In the future, if you were to go to a portal and choose a product, you could effectively provide for digital power of attorney to the lending institution to go and get all of the information about you without having to lift a finger beyond providing that digital power of attorney. So you could authorize the banking institution to collect information on your employment, on your alimony payments, on the value of the current asset or assets that you have, on your credit score, on so many things that have historically been very, very painful for the borrower to provide. And now it can all happen at the drop of a hat. There's no doubt that there could be situations where some of the process might be, let's say, accelerated or expedited. Like, for example, in the title search space. Many times, when a title search is done, the title search has done not just on the most recent owner for the property, but you may need to go back in history many generations and many owners ago to confirm the validity of the provenance and ownership for the current property. In a blockchain world, where there is confidence in the historical information that has been collected on the ownership for the property, then you will only have to go to one generation and to update the historical record. MC: When you take a look at the accounting industry, they really were the second adopter of enterprise blockchain technology. Obviously, the first use case was cross-border payments with Bitcoin, and buying and selling alpaca socks. But the second use case was really accounting. And I remember the first time that I put the words of a big four accounting firm in a headline, people were freaking out. Because the idea of a big four accounting firm using this technology that we had only used to buy alpaca socks before was mind-boggling. But the connection from a decentralized way to send money to a decentralized way to account for money is so close as to be inseparable. And I think it was really inevitable that accounting firms were going to be the next to experiment. I just actually purchased my first home, and I can't tell you how frequently I wished that the people that I was dealing with had access to the same ledger. It was just time, and time, and time again, week after-- 10 months of work, a week before closing, we discovered we were missing a certificate that the previous three owners hadn't had. AB: And this is exactly the case for that ledger that can go back and see what's been in the process. MC: Yeah, by moving certificate of occupancies to a distributed ledger. And so that every time an upgrade is made to a property, that certificate is passed down to the next owner without any extra work is incredibly, incredibly valuable. AB: Next we went out to Bushwick, Brooklyn to meet with Jesse Grushack, co-founder of Ujo Music, which works under the umbrella of the blockchain giant consensus. Jesse Grushack: What we're doing and what we have been kind of working on for the past few years is building a new music industry. A lot of the laws and rules and regulations were set when we were still listening to piano rolls. And the world's changed quite a bit since then. And so now, there's no system built for digital music. There's no systems that can handle the transfer of files and value transfers. And to us, that looks like creating systems that automate rights and royalties that can automate and create dynamic licensing, so you're not stuck in this one license. It can flex or mold or shift pricing based on the usage of it. And to start for us was the artist and their digital identity and their content. Now, how do we digitize those in a way where no matter where they are on the web, we can find out what the policies are around usage. We can find out know who wrote the song, who's involved in the song. And if we buy that license or utilize that content in some way, we want to make sure everyone who had a part in that song is being paid fairly. And fairly means that they can see who licensed it, or at least what it was licensed for, and they can see what percentage was. And they don't see that in a year or two. They see that instantly, or within 15 seconds. AB: Let's talk a little bit about the nuts and bolts mechanics of the technology itself. JG: It comes down to three main things, right? And that's the ability to have payments, to have data, and to have identity all wrapped up in a transferable way. If you're a musician or just a consumer, it's something you should be paying attention to. MC: So the music space was really a natural next step for the industry to go in a lot of ways. AB: Another very dysfunctional industry, right? MC: Well, also, I feel like if the accounting firm is kind of like the epitome of the big, boring, buttoned-up corporation, then the music industry is rock and roll. And it's a really easy way for an entirely different group of people to get interested in blockchain and the potential benefits that it can bring. Specifically, Ujo is reimagining the ways that musicians are compensated. And perhaps more importantly, the way that appreciators of music express that appreciation by removing the middle businessmen that separate the appreciation of music from the selling and the creation of music. AB: The possibilities here are virtually endless, right? And we're just at the very beginning of that process. MC: Very exciting space for blockchain. AB: We also went to Gowanus, Brooklyn to visit Lawrence Orsini, CEO and founder of LO3 Energy at their headquarters and workshop, where they design blockchain-based power meters for use on an electrical grid. So what is the Smart Grid? Lawrence Orsini: So historically speaking, we built from big power plants that push energy to the edge of the grid. So today, people are really looking for choice. So you see a lot of distributed renewables popping up, wind, solar, on people's rooftops. We now have two-way power flows. Electricity is being produced at the edge of the grid, as well as the head of the grid. And the grid's not really built for energy moving both directions. So Smart Grid has to figure out how to balance, load, generation, storage. AB: And how does blockchain fit into this ecosystem that you just described? LO: So one of the challenges is we're talking about adopting millions of devices that need to be controlled in real time. It's going to be billions of devices in the next few years. So what we're doing with blockchain is really setting price as a proxy for control, allowing those devices to respond in real time to grid physics. AB: So you're using blockchain as kind of a transporter communication layer inside the grid. Is that right? LO: It really is. Yeah. The blockchain is really just pushing information to the edge of the grid, and then picking information back up. AB: So Lawrence, tell me what we're looking at here. LO: So these are our transactive elements. These are the actual meters the blockchain runs on. So what these things do, they sit right next to your utility meter, and they net the energy that's going back onto the grid, or that's coming off of the grid. So if you're a prosumer-- that's somebody who has solar panels on your roof, or a battery behind the meter-- then when you're producing electricity, typically, you're overproducing. So you're making more energy than the house can use, so that energy actually goes back onto the grid. So that's when you're actually producing something valuable for the grid. So we want to count those electrons. So these meters actually count those electrons, net what goes back on the grid, and incorporate that into the blockchain. So it's really about how do we make the edge of the grid balance itself in a smart way as we get more and more distributed resources at the edge of the grid. And particularly, electric vehicles. Consider this, an electric vehicle looks like two houses to the utility grid, and they drive around. So somehow, we're going to have hundreds of new houses popping up on the electric grid that isn't built for it. AB: And are these actually deployed in the field today? LO: Yeah, we've got them deployed here. We have them in Australia. We have a few in Germany, the UK. AB: So right here in Brooklyn? LO: Right here in Brooklyn. MC: So I was actually on location in Brooklyn the first time they ever did a live demo of this technology, and it was thrilling to see two neighbors buying and selling energy from each other. On one side of the street, there was a gentleman that had good sun, and on the other side of the street there was a gentleman who was in the shade. They were friends, and they were transacting on the energy grid together in real time. AB: It sounds like an economics book test case, right? I mean, it's really extraordinary. MC: They loved it. This is another example similar to Ujo where the users are empowered in a really meaningful way. AB: It's also so interesting to see blockchain actually helping to build a new industry, rather than supplanting existing technology. Finally, we came back to Manhattan to meet with Alex Rass. Before Alex got involved in blockchain, he worked in traditional finance on credit risk systems at Goldman Sachs. Now he runs his own shop that specializes in blockchain and smart contract development. What was it that you saw in this space that made you feel like this was a technology that had promise? Alex Rass: Moving money, we've done this before. Storing data in a database, that's been done before. And then writing code on distributed machines, all of that was done before. But now they secured it, made it solid, and distributed it in a way that has never been done before. It's very easy to scale one tiny database to go to 10 users, 100 users, 10,000 users. Been done before. But you try to say OK, I want this piece of data to be available to the entire world, that is very tricky and does not work with the typical approach that's been taken so far to distributing data. AB: So one of the things that I find very interesting about you is that you're involved in this and you're a great advocate for the technology, but you're also profoundly skeptical of some of the things that are happening in this space. Can you tell us a little bit about that? AR: Yeah there's been a lot of companies-- larger ones especially-- who want to-- who see this, they understand the value, and they say, well, we'll make our own version. But then you looked into us, and we're not going to mention to you all the problems we create by doing it in house. AB: So what are some of those problems? AR: The infamous 51% attack. The way the nodes synchronize, is they declare a consensus that as long as majority agrees the data is right, then that's the data they maintain. AB: So what you're saying is if there are more than 51% on the network that are bad actors, then suddenly the entire security of the system can be compromised? AR: Correct. Which has actually happened with public blockchains, let alone with private ones where I can go to major-- AB: What's that distinction between private blockchains and public blockchains? AR: The private ones are run by a firm, within the firm, and they control the nodes. They say, these are the nodes we're allowed. These are nodes we don't allow. AB:I think for many people, when they hear that, they may think, well, that that could be less risk, because there's actually a corporation that's controlling-- AR: Exactly. AB: So I think the perception might be potentially at odds with what the reality is. AR: Yeah, it's very common, especially with high tech areas like math and sciences where that things seem intuitive, until somebody explains to you why they're not. AB: So do you see the potential, Alex, when you look at these technologies for a catastrophic risk at some point in the future for one of these firms that is using blockchain technology? AR: The problem is with the larger-- the popular ones, the open source blockchains, you have entire world looking for errors. Some looking to make it better, some looking to steal money. Whatever the case may be, there's a ton of people who are looking for problems. AB: So what you're saying is when these technologies are out there and they're public, they're being vetted by hundreds of thousands-- AR: Constantly, every day, all day long. Because everybody wants money. And Google in fact-- and a lot of other firms, Microsoft even started more recently-- they go out and they offer bounties to developers to go find bugs and report it to them. So that only works to a certain extent. The problem with the smartest guy in the room is that there's always another room. And that's what happens with this kind of project. Because there's so much code involved, it's really easy to miss something. AB: So you and I go to a lot of blockchain conferences, crypto conferences, those kinds of things, and you listen to the speeches that you hear there. And sometimes it sounds like the only thing that's missing is the pompoms, right? We're going to arrive at Nirvana two weeks from Tuesday. When you hear that, what is your reaction? AR: As a technologist, I'm usually skeptical, because if it was so amazing, they could have done this 10 years ago within your regular database. AB: When we're talking about blockchains, what are the questions that often comes up is the distinction between a blockchain and a traditional database. Can you explain what exactly those differences are? AR: The original database, you have-- typically, you have records that you store. And the record can contain let's say, name, phone number, and address. And it goes in something called a table, and there it resides until somebody decides to erase it, update it, change it. So with the blockchain, the difference is when you come and you say, OK, I when my phone number to be 1, 2, 3, 4, 5 from now on, you don't erase the old record, you just append the new record after all the-- after the latest record. So anybody who reads, has to read from start. What the benefit is now, you don't have to store all the data. You just say, phone number's being updated. In the same time, you can't say, oh, I never had that phone, because it's still stored there deep down somewhere, and anybody with the copy of the node-- which should be freely distributed and available-- can go dig down and find it. AB: So why or use cases that look like plain vanilla database solutions being sold as blockchain solutions? AR: Because of all the hype. It's become such a popular topic lately that everybody just wants to be part of it. Everybody wants to be on the bandwagon. Because they promised a new internet, here it is. Jump on it or you're going to regret-- you're gonna regret not jumping on it when your grandma said no. MC: So I think Alex is actually 100% right about the question of whether or not a blockchain is really just another word for a distributed database. And especially when you remove the cryptocurrency component, it really starts to look a whole lot like a distributed database. AB: Or a distributed database with marketing upsell attached to it. MC: Exactly. Exactly. And there is actually some value to be said for that. I think people weren't even talking about-- they weren't even looking for use cases of distributed databases before blockchain came along. And a traditional database system is perhaps no better exemplified than Equifax, the credit bureau that keeps a central repository of millions of people's credit history. The existing system-- which some people say might make blockchain not really as necessary as it's cracked up to be-- was very recently powerfully hacked. In a centralized system, you would think that there's actually fewer points of attack, and in a distributed system, you're expanding the points of attack, when in fact, we're seeing the exact opposite. And by moving this information to a shared, distributed technology, you're actually creating a disincentive for attackers to go after the honeypot, as it's called, right? AB: As we look back over what we watched today, what did you find most surprising? MC: What really catches me most off guard is the diversity within the enterprises themselves as far as whether or not they think there's promise, or it's just a bunch of hoopla. I'm really surprised that after almost 10 years, there isn't more consensus on that question. It's really a question of are people, are consumers looking to place-- to spend their money to express their trust in corporations, and in centralized authorities, and in protectors? Or are they looking to express their trust in cryptographically protected systems? AB: And that's probably a very nuanced question, right? And how does that balance out as we move forward? MC: Yeah. That's where there's going to be money to be made. The people who answer different parts of that question correctly first are going to make immense amounts of money. The people who miss subtle opportunities are going to be left behind. And that's when we talk about the big D word, disintermediation. AB: Right. Disintermediation is a lot of fun unless you're the one being disintermediated. MC: Indeed. It's funny though, to see some of these big enterprises-- as you put it earlier-- selfdisintermediate. And in the end, I'm not really sure where that takes us, but it's going to be fascinating to watch. AB: Thank you for joining us. MC: It was a pleasure. Thank you.