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Is it the destiny of Blockchain to become the Open Infrastructure?

[MAY 2022]

A summary of the webinar of May 26 2022 entitled Is it the destiny of Blockchain to become the Open Infrastructure?

SUMMARY

Is it the destiny of Blockchain to become the Open Infrastructure?

Is Blockchain just another software or database technology or is it a general purpose technology capable of totally transforming our economy and society?

The idea of a blockchain as not just a database technology but a foundational infrastructure on which private and commercial applications can be deployed at low cost – a common means to many ends, similar to a road network or an electricity grid – is gaining momentum. Indeed, a variety of projects around the world are implementing the idea. 

The 12-country LACChain Alliance led by the Inter-American Development Bank (IDB), for example, provides a secure, open, transparent, zero-fee, public-permissioned blockchain infrastructure for Latin America and the Caribbean. The payment application it has tested is a good example of a service that can be consumed by multiple applications on the same network, since any commercial product or service has to pay and get paid.

In Spain, Alastria, a non-profit established in October 2017, runs an open blockchain network infrastructure used by FinTechs. 

Within the European Union (EU), the European Blockchain Services Infrastructure (EBSI) aims to make it easier for consumers and businesses to access public services across national borders. The long-term potential of this project in, for example, bringing national digital identities on to a common platform, is immense.

In China, The Blockchain-based Service Network (BSN) is a Cloud-based public infrastructure on which distributed applications (DApps) can be deployed and operated by developers on a city-by-city basis.  It aims to reduce the costs of building and deploying DApps, but also to help them (and the services in different cities) to inter-operate.

As these projects indicate, the originators of blockchain infrastructure projects include public bodies and non-governmental organisations as well as commercial interests. They attract entities whose interests are aligned rather than competitive and develop membership schemes and governance mechanisms that others can imitate.  

The main purpose of all projects is to lower the costs and complexity of launching products and services on blockchain networks, and so accelerate the development of blockchain-based applications. 

By making it easier for networks and applications to inter-operate, these blockchain infrastructures also mirror both the “composability” ambitions of Ethereum and the strategy of Open Banking initiatives (where data is shared via Application Programme Interfaces, or APIs).

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Is Ethereum a blockchain infrastructure?

The Ethereum protocol is open to anybody, and developers can through “composability” put together a variety of products and services that capitalise on the work of others, making use of software that runs on Ethereum. 

In one sense, Ethereum remains a protocol only, with the nodes that make use of it – such as cryptocurrency exchanges – providing the “infrastructure.”  In another sense, what it makes possible – access to services, trustless, un-intermediated settlement of on-line transactions, traceability, provenance, and inter-operability with multiple applications – lend Ethereum something of the character of an infrastructure. The same might be said of other blockchain protocols.

Blockchain is also having an impact on the nature of corporate organisms. Limited liability, joint stocks organisations in general and banks in particular exist because they were until recently the only way to process transactional information and reach legal agreements at scale. Blockchain make it possible to accomplish the same things on a distributed or decentralized basis without trusted intermediaries. Decentralised Autonomous Organisations (DAOs) are an alternative to conventional corporations (though they present familiar problems of governance).

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Is blockchain technology too slow and, as a result, not scalable enough to rank as a true infrastructure?

Since 2017, when every new Initial Coin Offering (ICO) rendered the Ethereum platform unusable by anybody else for another purpose, progress has been made on the speed and scale limitations of blockchain technologies. 

The solutions to the problems of speed and scale have effectively re-designed blockchain as a “multi-form” technology, with different methods of reaching consensus such as Proof of Stake supplementing Proof of Work. Different problems (or products or services) need different types of blockchain technology.

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Is lack of inter-operability between different blockchain protocols an obstacle to blockchain becoming an infrastructural technology? 

The lack of inter-operability increases costs, because software engineers have to create bespoke links with each protocol. It also inhibits the growth of the markets, because holders of digital assets such as tokens cannot move assets between blockchains cheaply and easily in pursuit of higher returns. It is an argument for building a common infrastructure or allowing one to emerge. 

Unfortunately, the leading blockchain protocols tends to see inter-operability through a narrow lens: compatibility with their own blockchain rather than the blockchains of others. 

Bridges (used primarily for moving tokens between blockchains) are the obvious answer but bridges between different blockchain protocols have proved vulnerable. In February, Wormhole, which provides a bridge between blockchain protocols, was hacked and US$325 million was stolen. 

Non-bridge solutions and alternatives (such as the Cosmos SDK-Ethereum cross-chain integration smart contract Peggy, the “Internet Computer” Dfinity, the decentralised, cross-chain liquidity pools network THORChain and even the Polkadot “parachain” model) are developing, but the best advice currently is to remain within the same blockchain network. This lack of inter-operability remains  a major barrier to growth.

Works is being done on communications and data standards for blockchain networks via the International Organisation for Standardisation (ISO) and the Internet Engineering Task Force (IETF). In addition, the Inter-Blockchain Communication Protocol (IBC) is designed to facilitate cross-chain transactions of all kinds (not just token transfers).

Another alternative to bridges is to build gateways, like those developed by Quant Network. Gateways enable any blockchain to talk to any other blockchain, and to legacy applications as well, with blockchain functionality running via APIs. Gateways are also more secure than bridges.

However, increased security for transfers does entail trade-offs, especially in terms of speed, but also in terms of functionality. Bridges are less secure than gateways but they are fully automated, whereas gateways entail individual blockchain networks making changes to accommodate transfers from another blockchain.

One final alternative to bridges is the wrapping of tokens, in which cryptocurrencies are made available on blockchains other than the blockchain they were originally issued on. Like Stablecoins or e-money, wrapped tokens are backed 1:1 by the underlying assets, which are held in a secure digital vault.

Standards are the conventional answer. And standards to enable different blockchain protocols to inter-operate are emerging through iteration (such as ERC-20) rather than being selected through overt competition or imposed by standards bodies or an industry infrastructure playing a role akin to the part played by SWIFT in traditional finance (TradFi). 

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Is blockchain a sufficiently powerful social technology to transform the way our societies operate?

The original vision of blockchain (as articulated by Satoshi Nakamoto) was not just to supply a software application, or a database technology, or a transaction management tool, but to re-cast the foundations of capitalist economies and societies by eliminating intermediaries and not simply increasing transparency for investors and consumers but putting them in control of their own identity, data and transactional activities. 

The obvious way in which that vision remains alive today is Self-Sovereign Identity (SSI), in which consumers would own all the data that makes up their identity, and use those parts of it necessary to make themselves known to potential suppliers of products and services, whether they are companies or governments or governmental bodies, when they wish to transact. 

A corollary of the realization of the SSI vision is the disruption or even displacement of large corporations – such as Facebook or Google or Microsoft or Amazon or Uber – that profit from collecting and selling the data of their customers. In fact, Web 3.0 can be characterised as decentralising what is becoming known as “data labour.”

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What examples do we have of blockchain infrastructures in use today?

In the contest between those who would like consumers to be paid for their “data labour” and those who support the centralization and concentration of data (and the accompanying wealth) with a handful of large corporations, it is clear which side blockchain-as-infrastructure enthusiasts support.   

Data privacy, financial inclusion, access to government services and lower barriers to entry to make data markets more contestable are well-represented in public blockchain infrastructure projects such as LACChain, Alastria, EBSI and BSN.

However, change is not instant. One view is that at present blockchain is being deployed to make existing processes more efficient. The technology can reduce the cost and complexity of, for example, post-trade processing in the securities industry. 

On this view, even infrastructural projects such as LACChain are at this point focused on economic development through financial and digital inclusion or reducing the cost of developing new products and services and cutting their time to market. Revolutionising the entire economy remains a futuristic notion.

Indeed, the vast majority of applications on blockchains are aimed at the financially and digitally included, not the excluded. DeFi  dApps, for example, are a developed economy phenomenon only. DApps that might useful (such as one for micro-lending in developing economies) are not being developed as readily as commercial dApps aimed at wealthier consumers in developed economies.

An alternative view is that initial infrastructural experiments (such as LACChain, Alastria, EBSI and BSN) are pioneering open, public permissioned blockchain networks, and the contractual, legal liability and governance models needed to make them work, in both the private and the public sectors.

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Who should govern blockchain-based infrastructures?

DeFi and DAOs aim, aa their full names suggest, to decentralise ownership and control. Unfortunately, it is increasingly clear that governance of some DAOs is actually controlled by an often tiny minority of tokenholders (usually miners and validators taking no risk), as has become starkly apparent at DeFi ventures that have got into financial difficulties. 

In short, DeFi has failed to democratise ownership and control. Indeed, the way in which some DeFi protocols are governed may not be compliant with prevailing securities laws and regulations. Regulators need to engage with the problem.

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What role should governments play in blockchain infrastructure?

The blockchain industry divides between those who consider responding to government to be optional and those (mainly Enterprise) blockchains which actively seek to be regulated and want regulatory and legal clarity. 

With different governments pursuing different approaches to regulation of blockchain – think, for example, of the differences between the policies of the United States, the EU and Switzerland – it is impossible to recommend that the industry always work with governments and regulators. 

After all, some jurisdictions, including China, ban cryptocurrencies and others are crushing innovation with over-zealous applications of Know Your Client (KYC), Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT) and sanctions screening rules, as specified by the 40 Recommendations of the Financial Action Task Force (FATF). 

Other governments have adopted a laissez-faire policy though even they – the United Kingdom and Singapore are good examples of this – have not only adopted KYC, AML, CFT and sanctions screening recommendations but are now explicitly seeking to protect retail investors.

Governments could do more to lower the barriers to entry to established markets. In Open Banking in the United Kingdom, for example, the incumbent banks have succeeded in slowing down and emasculating the innovations of start-ups. Open Banking may have produced standardized APIs, but it has turned out to be pro-legacy rather than pro-innovation – in much the same way as instant payments were delayed and distorted by the incumbents.

Public blockchains such as Ethereum and Enterprise blockchains such as R3 Corda have a common interest in lowering those barriers to entry erected by the incumbents. The blockchain industry is rediscovering why TradFi operates with controls and constraints on the power of minorities of managers or shareholders.

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What contribution can operating systems make to improving inter-operability between blockchain protocols?

Operating systems do not matter to inter-operability, but the blockchain industry is philosophically committed to open-source software, so Linux is the default choice. Blockchain platforms for the Windows operating system do also exist.

For Enterprise blockchain users, Red Hat is the leading host of enterprise open-source software, including Linux. Microsoft Azure also supports Enterprise blockchain. 

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How can the idea of a blockchain infrastructure best be realised in practice?

An unresolved question is whether market forces – competition between innovators and incumbents – can deliver an open, public blockchain infrastructure on which further competition can thrive. Incumbents seem adept at slowing progress down, and consumers appear too apathetic to drive change.

One answer is that meaningful change depends upon collaboration between incumbents and innovators, because the incumbents own the customers and the innovators own the knowledge of the technology. If companies collaborated by sharing knowledge and experience that would also accelerate progress.

But there is an alternative to collaboration. Challenger banks and DeFi start-ups can use digital assets as a battering ram by offering investors digital assets brokerage and custody services. This could eventually force legacy financial institutions to embrace change as well, rather as they did in response to the threat posed by challenger banks to their retail payments and deposits franchises. 

This effect could be amplified by the efforts of companies in non-financial sectors such as manufacturing, aviation, motoring and telecommunications. If industrial and commercial companies embraced blockchain-based infrastructures – and most industries are at present trapped by the same model of centralised, data-driven platforms as finance – it would accelerate change in the financial markets that they use.

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Do you believe blockchain can be steered off its present purely private, commercial course onto a public, infrastructural course from which everybody in a society and an economy can benefit?

There are grounds to believe that the normal processes of creation and destruction in market economies can deliver a blockchain infrastructure. Despite the recent re-rating of the cryptocurrency and DeFi markets, blockchain-based asset classes have shown an ability to scale quickly (as NFTs did in 2021, for example, and security tokens could yet demonstrate). 

Developments such as DeFi and NFTs provoke change in DeFi, and that pressure is unlikely to abate. What happens in public, non-permissioned blockchain networks will continue to drive change in Enterprise blockchain networks, because it makes sense even for incumbents to adopt innovations that have proved workable and useful. 

Greater inter-operability between blockchain networks, and between blockchain networks and traditional financial networks, would accelerate the impact of that interaction between new and old. Standards are the obvious catalyst.

It is possible that such standards evolve spontaneously. The ERC-721 standard that drove the NFT boom, for example, emerged from interactions between members of the Ethereum community, and was adopted more widely because it was useful.  Inter-operability standards can be seen as a kind of algorithmic collaboration, iteratively but invisibly reinforcing anything that works.

If standards also came to embrace other troublesome issues in the digital asset markets – such as the strained governance model of DAOs, or the unresolved problems created by consensus mechanisms in blockchain networks – they could embed blockchain into the daily lives of consumers.

Certainly, the user experience in blockchain needs to be taken more seriously. At present, progress in blockchain is made by developers building solutions for other developers. Blockchain needs to become as invisible as the software that drives an application downloaded from an app store. The means by which retail customers in particular access blockchain-based services – think of the difficulty of opening, say, a digital wallet – need to be drastically simplified.

The blockchain industry also needs to lose it reputation for facilitating financial crime. Among other things, this means ending a culture of “move fast and break things,” in which applications written overnight are released into the market prematurely. 

But government undeniably has a role to play in realising the idea of a blockchain infrastructure – not in building it, but in sponsoring it and certainly in using it. 

Payments are an area where government could catalyse change by, say, widening access to the Real Time Gross Settlement (RTGS) system, or linking it with RTGSs in other countries, or by introducing a CBDC. If it became easier to pay counterparties, across as well as within national borders, across a national blockchain infrastructure that alone would attract businesses and consumers. 

Digital identity is another obvious use-case for government sponsorship. Once a digital identity framework was put in place by government, it too would attract consumers and businesses because digital identity services would be useful in facilitating transactions. 

Applications would proliferate on the infrastructure because it simplifies problems of trust (notably in opening an account or paying for a financial product such as insurance) and payment. 

But government could make one final contribution to the emergence of a blockchain infrastructure, by using it to distribute its own payments and services. 

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If you would like more information or we can assist in any way or you would like to join future discussions please email Wendy Gallagher on wendy.gallagher@futureoffinance.biz