Chapter 11 introduces issues relating to governance and leadership in a new blockchain era. Bit introduction - What changes can you see that should occur in your organizational unit (i.e. your departm

IS B N : 9 781101980132 In te rn atio nal e d itio n I S B N : 9 780399564062 IS B N : 9 781101980156 ( e b ook) While t h e a u th or h as m ad e e v ery e ffo rt t o p ro vid e a ccu ra te t e le p hone n um bers , I n te rn et a d dre sse s, a n d o th er c o nta ct in fo rm atio n a t t h e t im e o f p ublic atio n, n eith er t h e p ublis h er n or t h e a u th or a ssu m es a n y r e sp onsib ility f o r e rro rs o r f o r ch an ges t h at o ccu r a fte r p ublic atio n. F urth er, t h e p ublis h er d oes n ot h av e a n y c o ntr o l o ver a n d d oes n ot a ssu m e a n y re sp onsib ility f o r a u th or o r t h ir d -p arty W eb s ite s o r t h eir c o nte n t.

Vers io n_1 To A na L opes a nd A m y W els m an f o r e n ablin g t h is b ook, a nd f o r u ndersta ndin g t h at “ it’ s all a bout t h e b lo ckch ain .” “ A m aste rp ie ce. G ra cefu lly d is se cts t h e p ote n tia l o f b lo ck ch ain t e ch nolo gy t o t a k e o n t o day ’s m ost p re ssin g g lo bal c h alle n ges.” —Hern an do D e S oto , E co n om is t a n d P resid en t, I n stit u te f o r L ib erty a n d D em ocra cy , P eru “ T he b lo ck ch ain i s t o t r u st a s t h e I n te rn et i s t o i n fo rm atio n. L ik e t h e o rig in al I n te rn et, b lo ck ch ain h as p ote n tia l t o t r a n sfo rm e v ery th in g. R ead t h is b ook a n d y ou w ill u nders ta n d.” —Joic h i I to , D ir ecto r, M IT M ed ia L ab “ In t h is e x tr a o rd in ary j o urn ey t o t h e f ro ntie rs o f f in an ce, t h e T ap sc o tts s h ed n ew l ig ht o n t h e b lo ck ch ain p hen om en on a n d m ak e a c o m pellin g c ase f o r w hy w e a ll n eed t o b ette r u nders ta n d i ts p ow er a n d p ote n tia l.” —Dave M cK ay, P resid en t a n d C EO , R oyal B an k o f C an ad a “ D eco nstr u cts t h e p ro m is e a n d p eril o f t h e b lo ck ch ain i n a w ay t h at i s a t o nce a ccessib le a n d e ru dite .

Blo ckch ain R evo lu tio n g iv es r e ad ers a p riv ile g ed s n eak p eak a t t h e f u tu re .” —Ale c R oss, a u th or, The I n du str ie s o f t h e F utu re “ If e v er t h ere w as a t o pic f o r d em ystif ic atio n, b lo ck ch ain i s i t. T ogeth er, t h e T ap sc o tts h av e a ch ie v ed t h is c o m pre h en siv ely a n d i n d oin g s o h av e c ap tu re d t h e e x cite m en t, t h e p ote n tia l, a n d t h e i m porta n ce o f t h is t o pic t o e v ery one.” —Bly th e M aste rs, C EO , D ig it a l A sse t H old in gs “ T his i s a b ook w ith t h e p re d ic tiv e q uality o f O rw ell’ s 1984 an d t h e v is io n o f E lo n M usk . R ead i t o r b eco m e e x tin ct.” —Tim D ra p er, F ou nder, D ra p er A sso cia te s, D FJ, a n d D ra p er U niv ersit y “ B lo ck ch ain i s a r a d ic al t e ch nolo gic al w av e a n d, a s h e h as d one s o o fte n , T ap sc o tt i s o ut t h ere , n ow w ith s o n A le x , s u rfin g a t d aw n. I t’ s q uite a r id e.” —Yoch ai B en kle r, B erk m an P ro fe sso r o f E ntr ep ren eu ria l L eg al S tu die s, H arv ard L aw S ch ool “ If y ou w ork i n b usin ess o r g overn m en t, y ou n eed t o u nders ta n d t h e b lo ck ch ain r e v olu tio n. N o o ne h as w ritte n a m ore t h oro ughly r e se arc h ed o r e n gag in g b ook o n t h is t o pic t h an T ap sc o tt a n d T ap sc o tt.” —Erik B ry n jo lf s so n , P ro fe sso r a t M IT ; c o au th or o f The S eco n d M ach in e A ge “ A n i n dis p en sa b le a n d u p-to -th e-m in ute a cco unt o f h ow t h e t e ch nolo gy u nderly in g b itc o in c o uld — an d s h ould — u nle ash t h e t r u e p ote n tia l o f a d ig ita l e co nom y f o r d is tr ib ute d p ro sp erity .” —Dou gla s R ush koff, a u th or o f Pre se n t S hock a n d Thro w in g R ock s a t t h e G oogle B us “ T ech nolo gic al c h an ge t h at u se d t o d ev elo p o ver a g en era tio n n ow h its u s i n a r e la tiv e b lin k o f t h e e y e, a n d n o o ne t e lls t h is s to ry b ette r t h an t h e T ap sc o tts .” —Eric S pie g el, P resid en t a n d C EO , S ie m en s U SA “ F ew l e ad ers p ush u s t o l o ok a ro und c o rn ers t h e w ay D on T ap sc o tt d oes. W ith Blo ckch ain Revo lu tio n h e a n d h is s o n A le x t e ach u s, c h alle n ge u s, a n d s h ow u s a n e n tir e ly n ew w ay t o t h in k a b out t h e f u tu re .” —Bill M cD erm ott, C EO , S A P S E “ B lo ckch ain R evo lu tio n i s a b rillia n t m ix o f h is to ry , t e ch nolo gy, a n d s o cio lo gy t h at c o vers a ll a sp ects o f t h e b lo ck ch ain p ro to co l— an i n ven tio n t h at i n t im e m ay p ro ve a s m om en to us a s t h e i n ven tio n o f p rin tin g.” —Jam es R ic k ard s, a u th or o f Curre n cy W ars a n d The D ea th o f M on ey “ B lo ckch ain R evo lu tio n s e rv es a s a n a tla s t o t h e w orld o f d ig ita l m oney , m aste rfu lly e x pla in in g t h e c u rre n t l a n dsc ap e w hile s im ulta n eo usly i llu m in atin g a p ath f o rw ard t o w ard a m ore e q uita b le , e ffic ie n t, a n d c o nnecte d g lo bal f in an cia l s y ste m .” —Jim B rey er, C EO , B rey er C ap it a l “ B lo ckch ain R evo lu tio n i s t h e i n dis p en sa b le a n d d efin itiv e g uid e t o t h is w orld -c h an gin g t e ch nolo gy.” —Jerry B rit o , E xecu tiv e D ir ecto r, C oin C en te r “ In cre d ib le . R eally i n cre d ib le . T he T ap sc o tts ’ e x am in atio n o f t h e b lo ck ch ain a s a m odel f o r i n clu sio n i n a n i n cre asin gly c en tr a liz ed w orld i s b oth n uan ced a n d e x tr a o rd in ary .” —Ste v e L uczo , C hair m an a n d C EO , S ea gate T ech nolo gy “M ak es a p ow erfu l c ase f o r b lo ck ch ain ’s a b ility t o i n cre ase t r a n sp are n cy b ut a ls o e n su re p riv acy . I n t h e a u th ors ’ word s, ‘ T he I n te rn et o f T hin gs n eed s a L ed ger o f T hin gs.’ ” —Chan dra C han dra se k ara n , C EO a n d M an agin g D ir ecto r, T ata C on su lt a n cy S erv ic es “T he e p ic en te r o f t r u st i s a b out t o d if fu se ! T he d efin itiv e n arra tiv e o n t h e r e v olu tio nary p ossib ilitie s o f a decen tr a liz ed t r u st s y ste m .” —Fra n k D ’S ou za , C EO , C ogn iz a n t “Id en tif ie s a p ro fo und n ew t e ch nolo gy m ovem en t a n d c o nnects i t t o t h e d eep est o f h um an n eed s: t r u st.

Thoro ughly r e se arc h ed a n d p ro vocativ ely w ritte n . E very s e rio us b usin essp ers o n a n d p olic y m ak er n eed s t o r e ad Blo ckch ain R evo lu tio n .” —Bria n F eth ersto n hau gh , C hair m an a n d C EO , O gilv yO ne W orld w id e “ Blo ckch ain R evo lu tio n s e ts t h e t a b le f o r a w av e o f t e ch nolo gic al a d van cem en t t h at i s o nly j u st b eg in nin g.” —Fra n k B ro w n, M an agin g D ir ecto r a n d C hie f O pera tin g O ffic e, G en era l A tla n tic “A m ust r e ad . Y ou’ll g ain a d eep u nders ta n din g o f w hy t h e b lo ck ch ain i s q uic k ly b eco m in g o ne o f t h e m ost im porta n t e m erg in g t e ch nolo gie s s in ce t h e I n te rn et.” —Bria n F ord e, D ir ecto r o f D ig it a l C urren cy I n it ia tiv e, M IT M ed ia L ab “B lo ck ch ain t e ch nolo gy h as t h e p ote n tia l t o r e v olu tio niz e i n dustr y , f in an ce, a n d g overn m en t— a m ust r e ad f o r an yone i n te re ste d i n t h e f u tu re o f m oney a n d h um an ity .” —Peria n ne B orin g, F ou nder a n d P resid en t, C ham ber o f D ig it a l C om merce “W hen g en era tio nal t e ch nolo gy c h an ges t h e w orld i n w hic h w e l iv e, w e a re t r u ly f o rtu nate t o h av e c arto gra p hers lik e D on T ap sc o tt, a n d n ow h is s o n A le x , t o e x pla in w here w e’re g oin g.” —Ray L an e, M an agin g P artn er, G rea tP oin t V en tu res; P artn er E m erit u s, K le in er P erk in s “D on a n d A le x h av e w ritte n t h e d efin itiv e g uid eb ook f o r t h ose t r y in g t o n av ig ate t h is n ew a n d p ro m is in g fro ntie r.” —Ben ja m in L aw sk y, F orm er S uperin te n den t o f F in an cia l S erv ic es, S ta te o f N ew Y ork ; C EO o f T he L aw sk y G ro u p “ Blo ckch ain R evo lu tio n i s a n i llu m in atin g, c ritic ally i m porta n t m an if e sto f o r t h e n ex t d ig ita l a g e.” —Dan P on te fr a ct, a u th or o f The P urp ose E ffe ct ; C hie f E nvis io n er, T ELU S “T he m ost w ell- re se arc h ed , t h oro ugh, a n d i n sig htf u l b ook o n t h e m ost e x citin g n ew t e ch nolo gy s in ce t h e I n te rn et.

A w ork o f e x cep tio nal c la rity a n d a sto nis h in gly b ro ad a n d d eep i n sig ht.” —Andrea s A nto n op ou lo s, a u th or o f Maste rin g B itc o in “ Blo ckch ain R evo lu tio n b eau tif u lly c ap tu re s a n d i llu m in ate s t h e b ra v e n ew w orld o f d ecen tr a liz ed , t r u stle ss money .” —Tyle r W in kle v oss, C ofo u nder, G em in i a n d W in kle v oss C ap it a l “A f a sc in atin g— an d r e assu rin g— in sig ht i n to a t e ch nolo gy w ith t h e p ow er t o r e m ak e t h e g lo bal e co nom y. W hat a priz e. W hat a b ook!” —Pau l P olm an , C EO , Unile v er CO NTEN TS A ls o b y D on T apsc o tt T itle P age C opyrig ht D ed ic a tio n P ra is e f o r D on T apsc o tt a nd A le x T apsc o tt A ckn ow le d gm en ts P A RT I :

S ay Y ou W an t a R ev olu tio n C H APT ER 1 :

The T ru st P ro to co l I n S ea rch o f t h e T ru st P ro to co l H ow T his W orld w id e L ed ger W ork s A R atio n al E xu bera n ce f o r t h e B lo ck ch ain A ch ie v in g T ru st i n t h e D ig it a l A ge R etu rn o f t h e I n te rn et Y ou r P erso n al A vata r a n d t h e B la ck B ox o f I d en tit y A P la n f o r P ro sp erit y P ro m is e a n d P eril o f t h e N ew P la tfo rm C H APT ER 2 :

Boots tr a p pin g t h e F utu re: S ev en D esig n P rin cip le s o f t h e B lo ck ch ain E co n om y T he S ev en D esig n P rin cip le s 1. N etw ork ed I n te g rit y 2. D is tr ib ute d P ow er 3. V alu e a s I n cen tiv e 4. S ecu rit y 5. P riv acy 6. R ig h ts P rese rv ed 7. I n clu sio n D esig n in g t h e F utu re PA RT I I:

T ra n sfo rm atio n s CH APT ER 3 :

Rein ven tin g F in an cia l S erv ic es A N ew L ook f o r t h e W orld ’s S eco n d-O ld est P ro fe ssio n The G old en E ig h t: H ow t h e F in an cia l S erv ic es S ecto r W ill C han ge Fro m S to ck E xch an ges t o B lo ck E xch an ges Dr. F au st’s B lo ck ch ain B arg ain The B an k A pp: W ho W ill W in i n R eta il B an kin g Google T ra n sla te f o r B usin ess: N ew F ra m ew ork s f o r A cco u ntin g a n d C orp ora te Govern an ce Rep uta tio n : Y ou A re Y ou r C red it S co re The B lo ck ch ain I P O The M ark et f o r P red ic tio n M ark ets Road M ap f o r t h e G old en E ig h t CH APT ER 4 :

Re-a rch it e ctin g t h e F ir m : T he C ore a n d t h e E dges Build in g C on se n Sys Chan gin g t h e B ou ndarie s o f t h e F ir m Dete rm in in g C orp ora te B ou ndarie s CH APT ER 5 :

New B usin ess M od els : M ak in g I t R ain o n t h e B lo ck ch ain bA ir b nb V ersu s A ir b nb Glo b al C om putin g: T he R is e o f D is tr ib ute d A pplic a tio n s The D App K in gs: D is tr ib ute d B usin ess E ntit ie s Auto n om ou s A gen ts Dis tr ib ute d A uto n om ou s E nte rp ris e s The B ig S ev en : O pen N etw ork ed E nte rp ris e B usin ess M od els Hack in g Y ou r F utu re: B usin ess M od el I n novatio n CH APT ER 6 :

The L ed ger o f T hin gs: A nim atin g t h e P hysic a l W orld Pow er t o t h e P eo p le The E volu tio n o f C om putin g: F ro m M ain fr a m es t o S m art P ills The I n te rn et o f T hin gs N eed s a L ed ger o f T hin gs The T w elv e D is r u ptio n s: A nim atin g T hin gs The E co n om ic P ayoff The F utu re: F ro m U ber t o S U ber Hack in g Y ou r F utu re f o r a W orld o f S m art T hin gs CH APT ER 7 :

Solv in g t h e P ro sp erit y P ara d ox: E co n om ic I n clu sio n a n d Entr ep ren eu rsh ip A P ig I s N ot a P ig gy B an k The N ew P ro sp erit y P ara d ox Road M ap t o P ro sp erit y Rem it ta n ces: T he S to ry o f A nalie D om in go Blo ck ch ain H um an it a ria n A id Safe a s H ou se s? T he R oad t o A sse t O wnersh ip Im ple m en ta tio n C halle n ges a n d L ea d ersh ip O pportu nit ie s CH APT ER 8 :

Reb uild in g G overn m en t a n d D em ocra cy Som eth in g I s R otte n i n t h e S ta te Hig h -P erfo rm an ce G overn m en t S erv ic es a n d O pera tio n s Em pow erin g P eo p le t o S erv e S elv es a n d O th ers The S eco n d E ra o f D em ocra cy Blo ck ch ain V otin g Alt e rn ativ e M od els o f P olit ic s a n d J u stic e Engagin g C it iz en s t o S olv e B ig P ro b le m s Wie ld in g T ools o f T w en ty -fir st-C en tu ry D em ocra cy CH APT ER 9 :

Freein g C ult u re o n t h e B lo ck ch ain : M usic t o O ur E ars Fair T ra d e M usic : F ro m S tr ea m in g M usic t o M ete rin g R ig h ts Artle ry f o r A rt L overs: C on nectin g A rtis ts a n d P atr o n s Priv acy , F ree S peech , a n d F ree P ress o n t h e B lo ck ch ain Gettin g t h e W ord O ut: T he C rit ic a l R ole o f E duca tio n Cult u re o n t h e B lo ck ch ain a n d Y ou PA RT I II:

P ro m is e a n d P eril CH APT ER 1 0:

Overco m in g S how sto p pers: T en I m ple m en ta tio n C halle n ges 1. T he T ech nolo gy I s N ot R ea d y f o r P rim e T im e 2. T he E nerg y C on su m ed I s U nsu sta in ab le 3. G overn m en ts W ill S tif le o r T w is t I t 4. P ow erfu l I n cu m ben ts o f t h e O ld P ara d ig m W ill U su rp I t 5. T he I n cen tiv es A re I n ad eq uate f o r D is tr ib ute d M ass C olla b ora tio n 6. T he B lo ck ch ain I s a J ob K ille r 7. G overn in g t h e P ro to co ls I s L ik e H erd in g C ats 8. D is tr ib ute d A uto n om ou s A gen ts W ill F orm S kyn et 9. B ig B ro th er I s ( S till) W atc h in g Y ou 10. C rim in als W ill U se I t Rea so n s B lo ck ch ain W ill F ail o r I m ple m en ta tio n C halle n ges?

CH APT ER 1 1:

Lea d ersh ip f o r t h e N ex t E ra Who W ill L ea d a R ev olu tio n ?

The B lo ck ch ain E co sy ste m : Y ou C an ’t T ell t h e P la yers W it h ou t a R oste r A C au tio n ary T ale o f B lo ck ch ain R eg u la tio n The S en ato r W ho W ou ld C han ge t h e W orld Cen tr a l B an ks i n a D ecen tr a liz ed E co n om y Reg u la tio n V ersu s G overn an ce A N ew F ra m ew ork f o r B lo ck ch ain G overn an ce A N ew A gen da f o r t h e N ex t D ig it a l A ge The T ru st P ro to co l a n d Y ou Note s In dex ACK NOW LED GM EN TS T his b ook c am e f ro m t h e m eetin g o f t w o m in ds a n d t w o l if e t r a je cto rie s. D on h ad b een l e ad in g a $ 4 m illio n s y ndic ate d r e se arc h p ro gra m c alle d G lo bal S olu tio n N etw ork s ( G SN ) a t t h e R otm an S ch ool o f M an ag em en t, U niv ers ity o f T oro nto . T he i n itia tiv e w as i n vestig atin g n ew , n etw ork ed m odels o f g lo bal p ro ble m s o lv in g a n d g overn an ce. H e r e se arc h ed h ow t h e I n te rn et w as g overn ed b y a m ultis ta k eh old er e co sy ste m a n d b ecam e i n te re ste d i n d ig ita l c u rre n cie s a n d t h eir g overn an ce. M ean w hile , A le x w as a n e x ecu tiv e w ith t h e i n vestm en t b an k C an acco rd G en uity .

H e n otic ed t h e g ro w in g e n th usia sm f o r e arly -s ta g e b itc o in a n d b lo ck ch ain c o m pan ie s i n 2 013 a n d b eg an l e ad in g h is f ir m ’s e ffo rts i n t h e s p ace. D urin g a f a th er-s o n s k i t r ip t o M ont- T re m bla n t i n e arly 2 014, w e b ra in sto rm ed o ver d in ner a b out c o lla b ora tin g o n t h is t o pic , a n d A le x a g re ed t o l e ad a r e se arc h p ro je ct o n t h e g overn an ce o f d ig ita l c u rre n cie s, c u lm in atin g i n h is w hite p ap er, t itle d A B itc o in G overn ance N etw ork . T he m ore w e d ug i n to t h e i s su es, t h e m ore w e c o nclu ded t h at t h is c o uld b e t h e n ex t b ig t h in g.

Mean w hile o ur a g en t, W es N eff a t t h e L eig h B ure au , a lo ng w ith D on’s p ublis h er A dria n Z ack heim a t P ortf o lio /P en guin ( Wik in om ic s , Macro w ik in om ic s ), w as e n co ura g in g D on t o f o rm ula te a n ew b ook c o ncep t. W hen A le x ’s p ap er b ecam e w id ely r e co gniz ed a s l e ad in g t h in kin g i n t h is a re a, D on a p pro ach ed A le x t o b e h is c o au th or. A dria n , t o h is c re d it, m ad e u s a n o ffe r w e c o uld n’t r e fu se a n d t h e b ook n ev er w en t t o a u ctio n, a s i s n orm ally t h e c ase .

We t h en m ad e w hat i n h in dsig ht w as a s m art d ecis io n. W e a p pro ach ed t h e b est b ook e d ito r w e k new , K ir s te n S an dberg , f o rm erly o f H arv ard B usin ess S ch ool P re ss, a n d a sk ed h er t o e d it o ur b ook p ro posa l. S he d id a s p ecta cu la r j o b a n d o ur c o lla b ora tio n w as s o e ffo rtle ss t h at w e a sk ed h er t o b e a f u ll- tim e m em ber o f t h e b ook r e se arc h t e am . K ir s te n p artic ip ate d w ith u s i n m ore t h an o ne h undre d i n te rv ie w s a n d c o lla b ora te d i n r e al t im e a s w e t r ie d t o u nders ta n d t h e m yria d i s su es o n t h e t a b le a n d d ev elo p h elp fu l f o rm ula tio ns t o e x pla in t h is e x tr a o rd in ary s e t o f d ev elo pm en ts t o a n onte ch nic al a u die n ce. S he h elp ed u s b rin g t h e s to ry t o l if e . I n t h at s e n se , s h e w as o ur c o au th or a n d t h is b ook w ould n ot h av e a p peare d , a t l e ast i n i ts c u rre n t c o m pre h en sib le f o rm , w ith out h er. F or t h at, a n d f o r a ll t h e s tim ula tio n a n d l a u gh l in es, w e a re v ery g ra te fu l.

Our h eartf e lt t h an ks t o t h e p eo ple b elo w w ho g en ero usly s h are d t h eir tim e a n d i n sig hts w ith u s a n d w ith out w hom t h is b ook w ould n ot b e p ossib le . I n a lp hab etic al o rd er:

J e re m y A lla ir e , F ounder, C hair m an , a n d C EO , C ir c le M arc A ndre esse n , C ofo under, A ndre esse n H oro w itz G av in A ndre se n , C hie f S cie n tis t, B itc o in F oundatio n D in o A ngaritis , C EO , S m artw alle t A ndre as A nto nopoulo s, A uth or, Maste rin g B itc o in F ed eric o A st, C ro w dJu ry S usa n A th ey , E co nom ic s o f T ech nolo gy P ro fe sso r, S ta n fo rd G ra d uate S ch ool o f B usin ess A dam B ack , C ofo under a n d P re sid en t, B lo ck str e am Bill B arh ydt, C EO , A bra Chris to pher B av itz , M an ag in g D ir e cto r, C yberla w C lin ic , H arv ard L aw S ch ool Geo ff B eattie , C hair m an , R ela y V en tu re s Ste v e B eau re g ard , C EO a n d F ounder, G oC oin Maria n o B elin ky, M an ag in g P artn er, S an ta n der I n noV en tu re s Yoch ai B en kle r, B erk m an P ro fe sso r o f E ntr e p re n eu ria l S tu die s, H arv ard L aw S ch ool Ja k e B en so n, C EO a n d F ounder, L ib ra T ax Tim B ern ers -L ee, I n ven to r, W orld W id e W eb Doug B la ck , S en ato r, C an ad ia n S en ate , G overn m en t o f C an ad a Perria n e B orin g, F ounder a n d P re sid en t, C ham ber o f D ig ita l C om merc e Dav id B ra y , 2 015 E is e n how er F ello w a n d H arv ard V is itin g E xecu tiv e i n R esid en ce Je rry B rito , E xecu tiv e D ir e cto r, C oin C en te r Pau l B ro dy, A m eric as S tr a te g y L ead er, T ech nolo gy G ro up, E Y ( fo rm erly I o T a t I B M ) Ric h ard G . B ro w n, C TO , R 3 C EV ( fo rm er E xecu tiv e A rc h ite ct f o r I n dustr y I n novatio n a n d Busin ess D ev elo pm en t, I B M ) Vita lik B ute rin , F ounder, E th ere u m Patr ic k B yrn e, C EO , O vers to ck Bru ce C ah an , V is itin g S ch ola r, S ta n fo rd E ngin eerin g; S ta n fo rd S usta in ab le B an kin g I n itia tiv e Ja m es C arly le , C hie f E ngin eer, M D, R 3 C EV Nic o la s C ary , C ofo under, B lo ck ch ain L td .

Toni L an e C asse rly , C EO , C oin T ele g ra p h Chris tia n C ata lin i, A ssis ta n t P ro fe sso r, M IT S lo an S ch ool o f M an ag em en t Ann C av oukia n , E xecu tiv e D ir e cto r, P riv acy a n d B ig D ata I n stitu te , R yers o n U niv ers ity Vin t C erf, C o-c re ato r o f t h e I n te rn et a n d C hie f I n te rn et E van gelis t, G oogle Ben C han , S en io r S oftw are E ngin eer, B itG o Robin C hase , C ofo under a n d F orm er C EO , Z ip car Fad i C heh ad i, C EO , I C A NN Consta n ce C hoi, P rin cip al, S ev en A dvis o ry Jo hn H . C lip pin ger, C EO , I D 3, R ese arc h S cie n tis t, M IT M ed ia L ab Bra m C ohen , C re ato r, B itT orre n t Am y C orte se , J o urn alis t, F ounder, L ocav est J-F C ourv ille , C hie f O pera tin g O ffic er, R BC W ealth M an ag em en t Patr ic k D eeg an , C TO , P ers o nal B la ck B ox Prim av era D e F ilip pi, P erm an en t R ese arc h er, C N RS a n d F acu lty A sso cia te a t t h e B erk m an Cen te r f o r I n te rn et a n d S ocie ty a t H arv ard L aw S ch ool Hern an do d e S oto , P re sid en t, I n stitu te f o r L ib erty a n d D em ocra cy Pero net D esp eig nes, S pecia l O ps, A ugur Ja co b D ie n elt, B lo ck ch ain A rc h ite ct a n d C FO , i tB it a n d F acto m Jo el D ie tz , S w arm C orp Hele n D is n ey , ( fo rm erly ) B itc o in F oundatio n Adam D ra p er, C EO a n d F ounder, B oost V C Tim oth y C ook D ra p er, V en tu re C ap ita lis t; F ounder, D ra p er F is h er J u rv ets o n Andre w D udle y , F ounder a n d C EO , E arth O bse rv atio n Jo sh ua F air fie ld , P ro fe sso r o f L aw , W ash in gto n a n d L ee U niv ers ity Gra n t F ondo, P artn er, S ecu ritie s L itig atio n a n d W hite C olla r D efe n se G ro up, P riv acy a n d D ata Secu rity P ra ctic e, G oodw in P ro cte r L LP Bria n F ord e, F orm er S en io r A dvis e r, T he W hite H ouse ; D ir e cto r, D ig ita l C urre n cy , M IT M ed ia Lab Mik e G au lt, C EO , G uard tim e Geo rg e G ild er, F ounder a n d P artn er, G ild er T ech nolo gy F und Geo ff G ord on, C EO , V ogogo Vin ay G upta , R ele ase C oord in ato r, E th ere u m Ja m es H azard , F ounder, C om mon A cco rd Im ogen H eap , G ra m my-W in nin g M usic ia n a n d S ongw rite r Mik e H earn , F orm er G oogle E ngin eer, V in um eris /L ig hth ouse Austin H ill, C ofo under a n d C hie f I n stig ato r, B lo ck str e am Toom as H en drik I lv es, P re sid en t o f E sto nia Jo ic h i I to , D ir e cto r, M IT M ed ia L ab Eric J e n nin gs, C ofo under a n d C EO , F ila m en t Iz ab ella K am in sk a, F in an cia l R ep orte r, Fin ancia l T im es Pau l K em p-R oberts o n, C ofo under a n d E dito ria l D ir e cto r, C onta g io us C om munic atio ns Andre w K ey s, C onse n su s S yste m s Jo yce K im , E xecu tiv e D ir e cto r, S te lla r D ev elo pm en t F oundatio n Pete r K ir b y, C EO a n d C ofo under, F acto m Jo ey K ru g, C ore D ev elo per, A ugur Halu k K ulin , C EO , P ers o nal B la ck B ox Chris L ars e n , C EO , R ip ple L ab s Ben ja m in L aw sk y, F orm er S uperin te n den t o f F in an cia l S erv ic es f o r t h e S ta te o f N ew Y ork ; CEO , T he L aw sk y G ro up Charlie L ee, C re ato r, C TO ; F orm er E ngin eerin g M an ag er, L ite co in Matth ew L eib ow itz , P artn er, P la za V en tu re s Vin ny L in gham , C EO , G yft Ju an L la n os, E V P o f S tr a te g ic P artn ers h ip s a n d C hie f T ra n sp are n cy O ffic er, B itr e se rv e.o rg Jo se p h L ubin , C EO , C onse n su s S yste m s Adam L udw in , F ounder, C hain .c o m Chris tia n L undkvis t, B ala n c3 Dav id M cK ay , P re sid en t a n d C hie f E xecu tiv e O ffic er, R BC Ja n na M cM an us, G lo bal P R D ir e cto r, B itF ury Mic k ey M cM an us, M ay a I n stitu te Je sse M cW ate rs , F in an cia l I n novatio n S pecia lis t, W orld E co nom ic F oru m Bly th e M aste rs , C EO , D ig ita l A sse t H old in gs Alis ta ir M itc h ell, M an ag in g P artn er, G en era tio n V en tu re s Carlo s M ore ir a , F ounder, C hair m an , a n d C EO , W IS eK ey Tom M orn in i, F ounder a n d C usto m er A dvocate , S uble d ger Eth an N ad elm an n, E xecu tiv e D ir e cto r, D ru g P olic y A llia n ce Adam N an je e, H ead o f F in te ch C lu ste r, M aR S Dan ie l N eis , C EO a n d C ofo under, K OIN A Kelly O ls o n, N ew B usin ess I n itia tiv e, I n te l Ste v e O m ohundro , P re sid en t, S elf -A ware S yste m s Jim O rla n do, M an ag in g D ir e cto r, O M ER S V en tu re s Law re n ce O rs in i, C ofo under a n d P rin cip al, L O 3 E nerg y Pau l P acif ic o , C EO , F eatu re d A rtis ts C oalitio n Jo se P ag lie ry , S ta ff R ep orte r, C N NM oney Ste p hen P air , C ofo under a n d C EO , B itP ay I n c.

Vik ra m P an dit, F orm er C EO , C itig ro up; C oin base I n vesto r, P ortla n d S quare C ap ita l Ja ck P ete rs o n, C ore D ev elo per, A ugur Eric P is c in i, P rin cip al, B an kin g/T ech nolo gy, D elo itte C onsu ltin g Kau sik R ajg opal, S ilic o n V alle y O ffic e L ead er, M cK in se y a n d C om pan y Sure sh R am am urth i, C hair m an a n d C TO , C BW B an k Sunny R ay , C EO , U noco in .c o m Cate rin a R in di, C om munity M an ag er, S w arm C orp Eduard o R oble s E lv ir a , C TO , A gora V otin g Keo nne R odrig uez, P ro duct L ead , B lo ck ch ain L td .

Matth ew R osz ak , F ounder a n d C EO , T ally C ap ita l Colin R ule , C hair m an a n d C EO , M odria .c o m Marc o S an to ri, C ounse l, P ills b ury W in th ro p S haw P ittm an L LP Fra n k S ch uil, C EO , S afe llo Barry S ilb ert, F ounder a n d C EO , D ig ita l C urre n cy G ro up Thom as S paas, D ir e cto r, B elg iu m B itc o in A sso cia tio n Bala ji S rin iv asa n , C EO , 2 1; P artn er, A ndre esse n H oro w itz Lynn S t. A m our, F orm er P re sid en t, T he I n te rn et S ocie ty Bre tt S ta p per, F ounder a n d C EO , F alc o n G lo bal C ap ita l L LC Eliz ab eth S ta rk , V is itin g F ello w , Y ale L aw S ch ool Ju tta S te in er, E th ere u m /P ro ven an ce Mela n ie S w an , F ounder, I n stitu te f o r B lo ck ch ain S tu die s Nic k S zab o, G W U L aw Ash le y T ay lo r, C onen sy s S yste m s Sim on T ay lo r, V P E ntr e p re n eu ria l P artn ers h ip s, B arc la y s Dav id T hom so n, F ounder, A rtle ry Mic h elle T in sle y , D ir e cto r, M obility a n d P ay m en t S ecu rity , I n te l Pete r T odd, C hie f N ay sa y er, C oin K ite Ja so n T yra , C oin D esk Vale ry V av ilo v, C EO , B itF ury Ann L ouis e V eh ovec, S en io r V ic e P re sid en t, S tr a te g ic P ro je cts , R BC F in an cia l G ro up Roger V er, “ T he B itc o in J e su s,” M em ory deale rs K K Akse li V ir ta n en , H ed ge F und M an ag er, R obin H ood A sse t M an ag em en t Erik V oorh ees, C EO a n d F ounder, S hap eS hif t Jo e W ein berg , C ofo under a n d C EO , P ay case Dere k W hite , C hie f D esig n a n d D ig ita l O ffic er, B arc la y s B an k Ted W hite h ead , S en io r M an ag in g D ir e cto r, M an ulif e A sse t M an ag em en t Zooko W ilc o x-O ’H earn , C EO , L east A uth ority E nte rp ris e s Caro ly n W ilk in s, S en io r D ep uty G overn or, B an k o f C an ad a Robert W ilk in s, C EO , m yV BO Cam ero n W in kle v oss, F ounder, W in kle v oss C ap ita l Tyle r W in kle v oss, F ounder, W in kle v oss C ap ita l Pin dar W ong, I n te rn et P io neer, C hair m an o f V eriF i Gab rie l W oo, V ic e P re sid en t o f I n novatio n, R BC F in an cia l G ro up Gav in W ood, C TO , E th ere u m F oundatio n Aaro n W rig ht, P ro fe sso r, C ard ozo L aw S ch ool, Y esh iv a U niv ers ity Jo nath an Z ittr a in , H arv ard L aw S ch ool Als o s p ecia l t h an ks t o a f e w p eo ple w ho r e ally r o lle d u p t h eir s le ev es t o h elp . A nth ony W illia m s an d J o an B ig ham o f t h e G SN p ro je ct w ork ed c lo se ly w ith Ale x o n t h e o rig in al d ig ita l c u rre n cie s govern an ce p ap er. F orm er C is c o e x ecu tiv e J o an M cC alla d id d eep r e se arc h f o r t h e c h ap te rs o n th e I n te rn et o f T hin gs a n d a ls o G overn m en t a n d D em ocra cy . W e r e ceiv ed a l o t o f f a m ilia l su pport. I T e x ecu tiv e B ob T ap sc o tt s p en t m an y d ay s d ow nlo ad in g a n d g ettin g u nder t h e h ood o f th e e n tir e b itc o in b lo ck ch ain t o g iv e u s f ir s th an d i n sig hts o n s o m e o f t h e t e ch nic al i s su es.

Tech nolo gy e n tr e p re n eu r B ill T ap sc o tt c am e u p w ith t h e r e v olu tio nary i d ea o f a b lo ck ch ain - base d p ers o nal c arb on c re d it t r a d in g s y ste m , a n d t e ch nolo gy e x ecu tiv e N ik i T ap sc o tt a n d h er husb an d, f in an cia l a n aly st J a m es L eo , h av e b een g re at s o undin g b oard s t h ro ughout. K ath erin e MacL ella n o f t h e T ap sc o tt G ro up ( c o nven ie n tly a l a w yer) t a ck le d s o m e o f t h e t o ugher i s su es aro und s m art c o ntr a cts a s w ell a s m an ag in g t h e i n te rv ie w p ro cess. P hil C ourn ey eu r w as o n t h e lo okout d aily f o r j u ic y m ate ria l, a n d D av id T ic o ll p ro vid ed h elp fu l i n sig hts a b out t h e s ta te o f t h e dig ita l a g e s o f a r. W es N eff a n d B ill L eig h o f t h e L eig h B ure au h elp ed u s c ra ft t h e b ook c o ncep t (h ow m an y b ooks i s t h is , g uys? ). A s a lw ay s ( n ow m ore t h an t w en ty y ears ), J o dy S te v en s fla w le ssly m an ag ed t h e a d m in is tr a tio n f o r t h e e n tir e p ro je ct i n clu din g d ata b ase s, f in an ces, a n d docu m en t m an ag em en t, a s w ell a s t h e p ro ofre ad in g a n d p ro ductio n p ro cess— a f u ll- tim e j o b, i n ad ditio n t o h er o th er f u ll- tim e j o bs a t t h e T ap sc o tt G ro up.

Specia l t h an ks t o D in o M ark A ngaritis , t h e C EO o f b lo ck ch ain c o m pan y S m artw alle t; Jo se p h L ubin , C EO o f t h e E th ere u m d ev elo pm en t s tu dio C onse n su s S yste m s; a n d C arlo s More ir a o f f a st- g ro w in g s e cu rity c o m pan y W IS eK ey — who e ach s p en t c o nsid era b le t im e w ith u s bra in sto rm in g i d eas. T hey a re e ach b rillia n t a n d s o k in d t o h elp u s o ut. N ow w e g et t o e n jo y witn essin g t h e s u ccess o f e ach o f t h eir b usin esse s i n t h is s p ace. A ls o b ig t h an ks t o t h e g re at t e am at P en guin R an dom H ouse l e d b y o ur e d ito r J e sse M aesh ir o a n d o vers e en b y A dria n Z ack heim .

Most i m porta n t, w e’d l ik e t o g iv e o ur h eartf e lt t h an ks t o o ur w iv es, A na L opes ( D on) a n d Am y W els m an ( A le x ), w ho m ore t h an t o le ra te d o ur o bse ssio n w ith c ra ck in g t h is b ig n ut o ver t h e bette r p art o f a y ear. W e a re b oth v ery f o rtu nate t o h av e s u ch w onderfu l l if e p artn ers .

Writin g t h is b ook h as b een a j o yous e x perie n ce f o r b oth o f u s a n d i t’ s f a ir t o s a y t h at w e lo ved e v ery m in ute o f i t. A s s o m eo ne f a m ous o nce s a id , “ If t w o p eo ple a g re e o n e v ery th in g, o ne of t h em i s u nnecessa ry .” W e c h alle n ged e ach o th er d aily t o t e st o ur b elie fs a n d a ssu m ptio ns, a n d th is b ook i s l iv in g p ro of o f t h at h ealth y a n d v ig oro us c o lla b ora tio n. M in d y ou, c o lla b ora tin g d oes se em e ffo rtle ss w hen y ou s h are s o m uch D NA a n d h av e a s h are d t h ir ty -y ear h is to ry o f e x plo rin g th e w orld t o geth er. W e d o h ope y ou f in d t h e p ro duct o f t h is c o lla b ora tio n i m porta n t a n d h elp fu l.

Don T ap sc o tt a n d A le x T ap sc o tt, J an uary 2 016 PA RT I SA Y Y OU W ANT A REV OLU TIO N I CH APT ER 1 TH E T R U ST P R O TO CO L t a p pears t h at o nce a g ain , t h e t e ch nolo gic al g en ie h as b een u nle ash ed f ro m i ts b ottle .

Sum moned b y a n u nknow n p ers o n o r p ers o ns w ith u ncle ar m otiv es, a t a n u ncerta in t im e i n h is to ry , t h e g en ie i s n ow a t o ur s e rv ic e f o r a n oth er k ic k a t t h e c an — to t r a n sfo rm t h e e co nom ic p ow er g rid a n d t h e o ld o rd er o f h um an a ffa ir s f o r t h e b ette r. I f w e w ill i t.

Let u s e x pla in .

The f ir s t f o ur d ecad es o f t h e I n te rn et b ro ught u s e -m ail, t h e W orld W id e W eb , d ot- c o m s, s o cia l m ed ia , t h e m obile W eb , b ig d ata , c lo ud c o m putin g, a n d t h e e arly d ay s o f t h e I n te rn et o f T hin gs. I t h as b een g re at f o r r e d ucin g t h e c o sts o f s e arc h in g, c o lla b ora tin g, a n d e x ch an gin g i n fo rm atio n. I t h as l o w ere d t h e b arrie rs t o e n tr y f o r n ew m ed ia a n d e n te rta in m en t, n ew f o rm s o f r e ta ilin g a n d o rg an iz in g w ork , a n d u npre ced en te d d ig ita l v en tu re s. T hro ugh s e n so r t e ch nolo gy, i t h as i n fu se d i n te llig en ce i n to o ur w alle ts , o ur c lo th in g, o ur a u to m obile s, o ur b uild in gs, o ur c itie s, a n d e v en o ur b io lo gy. I t i s s a tu ra tin g o ur e n vir o nm en t s o c o m ple te ly t h at s o on w e w ill n o l o nger “ lo g o n” b ut r a th er g o a b out o ur b usin ess a n d o ur l iv es i m mers e d i n p erv asiv e t e ch nolo gy.

Overa ll, t h e I n te rn et h as e n ab le d m an y p ositiv e c h an ges— fo r t h ose w ith a ccess t o i t— but i t h as s e rio us l im ita tio ns f o r b usin ess a n d e co nom ic a ctiv ity .

The N ew Y ork er c o uld r e ru n P ete r S te in er’s 1 993 c arto on o f o ne d og t a lk in g t o a n oth er w ith out r e v is io n: “ O n t h e I n te rn et, n obody k now s y ou’re a d og.” O nlin e, w e s till c an ’t r e lia b ly e sta b lis h o ne a n oth er’s i d en titie s o r t r u st o ne a n oth er t o t r a n sa ct a n d e x ch an ge m oney w ith out v alid atio n f ro m a t h ir d p arty l ik e a b an k o r a g overn m en t. T hese s a m e i n te rm ed ia rie s c o lle ct o ur d ata a n d i n vad e o ur p riv acy f o r c o m merc ia l g ain a n d n atio nal se cu rity . E ven w ith t h e I n te rn et, t h eir c o st s tr u ctu re e x clu des s o m e 2 .5 b illio n p eo ple f ro m t h e g lo bal f in an cia l s y ste m . D esp ite t h e p ro m is e o f a p eer-to -p eer e m pow ere d w orld , t h e e co nom ic a n d p olitic al b en efits h av e p ro ven t o b e a sy m metr ic al— with p ow er a n d p ro sp erity c h an nele d t o t h ose w ho a lr e ad y h av e i t, e v en i f t h ey ’re n o l o nger e arn in g i t. M oney i s m ak in g m ore m oney t h an m an y p eo ple d o.

Tech nolo gy d oesn ’t c re ate p ro sp erity a n y m ore t h an i t d estr o ys p riv acy . H ow ev er, i n t h is d ig ita l a g e, t e ch nolo gy i s a t t h e h eart o f j u st a b out e v ery th in g— good a n d b ad . I t e n ab le s h um an s t o v alu e a n d t o v io la te o ne a n oth er’s r ig hts i n p ro fo und n ew w ay s. T he e x plo sio n i n o nlin e c o m munic atio n a n d c o m merc e i s c re atin g m ore o pportu nitie s f o r c y berc rim e. M oore ’s l a w o f t h e a n nual d oublin g o f p ro cessin g p ow er d ouble s t h e p ow er o f f ra u dste rs a n d t h ie v es— “M oore ’s O utla w s” 1 —not t o m en tio n s p am mers , i d en tity t h ie v es, p his h ers , s p ie s, z o m bie f a rm ers , h ack ers , c y berb ullie s, a n d d ata n ap pers — crim in als w ho u nle ash r a n so m ware t o h old d ata h osta g e— th e l is t g oes o n. IN S E A RCH O F T H E T R UST P R O TO CO L As e arly a s 1 981, i n ven to rs w ere a tte m ptin g t o s o lv e t h e I n te rn et’ s p ro ble m s o f p riv acy , s e cu rity , an d i n clu sio n w ith c ry pto gra p hy. N o m atte r h ow t h ey r e en gin eere d t h e p ro cess, t h ere w ere alw ay s l e ak s b ecau se t h ir d p artie s w ere i n volv ed . P ay in g w ith c re d it c ard s o ver t h e I n te rn et w as in se cu re b ecau se u se rs h ad t o d iv ulg e t o o m uch p ers o nal d ata , a n d t h e t r a n sa ctio n f e es w ere t o o hig h f o r s m all p ay m en ts .

In 1 993, a b rillia n t m ath em atic ia n n am ed D av id C hau m c am e u p w ith e C ash , a d ig ita l pay m en t s y ste m t h at w as “ a t e ch nic ally p erfe ct p ro duct w hic h m ad e i t p ossib le t o s a fe ly a n d an onym ously p ay o ver t h e I n te rn et. . . . I t w as p erfe ctly s u ite d t o s e n din g e le ctr o nic p en nie s, nic k els , a n d d im es o ver t h e I n te rn et.” 2 I t w as s o p erfe ct t h at M ic ro so ft a n d o th ers w ere i n te re ste d in i n clu din g e C ash a s a f e atu re i n t h eir s o ftw are .

3 T he t r o uble w as, o nlin e s h oppers d id n’t c are ab out p riv acy a n d s e cu rity o nlin e t h en . C hau m ’s D utc h c o m pan y D ig iC ash w en t b an kru pt i n 1998.

Aro und t h at t im e, o ne o f C hau m ’s a sso cia te s, N ic k S zab o, w ro te a s h ort p ap er e n title d “ T he God P ro to co l,” a t w is t o n N obel l a u re ate L eo n L ed erm an ’s p hra se “ th e G od p artic le ,” r e fe rrin g to t h e i m porta n ce o f t h e H ig gs boso n t o m odern p hysic s. I n h is p ap er, S zab o m use d a b out t h e cre atio n o f a b e-a ll e n d-a ll t e ch nolo gy p ro to co l, o ne t h at d esig nate d G od t h e t r u ste d t h ir d p arty i n th e m id dle o f a ll t r a n sa ctio ns: “ A ll t h e p artie s w ould s e n d t h eir i n puts t o G od. G od w ould re lia b ly d ete rm in e t h e r e su lts a n d r e tu rn t h e o utp uts . G od b ein g t h e u ltim ate i n c o nfe ssio nal dis c re tio n, n o p arty w ould l e arn a n yth in g m ore a b out t h e o th er p artie s’ i n puts t h an t h ey c o uld le arn f ro m t h eir o w n i n puts a n d t h e o utp ut.” 4 H is p oin t w as p ow erfu l: D oin g b usin ess o n t h e In te rn et r e q uir e s a l e ap o f f a ith . B ecau se t h e i n fra str u ctu re l a ck s t h e m uch -n eed ed s e cu rity , w e ofte n h av e l ittle c h oic e b ut t o t r e at t h e m id dle m en a s i f t h ey w ere d eitie s.

A d ecad e l a te r i n 2 008, t h e g lo bal f in an cia l i n dustr y c ra sh ed . P erh ap s p ro pitio usly , a pse u donym ous p ers o n o r p ers o ns n am ed S ato sh i N ak am oto o utlin ed a n ew p ro to co l f o r a p eer- to -p eer e le ctr o nic c ash s y ste m u sin g a c ry pto cu rre n cy c alle d b itc o in . C ry pto cu rre n cie s ( d ig ita l cu rre n cie s) a re d if fe re n t f ro m t r a d itio nal f ia t c u rre n cie s b ecau se t h ey a re n ot c re ate d o r c o ntr o lle d by c o untr ie s. T his p ro to co l e sta b lis h ed a s e t o f r u le s— in t h e f o rm o f d is tr ib ute d c o m puta tio ns— th at e n su re d t h e in te g rity of t h e d ata e x ch an ged a m ong t h ese b illio ns o f d ev ic es with out g oin g th ro ugh a t r u ste d t h ir d p arty .

T his s e em in gly s u btle a ct s e t o ff a s p ark t h at h as e x cite d , t e rrif ie d , or o th erw is e c ap tu re d t h e i m ag in atio n o f t h e c o m putin g w orld a n d h as s p re ad l ik e w ild fir e t o busin esse s, g overn m en ts , p riv acy a d vocate s, s o cia l d ev elo pm en t a ctiv is ts , m ed ia t h eo ris ts , a n d jo urn alis ts , t o n am e a f e w , e v ery w here .

“T hey ’re l ik e, ‘ O h m y g od, t h is i s i t. T his i s t h e b ig b re ak th ro ugh. T his i s t h e t h in g w e’v e been w aitin g f o r,’ ” s a id M arc A ndre esse n , t h e c o cre ato r o f t h e f ir s t c o m merc ia l W eb b ro w se r, Nets c ap e, a n d a b ig i n vesto r i n t e ch nolo gy v en tu re s. “ ‘H e s o lv ed a ll t h e p ro ble m s. W hoev er h e i s sh ould g et t h e N obel P riz e— he’s a g en iu s.’ T his i s t h e t h in g! T his i s t h e d is tr ib ute d t r u st n etw ork th at t h e I n te rn et a lw ay s n eed ed a n d n ev er h ad .” 5 Today t h oughtf u l p eo ple e v ery w here a re t r y in g t o u nders ta n d t h e i m plic atio ns o f a p ro to co l th at e n ab le s m ere m orta ls t o m an ufa ctu re t r u st t h ro ugh c le v er c o de. T his h as n ev er h ap pen ed befo re — tr u ste d t r a n sa ctio ns d ir e ctly b etw een t w o o r m ore p artie s, a u th en tic ate d b y m ass co lla b ora tio n a n d p ow ere d b y c o lle ctiv e s e lf -in te re sts , r a th er t h an b y l a rg e c o rp ora tio ns motiv ate d b y p ro fit. It m ay n ot b e t h e A lm ig hty , b ut a t r u stw orth y g lo bal p la tf o rm f o r o ur t r a n sa ctio ns i s so m eth in g v ery b ig . W e’re c allin g i t t h e T ru st P ro to co l.

This p ro to co l i s t h e f o undatio n o f a g ro w in g n um ber o f g lo bal d is tr ib ute d l e d gers c alle d blo ck ch ain s— of w hic h t h e b itc o in b lo ck ch ain i s t h e l a rg est. W hile t h e t e ch nolo gy i s c o m plic ate d an d t h e w ord blo ckch ain i s n ’t e x actly s o noro us, t h e m ain i d ea i s s im ple . B lo ck ch ain s e n ab le u s to s e n d m oney d ir e ctly a n d s a fe ly f ro m m e t o y ou, w ith out g oin g t h ro ugh a b an k, a c re d it c ard co m pan y, o r P ay P al.

Rath er t h an t h e I n te rn et o f I n fo rm atio n, i t’ s t h e I n te rn et o f V alu e o r o f M oney . I t’ s a ls o a pla tf o rm f o r e v ery one t o k now w hat i s t r u e— at l e ast w ith r e g ard t o s tr u ctu re d r e co rd ed in fo rm atio n. A t i ts m ost b asic , i t i s a n o pen s o urc e c o de: a n yone c an d ow nlo ad i t f o r f re e, r u n i t, an d u se i t t o d ev elo p n ew t o ols f o r m an ag in g t r a n sa ctio ns o nlin e. A s s u ch , i t h old s t h e p ote n tia l fo r u nle ash in g c o untle ss n ew a p plic atio ns a n d a s y et u nre aliz ed c ap ab ilitie s t h at h av e t h e pote n tia l t o t r a n sfo rm m an y t h in gs.

HOW T H IS W ORLD W ID E L ED G ER W ORK S Big b an ks a n d s o m e g overn m en ts a re i m ple m en tin g b lo ck ch ain s a s d is tr ib ute d l e d gers t o re v olu tio niz e t h e w ay i n fo rm atio n i s s to re d a n d t r a n sa ctio ns o ccu r. T heir g oals a re l a u dab le — sp eed , l o w er c o st, s e cu rity , f e w er e rro rs , a n d t h e e lim in atio n o f c en tr a l p oin ts o f a tta ck a n d fa ilu re . T hese m odels d on’t n ecessa rily i n volv e a c ry pto cu rre n cy f o r p ay m en ts .

How ev er, t h e m ost i m porta n t a n d f a r-re ach in g b lo ck ch ain s a re b ase d o n S ato sh i’ s b itc o in model. H ere ’s h ow t h ey w ork .

Bitc o in o r o th er d ig ita l c u rre n cy i s n ’t s a v ed i n a f ile s o m ew here ; i t’ s r e p re se n te d b y tr a n sa ctio ns r e co rd ed i n a b lo ck ch ain — kin d o f l ik e a g lo bal s p re ad sh eet o r l e d ger, w hic h le v era g es t h e r e so urc es o f a l a rg e p eer-to -p eer b itc o in n etw ork t o v erif y a n d a p pro ve e ach b itc o in tr a n sa ctio n. E ach b lo ck ch ain , l ik e t h e o ne t h at u se s b itc o in , i s dis tr ib ute d : i t r u ns o n c o m pute rs pro vid ed b y v olu nte ers a ro und t h e w orld ; t h ere i s n o c en tr a l d ata b ase t o h ack . T he b lo ck ch ain i s public : a n yone c an v ie w i t a t a n y t im e b ecau se i t r e sid es o n t h e n etw ork , n ot w ith in a s in gle in stitu tio n c h arg ed w ith a u ditin g t r a n sa ctio ns a n d k eep in g r e co rd s. A nd t h e b lo ck ch ain i s en cry p te d : i t u se s h eav y-d uty e n cry ptio n i n volv in g p ublic a n d p riv ate k ey s ( ra th er l ik e t h e t w o- key s y ste m t o a ccess a s a fe ty d ep osit b ox) t o m ain ta in vir tu al s e cu rity . Y ou n eed n’t w orry a b out th e w eak f ir e w alls o f T arg et o r H om e D ep ot o r a t h ie v in g s ta ffe r o f M org an S ta n le y o r t h e U .S .

fe d era l g overn m en t.

Every t e n m in ute s, l ik e t h e h eartb eat o f t h e b itc o in n etw ork , a ll t h e t r a n sa ctio ns c o nducte d are v erif ie d , c le are d , a n d s to re d i n a b lo ck w hic h i s l in ked t o t h e p re ced in g b lo ck , t h ere b y cre atin g a c h ain . E ach b lo ck m ust r e fe r t o t h e p re ced in g b lo ck t o b e v alid . T his s tr u ctu re perm an en tly t im e-s ta m ps a n d s to re s e x ch an ges o f v alu e, p re v en tin g a n yone f ro m a lte rin g t h e le d ger. I f y ou w an te d t o s te al a b itc o in , y ou’d h av e t o r e w rite t h e c o in ’s e n tir e h is to ry o n t h e blo ck ch ain i n b ro ad d ay lig ht. T hat’ s p ra ctic ally i m possib le . S o t h e b lo ck ch ain i s a d is tr ib ute d le d ger r e p re se n tin g a n etw ork c o nse n su s o f e v ery t r a n sa ctio n t h at h as e v er o ccu rre d . L ik e t h e World W id e W eb o f i n fo rm atio n, i t’ s t h e W orld W id e L ed ger o f v alu e— a d is tr ib ute d l e d ger t h at ev ery one c an d ow nlo ad a n d r u n o n t h eir p ers o nal c o m pute r.

Som e s c h ola rs h av e a rg ued t h at t h e i n ven tio n o f d ouble -e n tr y b ookkeep in g e n ab le d t h e r is e of c ap ita lis m a n d t h e n atio n-s ta te . T his n ew d ig ita l l e d ger o f e co nom ic t r a n sa ctio ns c an b e pro gra m med t o r e co rd v ir tu ally e v ery th in g o f v alu e a n d i m porta n ce t o h um an kin d: b ir th a n d death c ertif ic ate s, m arria g e l ic en se s, d eed s a n d t itle s o f o w ners h ip , e d ucatio nal d eg re es, f in an cia l acco unts , m ed ic al p ro ced ure s, i n su ra n ce c la im s, v ote s, p ro ven an ce o f f o od, a n d a n yth in g e ls e th at c an b e e x pre sse d i n c o de.

The n ew p la tf o rm e n ab le s a r e co ncilia tio n o f d ig ita l r e co rd s r e g ard in g j u st a b out e v ery th in g in r e al t im e. I n f a ct, s o on b illio ns o f s m art t h in gs i n t h e p hysic al w orld w ill b e s e n sin g, re sp ondin g, c o m munic atin g, b uyin g t h eir o w n e le ctr ic ity a n d s h arin g i m porta n t d ata , d oin g ev ery th in g f ro m p ro te ctin g o ur e n vir o nm en t t o m an ag in g o ur h ealth . T his I n te rn et o f E very th in g need s a L ed ger o f E very th in g. B usin ess, c o m merc e, a n d t h e e co nom y n eed a D ig ita l R eck onin g.

So w hy s h ould y ou c are ? W e b elie v e t h e t r u th ca n s e t u s f re e a n d d is tr ib ute d t r u st w ill pro fo undly a ffe ct p eo ple i n a ll w alk s o f l if e . M ay be y ou’re a m usic l o ver w ho w an ts a rtis ts t o mak e a l iv in g o ff t h eir a rt. O r a c o nsu m er w ho w an ts t o k now w here t h at h am burg er m eat r e ally cam e f ro m . P erh ap s y ou’re a n i m mig ra n t w ho’s s ic k o f p ay in g b ig f e es t o s e n d m oney h om e t o lo ved o nes i n y our a n cestr a l l a n d. O r a S au di w om an w ho w an ts t o p ublis h h er o w n f a sh io n mag azin e. M ay be y ou’re a n a id w ork er w ho n eed s t o id en tif y l a n d t itle s o f l a n dow ners s o y ou can r e b uild t h eir h om es a fte r a n e arth quak e. O r a c itiz en f e d u p w ith t h e l a ck o f t r a n sp are n cy a n d acco unta b ility o f p olitic al l e ad ers . O r a u se r o f s o cia l m ed ia w ho v alu es y our p riv acy a n d t h in ks all t h e d ata y ou g en era te m ig ht b e w orth s o m eth in g— to y ou. E ven a s w e w rite , i n novato rs a re build in g b lo ck ch ain -b ase d a p plic atio ns t h at s e rv e t h ese e n ds. A nd t h ey a re j u st t h e b eg in nin g.

A R ATIO NAL E X UBER ANCE F O R T H E B LO CK CH AIN For s u re , b lo ck ch ain t e ch nolo gy h as p ro fo und i m plic atio ns f o r m an y i n stitu tio ns. W hic h h elp s ex pla in a ll t h e e x cite m en t f ro m m an y s m art a n d i n flu en tia l p eo ple . B en L aw sk y q uit h is j o b a s th e s u perin te n den t o f f in an cia l s e rv ic es f o r N ew Y ork S ta te t o b uild a n a d vis o ry c o m pan y i n t h is sp ace. H e t o ld u s, “ In f iv e t o t e n y ears , t h e f in an cia l s y ste m m ay b e u nre co gniz ab le . . . a n d I wan t t o b e p art o f t h e c h an ge.” 6 B ly th e M aste rs , f o rm erly c h ie f f in an cia l o ffic er a n d h ead o f Glo bal C om moditie s a t J P M org an ’s i n vestm en t b an k, l a u nch ed a b lo ck ch ain -fo cu se d te ch nolo gy s ta rt- u p t o t r a n sfo rm t h e i n dustr y . T he c o ver o f t h e O cto ber 2 015 Blo om berg Mark ets fe atu re d M aste rs w ith t h e h ead lin e “ It’ s A ll A bout t h e B lo ck ch ain .” L ik ew is e , The E co nom is t r a n an O cto ber 2 015 c o ver s to ry , “ T he T ru st M ach in e,” w hic h a rg ued t h at “ th e t e ch nolo gy b eh in d bitc o in c o uld c h an ge h ow t h e e co nom y w ork s.” 7 T o The E co nom is t , b lo ck ch ain t e ch nolo gy i s “th e g re at c h ain o f b ein g s u re a b out t h in gs.” B an ks e v ery w here a re s c ra m blin g t o p-le v el t e am s t o in vestig ate o pportu nitie s, s o m e o f t h ese w ith d ozen s o f c ra ck erja ck t e ch nolo gis ts . B an kers l o ve th e i d ea o f s e cu re , f ric tio nle ss, a n d i n sta n t t r a n sa ctio ns, b ut s o m e f lin ch a t t h e i d ea o f o pen ness, decen tr a liz atio n, a n d n ew f o rm s o f c u rre n cy . T he f in an cia l s e rv ic es i n dustr y h as a lr e ad y re b ra n ded a n d p riv atiz ed b lo ck ch ain t e ch nolo gy, r e fe rrin g t o i t a s dis tr ib ute d l e d ger t e ch nolo gy, in a n a tte m pt t o r e co ncile t h e b est o f b itc o in — se cu rity , s p eed , a n d c o st— with a n e n tir e ly c lo se d sy ste m t h at r e q uir e s a b an k o r f in an cia l i n stitu tio n’s p erm is sio n t o u se . T o t h em , b lo ck ch ain s a re more r e lia b le d ata b ase s t h an w hat t h ey a lr e ad y h av e, d ata b ase s t h at e n ab le k ey s ta k eh old ers — buyers , s e lle rs , c u sto dia n s, a n d r e g ula to rs — to k eep s h are d , i n delib le r e co rd s, t h ere b y r e d ucin g co st, m itig atin g s e ttle m en t r is k , a n d e lim in atin g c en tr a l p oin ts o f f a ilu re .

In vestin g i n b lo ck ch ain s ta rt- u ps i s t a k in g o ff, a s d id i n vestin g i n dot- c o m s i n t h e 1 990s.

Ven tu re c ap ita lis ts a re s h ow in g e n th usia sm a t a l e v el t h at w ould m ak e a 1 990s d ot- c o m i n vesto r blu sh . I n 2 014 a n d 2 015 a lo ne, m ore t h an $ 1 b illio n o f v en tu re c ap ita l f lo oded i n to t h e e m erg in g blo ck ch ain e co sy ste m , a n d t h e r a te o f i n vestm en t i s a lm ost d oublin g a n nually .

8 “ W e’re q uite co nfid en t,” s a id M arc A ndre esse n i n a n i n te rv ie w w ith The W ash in gto n P ost, “th at w hen w e’re sittin g h ere i n 2 0 y ears , w e’ll b e t a lk in g a b out [ b lo ck ch ain t e ch nolo gy] t h e w ay w e t a lk a b out t h e In te rn et t o day .” 9 Reg ula to rs h av e a ls o s n ap ped t o a tte n tio n, e sta b lis h in g t a sk f o rc es t o e x plo re w hat k in d o f le g is la tio n, i f a n y, m ak es s e n se . A uth orita ria n g overn m en ts l ik e R ussia ’s h av e b an ned o r se v ere ly l im ite d t h e u se o f b itc o in , a s h av e d em ocra tic s ta te s t h at s h ould k now b ette r, l ik e Arg en tin a, g iv en i ts h is to ry o f c u rre n cy c ris e s. M ore t h oughtf u l g overn m en ts i n t h e W est a re in vestin g c o nsid era b ly i n u nders ta n din g h ow t h e n ew t e ch nolo gy c o uld t r a n sfo rm n ot o nly cen tr a l b an kin g a n d t h e n atu re o f m oney , b ut a ls o g overn m en t o pera tio ns a n d t h e n atu re o f dem ocra cy . C aro ly n W ilk in s, t h e s e n io r d ep uty g overn or o f t h e B an k o f C an ad a, b elie v es i t’ s tim e f o r c en tr a l b an ks e v ery w here t o s e rio usly s tu dy t h e i m plic atio ns o f m ovin g e n tir e n atio nal cu rre n cy s y ste m s t o d ig ita l m oney . T he B an k o f E ngla n d’s t o p e co nom is t, A ndre w H ald an e, h as pro pose d a n atio nal d ig ita l c u rre n cy f o r t h e U nite d K in gdom .

10 These a re h ead y t im es. T o b e s u re , t h e g ro w in g t h ro ng o f e n th usia sts h as i ts s h are o f opportu nis ts , s p ecu la to rs , a n d c rim in als . T he f ir s t t a le m ost p eo ple h ear a b out d ig ita l c u rre n cie s is t h e b an kru ptc y o f t h e M t. G ox e x ch an ge o r t h e c o nvic tio n o f R oss W illia m U lb ric h t, f o under of t h e S ilk R oad d ark net m ark et s e iz ed b y t h e F ed era l B ure au o f I n vestig atio n f o r t r a ffic k in g ille g al d ru gs, c h ild p orn ogra p hy, a n d w eap ons u sin g t h e b itc o in b lo ck ch ain a s a p ay m en t s y ste m .

Bitc o in ’s p ric e h as f lu ctu ate d d ra stic ally , a n d t h e o w ners h ip o f b itc o in s i s s till c o ncen tr a te d . A 2013 s tu dy s h ow ed t h at 9 37 p eo ple o w ned h alf o f a ll b itc o in , a lth ough t h at i s c h an gin g t o day .

11 How d o w e g et f ro m p orn a n d P onzi s c h em es t o p ro sp erity ? T o b eg in , i t’ s n ot b itc o in , t h e still s p ecu la tiv e a sse t, t h at s h ould i n te re st y ou, u nle ss y ou’re a t r a d er. T his b ook i s a b out so m eth in g b ig ger t h an t h e a sse t. I t’ s a b out t h e p ow er a n d p ote n tia l o f t h e u nderly in g te ch nolo gic al p la tf o rm .

This i s n ot t o s a y t h at b itc o in o r c ry pto cu rre n cie s p er s e a re u nim porta n t, a s s o m e p eo ple hav e s u ggeste d a s t h ey s c ra m ble t o d is a sso cia te t h eir p ro je cts f ro m t h e s c an dalo us v en tu re s o f th e p ast. T hese c u rre n cie s a re critic al t o t h e b lo ck ch ain r e v olu tio n, w hic h i s f ir s t a n d f o re m ost ab out t h e p eer-to -p eer e x ch an ge o f v alu e, e sp ecia lly m oney .

ACH IE V IN G T R UST I N T H E D IG IT A L A G E Tru st i n b usin ess i s t h e e x pecta tio n t h at t h e o th er p arty w ill b eh av e a cco rd in g t o t h e f o ur prin cip le s o f i n te g rity : h onesty , c o nsid era tio n, a cco unta b ility , a n d t r a n sp are n cy .

12 Hon esty i s n ot j u st a n e th ic al i s su e; i t h as b eco m e a n e co nom ic o ne. T o e sta b lis h t r u stin g re la tio nsh ip s w ith e m plo yees, p artn ers , c u sto m ers , s h are h old ers , a n d t h e p ublic , o rg an iz atio ns must b e t r u th fu l, a ccu ra te , a n d c o m ple te i n c o m munic atio ns. N o l y in g t h ro ugh o m is sio n, n o obfu sc atio n t h ro ugh c o m ple x ity .

Con sid era tio n i n b usin ess o fte n m ean s a f a ir e x ch an ge o f b en efits o r d etr im en ts t h at p artie s will o pera te i n g ood f a ith . B ut t r u st r e q uir e s a g en uin e r e sp ect f o r t h e i n te re sts , d esir e s, o r fe elin gs o f o th ers , a n d t h at p artie s c an o pera te w ith g oodw ill t o w ard o ne a n oth er.

Acco u nta b ilit y m ean s m ak in g c le ar c o m mitm en ts t o s ta k eh old ers a n d a b id in g b y t h em .

In div id uals a n d i n stitu tio ns a lik e m ust d em onstr a te t h at t h ey h av e h onore d t h eir c o m mitm en ts an d o w ned t h eir b ro ken p ro m is e s, p re fe ra b ly w ith t h e v erif ic atio n o f t h e s ta k eh old ers t h em se lv es or i n dep en den t o uts id e e x perts . N o p assin g t h e b uck , n o p la y in g t h e b la m e g am e.

Tra n sp aren cy m ean s o pera tin g o ut i n t h e o pen , i n t h e l ig ht o f d ay . “ W hat a re t h ey h id in g?” is a s ig n o f p oor t r a n sp are n cy t h at l e ad s t o d is tr u st. O f c o urs e , c o m pan ie s h av e l e g itim ate r ig hts to t r a d e s e cre ts a n d o th er k in ds o f p ro prie ta ry i n fo rm atio n. B ut w hen i t c o m es t o p ertin en t in fo rm atio n f o r c u sto m ers , s h are h old ers , e m plo yees, a n d o th er s ta k eh old ers , a ctiv e o pen ness i s cen tr a l t o e arn in g t r u st. R ath er t h an d re ssin g f o r s u ccess, c o rp ora tio ns c an u ndre ss f o r s u ccess.

Tru st i n b usin ess a n d o th er i n stitu tio ns i s m ostly a t a n a ll- tim e l o w . T he p ublic r e la tio ns co m pan y E delm an ’s 2 015 “ T ru st B aro m ete r” i n dic ate s t h at t r u st i n i n stitu tio ns, e sp ecia lly co rp ora tio ns, h as f a lle n b ack t o l e v els f ro m t h e d is m ally l o w p erio d o f t h e 2 008 g re at r e cessio n.

Edelm an n ote d t h at e v en t h e o nce i m pre g nab le t e ch nolo gy i n dustr y , s till t h e m ost t r u ste d busin ess s e cto r, s a w d eclin es i n t h e m ajo rity o f c o untr ie s f o r t h e f ir s t t im e. G lo bally , C EO s a n d govern m en t o ffic ia ls c o ntin ue t o b e t h e l e ast c re d ib le in fo rm atio n s o urc es, l a g gin g f a r b eh in d acad em ic o r i n dustr y e x perts .

13 S im ila rly , G allu p r e p orte d i n i ts 2 015 s u rv ey o f A m eric an co nfid en ce i n i n stitu tio ns t h at “ b usin ess” r a n ked s e co nd l o w est a m ong t h e f if te en i n stitu tio ns measu re d ; f e w er t h an 2 0 p erc en t o f r e sp onden ts i n dic ate d t h ey h ad c o nsid era b le o r h ig h l e v els o f tr u st. O nly t h e U .S . C ongre ss h ad a l o w er s c o re .

14 In t h e p re b lo ck ch ain w orld , t r u st i n t r a n sa ctio ns d eriv ed f ro m i n div id uals , i n te rm ed ia rie s, o r oth er o rg an iz atio ns a ctin g w ith i n te g rity . B ecau se w e o fte n c an ’t k now o ur c o unte rp artie s, l e t alo ne w heth er t h ey h av e i n te g rity , w e’v e c o m e t o r e ly o n t h ir d p artie s n ot o nly t o v ouch f o r str a n gers , b ut a ls o t o m ain ta in t r a n sa ctio n r e co rd s a n d p erfo rm t h e b usin ess l o gic a n d t r a n sa ctio n lo gic t h at p ow ers c o m merc e o nlin e. T hese p ow erfu l i n te rm ed ia rie s— ban ks, g overn m en ts , Pay P al, V is a , U ber, A pple , G oogle , a n d o th er d ig ita l c o nglo m era te s— harv est m uch o f t h e v alu e.

In t h e e m erg in g b lo ck ch ain w orld , t r u st d eriv es f ro m t h e n etw ork a n d e v en f ro m o bje cts o n th e n etw ork . C arlo s M ore ir a o f t h e c ry pto gra p hic s e cu rity c o m pan y W IS eK ey s a id t h at t h e n ew te ch nolo gie s e ffe ctiv ely d ele g ate t r u st— ev en t o p hysic al t h in gs. “ If a n o bje ct, w heth er i t b e a se n so r o n a c o m munic atio ns t o w er, a l ig ht b ulb , o r a h eart m onito r, i s n ot t r u ste d t o p erfo rm w ell or p ay f o r s e rv ic es i t w ill b e r e je cte d b y t h e o th er o bje cts a u to m atic ally .” 15 T he l e d ger i ts e lf i s th e f o undatio n o f t r u st.

16 To b e c le ar, “ tr u st” r e fe rs t o b uyin g a n d s e llin g g oods a n d s e rv ic es a n d t o t h e i n te g rity a n d pro te ctio n o f i n fo rm atio n, n ot t r u st i n a ll b usin ess a ffa ir s . H ow ev er, y ou w ill r e ad t h ro ughout t h is book h ow a g lo bal l e d ger o f t r u th fu l i n fo rm atio n c an h elp b uild i n te g rity i n to a ll o ur i n stitu tio ns an d c re ate a m ore s e cu re a n d t r u stw orth y w orld . I n o ur v ie w , c o m pan ie s t h at c o nduct s o m e o r a ll of t h eir t r a n sa ctio ns o n t h e b lo ck ch ain w ill e n jo y a t r u st b um p i n s h are p ric e. S hare h old ers a n d citiz en s w ill c o m e t o e x pect a ll p ublic ly t r a d ed f ir m s a n d t a x pay er-fu nded o rg an iz atio ns t o r u n th eir t r e asu rie s, a t m in im um , o n t h e b lo ck ch ain . B ecau se o f i n cre ase d t r a n sp are n cy , i n vesto rs will b e a b le t o s e e w heth er a C EO r e ally d ese rv ed t h at f a t b onus. S m art c o ntr a cts e n ab le d b y blo ck ch ain s w ill r e q uir e c o unte rp artie s t o a b id e b y t h eir c o m mitm en ts a n d v ote rs w ill b e a b le t o se e w heth er t h eir r e p re se n ta tiv es a re b ein g h onest o r a ctin g w ith f is c al i n te g rity .

RETU RN O F T H E I N TER NET The f ir s t e ra o f t h e I n te rn et s ta rte d w ith t h e e n erg y a n d s p ir it o f a y oung L uke S kyw alk er— with th e b elie f t h at a n y k id f ro m a h ars h d ese rt p la n et c o uld b rin g d ow n a n e v il e m pir e a n d s ta rt a n ew civ iliz atio n b y l a u nch in g a d ot- c o m . N aïv e t o b e s u re , b ut m an y p eo ple , p re se n t c o m pan y in clu ded , h oped t h e I n te rn et, a s e m bodie d i n t h e W orld W id e W eb , w ould d is ru pt t h e i n dustr ia l world w here p ow er w as g rip ped b y t h e f e w a n d p ow er s tr u ctu re s w ere h ard t o c lim b a n d h ard er to t o pple . U nlik e t h e o ld m ed ia t h at w ere c en tr a liz ed a n d c o ntr o lle d b y p ow erfu l f o rc es, a n d where t h e u se rs w ere i n ert, t h e n ew m ed ia w ere d is tr ib ute d a n d n eu tr a l, a n d e v ery one w as a n activ e p artic ip an t r a th er t h an a p assiv e r e cip ie n t. L ow c o st a n d m assiv e p eer-to -p eer co m munic atio n o n t h e I n te rn et w ould h elp u nderm in e t r a d itio nal h ie ra rc h ie s a n d h elp w ith t h e in clu sio n o f d ev elo pin g w orld c itiz en s i n t h e g lo bal e co nom y. V alu e a n d r e p uta tio n w ould d eriv e fro m q uality o f c o ntr ib utio n, n ot s ta tu s. I f y ou w ere s m art a n d h ard w ork in g i n I n dia , y our m erit would b rin g y ou r e p uta tio n. T he w orld w ould b e f la tte r, m ore m erito cra tic , m ore f le x ib le , a n d more f lu id . M ost i m porta n t, t e ch nolo gy w ould c o ntr ib ute t o p ro sp erity f o r e v ery one, n ot j u st wealth f o r t h e f e w .

Som e o f t h is h as c o m e t o p ass. T here h av e b een m ass c o lla b ora tio ns l ik e W ik ip ed ia , L in ux, an d G ala x y Z oo. O uts o urc in g a n d n etw ork ed b usin ess m odels h av e e n ab le d p eo ple i n t h e dev elo pin g w orld t o p artic ip ate i n t h e g lo bal e co nom y b ette r. T oday t w o b illio n p eo ple co lla b ora te a s p eers s o cia lly . W e a ll h av e a ccess t o i n fo rm atio n i n u npre ced en te d w ay s.

How ev er, t h e E m pir e s tr u ck b ack . I t h as b eco m e c le ar t h at c o ncen tr a te d p ow ers i n b usin ess an d g overn m en t h av e b en t t h e o rig in al d em ocra tic a rc h ite ctu re o f t h e I n te rn et t o t h eir w ill.

Huge i n stitu tio ns n ow c o ntr o l a n d o w n t h is n ew m ean s o f p ro ductio n a n d s o cia l i n te ra ctio n —its u nderly in g i n fra str u ctu re ; m assiv e a n d g ro w in g t r e asu re t r o ves o f d ata ; t h e a lg orith m s t h at in cre asin gly g overn b usin ess a n d d aily l if e ; t h e w orld o f a p ps; a n d e x tr a o rd in ary e m erg in g cap ab ilitie s, m ach in e l e arn in g, a n d a u to nom ous v eh ic le s. F ro m S ilic o n V alle y a n d W all S tr e et t o Shan ghai a n d S eo ul, t h is n ew a ris to cra cy u se s i ts i n sid er a d van ta g e t o e x plo it t h e m ost ex tr a o rd in ary t e ch nolo gy e v er d ev is e d t o e m pow er p eo ple a s e co nom ic a cto rs , t o b uild sp ecta cu la r f o rtu nes a n d s tr e n gth en i ts p ow er a n d i n flu en ce o ver e co nom ie s a n d s o cie tie s.

Man y o f t h e d ark s id e c o ncern s r a is e d b y e arly d ig ita l p io neers h av e p re tty m uch mate ria liz ed .

17 W e h av e g ro w th i n g ro ss d om estic p ro duct b ut n ot c o m men su ra te j o b g ro w th i n most d ev elo ped c o untr ie s. W e h av e g ro w in g w ealth c re atio n a n d g ro w in g s o cia l i n eq uality .

Pow erfu l t e ch nolo gy c o m pan ie s h av e s h if te d m uch a ctiv ity f ro m t h e o pen , d is tr ib ute d , eg alita ria n , a n d e m pow erin g W eb t o c lo se d o nlin e w alle d g ard en s o r p ro prie ta ry , r e ad -o nly ap plic atio ns t h at a m ong o th er t h in gs k ill t h e c o nvers a tio n. C orp ora te f o rc es h av e c ap tu re d m an y of t h ese w onderfu l p eer-to -p eer, d em ocra tic , a n d o pen t e ch nolo gie s a n d a re u sin g t h em t o e x tr a ct an i n ord in ate s h are o f v alu e.

The u psh ot i s t h at, i f a n yth in g, e co nom ic p ow er h as g otte n s p ik ie r, m ore c o ncen tr a te d , a n d more e n tr e n ch ed . R ath er t h an d ata b ein g m ore w id ely a n d d em ocra tic ally d is tr ib ute d , i t i s b ein g hoard ed a n d e x plo ite d b y f e w er e n titie s t h at o fte n u se i t t o c o ntr o l m ore a n d a cq uir e m ore p ow er.

If y ou a ccu m ula te d ata a n d t h e p ow er t h at c o m es w ith i t, y ou c an f u rth er f o rtif y y our p ositio n b y pro ducin g p ro prie ta ry k now le d ge. T his p riv ile g e t r u m ps m erit, r e g ard le ss o f i ts o rig in .

Furth er, p ow erfu l “ d ig ita l c o nglo m era te s” s u ch a s A m azo n, G oogle , A pple , a n d F aceb ook— all I n te rn et s ta rt- u ps a t o ne t im e— are c ap tu rin g t h e t r e asu re t r o ves o f d ata t h at c itiz en s a n d in stitu tio ns g en era te o fte n i n p riv ate d ata s ilo s r a th er t h an o n t h e W eb . W hile t h ey c re ate g re at valu e f o r c o nsu m ers , o ne u psh ot i s t h at d ata i s b eco m in g a n ew a sse t c la ss— one t h at m ay t r u m p pre v io us a sse t c la sse s. A noth er i s t h e u nderm in in g o f o ur t r a d itio nal c o ncep ts o f p riv acy a n d t h e au to nom y o f t h e i n div id ual. Govern m en ts o f a ll k in ds u se t h e I n te rn et t o i m pro ve o pera tio ns a n d s e rv ic es, b ut t h ey n ow als o d ep lo y t e ch nolo gy t o m onito r a n d e v en m an ip ula te c itiz en s. I n m an y d em ocra tic c o untr ie s, govern m en ts u se i n fo rm atio n a n d c o m munic atio ns t e ch nolo gie s t o s p y o n c itiz en s, c h an ge p ublic opin io n, f u rth er t h eir p aro ch ia l i n te re sts , u nderm in e r ig hts a n d f re ed om s, a n d o vera ll t o s ta y i n pow er. R ep re ssiv e g overn m en ts l ik e t h ose o f C hin a a n d I ra n e n clo se t h e I n te rn et, e x plo itin g i t t o cra ck d ow n o n d is se n t a n d m obiliz e c itiz en s a ro und t h eir o bje ctiv es.

This i s n ot t o s a y t h at t h e W eb i s d ead , a s s o m e h av e s u ggeste d . T he W eb i s c ritic al t o t h e fu tu re o f t h e d ig ita l w orld a n d a ll o f u s s h ould s u pport e ffo rts u nder w ay t o d efe n d i t, s u ch a s th ose o f t h e W orld W id e W eb F oundatio n, w ho a re f ig htin g t o k eep i t o pen , n eu tr a l, a n d co nsta n tly e v olv in g.

Now , w ith b lo ck ch ain t e ch nolo gy, a w orld o f n ew p ossib ilitie s h as o pen ed u p t o r e v ers e a ll th ese t r e n ds. W e n ow h av e a t r u e p eer-to -p eer p la tf o rm t h at e n ab le s t h e m an y e x citin g t h in gs we’v e d is c u sse d i n t h is b ook. W e c an e ach o w n o ur i d en titie s a n d o ur p ers o nal d ata . W e c an d o tr a n sa ctio ns, c re atin g a n d e x ch an gin g v alu e w ith out p ow erfu l i n te rm ed ia rie s a ctin g a s t h e arb ite rs o f m oney a n d i n fo rm atio n. B illio ns o f e x clu ded p eo ple c an s o on e n te r t h e g lo bal eco nom y. W e c an p ro te ct o ur p riv acy a n d m onetiz e o ur o w n i n fo rm atio n. W e c an e n su re t h at cre ato rs a re c o m pen sa te d f o r t h eir i n te lle ctu al p ro perty . R ath er t h an t r y in g t o s o lv e t h e p ro ble m of g ro w in g s o cia l i n eq uality t h ro ugh t h e r e d is tr ib utio n o f w ealth o nly , w e c an s ta rt t o c h an ge t h e way w ealth i s dis tr ib ute d —how i t i s c re ate d i n t h e f ir s t p la ce, a s p eo ple e v ery w here f ro m fa rm ers t o m usic ia n s c an s h are m ore f u lly , a p rio ri, i n t h e w ealth t h ey c re ate . T he s k y d oes s e em to b e t h e l im it.

It’ s m ore Y oda t h an G od. B ut t h is n ew p ro to co l, i f n ot d iv in e, d oes e n ab le t r u ste d co lla b ora tio n t o o ccu r i n a w orld t h at n eed s i t, a n d t h at’ s a l o t. E xcite d , w e a re .

YO UR P E R SO NAL A VATA R A ND T H E B LA CK B O X O F I D EN TIT Y Thro ughout h is to ry , e ach n ew f o rm o f m ed ia h as e n ab le d m an kin d t o t r a n sc en d t im e, s p ace, a n d morta lity . T hat— dare w e s a y — div in e a b ility i n ev ita b ly r a is e s a n ew t h e e x is te n tia l q uestio n o f id en tity : W ho a re w e? W hat d oes i t m ean t o b e h um an ? H ow d o w e c o ncep tu aliz e o urs e lv es? A s Mars h all M cL uhan o bse rv ed , t h e m ed iu m b eco m es t h e m essa g e o ver t im e. P eo ple s h ap e a n d a re sh ap ed b y m ed ia . O ur b ra in s a d ap t. O ur i n stitu tio ns a d ap t. S ocie ty a d ap ts .

“T oday y ou n eed a n o rg an iz atio n w ith e n dow ed r ig hts t o p ro vid e y ou w ith a n i d en tity , l ik e a ban k c ard , a f re q uen t f ly er c ard , o r a c re d it c ard ,” 18 s a id C arlo s M ore ir a o f W IS eK ey . Y our pare n ts g av e y ou a n am e, t h e s ta te -lic en se d o bste tr ic ia n o r m id w if e w ho d eliv ere d y ou t o ok y our fo otp rin t a n d v ouch ed f o r y our w eig ht a n d l e n gth , a n d b oth p artie s a tte ste d t o t h e t im e, d ate , a n d pla ce o f y our a rriv al b y s ig nin g y our b ir th c ertif ic ate . N ow t h ey c an r e co rd t h is c ertif ic ate o n t h e blo ck ch ain a n d l in k b ir th a n nouncem en ts a n d a c o lle g e f u nd t o i t. F rie n ds a n d f a m ily c an co ntr ib ute b itc o in t o y our h ig her e d ucatio n. T here , y our d ata f lo w b eg in s.

In t h e e arly d ay s o f t h e I n te rn et, T om P ete rs w ro te , “ Y ou a re y our p ro je cts .” 19 H e m ean t t h at our c o rp ora te a ffilia tio ns a n d j o b t itle s n o l o nger d efin ed u s. W hat i s e q ually t r u e n ow : “ Y ou a re your d ata .” T ro uble i s , M ore ir a s a id , “ T hat i d en tity i s n ow y ours , b ut t h e d ata t h at c o m es f ro m i ts in te ra ctio n i n t h e w orld i s o w ned b y s o m eo ne e ls e .” 20 T hat’ s h ow m ost c o rp ora tio ns a n d in stitu tio ns v ie w y ou, b y y our d ata c o ntr a il a cro ss t h e I n te rn et. T hey a g gre g ate y our d ata i n to a vir tu al r e p re se n ta tio n o f y ou, a n d t h ey p ro vid e t h is “ v ir tu al y ou” w ith e x tr a o rd in ary n ew b en efits bey ond y our p are n ts ’ h ap pie st d re am s.

21 B ut c o nven ie n ce c o m es w ith a p ric e: p riv acy . T hose who s a y “ p riv acy i s d ead — get o ver i t” a re w ro ng.

22 P riv acy i s t h e f o undatio n o f f re e s o cie tie s.

“P eo ple h av e a v ery s im plis tic v ie w o f i d en tity ,” 23 s a id b lo ck ch ain t h eo ris t A ndre as Anto nopoulo s. W e u se t h e w ord id en tity t o d esc rib e t h e s e lf , t h e p ro je ctio n o f t h at s e lf t o t h e world , a n d a ll t h ese a ttr ib ute s t h at w e a sso cia te w ith t h at s e lf o r o ne o f i ts p ro je ctio ns. T hese m ay co m e f ro m n atu re , f ro m t h e s ta te , f ro m p riv ate o rg an iz atio ns. W e m ay h av e o ne o r m ore r o le s an d a s e rie s o f m etr ic s a tta ch ed t o t h ose r o le s, a n d t h e r o le s m ay c h an ge. C onsid er y our l a st j o b.

Did y our r o le c h an ge o rg an ic ally b ecau se o f c h an ges i n t h e w ork t h at n eed ed t o b e d one o r becau se o f r e v is io ns t o y our j o b d esc rip tio n?

What i f “ th e v ir tu al y ou” w as i n f a ct o w ned b y y ou— your p ers o nal a v ata r— an d “ liv ed ” i n th e b la ck b ox o f y our i d en tity s o t h at y ou c o uld m onetiz e y our d ata s tr e am a n d r e v eal o nly w hat you n eed ed t o , w hen a sse rtin g a p artic u la r r ig ht. W hy d oes y our d riv er’s l ic en se c o nta in m ore in fo rm atio n t h an t h e f a ct t h at y ou h av e p asse d y our d riv in g t e st a n d d em onstr a te d y our a b ility t o driv e? I m ag in e a n ew e ra o f t h e I n te rn et w here y our p ers o nal a v ata r m an ag es a n d p ro te cts t h e co nte n ts o f y our b la ck b ox. T his t r u sty s o ftw are s e rv an t c o uld r e le ase o nly t h e r e q uir e d d eta il o r am ount f o r e ach s itu atio n a n d a t t h e s a m e t im e w his k u p y our d ata c ru m bs a s y ou n av ig ate t h e dig ita l w orld .

This m ay s o und l ik e t h e s tu ff o f s c ie n ce f ic tio n a s p ortr a y ed i n f ilm s l ik e The M atr ix o r Ava ta r . B ut t o day b lo ck ch ain t e ch nolo gie s m ak e i t p ossib le . J o e L ubin , C EO o f C onse n su s Syste m s, r e fe rs t o t h is c o ncep t a s a “ p ers is te n t d ig ita l I D a n d p ers o na” o n a b lo ck ch ain . “ I s h ow a d if fe re n t a sp ect o f m yse lf t o m y c o lle g e f rie n ds c o m pare d t o w hen I a m s p eak in g a t t h e Chic ag o F ed ,” h e s a id . “ In t h e o nlin e d ig ita l e co nom y, I w ill r e p re se n t my v ario us a sp ects a n d in te ra ct i n t h at w orld f ro m t h e p la tf o rm o f d if fe re n t p ers o nas.” L ubin e x pects t o h av e a “can onic al p ers o na,” t h e v ers io n o f h im t h at p ay s t a x es, o bta in s l o an s, a n d g ets i n su ra n ce. “ I w ill hav e p erh ap s a b usin ess p ers o na a n d a f a m ily p ers o na t o s e p ara te t h e c o ncern s t h at I c h oose t o lin k t o m y c an onic al p ers o na. I m ay h av e a g am er p ers o na t h at I d on’t w an t l in ked t o m y busin ess p ers o na. I m ig ht e v en h av e a d ark w eb p ers o na t h at i s n ev er l in kab le t o t h e o th ers .” 24 Your b la ck b ox m ay i n clu de i n fo rm atio n s u ch a s a g overn m en t- is su ed I D , S ocia l S ecu rity num ber, m ed ic al i n fo rm atio n, s e rv ic e a cco unts , f in an cia l a cco unts , d ip lo m as, p ra ctic e l ic en se s, bir th c ertif ic ate , v ario us o th er c re d en tia ls , a n d i n fo rm atio n s o p ers o nal y ou d on’t w an t t o r e v eal i t but d o w an t t o m onetiz e i ts v alu e, s u ch a s s e x ual p re fe re n ce o r m ed ic al c o nditio n, f o r a p oll o r a re se arc h s tu dy. Y ou c o uld l ic en se t h ese d ata f o r s p ecif ic p urp ose s t o s p ecif ic e n titie s f o r s p ecif ic perio ds o f t im e. Y ou c o uld s e n d a s u bse t o f y our a ttr ib ute s t o y our e y e d octo r a n d a d if fe re n t su bse t t o t h e h ed ge f u nd t h at y ou w ould l ik e t o i n vest i n . Y our a v ata r c o uld a n sw er y es-n o questio ns w ith out d is c lo sin g w ho y ou a re : “ A re y ou t w en ty -o ne y ears o r o ld er? D id y ou e arn more t h an $ 100,0 00 i n e ach o f t h e l a st t h re e y ears ? D o y ou h av e a b ody m ass i n dex i n t h e n orm al ra n ge?” 25 In t h e p hysic al w orld , y our r e p uta tio n i s l o cal— your l o cal s h opkeep er, y our e m plo yer, y our frie n ds a t a d in ner p arty a ll h av e a c erta in o pin io n a b out y ou. I n t h e d ig ita l e co nom y, t h e re p uta tio ns o f v ario us p ers o nas i n y our a v ata r w ill b e p orta b le . P orta b ility w ill h elp b rin g p eo ple ev ery w here i n to t h e d ig ita l e co nom y. P eo ple w ith a d ig ita l w alle t a n d a v ata r i n A fric a c o uld esta b lis h t h e r e p uta tio n r e q uir e d t o , s a y , b orro w m oney t o s ta rt a b usin ess. “ S ee, a ll t h ese p eo ple know m e a n d h av e v ouch ed f o r m e. I a m f in an cia lly t r u stw orth y. I a m a n e n fra n ch is e d c itiz en o f th e g lo bal d ig ita l e co nom y.” Id en tity i s o nly a s m all p art o f i t. T he r e st i s a c lo ud— an i d en tity c lo ud— of p artic u la te s lo ose ly o r t ig htly l in ked t o y our i d en tity . I f w e t r y t o r e co rd a ll t h ese i n to t h e b lo ck ch ain , a n im muta b le l e d ger, w e l o se n ot o nly t h e n uan ce o f s o cia l i n te ra ctio n b ut a ls o t h e g if t o f f o rg ettin g.

Peo ple o ught n ev er b e d efin ed b y t h eir w ors t d ay .

A P L A N F O R P R O SP E R IT Y In t h is b ook, y ou’ll r e ad d ozen s o f s to rie s a b out i n itia tiv es e n ab le d b y t h is t r u st p ro to co l t h at cre ate n ew o pportu nitie s f o r a m ore p ro sp ero us w orld . P ro sp erity f ir s t a n d f o re m ost i s a b out one’s s ta n dard o f l iv in g. T o a ch ie v e i t, p eo ple m ust h av e t h e m ean s, t o ols , a n d o pportu nitie s t o cre ate m ate ria l w ealth a n d t h riv e e co nom ic ally . B ut f o r u s i t i n clu des m ore — se cu rity o f t h e pers o n, s a fe ty , h ealth , e d ucatio n, e n vir o nm en ta l s u sta in ab ility , o pportu nitie s t o s h ap e a n d c o ntr o l one’s d estin y a n d t o p artic ip ate i n a n e co nom y a n d s o cie ty . I n o rd er t o a ch ie v e p ro sp erity , a n in div id ual m ust p osse ss, a t m in im um , a ccess t o s o m e f o rm o f b asic f in an cia l s e rv ic es t o r e lia b ly sto re a n d m ove v alu e, c o m munic atio n, a n d t r a n sa ctio nal t o ols t o c o nnect t o t h e g lo bal e co nom y, an d s e cu rity , p ro te ctio n, a n d e n fo rc em en t o f t h e t itle t o l a n d a n d o th er a sse ts t h ey p osse ss le g ally .

26 T his a n d m ore i s t h e p ro m is e o f t h e b lo ck ch ain . T he s to rie s y ou w ill r e ad s h ould g iv e you a s e n se o f a f u tu re w here t h ere i s p ro sp erity f o r e v ery one, n ot j u st m ore w ealth a n d p ow er fo r t h e w ealth y a n d p ow erfu l. P erh ap s e v en a w orld w here w e o w n o ur d ata a n d c an p ro te ct o ur priv acy a n d p ers o nal s e cu rity . A n o pen w orld w here e v ery one c an c o ntr ib ute t o o ur t e ch nolo gy in fra str u ctu re , r a th er t h an a w orld o f w alle d g ard en s w here b ig c o m pan ie s o ffe r p ro prie ta ry a p ps.

A w orld w here b illio ns o f e x clu ded p eo ple c an n ow p artic ip ate i n t h e g lo bal e co nom y a n d s h are in i ts l a rg esse . H ere ’s a p re v ie w .

Crea tin g a T ru e P eer-to -P eer S harin g E co n om y Pundits o fte n r e fe r t o A ir b nb, U ber, L yft, T ask R ab bit, a n d o th ers a s p la tf o rm s f o r t h e “ sh arin g eco nom y.” I t’ s a n ic e n otio n— th at p eers c re ate a n d s h are i n v alu e. B ut t h ese b usin esse s h av e little t o d o w ith s h arin g. I n f a ct, t h ey a re s u ccessfu l p re cis e ly b ecau se t h ey d o n ot s h are — th ey ag gre g ate . I t i s a n a g gre g atin g e co nom y. U ber i s a $ 65 b illio n c o rp ora tio n t h at a g gre g ate s d riv in g se rv ic es. A ir b nb, t h e $ 25 b illio n S ilic o n V alle y d arlin g, a g gre g ate s v acan t r o om s. O th ers ag gre g ate e q uip m en t a n d h an dym en t h ro ugh t h eir c en tr a liz ed , p ro prie ta ry p la tf o rm s a n d t h en re se ll t h em . I n t h e p ro cess, t h ey c o lle ct d ata f o r c o m merc ia l e x plo ita tio n. N one o f t h ese co m pan ie s e x is te d a d ecad e a g o b ecau se t h e t e ch nolo gic al p re co nditio ns w ere n ot t h ere :

ubiq uito us s m art p hones, f u ll G PS, a n d s o phis tic ate d pay m en t s y ste m s. N ow w ith b lo ck ch ain s, th e t e ch nolo gy e x is ts t o r e in ven t t h ese i n dustr ie s a g ain . T oday ’s b ig d is ru pte rs a re a b out t o g et dis ru pte d .

Im ag in e i n ste ad o f t h e c en tr a liz ed c o m pan y A ir b nb, a d is tr ib ute d a p plic atio n— call i t blo ck ch ain A ir b nb o r b A ir b nb— esse n tia lly a c o opera tiv e o w ned b y i ts m em bers . W hen a r e n te r wan ts t o f in d a l is tin g, t h e b A ir b nb s o ftw are s c an s t h e b lo ck ch ain f o r a ll t h e l is tin gs a n d f ilte rs an d d is p la y s t h ose t h at m eet h er c rite ria . B ecau se t h e n etw ork c re ate s a r e co rd o f t h e t r a n sa ctio n on t h e b lo ck ch ain , a p ositiv e u se r r e v ie w i m pro ves t h eir r e sp ectiv e r e p uta tio ns a n d e sta b lis h es th eir i d en titie s— now w ith out a n i n te rm ed ia ry . S ay s V ita lik B ute rin , f o under o f t h e E th ere u m blo ck ch ain : “ W here as m ost t e ch nolo gie s t e n d t o a u to m ate w ork ers o n t h e p erip hery d oin g men ia l t a sk s, b lo ck ch ain s a u to m ate a w ay t h e c en te r. I n ste ad o f p uttin g t h e t a x i d riv er o ut o f a jo b, b lo ck ch ain p uts U ber o ut o f a j o b a n d l e ts t h e t a x i d riv ers w ork w ith t h e c u sto m er dir e ctly .” 27 Rew ir in g t h e F in an cia l S yste m f o r S peed a n d I n clu sio n The f in an cia l s e rv ic es i n dustr y m ak es o ur g lo bal e co nom y h um , b ut t h e s y ste m t o day i s f ra u ght with p ro ble m s. F or o ne, i t i s a rg uab ly t h e m ost c en tr a liz ed i n dustr y i n t h e w orld a n d t h e l a st in dustr y t o f e el t h e t r a n sfo rm atio nal e ffe ct o f t h e t e ch nolo gic al r e v olu tio n. B astio ns o f t h e o ld fin an cia l o rd er s u ch a s b an ks g o t o g re at l e n gth s t o d efe n d m onopolie s a n d o fte n s ty m ie dis ru ptiv e i n novatio n. T he f in an cia l s y ste m a ls o r u ns o n o utm oded t e ch nolo gy a n d i s g overn ed by r e g ula tio ns d atin g b ack t o t h e n in ete en th c en tu ry . I t i s r if e w ith c o ntr a d ic tio ns a n d u nev en dev elo pm en ts , m ak in g i t s o m etim es s lo w , o fte n tim es i n se cu re , a n d l a rg ely o paq ue t o m an y sta k eh old ers .

Dis tr ib ute d l e d ger t e ch nolo gy c an l ib era te m an y f in an cia l s e rv ic es f ro m t h e c o nfin es o f o ld in stitu tio ns, f o ste rin g c o m petitio n a n d i n novatio n. T hat’ s g ood f o r t h e e n d u se r. E ven w hen co nnecte d t o t h e o ld I n te rn et, b illio ns o f p eo ple a re e x clu ded f ro m t h e e co nom y f o r t h e s im ple re aso n t h at f in an cia l i n stitu tio ns d on’t p ro vid e s e rv ic es l ik e b an kin g t o t h em b ecau se t h ey w ould be u npro fita b le a n d r is k y c u sto m ers . W ith t h e b lo ck ch ain t h ese p eo ple c an n ot o nly b eco m e co nnecte d , b ut m ore i m porta n t b eco m e i n clu ded i n f in an cia l a ctiv ity , a b le t o p urc h ase , b orro w , se ll, a n d o th erw is e h av e a c h an ce a t b uild in g a p ro sp ero us l if e .

Sim ila rly i n cu m ben t i n stitu tio ns c an t r a n sfo rm t h em se lv es a ro und b lo ck ch ain t e ch nolo gy, i f th ey c an f in d t h e l e ad ers h ip t o d o i t. T he t e ch nolo gy h old s g re at p ro m is e t o r e v olu tio niz e t h e in dustr y f o r t h e g ood— fro m b an ks t o s to ck e x ch an ges, i n su ra n ce c o m pan ie s t o a cco untin g f ir m s, bro kera g es, m ic ro le n ders , c re d it c ard n etw ork s, r e al e sta te a g en ts , a n d e v ery th in g i n b etw een .

When e v ery one s h are s t h e s a m e d is tr ib ute d l e d ger, s e ttle m en ts d on’t t a k e d ay s, t h ey o ccu r in sta n tly f o r a ll t o s e e. B illio ns w ill b en efit, a n d t h is s h if t c o uld l ib era te a n d e m pow er en tr e p re n eu rs e v ery w here .

Pro te ctin g E co n om ic R ig h ts G lo b ally Pro perty r ig hts a re s o i n ex ora b ly t ie d t o o ur s y ste m o f c ap ita lis t d em ocra cy t h at J e ffe rs o n’s f ir s t dra ft o f t h e D ecla ra tio n o f I n dep en den ce l is te d t h e i n alie n ab le r ig hts o f m an a s l if e , l ib erty , a n d th e p urs u it o f pro perty , n ot h ap pin ess.

28 W hile t h ose a sp ir a tio nal t e n ets l a id t h e g ro undw ork f o r th e m odern e co nom y a n d s o cie ty w e e n jo y i n m uch o f t h e d ev elo ped w orld , t o t h is d ay m uch o f th e w orld ’s p opula tio n d oes n ot r e ap t h eir b en efits . E ven t h ough s o m e p ro gre ss h as b een m ad e i n th e d ep artm en ts o f l if e a n d l ib erty , a m ajo rity o f t h e w orld ’s p ro perty h old ers c an h av e t h eir hom es o r t h eir b it o f l a n d s e iz ed a rb itr a rily b y c o rru pt g overn m en t f u nctio narie s, w ith t h e f lic k o f a s o ftw are s w itc h i n t h eir c en tr a liz ed g overn m en t p ro perty d ata b ase . W ith out p ro of o f p ro perty ow ners h ip , l a n dow ners c an ’t s e cu re a l o an , g et a b uild in g p erm it, o r s e ll t h e p ro perty a n d t h ey can b e e x pro pria te d — all s e rio us i m ped im en ts t o p ro sp erity .

Peru via n e co nom is t a n d p re sid en t o f t h e I n stitu te f o r L ib erty a n d D em ocra cy H ern an do d e Soto , o ne o f t h e w orld ’s f o re m ost e co nom ic m in ds, s u ggests t h at a s m an y a s f iv e b illio n p eo ple in t h e w orld a re b arre d f ro m p artic ip atin g f u lly i n t h e v alu e c re ate d t h ro ugh g lo baliz atio n becau se t h ey h av e a t e n uous r ig ht t o t h eir l a n d. B lo ck ch ain , h e a rg ues, c o uld c h an ge a ll t h at.

“T he c en tr a l i d ea t o b lo ck ch ain i s t h at t h e r ig hts t o g oods c an b e t r a n sa cte d , w heth er t h ey b e fin an cia l, h ard a sse ts o r i d eas. T he g oal i s n ot m ere ly t o r e co rd t h e p lo t o f l a n d b ut r a th er t o re co rd t h e r ig hts i n volv ed s o t h at t h e r ig hts h old er c an not b e v io la te d .” 29 U niv ers a l p ro perty rig hts c o uld l a y t h e g ro undw ork f o r a n ew a g en da o f g lo bal j u stic e, e co nom ic g ro w th , p ro sp erity , an d p eace. I n t h is n ew p ara d ig m , r ig hts a re p ro te cte d , n ot b y guns o r m ilitia s o r m in ute m en , b ut by t e ch nolo gy. “ B lo ck ch ain i s f o r a w orld t h at’ s g overn ed b y r e al t h in gs i n ste ad o f f ic titio us th in gs. A nd I t h in k t h at’ s g ood,” 30 s a id d e S oto . A nd i t’ s d ecen tr a liz ed . N o c en tr a l a u th ority co ntr o ls i t, e v ery body k now s w hat’ s h ap pen in g, a n d i t r e m em bers f o re v er.

Endin g t h e R em it ta n ce R ip -o ff Ju st a b out e v ery r e p ort, a rtic le , o r b ook r e v ie w in g t h e b en efits o f c ry pto cu rre n cie s d is c u sse s t h e opportu nity o f r e m itta n ces. A nd f o r g ood r e aso n. T he l a rg est f lo w o f f u nds i n to t h e d ev elo pin g world i s n ot f o re ig n a id o r d ir e ct f o re ig n i n vestm en t. R ath er, i t i s r e m itta n ce m oney r e p atr ia te d t o poor c o untr ie s f ro m t h eir d ia sp ora s l iv in g a b ro ad . T he p ro cess t a k es t im e, p atie n ce, a n d so m etim es c o ura g e t o t r a v el e ach w eek t o t h e s a m e w ir e t r a n sfe r o ffic e’s s e ed y n eig hborh ood, fill o ut t h e s a m e p ap erw ork e ach t im e, a n d p ay t h e s a m e 7 p erc en t f e e. T here i s a b ette r w ay .

Abra a n d o th er c o m pan ie s a re b uild in g p ay m en t n etw ork s u sin g t h e b lo ck ch ain . A bra ’s g oal is t o t u rn e v ery o ne o f i ts u se rs i n to a t e lle r. T he w hole p ro cess— fro m t h e f u nds l e av in g o ne co untr y t o t h eir a rriv in g i n a n oth er— ta k es a n h our r a th er t h an a w eek a n d c o sts 2 p erc en t v ers u s 7 p erc en t o r h ig her. A bra w an ts i ts p ay m en t n etw ork t o o utn um ber a ll p hysic al A TM s i n t h e world . I t t o ok W este rn U nio n 1 50 y ears t o g et t o 5 00,0 00 a g en ts w orld w id e. A bra w ill h av e t h at man y t e lle rs i n i ts f ir s t y ear.

Cuttin g O ut B urea u cra cy a n d C orru ptio n i n F oreig n A id Could b lo ck ch ain s o lv e p ro ble m s w ith f o re ig n a id ? T he 2 010 H aiti e arth quak e w as o ne o f t h e dead lie st n atu ra l d is a ste rs i n r e co rd ed h is to ry . S om ew here b etw een 1 00,0 00 a n d 3 00,0 00 p eo ple peris h ed . T he g overn m en t i n H aiti p ro ved i ts e lf a l ia b ility i n t h e a fte rm ath . T he g lo bal co m munity d onate d m ore t h an $ 500 m illio n t o t h e R ed C ro ss, a k now n b ra n d. A n a fte r-a ctio n in vestig atio n r e v eale d t h at f u nds w ere m is sp en t o r w en t m is sin g a lto geth er.

The b lo ck ch ain c an i m pro ve t h e d eliv ery o f f o re ig n a id b y e lim in atin g t h e m id dle m en w ho ta k e t h e a id b efo re i t r e ach es i ts d estin atio n. S eco nd, a s a n i m muta b le l e d ger o f t h e f lo w o f f u nds, blo ck ch ain h old s i n stitu tio ns m ore a cco unta b le f o r t h eir a ctio ns. I m ag in e i f y ou c o uld t r a ck e ach dolla r you g av e t o t h e R ed C ro ss f ro m i ts s ta rtin g p oin t o n y our s m art p hone t o t h e p ers o n i t ben efite d . Y ou c o uld p ark y our f u nds i n e sc ro w , r e le asin g a m ounts a fte r t h e R ed C ro ss r e ach ed each m ile sto ne.

Feed in g t h e C rea to rs o f V alu e F ir st Under t h e f ir s t g en era tio n o f t h e I n te rn et, m an y c re ato rs o f i n te lle ctu al p ro perty d id n ot r e ceiv e pro per c o m pen sa tio n f o r i t. E xhib it A w as m usic ia n s a n d c o m pose rs w ho h ad s ig ned w ith r e co rd la b els w hose l e ad ers f a ile d t o i m ag in e h ow t h e I n te rn et w ould a ffe ct t h eir i n dustr y . T hey f a ile d to e m bra ce t h e d ig ita l a g e a n d r e in ven t t h eir o w n b usin ess m odels , s lo w ly c ed in g c o ntr o l t o in novativ e o nlin e d is tr ib uto rs .

Consid er t h e m ajo r l a b els ’ r e actio n t o N ap ste r, t h e p eer-to -p eer m usic f ile -s h arin g p la tf o rm la u nch ed i n 1 999. I n cu m ben ts i n t h e m usic i n dustr y t e am ed u p t o s u e t h e n ew v en tu re , i ts fo unders , and e ig hte en t h ousa nd o f i ts u se rs , d is m an tlin g t h e p la tf o rm b y J u ly 2 001. A le x Win te r, d ir e cto r o f a d ocu m en ta ry o n N ap ste r, t o ld The G uard ia n , “ I h av e a p ro ble m w ith b la ck - an d-w hite t h in kin g w hen i t c o m es t o b ig c u ltu ra l c h an ges. . . . W ith N ap ste r, t h ere w as a n en orm ous a m ount o f g re y ” b etw een t h e ‘ I c an s h are e v ery th in g I ’v e p aid f o r’ p ositio n a n d t h e ‘Y ou’re a c rim in al e v en i f y ou s h are o nly o ne o f t h e f ile s y ou’v e p urc h ase d ’ p oin t o f v ie w .” 31 We a g re e. C ocre atin g w ith c o nsu m ers i s u su ally a m ore s u sta in ab le b usin ess m odel t h an su in g t h em . T he w hole i n cid en t t u rn ed a h uge h ot s p otlig ht o n t h e m usic i n dustr y , e x posin g i ts outd ate d m ark etin g p ra ctic es, g ro ss d is tr ib utio n i n effic ie n cie s, a n d w hat s o m e i n te rp re te d a s an tim usic ia n p olic ie s.

Very l ittle h as c h an ged s in ce t h en . U ntil n ow . W e l o ok a t t h e n ew m usic e co sy ste m em erg in g o n t h e b lo ck ch ain , l e d b y B ritis h s in ger-s o ngw rite r I m ogen H eap , c ellis t Z oë K eatin g, an d b lo ck ch ain d ev elo pers a n d e n tr e p re n eu rs . E very c u ltu ra l i n dustr y i s u p f o r d is ru ptio n, a n d th e p ro m is e i s t h at c re ato rs g et f u lly c o m pen sa te d f o r t h e v alu e t h ey c re ate .

Reco n fig u rin g t h e C orp ora tio n a s t h e E ngin e o f C ap it a lis m With t h e r is e o f a g lo bal p eer-to -p eer p la tf o rm f o r i d en tity , t r u st, r e p uta tio n, a n d t r a n sa ctio ns, w e will f in ally b e a b le t o r e -a rc h ite ct t h e d eep str u ctu re s o f t h e f ir m f o r i n novatio n, s h are d -v alu e cre atio n, a n d p erh ap s e v en p ro sp erity f o r t h e m an y, r a th er t h an j u st w ealth f o r t h e f e w . T his doesn ’t m ean s m alle r f ir m s i n t e rm s o f r e v en ue o r i m pact. T o t h e c o ntr a ry , w e’re t a lk in g a b out build in g t w en ty -fir s t- c en tu ry c o m pan ie s, s o m e t h at m ay b e m assiv e w ealth c re ato rs a n d p ow erfu l in t h eir r e sp ectiv e m ark ets . W e d o t h in k e n te rp ris e s w ill l o ok m ore l ik e n etw ork s r a th er t h an t h e vertic ally i n te g ra te d h ie ra rc h ie s o f t h e i n dustr ia l a g e. A s s u ch t h ere i s a n o pportu nity t o d is tr ib ute (n ot r e d is tr ib ute ) w ealth m ore d em ocra tic ally .

We’ll a ls o t a k e y ou o n a s tr o ll t h ro ugh t h e m in d-b ogglin g w orld o f s m art c o ntr a cts , n ew au to nom ous e co nom ic a g en ts , a n d w hat w e c all d is tr ib ute d a u to nom ous e n te rp ris e s w here in te llig en t s o ftw are t a k es o ver t h e m an ag em en t a n d o rg an iz atio n o f m an y r e so urc es a n d cap ab ilitie s, p erh ap s d is p la cin g c o rp ora tio ns. S m art c o ntr a cts e n ab le t h e c re atio n o f w hat w e c all open n etw ork ed e n te rp ris e s b ase d o n a n ew s e t o f b usin ess m odels , o r o ld b usin ess m odels w ith a blo ck ch ain t w is t.

Anim atin g O bje cts a n d P uttin g T hem t o W ork Tech nolo gis ts a n d s c ie n ce f ic tio n w rite rs h av e l o ng e n vis io ned a w orld w here a s e am le ss g lo bal netw ork o f I n te rn et- c o nnecte d s e n so rs c o uld c ap tu re e v ery e v en t, a ctio n, a n d c h an ge o n e arth .

Blo ck ch ain t e ch nolo gy w ill e n ab le t h in gs t o c o lla b ora te , e x ch an ge u nits o f v alu e— en erg y, t im e, an d m oney — an d r e co nfig ure s u pply c h ain s a n d p ro ductio n p ro cesse s a cco rd in g t o s h are d in fo rm atio n o n d em an d a n d c ap acity . W e c an a tta ch m eta d ata t o s m art d ev ic es a n d p ro gra m t h em to r e co gniz e o th er o bje cts b y t h eir m eta d ata a n d t o a ct o r r e act t o d efin ed c ir c u m sta n ces w ith out ris k o f e rro r o r t a m perin g.

As t h e p hysic al w orld c o m es t o l if e , e v ery one c an p ro sp er— fro m s m all f a rm ers i n t h e Austr a lia n o utb ack w ho n eed e le ctr ic al p ow er f o r t h eir b usin esse s t o h om e o w ners e v ery w here who c an b eco m e p art o f a d is tr ib ute d b lo ck ch ain p ow er g rid .

Cult iv atin g t h e B lo ck ch ain E ntr ep ren eu r Entr e p re n eu rs h ip i s e sse n tia l t o a t h riv in g e co nom y a n d a p ro sp ero us s o cie ty . T he I n te rn et w as su ppose d t o l ib era te e n tr e p re n eu rs , g iv in g t h em th e t o ols a n d c ap ab ilitie s o f b ig c o m pan ie s with out m an y o f t h e l ia b ilitie s, s u ch a s l e g acy c u ltu re , o ssif ie d p ro cesse s, a n d d ead w eig ht.

How ev er, t h e h ig h-fly in g s u ccess o f d ot- c o m b illio nair e s o bfu sc ate s a n u nse ttlin g t r u th :

en tr e p re n eu rs h ip a n d n ew b usin ess s ta rts h av e b een s te ad ily d eclin in g f o r t h ir ty y ears i n m an y dev elo ped e co nom ie s.

32 I n t h e d ev elo pin g w orld , t h e I n te rn et h as d one l ittle t o l o w er t h e b arrie rs of w ould -b e e n tr e p re n eu rs w ho m ust s u ffe r d ead en in g g overn m en t b ure au cra cie s. T he I n te rn et has a ls o n ot l ib era te d t h e f in an cia l t o ols e sse n tia l t o s ta rtin g a b usin ess a v aila b le t o b illio ns o f peo ple . N ot e v ery one i s d estin ed t o b e a n e n tr e p re n eu r, o f c o urs e , b ut e v en f o r t h e a v era g e pers o n t r y in g t o e arn a d ecen t w ag e, t h e l a ck o f f in an cia l t o ols a n d t h e p re v ale n ce o f g overn m en t re d t a p e m ak e d oin g s o c h alle n gin g.

This i s a c o m ple x i s su e, b ut b lo ck ch ain c an h elp s u perc h arg e e n tr e p re n eu rs h ip a n d t h ere fo re pro sp erity i n m an y i m porta n t w ay s. F or t h e a v era g e p ers o n l iv in g i n t h e d ev elo pin g w orld t o hav e a r e lia b le s to re o f v alu e a n d a w ay t o c o nduct b usin ess b ey ond h is c o m munity , a ll h e n eed s now i s a n I n te rn et- e n ab le d d ev ic e. A ccess t o t h e g lo bal e co nom y m ean s g re ate r a ccess t o n ew so urc es o f c re d it, f u ndin g, s u pplie rs , p artn ers , a n d i n vestm en t o pportu nitie s. N o t a le n t o r re so urc e i s t o o s m all t o m onetiz e o n t h e b lo ck ch ain .

Rea liz in g G overn m en ts b y t h e P eo p le f o r t h e P eo p le Buck le u p f o r b ig c h an ges i n g overn m en t a n d g overn an ce t o o. B lo ck ch ain t e ch nolo gy i s a lr e ad y re v olu tio niz in g t h e m ach in ery o f g overn m en t a n d h ow w e c an m ak e i t h ig h p erfo rm an ce— bette r an d c h eap er. I t’ s a ls o c re atin g n ew o pportu nitie s t o c h an ge d em ocra cy i ts e lf — how g overn m en ts can b e m ore o pen a n d f re e f ro m l o bbyis t c o ntr o l, a n d b eh av e w ith t h e f o ur v alu es o f i n te g rity .

We l o ok a t h ow b lo ck ch ain t e ch nolo gie s c an c h an ge w hat i t m ean s t o b e a c itiz en a n d p artic ip ate in t h e p olitic al p ro cess, f ro m v otin g a n d a ccessin g s o cia l s e rv ic es t o s o lv in g s o m e o f s o cie ty ’s big h air y p ro ble m s a n d h old in g e le cte d r e p re se n ta tiv es a cco unta b le f o r t h e p ro m is e s t h at g ot th em e le cte d .

PR O M IS E A ND P E R IL O F T H E N EW P L A TFO RM If t h ere a re s ix m illio n p eo ple i n t h e n ak ed c ity , 33 t h en t h ere a re s ix m illio n o bsta cle s t o t h is te ch nolo gy f u lf illin g i ts p ote n tia l. F urth er, t h ere a re s o m e w orris o m e d ow nsid es. S om e s a y t h e te ch nolo gy i s n ot r e ad y f o r p rim e t im e; t h at i t’ s s till h ard t o u se , a n d t h at t h e k ille r a p plic atio ns are n asc en t. O th er c ritic s p oin t t o t h e m assiv e a m ount o f e n erg y c o nsu m ed t o r e ach c o nse n su s i n ju st t h e b itc o in n etw ork : W hat h ap pen s w hen t h ousa n ds o r p erh ap s m illio ns o f i n te rc o nnecte d blo ck ch ain s a re e ach p ro cessin g b illio ns o f t r a n sa ctio ns a d ay ? A re t h e i n cen tiv es g re at e n ough fo r p eo ple t o p artic ip ate a n d b eh av e s a fe ly o ver t im e, a n d n ot t r y t o o verp ow er t h e n etw ork ? I s blo ck ch ain t e ch nolo gy t h e w ors t j o b k ille r e v er?

These a re q uestio ns o f l e ad ers h ip a n d g overn an ce, n ot o f t e ch nolo gy. T he f ir s t e ra o f t h e In te rn et t o ok o ff b ecau se o f t h e v is io n a n d c o m mon i n te re sts o f i ts k ey s ta k eh old ers — govern m en ts , c iv il s o cie ty o rg an iz atio ns, d ev elo pers , a n d e v ery day p eo ple l ik e y ou. B lo ck ch ain re q uir e s s im ila r l e ad ers h ip . W e d is c u ss a t g re ate r l e n gth i n t h e b ook w hy l e ad ers o f t h is n ew dis tr ib ute d p ara d ig m w ill n eed t o s ta k e t h eir c la im a n d u nle ash a w av e o f e co nom ic a n d in stitu tio nal i n novatio n, t o e n su re t h is t im e t h at t h e p ro m is e i s f u lf ille d . W e i n vite y ou t o b e o ne of t h ese .

This b ook g re w o ut o f t h e $ 4 m illio n G lo bal S olu tio n N etw ork s p ro gra m a t t h e R otm an Sch ool o f M an ag em en t a t t h e U niv ers ity o f T oro nto . F unded p rim arily b y l a rg e t e ch nolo gy co rp ora tio ns a lo ng w ith t h e R ock efe lle r a n d S koll f o undatio ns, t h e U .S . S ta te D ep artm en t, a n d In dustr y C an ad a, t h e i n itia tiv e e x plo re d n ew a p pro ach es t o g lo bal p ro ble m s o lv in g a n d govern an ce. W e w ere b oth i n volv ed i n r u nnin g t h e p ro gra m . ( D on f o unded i t; A le x l e d t h e pro je ct o n c ry pto cu rre n cie s.) I n 2 014, w e l a u nch ed a o ne-y ear i n itia tiv e o n t h e b lo ck ch ain re v olu tio n a n d i ts i m plic atio ns f o r b usin ess a n d s o cie ty , c u lm in atin g i n t h is b ook. I n i t, w e h av e atte m pte d t o p ut t h e p ro m is e a n d t h e p eril o f t h e n ew p la tf o rm i n to p ers p ectiv e.

If b usin ess, g overn m en t, a n d c iv il s o cie ty i n novato rs g et t h is r ig ht, w e w ill m ove f ro m a n In te rn et d riv en p rim arily b y t h e f a llin g c o sts o f s e arc h , c o ord in atio n, d ata c o lle ctio n, a n d decis io n m ak in g— where t h e n am e o f t h e g am e w as m onito rin g, m ed ia tin g, a n d m onetiz in g in fo rm atio n a n d t r a n sa ctio ns o n t h e W eb — to o ne d riv en b y t h e f a llin g c o sts o f b arg ain in g, polic in g, a n d e n fo rc in g s o cia l a n d c o m merc ia l a g re em en ts , w here t h e n am e of t h e g am e w ill b e in te g rity , s e cu rity , c o lla b ora tio n, t h e p riv acy o f a ll t r a n sa ctio ns, a n d t h e c re atio n a n d d is tr ib utio n of v alu e. T hat’ s a 1 80-d eg re e t u rn i n s tr a te g y. T he r e su lt c an b e a n e co nom y o f p eers w ith in stitu tio ns t h at a re t r u ly d is tr ib ute d , i n clu siv e, a n d e m pow erin g— an d t h ere b y l e g itim ate . B y fu ndam en ta lly c h an gin g w hat w e c an d o o nlin e, h ow w e d o i t, a n d w ho c an p artic ip ate , t h e n ew pla tf o rm m ay e v en c re ate t h e t e ch nolo gic al p re co nditio ns t o r e co ncilin g s o m e o f o ur m ost v ex in g so cia l a n d e co nom ic c h alle n ges.

If w e g et t h is w ro ng, b lo ck ch ain t e ch nolo gy, w hic h h old s s o m uch p ro m is e , w ill b e co nstr a in ed o r e v en c ru sh ed . W ors e , i t c o uld b eco m e a t o ol p ow erfu l i n stitu tio ns u se t o e n tr e n ch th eir w ealth o r, i f h ack ed b y g overn m en ts , a p la tf o rm f o r s o m e k in d o f n ew s u rv eilla n ce s o cie ty .

The t ig htly r e la te d t e ch nolo gie s o f d is tr ib ute d s o ftw are , c ry pto gra p hy, a u to nom ous a g en ts , a n d ev en a rtif ic ia l i n te llig en ce c o uld g et o ut o f c o ntr o l a n d t u rn a g ain st t h eir h um an p ro gen ito rs .

It i s p ossib le t h at t h is n ew t e ch nolo gy m ay b e d ela y ed , s ta lle d , u nderu tiliz ed , o r w ors e . T he blo ck ch ain a n d c ry pto cu rre n cie s, p artic u la rly b itc o in , a lr e ad y h av e m assiv e m om en tu m , b ut we’re n ot p re d ic tin g w heth er o r n ot a ll t h is w ill s u cceed , a n d i f i t d oes, h ow f a st i t w ill o ccu r.

34 Pre d ic tio n i s a lw ay s a r is k y b usin ess. S ay s t e ch nolo gy t h eo ris t D av id T ic o ll: “ M an y o f u s d id a bad j o b o f p re d ic tin g t h e f u ll i m pact o f t h e I n te rn et. I S IS t y pe b ad p hen om en a a re a m ong w hat we m is se d , a n d s o m e b ig o ptim is tic p re d ic tio ns t u rn ed o ut w ro ng.” H e s a y s, “ If t h e b lo ck ch ain i s as b ig a n d u niv ers a l a s t h e N et, w e a re l ik ely t o d o a c o m para b ly b ad j o b o f p re d ic tin g b oth i ts upsid es a n d d ow nsid es.” 35 So r a th er t h an p re d ic tin g a b lo ck ch ain f u tu re , w e’re a d vocatin g f o r i t. W e’re a rg uin g t h at i t sh ould s u cceed , b ecau se i t c o uld h elp u s u sh er i n a n ew e ra o f p ro sp erity . W e b elie v e t h at t h e eco nom y w ork s b est w hen i t w ork s f o r e v ery one, a n d t h is n ew p la tf o rm i s a n e n gin e o f i n clu sio n.

It d ra stic ally l o w ers t h e c o st o f t r a n sm ittin g s u ch f u nds a s r e m itta n ces. I t s ig nif ic an tly l o w ers t h e barrie r t o h av in g a b an k a cco unt, o bta in in g c re d it, a n d i n vestin g. A nd i t s u pports en tr e p re n eu rs h ip a n d p artic ip atio n i n g lo bal t r a d e. I t c ata ly zes d is tr ib ute d c ap ita lis m , n ot j u st a re d is tr ib ute d c ap ita lis m .

Every one s h ould s to p f ig htin g i t a n d t a k e t h e r ig ht s te p s t o g et o n b oard . L et’ s h arn ess t h is fo rc e n ot f o r t h e i m med ia te b en efit o f t h e f e w b ut f o r t h e l a stin g b en efit o f t h e m an y.

Today , b oth o f u s a re e x cite d a b out t h e p ote n tia l o f t h is n ex t r o und o f t h e I n te rn et. W e’re en th usia stic a b out t h e m assiv e w av e o f i n novatio n t h at i s b ein g u nle ash ed a n d i ts p ote n tia l f o r pro sp erity a n d a b ette r w orld . T his b ook i s o ur c ase t o y ou t o b eco m e i n te re ste d , u nders ta n d t h is nex t w av e, a n d t a k e a ctio n t o e n su re t h at t h e p ro m is e i s f u lf ille d .

So h an g o n t o y our s e at a n d r e ad o n! W e’re a t o ne o f t h ose c ritic al j u nctu re s i n h um an his to ry .

F CH APT ER 2 BO OTST R A PPIN G T H E F U TU RE:

SE V EN D ESIG N P R IN CIP L ES O F T H E B LO CK CH AIN E C O NOM Y re ed om i s p re d ic ate d o n p riv acy ,” s a id A nn C av oukia n , e x ecu tiv e d ir e cto r o f t h e P riv acy a n d Big D ata I n stitu te a t R yers o n U niv ers ity . “ I f ir s t l e arn ed t h at t h ir ty y ears a g o w hen I s ta rte d g oin g t o c o nfe re n ces i n G erm an y. I t i s n o a ccid en t t h at G erm an y i s t h e l e ad in g p riv acy a n d d ata p ro te ctio n c o untr y i n t h e w orld . T hey h ad t o e n dure t h e a b use s o f t h e T hir d R eic h a n d t h e c o m ple te c essa tio n o f a ll o f t h eir f re ed om s, w hic h s ta rte d w ith t h e c o m ple te r e m oval o f t h eir p riv acy . W hen t h at e n ded , t h ey s a id , ‘ N ev er a g ain .’ ” 1 And s o i t i s i r o nic — or t o ta lly f ittin g— th at o ne o f t h e f ir s t d ecen tr a liz ed p eer-to -p eer c o m puta tio nal p la tf o rm s t o g uara n te e u se r p riv acy i s c alle d E nig m a, a ls o t h e n am e g iv en t o t h e m ach in e d ev elo ped b y G erm an e n gin eer A rth ur S ch erb iu s t o t r a n sc rib e c o ded i n fo rm atio n.

S ch erb iu s d esig ned E nig m a f o r c o m merc ia l u se : t h ro ugh h is d ev ic e, g lo bal c o m pan ie s c o uld q uic k ly a n d s a fe ly c o m munic ate t h eir t r a d e s e cre ts , s to ck t ip s, a n d o th er i n sid er i n fo rm atio n.

W ith in a f e w y ears , G erm an y’s m ilita ry f o rc es w ere m an ufa ctu rin g t h eir o w n v ers io ns o f E nig m a t o b ro ad cast c o ded m essa g es o ver r a d io t o t r o ops. D urin g t h e w ar, t h e N azis u se d E nig m a t o d is se m in ate s tr a te g ic p la n s, d eta ils o f t a rg ets , a n d t h e t im in g o f a tta ck s. I t w as a t o ol o f s u ffe rin g a n d o ppre ssio n.

Our c o nte m pora ry E nig m a i s a t o ol o f f re ed om a n d p ro sp erity . D esig ned a t M IT M ed ia L ab b y G uy Z ysk in d a n d O z N ath an , t h e n ew E nig m a c o m bin es t h e v ir tu es o f b lo ck ch ain ’s p ublic l e d ger, t h e t r a n sp are n cy o f whic h “ p ro vid es s tr o ng i n cen tiv es f o r h onest b eh av io r,” w ith s o m eth in g k now n a s h om om orp hic e n cry p tio n a n d s e cu re m ultip arty c o m puta tio n.

2 M ore s im ply p ut, “ E nig m a t a k es y our i n fo rm atio n— an y i n fo rm atio n— bre ak s i t u p, a n d e n cry pts i t i n to p ie ces o f d ata t h at a re r a n dom ly d is tr ib ute d t o n odes i n t h e n etw ork . I t d oesn ’t e x is t i n o ne s p ot,” s a id C av oukia n . “ E nig m a u se s b lo ck ch ain t e ch nolo gy t o e m bed t h e d ata a n d t r a ck a ll t h e p ie ces o f i n fo rm atio n.” 3 Y ou c an s h are i t w ith t h ir d p artie s a n d t h ose p artie s c an u se i t i n c o m puta tio ns w ith out e v er d ecry ptin g i t.

4 I f i t w ork s, i t c o uld r e sh ap e h ow w e a p pro ach o ur o w n i d en tity o nlin e. I m ag in e h av in g a b la ck b ox o f y our p ers o nal i n fo rm atio n t h at y ou a lo ne c o ntr o l a n d c an a ccess.

No m atte r h ow c o ol i t m ay s o und, t h ere a re r e aso ns t o t r e ad c au tio usly o n t h e c ry pto gra p hic f ro ntie r. F ir s t, i t n eed s t o b oots tr a p a l a rg e n etw ork o f p artic ip an ts . S eco nd, “ cry pto gra p hy i s a n a re a w here y ou n ev er w an t t o b e u sin g t h e n ew est a n d g re ate st, b ecau se t h ere i s a n e n tir e h is to ry o f a n a lg orith m t h at e v ery one b elie v es i s s e cu re , t h at’ s o ut t h ere f o r f o ur o r f iv e y ears , a n d s o m e v ery i n sp ir e d s c ie n tis t w ill c o m e o ut a n d s a y , t h ere ’s a f la w , a n d t h e e n tir e t h in g t u m ble s,” s a id Austin H ill o f B lo ck str e am . “ T hat’ s w hy w e g en era lly p re fe r c o nse rv ativ e, v ery w ell- e sta b lis h ed , lo ng-s ta n din g a lg orith m s. T his s tu ff i s v ery , v ery w ell f u tu re -p ro ofe d , a n d b itc o in w as d esig ned with t h at i n m in d.” 5 Still, t h e c o ncep t i s w orth t a k in g v ery s e rio usly , a s i t h as p ro fo und i m plic atio ns f o r p riv acy , se cu rity , a n d s u sta in ab ility . “ E nig m a i s o ffe rin g w hat t h ey s a y g uara n te es p riv acy ,” C av oukia n sa id . “ T hat i s a b ig c la im , b ut t h at’ s t h e k in d o f t h in g w e i n cre asin gly n eed i n t h is c o nnecte d , in te rc o nnecte d w orld .” 6 In o ur r e se arc h , w e c am e a cro ss a n um ber o f p ro je cts i n itia te d o n b lo ck ch ain t e ch nolo gie s whose d ev elo pers h ad s im ila r a sp ir a tio ns f o r e n ab lin g b asic h um an r ig hts — not o nly t h e r ig hts t o priv acy a n d s e cu rity , b ut a ls o t h e r ig hts t o p ro perty , r e co gnitio n a s a p ers o n u nder t h e l a w , a n d partic ip atio n i n g overn m en t, c u ltu re , a n d t h e e co nom y. I m ag in e a t e ch nolo gy t h at c o uld p re se rv e our f re ed om t o c h oose f o r o urs e lv es a n d o ur f a m ilie s, t o e x pre ss t h ese c h oic es i n t h e w orld , a n d to c o ntr o l o ur o w n d estin y, n o m atte r w here w e l iv ed o r w ere b orn . W hat n ew t o ols a n d n ew j o bs co uld w e c re ate w ith t h ose c ap ab ilitie s? W hat n ew b usin esse s a n d s e rv ic es? H ow s h ould w e th in k a b out t h e o pportu nitie s? T he a n sw ers w ere r ig ht i n f ro nt o f u s, c o m plim en ts o f S ato sh i Nak am oto .

TH E S E V EN D ESIG N P R IN CIP L ES We b elie v e t h at t h is n ex t e ra c o uld b e i n sp ir e d b y S ato sh i N ak am oto ’s v is io n, d esig ned a ro und a se t o f i m plic it p rin cip le s, a n d r e aliz ed b y t h e c o lla b ora tiv e s p ir it o f m an y p assio nate a n d e q ually ta le n te d l e ad ers i n t h e c o m munity .

His g ra n d v is io n w as l im ite d t o m oney , n ot t o s o m e g re ate r g oal o f c re atin g a s e co nd gen era tio n o f t h e I n te rn et. T here w as n o d is c u ssio n o f r e in ven tin g t h e f ir m , c h an gin g o ur in stitu tio ns, o r t r a n sfo rm in g c iv iliz atio n f o r t h e b ette r. S till, S ato sh i’ s v is io n w as s tu nnin g i n i ts sim plic ity , o rig in ality , a n d i n sig ht i n to h um an kin d. I t b ecam e c le ar t o t h ose w ho r e ad t h e 2 008 pap er t h at a n ew e ra o f t h e d ig ita l e co nom y w as a b out t o b eg in . W here t h e f ir s t e ra o f t h e d ig ita l eco nom y w as s p ark ed b y a c o nverg en ce o f c o m putin g a n d c o m munic atio ns t e ch nolo gie s, t h is se co nd e ra w ould b e p ow ere d b y a c le v er c o m bin atio n o f c o m pute r e n gin eerin g, m ath em atic s, cry pto gra p hy, a n d b eh av io ra l e co nom ic s.

Folk sin ger G ord on L ig htf o ot c ro oned , “ If y ou c o uld r e ad m y m in d, l o ve, w hat a t a le m y th oughts c o uld t e ll.” S ato sh i h as b een i n co m munic ad o s in ce 2 011 ( th ough t h e n am e p ops u p o n dis c u ssio n b oard s f ro m t im e t o t im e), b ut w e t h in k t h e t r u st p ro to co l h e b oots tr a p ped l e n ds i ts e lf to p rin cip le s f o r r e co nfig urin g o ur i n stitu tio ns a n d e co nom y.

Every one w e t a lk ed t o h as b een e ag er t o s h are i n sig hts i n to b lo ck ch ain t e ch nolo gy w ith u s.

Each c o nvers a tio n, e ach w hite p ap er, e ach f o ru m t h re ad h as s u rfa ced a n um ber o f t h em es t h at we’v e r e v ers e -e n gin eere d i n to d esig n p rin cip le s— prin cip le s f o r c re atin g s o ftw are , s e rv ic es, busin ess m odels , m ark ets , o rg an iz atio ns, a n d e v en g overn m en ts o n t h e b lo ck ch ain . S ato sh i n ev er wro te a b out t h ese p rin cip le s, b ut t h ey a re i m plic it i n t h e t e ch nolo gy p la tf o rm h e u nle ash ed . W e se e t h em a s p rin cip le s f o r s h ap in g t h e n ex t e ra o f t h e d ig ita l e co nom y, a n d a n e ra o f r e n ew ed tr u st.

If y ou’re n ew t o t h is s p ace, w e h ope t h ese p rin cip le s w ill h elp y ou u nders ta n d t h e b asic s o f th e b lo ck ch ain r e v olu tio n. I f y ou’re a d ie -h ard s k ep tic o f t h e b itc o in b lo ck ch ain , t h ey s h ould s till se rv e y ou a s y ou c o nte m pla te y our f u tu re a s a n e n tr e p re n eu r, i n ven to r, e n gin eer, o r a rtis t w ho se ek s c re ativ e c o lla b ora tio ns w ith l ik e-m in ded p eo ple ; a s a n o w ner o r i n vesto r i n a sse ts o f a ll kin ds; o r a s a m an ag er w ho w an ts t o r e im ag in e y our r o le i n t h is n asc en t b lo ck ch ain e co nom y.

1.

N etw ork ed I n te g rity Prin cip le :

Tru st i s i n tr in sic , n ot e x tr in sic . I n te g rity i s e n co ded i n e v ery s te p o f t h e p ro cess a n d dis tr ib ute d , n ot v este d i n a n y s in gle m em ber. P artic ip an ts c an e x ch an ge v alu e d ir e ctly w ith t h e ex pecta tio n t h at t h e o th er p arty w ill a ct w ith i n te g rity . T hat m ean s t h at t h e v alu es o f i n te g rity — honesty i n o ne’s w ord s a n d d eed s, c o nsid era tio n f o r o th ers ’ i n te re sts , a cco unta b ility f o r t h e co nse q uen ces o f o ne’s d ecis io ns a n d a ctio ns, a n d t r a n sp are n cy i n d ecis io n m ak in g a n d a ctio n ta k in g— are c o ded i n d ecis io n r ig hts , i n cen tiv e s tr u ctu re s, a n d o pera tio ns s o t h at a ctin g w ith out in te g rity e ith er i s i m possib le o r c o sts a l o t m ore t im e, m oney , e n erg y, a n d r e p uta tio n.

Pro b le m t o B e S olv ed :

On t h e I n te rn et, p eo ple h av en ’t b een a b le t o t r a n sa ct o r d o b usin ess dir e ctly f o r t h e s im ple r e aso n t h at m oney i s n ’t l ik e o th er i n fo rm atio n g oods a n d i n te lle ctu al pro perty p er s e . Y ou c an s e n d t h e s a m e s e lf ie t o a ll y our f rie n ds, b ut y ou o ught n ot g iv e y our frie n d a d olla r t h at y ou’v e a lr e ad y g iv en t o s o m eo ne e ls e . T he m oney m ust l e av e y our a cco unt an d g o i n to y our f rie n d’s . I t c an ’t e x is t i n b oth p la ces, l e t a lo ne m ultip le p la ces. A nd s o t h ere ’s a ris k o f y our s p en din g a u nit o f d ig ita l c u rre n cy i n t w o p la ces a n d h av in g o ne o f t h em b ounce l ik e a b ad c h eck . T hat’ s c alle d t h e double -s p en d p ro ble m . T hat’ s g ood f o r f ra u dste rs w ho w an t t o sp en d t h eir m oney t w ic e. I t’ s b ad f o r t h e r e cip ie n t o f t h e b ounced a m ount a n d b ad f o r y our re p uta tio n o nlin e. T ra d itio nally , w hen m ak in g o nlin e p ay m en ts , w e s o lv e t h e d ouble -s p en d pro ble m b y c le arin g e v ery t r a n sa ctio n t h ro ugh t h e c en tr a l d ata b ase s o f o ne o r m an y t h ir d p artie s, su ch a s a m oney t r a n sfe r s e rv ic e ( lik e W este rn U nio n), a c o m merc ia l b an k ( C itic o rp ), a govern m en t b ody ( C om monw ealth B an k o f A ustr a lia ), a c re d it c ard c o m pan y ( V is a ), o r a n onlin e p ay m en t p la tf o rm ( P ay P al) . S ettle m en t c an t a k e d ay s o r e v en w eek s i n s o m e p arts o f t h e world .

Brea k th ro u gh :

Sato sh i l e v era g ed a n e x is tin g d is tr ib ute d p eer-to -p eer n etw ork a n d a b it o f cle v er c ry pto gra p hy t o c re ate a co nse n su s m ech anis m t h at c o uld s o lv e t h e d ouble -s p en d p ro ble m as w ell a s, i f n ot b ette r t h an , a t r u ste d t h ir d p arty . O n t h e b itc o in b lo ck ch ain , t h e n etw ork t im e- sta m ps t h e f ir s t t r a n sa ctio n w here t h e o w ner s p en ds a p artic u la r c o in a n d r e je cts s u bse q uen t sp en ds o f t h e c o in , t h us e lim in atin g a d ouble s p en d. N etw ork p artic ip an ts w ho r u n f u lly opera tin g b itc o in n odes— calle d min ers— gath er u p r e cen t t r a n sa ctio ns, s e ttle t h em i n t h e f o rm o f a b lo ck o f d ata , a n d r e p eat t h e p ro cess e v ery t e n m in ute s. E ach b lo ck m ust r e fe r t o t h e p re ced in g blo ck t o b e v alid . T he p ro to co ls a ls o i n clu de a m eth od f o r r e cla im in g d is k s p ace s o t h at a ll n odes can e ffic ie n tly s to re t h e f u ll b lo ck ch ain . F in ally , t h e b lo ck ch ain i s p ublic . A nyone c an s e e tr a n sa ctio ns t a k in g p la ce. N o o ne c an h id e a t r a n sa ctio n, a n d t h at m ak es b itc o in m ore t r a ceab le th an c ash .

Sato sh i s o ught n ot o nly t o d is in te rm ed ia te t h e c en tr a l b an kin g p ow ers b ut a ls o t o e lim in ate th e a m big uity a n d c o nflic tin g i n te rp re ta tio ns o f w hat h ap pen ed . L et t h e c o de s p eak f o r i ts e lf . L et th e n etw ork r e ach c o nse n su s a lg orith m ic ally o n w hat h ap pen ed a n d r e co rd i t c ry pto gra p hic ally on t h e b lo ck ch ain . T he m ech an is m f o r r e ach in g c o nse n su s i s c ritic al. “ C onse n su s i s a s o cia l pro cess,” b lo gged V ita lik B ute rin , p io neer o f t h e E th ere u m b lo ck ch ain . “ H um an b ein gs a re f a ir ly good a t e n gag in g i n c o nse n su s . . . w ith out a n y h elp f ro m a lg orith m s.” H e e x pla in ed t h at, o nce a sy ste m s c ale s b ey ond a n i n div id ual’ s a b ility t o d o t h e m ath , p eo ple t u rn t o s o ftw are a g en ts . I n peer-to -p eer n etw ork s, t h e c o nse n su s a lg orith m d iv vie s u p t h e r ig ht t o u pdate t h e s ta tu s o f t h e netw ork , t h at i s , t o v ote o n t h e t r u th . T he a lg orith m d ole s o ut t h is r ig ht t o a g ro up o f p eers w ho co nstitu te a n e co nom ic s e t, a s e t t h at h as s k in i n t h e g am e, s o t o s p eak . A cco rd in g t o B ute rin , what’ s i m porta n t a b out t h is e co nom ic s e t i s t h at i ts m em bers a re s e cu re ly d is tr ib ute d : n o s in gle mem ber o r c arte l s h ould b e a b le t o o verta k e a m ajo rity , e v en i f t h ey h ad t h e m ean s a n d i n cen tiv e to d o s o .

7 To a ch ie v e c o nse n su s, t h e b itc o in n etw ork u se s w hat’ s c alle d a pro of o f w ork ( P oW ) mech an is m . T his m ay s o und c o m plic ate d b ut t h e i d ea i s a s im ple o ne. B ecau se w e c an ’t r e ly o n th e i d en tity o f t h e m in ers t o s e le ct w ho c re ate s t h e n ex t b lo ck , w e i n ste ad c re ate a p uzzle t h at i s hard t o s o lv e ( i.e ., i t t a k es a l o t o f work ), b ut e asy t o v erif y ( i.e ., e v ery one e ls e c an c h eck t h e an sw er v ery q uic k ly ). P artic ip an ts a g re e t h at w hoev er s o lv es t h e p ro ble m f ir s t g ets t o c re ate t h e nex t b lo ck . M in ers h av e t o e x pen d r e so urc es ( c o m putin g h ard w are a n d e le ctr ic ity ) t o s o lv e t h e puzzle b y f in din g t h e r ig ht h ash , a k in d o f u niq ue f in gerp rin t f o r a t e x t o r a d ata f ile . F or e ach blo ck t h ey f in d, m in ers r e ceiv e b itc o in a s a r e w ard . T he p uzzle i s m ath em atic ally s e t u p t o m ak e it i m possib le t o f in d a s h ortc u t t o s o lv e i t. T hat’ s w hy, w hen t h e r e st o f t h e n etw ork s e es t h e an sw er, e v ery one t r u sts t h at a l o t o f w ork w en t i n to p ro ducin g i t. A ls o , t h is p uzzle s o lv in g i s co ntin uous “ to t h e t u ne o f 5 00,0 00 t r illio n h ash es p er s e co nd,” a cco rd in g t o D in o M ark Angaritis . M in ers a re “ lo okin g f o r a h ash t h at m eets t h e t a rg et. I t i s sta tis tic ally b ound t o o ccu r ev ery t e n m in ute s. I t’ s a P ois so n p ro cess, s o t h at s o m etim es i t t a k es o ne m in ute a n d s o m etim es one h our, b ut o n a v era g e, i t’ s t e n m in ute s.” A ngaritis e x pla in ed h ow i t w ork s: “ M in ers g ath er a ll th e p en din g t r a n sa ctio ns t h at t h ey f in d o n t h e n etw ork a n d r u n t h e d ata t h ro ugh a c ry pto gra p hic dig est f u nctio n c alle d t h e s e cu re h ash a lg orith m ( S H A-2 56), w hic h o utp uts a 3 2-b yte hash v a lu e .

If t h e h ash v alu e i s b elo w a c erta in t a rg et ( s e t b y t h e n etw ork a n d a d ju ste d e v ery 2 ,0 16 b lo ck s), th en t h e m in er h as f o und t h e a n sw er t o t h e p uzzle a n d h as ‘ s o lv ed ’ t h e b lo ck . U nfo rtu nate ly f o r th e m in er, f in din g t h e r ig ht h ash v alu e i s v ery d if fic u lt. I f t h e h ash v alu e i s w ro ng, t h e m in er ad ju sts t h e i n put d ata s lig htly a n d t r ie s a g ain . E ach a tte m pt r e su lts i n a n en tir e ly d iffe re n t h ash valu e. M in ers h av e t o t r y m an y t im es t o f in d t h e r ig ht a n sw er. A s o f N ovem ber 2 015, t h e n um ber of h ash a tte m pts i s o n a v era g e 3 50 m illio n t r illio n. T hat’ s a l o t o f w ork !” 8 You m ay h ear a b out o th er c o nse n su s m ech an is m s. T he f ir s t v ers io n o f t h e E th ere u m blo ck ch ain — Fro ntie r— als o u se s p ro of o f w ork , b ut t h e d ev elo pers o f E th ere u m 1 .1 e x pect t o re p la ce i t w ith a pro of o f s ta ke m ech an is m . P ro of o f s ta k e r e q uir e s m in ers t o i n vest i n a n d h an g on t o s o m e s to re o f v alu e ( i.e ., t h e n ativ e t o ken o f t h e b lo ck ch ain s u ch a s P eerc o in , N XT, e tc .) .

They n eed n’t s p en d e n erg y t o v ote . O th er b lo ck ch ain s, s u ch a s R ip ple a n d S te lla r, r e ly o n s o cia l netw ork s f o r c o nse n su s a n d m ay r e co m men d t h at n ew p artic ip an ts ( i.e ., n ew n odes) g en era te a uniq ue n ode l is t o f a t l e ast o ne h undre d n odes t h ey c an t r u st i n v otin g o n t h e s ta te o f a ffa ir s . T his ty pe o f p ro of i s b ia se d : n ew co m ers n eed s o cia l i n te llig en ce a n d r e p uta tio n t o p artic ip ate .

Pro of o f activ ity i s a n oth er m ech an is m ; i t c o m bin es p ro of o f w ork a n d p ro of o f s ta k e, w here a r a n dom num ber o f m in ers m ust s ig n o ff o n t h e b lo ck u sin g a c ry pto key b efo re t h e b lo ck b eco m es offic ia l.

9 Pro of o f c a pacity r e q uir e s m in ers t o a llo t a s iz ab le v olu m e o f t h eir h ard d riv e t o min in g. A s im ila r c o ncep t, pro of o f s to ra ge , r e q uir e s m in ers t o a llo cate a n d s h are d is k s p ace i n a dis tr ib ute d c lo ud.

Sto ra g e d oes m atte r. D ata o n b lo ck ch ain s a re d if fe re n t f ro m d ata o n t h e I n te rn et i n o ne im porta n t w ay . O n t h e I n te rn et, m ost o f t h e i n fo rm atio n i s m alle ab le a n d f le etin g, a n d t h e e x act date a n d t im e o f i ts p ublic atio n i s n ’t c ritic al t o p ast o r f u tu re i n fo rm atio n. O n t h e b lo ck ch ain , bitc o in m ovem en t a cro ss t h e n etw ork i s p erm an en tly s ta m ped , f ro m t h e m om en t o f i ts c o in ag e. For a b itc o in t o b e v alid , i t m ust r e fe re n ce i ts o w n h is to ry a s w ell a s t h e his to ry o f t h e blo ck ch ain . T here fo re , t h e b lo ck ch ain m ust b e p re se rv ed i n i ts e n tir e ty .

So i m porta n t a re t h e p ro cesse s o f m in in g— asse m blin g a b lo ck o f t r a n sa ctio ns, s p en din g so m e r e so urc e, s o lv in g t h e p ro ble m , r e ach in g c o nse n su s, m ain ta in in g a c o py o f t h e f u ll l e d ger— th at s o m e h av e c alle d t h e b itc o in b lo ck ch ain a p ublic u tility l ik e t h e I n te rn et, a u tility t h at re q uir e s p ublic s u pport. P au l B ro dy o f E rn st & Y oung t h in ks t h at a ll o ur a p plia n ces s h ould donate t h eir p ro cessin g p ow er t o t h e u pkeep o f a b lo ck ch ain : “ Y our l a w nm ow er o r d is h w ash er i s goin g t o c o m e w ith a C PU t h at i s p ro bab ly a t h ousa n d t im es m ore p ow erfu l t h an i t a ctu ally need s, a n d s o w hy n ot h av e i t m in e? N ot f o r t h e p urp ose o f m ak in g y ou m oney , b ut t o m ain ta in your s h are o f t h e b lo ck ch ain ,” 10 h e s a id . R eg ard le ss o f t h e c o nse n su s m ech an is m , t h e b lo ck ch ain en su re s i n te g rity t h ro ugh c le v er c o de r a th er t h an t h ro ugh h um an b ein gs w ho c h oose t o d o t h e rig ht t h in g.

Im plic a tio n s f o r t h e B lo ck ch ain E co n om y:

Rath er t h an t r u stin g b ig c o m pan ie s a n d govern m en ts t o v erif y p eo ple ’s i d en titie s a n d v ouch f o r t h eir r e p uta tio ns, w e c an t r u st t h e netw ork .

For t h e f ir st t im e e ver, w e h ave a p la tfo rm t h at e n su re s t r u st i n t r a nsa ctio ns a nd m uch re co rd ed i n fo rm atio n n o m atte r h ow t h e o th er p arty a cts .

The i m plic atio ns f o r m ost s o cia l, p olitic al, a n d e co nom ic a ctiv ity a re s ta g gerin g. I t’ s n ot j u st ab out w ho m arrie d w hom , w ho v ote d f o r w hom , w ho p aid w hom , i t’ s a b out a n y e n deav or t h at re q uir e s t r u ste d r e co rd s a n d a ssu re d t r a n sa ctio ns. W ho o w ns w hat? W ho h old s w hic h r ig hts t o th is i n te lle ctu al p ro perty ? W ho g ra d uate d f ro m m ed ic al s c h ool? W ho b ought g uns? W ho m ad e th ese N ik e s h oes, t h is A pple d ev ic e, o r t h is b ab y f o rm ula ? W here d id t h ese d ia m onds c o m e fro m ? T ru st i s t h e s in e q ua n on o f t h e d ig ita l e co nom y, a n d a p la tf o rm f o r s e cu re a n d r e lia b le mass c o lla b ora tio n h old s m an y p ossib ilitie s f o r a n ew k in d o f o rg an iz atio n a n d s o cie ty .

2.

D is tr ib ute d P ow er Prin cip le :

The s y ste m d is tr ib ute s p ow er a cro ss a p eer-to -p eer n etw ork w ith n o s in gle p oin t o f co ntr o l. N o s in gle p arty c an s h ut t h e s y ste m d ow n. I f a c en tr a l a u th ority m an ag es t o b la ck o ut o r cu t o ff a n i n div id ual o r g ro up, t h e s y ste m w ill s till s u rv iv e. I f o ver h alf t h e n etw ork a tte m pts t o overw helm t h e w hole , e v ery one w ill s e e w hat’ s h ap pen in g.

Pro b le m t o B e S olv ed :

In t h e f ir s t e ra o f t h e I n te rn et, a n y l a rg e in stitu tio n w ith a l a rg e esta b lis h ed b ase o f u se rs , b e t h ey e m plo yees, c itiz en s, c u sto m ers , o r o th er o rg an iz atio ns, t h ought little o f t h eir s o cia l c o ntr a ct. T im e a n d t im e a g ain , c en tr a l p ow ers h av e p ro ven t h at t h ey ’re willin g a n d a b le t o o verrid e u se rs , w are h ouse a n d a n aly ze u se r d ata , r e sp ond t o g overn m en t re q uests f o r d ata w ith out u se rs ’ k now le d ge, a n d i m ple m en t l a rg e-s c ale c h an ges w ith out u se rs ’ co nse n t.

Brea k th ro u gh :

The e n erg y c o sts o f o verp ow erin g t h e b itc o in b lo ck ch ain w ould o utw eig h th e f in an cia l b en efits . S ato sh i d ep lo yed a p ro of-o f-w ork m eth od t h at r e q uir e s u se rs t o e x pen d a lo t o f c o m putin g p ow er ( w hic h r e q uir e s a l o t o f e le ctr ic ity ) t o d efe n d t h e n etw ork a n d m in t n ew co in s. H e w as i n sp ir e d b y c ry pto gra p her A dam B ack ’s s o lu tio n, H ash cash , t o m itig ate s p am a n d den ia l- o f-s e rv ic e a tta ck s. B ack ’s m eth od r e q uir e d e -m aile rs t o p ro vid e p ro of o f w ork w hen se n din g t h e m essa g e. I t i n e ffe ct s ta m ped “ sp ecia l d eliv ery ” o n a n e -m ail t o s ig nal t h e m essa g e’s im porta n ce t o i ts s e n der. “ T his m essa g e i s s o c ritic al t h at I ’v e s p en t a ll t h is e n erg y i n s e n din g i t to y ou.” I t i n cre ase s t h e c o sts o f s e n din g s p am , m alw are , a n d r a n so m ware . Anyone c an d ow nlo ad t h e b itc o in p ro to co l f o r f re e a n d m ain ta in a c o py o f t h e b lo ck ch ain . I t le v era g es boots tr a ppin g , a t e ch niq ue f o r u plo ad in g t h e p ro gra m o nto a v olu nte er’s c o m pute r o r mobile d ev ic e t h ro ugh a f e w s im ple i n str u ctio ns t h at s e t t h e r e st o f t h e p ro gra m i n m otio n. I t’ s fu lly d is tr ib ute d a cro ss a v olu nte er n etw ork l ik e B itT orre n t, a s h are d d ata b ase o f i n te lle ctu al pro perty t h at r e sid es o n t e n s o f t h ousa n ds o f c o m pute rs w orld w id e.

To b e s u re , t h is s h ie ld s t h e n etw ork f ro m t h e h an ds o f t h e s ta te , w hic h c o uld b e g ood o r b ad dep en din g o n t h e s itu atio n— sa y a d is sid en t i n a t o ta lita ria n c o untr y f ig htin g f o r w om en ’s r ig hts vers u s a c rim in al i n a d em ocra tic c o untr y c o nductin g e x to rtio n. T ota lita ria n r e g im es c o uld n ot fre eze b an k a cco unts o r s e iz e f u nds o f p olitic al a ctiv is ts . S ta te s c o uld n ot a rb itr a rily s e iz e a sse ts on t h e b lo ck ch ain a s F ra n klin D ela n o R oose v elt’ s a d m in is tr a tio n d id t h ro ugh F D R’s E xecu tiv e Ord er 6 102, w hic h r e q uir e d c itiz en s t o t u rn t h eir “ g old c o in , g old b ullio n, a n d g old c ertif ic ate s” over t o t h e g overn m en t o r r is k f in es o r i m pris o nm en t.

11 J o sh F air fie ld o f W ash in gto n a n d L ee Univ ers ity p ut i t b lu ntly : “ T here ’s n o m id dle m an t o g o a fte r a n ym ore .” 12 T he b lo ck ch ain r e sid es ev ery w here . V olu nte ers m ain ta in i t b y k eep in g t h eir c o py o f t h e b lo ck ch ain u p t o d ate a n d le n din g t h eir s p are c o m pute r p ro cessin g u nits f o r m in in g. N o b ack door d ealin g. E very a ctio n o r tr a n sa ctio n i s b ro ad cast a cro ss t h e n etw ork f o r s u bse q uen t v erif ic atio n an d v alid atio n. N oth in g passe s t h ro ugh a c en tr a l t h ir d p arty ; n oth in g i s s to re d o n a c en tr a l s e rv er.

Sato sh i a ls o d is tr ib ute d t h e min t by l in kin g t h e i s su an ce o f b itc o in s t o t h e c re atio n o f a n ew blo ck i n t h e l e d ger, p uttin g t h e p ow er t o m in t i n to a ll t h e h an ds o f t h e p eer n etw ork . W hic h ev er min er s o lv ed t h e p uzzle a n d s u bm itte d p ro of o f w ork f ir s t c o uld r e ceiv e a n um ber o f n ew bitc o in s. T here i s n o F ed era l R ese rv e, c en tr a l b an k, o r t r e asu ry w ith c o ntr o l o ver t h e m oney su pply . M ore o ver, e ach b itc o in c o nta in s d ir e ct l in ks t o i ts g en esis b lo ck a n d a ll s u bse q uen t tr a n sa ctio ns.

So n o i n te rm ed ia rie s a re r e q uir e d . T he f u nctio nin g o f t h e b lo ck ch ain i s m ass c o lla b ora tio n a t its b est. Y ou h av e p ow er o ver y our d ata , y our p ro perty , a n d y our l e v el o f p artic ip atio n. I t’ s dis tr ib ute d c o m putin g p ow er e n ab lin g d is tr ib ute d a n d c o lle ctiv e h um an p ow er.

Im plic a tio n s f o r t h e B lo ck ch ain E co n om y:

Perh ap s s u ch a p la tf o rm c o uld e n ab le n ew dis tr ib ute d m odels o f w ealth c re atio n. P erh ap s n ew k in ds o f p eer-to -p eer c o lla b ora tio ns c o uld ta rg et h um an ity ’s m ost v ex in g s o cia l p ro ble m s. P erh ap s w e c o uld s o lv e t h e c ris is o f c o nfid en ce an d e v en l e g itim acy i n t o day ’s i n stitu tio ns b y s h if tin g r e al p ow er t o w ard c itiz en s, e q uip pin g th em w ith r e al o pportu nitie s f o r p ro sp erity a n d p artic ip atio n i n s o cie ty , r a th er t h an t h ro ugh P R tr ic k ery .

3.

V alu e a s I n cen tiv e Prin cip le :

The s y ste m a lig ns t h e i n cen tiv es o f a ll s ta k eh old ers . B itc o in o r s o m e t o ken o f v alu e i s in te g ra l t o t h is a lig nm en t a n d c o rre la tiv e o f r e p uta tio n. S ato sh i p ro gra m med t h e s o ftw are t o re w ard t h ose w ho w ork o n i t a n d b elo ng t o t h ose w ho h old a n d u se i ts t o ken s, s o t h at t h ey a ll ta k e c are o f i t. S ort o f t h e u ltim ate T am ag otc h i, t h e b lo ck ch ain i s a g lo bally d is tr ib ute d n est eg g.

13 Pro b le m t o B e S olv ed :

In t h e f ir s t e ra o f t h e I n te rn et, t h e c o ncen tr a tio n o f p ow er i n co rp ora tio ns, c o m bin ed w ith t h eir s h eer s iz e, c o m ple x ity , a n d o pacity , e n ab le d t h em t o e x tr a ct dis p ro portio nate v alu e f ro m t h e v ery n etw ork s t h at e n dow ed t h em w ith r ig hts . L arg e b an ks ex plo ite d t h e f in an cia l s y ste m t o i ts b re ak in g p oin t b ecau se “ in cen tiv e s tr u ctu re s f o r m ost o f t h e to p e x ecu tiv es a n d m an y o f t h e l e n din g o ffic ers o f t h ese b an ks [ w ere ] d esig ned t o e n co ura g e sh ort- s ig hte d b eh av io r a n d e x cessiv e r is k -ta k in g,” a cco rd in g t o e co nom is t J o se p h S tig litz . T hat in clu ded “ p re y in g o n t h e poore st A m eric an s.” H e s u m med u p t h e p ro ble m : “ If y ou g iv e p eo ple bad i n cen tiv es, t h ey b eh av e b ad ly , a n d t h ey b eh av ed j u st a s o ne w ould h av e e x pecte d .” 14 Larg e d ot- c o m s d an gle d f re e s e rv ic es i n r e ta il, s e arc h , a n d s o cia l m ed ia i n e x ch an ge f o r u se r data . A cco rd in g t o a n E rn st & Y oung s u rv ey , n early t w o t h ir d s o f m an ag ers p olle d s a id t h ey co lle cte d c o nsu m er d ata t o d riv e b usin ess, a n d n early 8 0 p erc en t c la im ed t o h av e i n cre ase d re v en ues f ro m t h is d ata m in in g. B ut w hen t h ese f ir m s g et h ack ed , i t’ s t h e c o nsu m ers w ho h av e t o cle an u p t h e m ess o f s to le n c re d it c ard a n d b an k a cco unt i n fo rm atio n. I t’ s n ot s u rp ris in g t h at, i n th e s a m e s u rv ey , n early h alf o f c o nsu m ers s a id t h ey ’d b e c u ttin g o ff a ccess t o t h eir d ata i n t h e nex t f iv e y ears , a n d o ver h alf s a id t h ey w ere a lr e ad y p ro vid in g l e ss d ata , i n clu din g c en so rin g th em se lv es o n s o cia l m ed ia , t h an i n t h e p re v io us f iv e y ears .

15 Brea k th ro u gh :

Sato sh i e x pecte d p artic ip an ts t o a ct i n t h eir o w n s e lf -in te re sts . H e unders to od g am e t h eo ry . H e k new t h at n etw ork s w ith out g ate k eep ers h av e b een v uln era b le t o Sybil a tta ck s, w here n odes f o rg e m ultip le i d en titie s, d ilu te r ig hts , a n d d ep re cia te t h e v alu e o f re p uta tio n.

16 T he i n te g rity o f t h e p eer-to -p eer n etw ork a n d t h e r e p uta tio n o f i ts p eers b oth dim in is h i f y ou d on’t k now w heth er y ou’re d ealin g w ith t h re e p artie s o r o ne p arty u sin g t h re e id en titie s. S o S ato sh i p ro gra m med t h e s o urc e c o de s o t h at, n o m atte r h ow s e lf is h ly p eo ple a cte d , th eir a ctio ns w ould b en efit t h e s y ste m o vera ll a n d a ccru e t o t h eir r e p uta tio ns, h ow ev er t h ey ch ose t o i d en tif y t h em se lv es. T he r e so urc e r e q uir e m en ts o f t h e c o nse n su s m ech an is m , c o m bin ed with b itc o in s a s r e w ard , c o uld c o m pel p artic ip an ts t o d o t h e r ig ht t h in g, m ak in g t h em t r u stw orth y in t h e s e n se t h at t h ey w ere p re d ic ta b le . S ybil a tta ck s w ould b e e co nom ic ally u nvia b le .

Sato sh i w ro te , “ B y c o nven tio n, t h e f ir s t t r a n sa ctio n i n a b lo ck i s a s p ecia l t r a n sa ctio n t h at sta rts a n ew c o in o w ned b y t h e c re ato r o f t h e b lo ck . T his a d ds a n i n cen tiv e f o r n odes t o s u pport th e n etw ork .” 17 B itc o in i s a n i n cen tiv e f o r m in ers t o p artic ip ate i n c re atin g a b lo ck a n d l in kin g i t to t h e p re v io us b lo ck . T hose w ho c o m ple te a b lo ck f ir s t g et a q uan tity o f b itc o in s f o r t h eir effo rts . S ato sh i’ s p ro to co l r e w ard ed e arly a d opte rs h an dso m ely w ith b itc o in : f o r t h e f ir s t f o ur years , m in ers r e ceiv ed 5 0 b itc o in s ( B TC ) f o r e ach b lo ck . E very f o ur y ears , t h e r e w ard p er b lo ck would h alv e: 2 5 B TC , 1 2.5 B TC , a n d s o o n. B ecau se t h ey n ow o w n b itc o in , t h ey h av e a n in cen tiv e t o e n su re t h e p la tf o rm ’s l o ng-te rm s u ccess, b uyin g t h e b est e q uip m en t t o ru n m in in g opera tio ns, s p en din g e n erg y a s e ffic ie n tly a s p ossib le , a n d m ain ta in in g t h e l e d ger. B itc o in i s a ls o a c la im o n t h e b lo ck ch ain , n ot j u st a s a n i n cen tiv e t o p artic ip ate i n m in in g a n d t r a n sa ctin g w ith oth ers b ut t h ro ugh o w ners h ip i n t h e p la tf o rm i ts e lf . D is tr ib ute d u se r a cco unts a re t h e m ost b asic ele m en t o f t h e c ry pto gra p hic n etw ork i n fra str u ctu re . B y o w nin g a n d u sin g b itc o in , o ne i s fin an cin g t h e b lo ck ch ain ’s d ev elo pm en t.

Sato sh i c h ose a s t h e e co nom ic s e t t h e ow ners o f c o m putin g p ow er . T his r e q uir e s t h ese min ers t o c o nsu m e a r e so urc e e x te rn al t o t h e n etw ork , n am ely e le ctr ic ity , i f t h ey w an t t o partic ip ate i n t h e r e w ard s y ste m . E very s o o fte n , d if fe re n t m in ers f in d t w o e q ually v alid b lo ck s of e q ual h eig ht, a n d t h e r e st o f t h e m in ers m ust c h oose w hic h b lo ck t o b uild o n n ex t. T hey gen era lly p ic k w hic h ev er t h ey t h in k w ill w in r a th er t h an b uild in g o n b oth , b ecau se t h ey ’d oth erw is e h av e t o s p lit t h eir p ro cessin g p ow er b etw een t h e f o rk s, a n d t h at’ s a s tr a te g y f o r l o sin g valu e. T he l o ngest c h ain r e p re se n ts t h e g re ate st a m ount o f w ork a n d t h ere fo re p artic ip an ts ch oose i t a s t h e c an onic al s ta te o f t h e b lo ck ch ain . I n c o ntr a st, E th ere u m c h ose ow ners o f c o in as its e co nom ic s e t. R ip ple a n d S te lla r c h ose t h e s o cia l n etw ork . The p ara d ox o f t h ese c o nse n su s s c h em es i s t h at b y a ctin g i n o ne’s s e lf -in te re st, o ne i s se rv in g t h e p eer-to -p eer ( P 2P ) n etw ork , a n d t h at i n t u rn a ffe cts o ne’s r e p uta tio n a s a m em ber o f th e e co nom ic s e t. B efo re b lo ck ch ain t e ch nolo gie s, p eo ple c o uld n’t e asily l e v era g e t h e v alu e o f th eir r e p uta tio n o nlin e. I t w asn ’t o nly b ecau se o f S ybil a tta ck s, w here a c o m pute r c o uld i n hab it multip le r o le s. I d en tity i s m ultif a cete d , n uan ced , a n d t r a n sie n t. F ew p eo ple s e e a ll s id es, l e t a lo ne th e s u btle tie s a n d t h e a rc o f o ur i d en tity . F or d if fe re n t c o nte x ts , w e h av e t o p ro duce s o m e docu m en t o r o th er t o a tte st t o s o m e d eta il o f o ur i d en tity . P eo ple “ w ith out p ap ers ” a re c o nfin ed to c o lla b ora tin g w ith t h eir s o cia l c ir c le . O n b lo ck ch ain s l ik e S te lla r, t h at’ s a n e x celle n t s ta rt, a mean s o f c re atin g a p ers is te n t d ig ita l p re se n ce a n d e sta b lis h in g r e p uta tio n t h at i s p orta b le w ell bey ond o ne’s g eo gra p hic c o m munity .

Anoth er b re ak th ro ugh t o p re se rv e v alu e i s t h e moneta ry p olic y p ro gra m med i n to t h e so ftw are . “ A ll m oney m an kin d h as e v er u se d h as b een i n se cu re i n o ne w ay o r a n oth er,” s a id Nic k S zab o. “ T his i n se cu rity h as b een m an if e ste d i n a w id e v arie ty o f w ay s, f ro m c o unte rfe itin g to t h eft, b ut t h e m ost p ern ic io us o f w hic h h as p ro bab ly b een i n fla tio n.” 18 S ato sh i c ap ped t h e su pply o f b itc o in s a t 2 1 m illio n t o b e i s su ed o ver t im e t o p re v en t arb itr a ry i n fla tio n. G iv en t h e halv in g e v ery f o ur y ears o f b itc o in s m in ed i n a b lo ck a n d t h e c u rre n t r a te o f m in in g— six b lo ck s per h our— th ose 2 1 m illio n B TC s h ould b e i n c ir c u la tio n a ro und t h e y ear 2 140. N o hyperin fla tio n o r c u rre n cy d ev alu atio n c au se d b y i n co m pete n t o r c o rru pt b ure au cra cie s.

Curre n cie s a re n ot t h e o nly a sse ts t h at w e c an t r a d e o n t h e b lo ck ch ain . “ W e’v e o nly b eg un t o sc ra tc h t h e s u rfa ce o n w hat’ s p ossib le ,” s a id H ill o f B lo ck str e am . “ W e’re s till a t t h at 1 994 p oin t in t e rm s o f a p plic atio ns a n d p ro to co ls t h at r e ally t a k e a d van ta g e o f t h e n etw ork a n d s h ow t h e world , ‘ H ere ’s w hat y ou c an d o t h at i s t o ta lly g ro undbre ak in g.’ ” 19 H ill e x pects t o s e e d if fe re n t fin an cia l i n str u m en ts , f ro m p ro of-o f-a sse t a u th en tic ity t o p ro of-o f-p ro perty o w ners h ip . H e a ls o ex pects t o s e e b itc o in a p plic atio ns i n t h e M eta v ers e ( a v ir tu al w orld ) w here y ou c an c o nvert bitc o in i n to K ongbuck s a n d h ir e H ir o P ro ta g onis t t o h ack y ou s o m e d ata .

20 O r j a ck y ours e lf i n to th e O ASIS ( a w orld o f m ultip le v ir tu al u to pia s) w here y ou a ctu ally d o d is c o ver t h e E aste r e g g, win H allid ay ’s e sta te , l ic en se O ASIS ’s v ir tu al p ositio nin g r ig hts t o G oogle , a n d b uy a s e lf - driv in g c ar t o n av ig ate T oro nto .

21 And, o f c o urs e , t h ere ’s t h e I n te rn et o f T hin gs, w here w e r e g is te r o ur d ev ic es, a ssig n t h em a n id en tity ( In te l i s a lr e ad y d oin g t h is ), a n d c o ord in ate p ay m en t a m ong t h em u sin g b itc o in r a th er th an m ultip le f ia t c u rre n cie s. “ Y ou c an d efin e a ll t h ese n ew b usin ess c ase s t h at y ou w an t t o d o, an d h av e i t i n te ro pera te w ith in t h e n etw ork , a n d u se t h e n etw ork i n fra str u ctu re w ith out h av in g t o boots tr a p a n ew b lo ck ch ain , j u st f o r y ours e lf ,” s a id H ill.

22 Unlik e f ia t c u rre n cy , e ach b itc o in i s d iv is ib le t o e ig ht d ecim al p la ces. I t e n ab le s u se rs t o co m bin e a n d s p lit v alu e o ver t im e i n a s in gle t r a n sa ctio n, m ean in g t h at a n i n put c an h av e multip le o utp uts o ver m ultip le p erio ds o f t im e, w hic h i s f a r m ore e ffic ie n t t h an a s e rie s o f tr a n sa ctio ns. U se rs c an s e t u p s m art c o ntr a cts t o m ete r u sa g e o f a s e rv ic e a n d m ak e t in y f ra ctio ns of p ay m en ts a t r e g ula r i n te rv als .

Im plic a tio n s f o r t h e B lo ck ch ain E co n om y:

The f ir s t e ra o f t h e I n te rn et m is se d a ll t h is .

Now w e h av e a p la tf o rm w here p eo ple a n d e v en t h in gs h av e p ro per f in an cia l i n cen tiv es t o co lla b ora te e ffe ctiv ely a n d c re ate j u st a b out a n yth in g. I m ag in e o nlin e d is c u ssio n g ro ups w here partic ip an ts h av e r e p uta tio ns w orth e n han cin g, i n p art b ecau se b ad b eh av io r w ill c o st t h em fin an cia lly . T ro lls n eed n ot a p ply . I m ag in e a p eer-to -p eer n etw ork o f s o la r p an els w here h om e ow ners r e ceiv e r e al- tim e c o m pen sa tio n o n t h e blo ck ch ain f o r g en era tin g s u sta in ab le e n erg y. Im ag in e a n o pen s o urc e s o ftw are p ro je ct w here a c o m munity o f d ev elo pers c o m pen sa te s su perc o ntr ib uto rs f o r a ccep ta b le c o de. I m ag in e t h ere ’s n o c o untr ie s. I t i s n ’t h ard t o d o.

23 4.

S ecu rity Prin cip le :

Safe ty m easu re s a re e m bed ded i n t h e n etw ork w ith n o s in gle p oin t o f f a ilu re , a n d t h ey pro vid e n ot o nly c o nfid en tia lity , b ut a ls o a u th en tic ity a n d n onre p udia tio n t o a ll a ctiv ity . A nyone who w an ts t o p artic ip ate m ust u se c ry pto gra p hy— optin g o ut i s n ot a n o ptio n— an d t h e co nse q uen ces o f r e ck le ss b eh av io r a re i s o la te d t o t h e p ers o n w ho b eh av ed r e ck le ssly .

Pro b le m t o B e S olv ed :

Hack in g, i d en tity t h eft, f ra u d, c y berb ully in g, p his h in g, s p am , malw are , r a n so m ware — all o f t h ese u nderm in e t h e s e cu rity o f t h e i n div id ual i n s o cie ty . T he f ir s t era o f t h e I n te rn et, r a th er t h an b rin gin g t r a n sp are n cy a n d i m pair in g v io la tio ns, s e em s t o h av e done l ittle t o i n cre ase s e cu rity o f p ers o ns, i n stitu tio ns, a n d e co nom ic a ctiv ity . T he a v era g e In te rn et u se r o fte n h as t o r e ly o n f lim sy p assw ord s t o p ro te ct e -m ail a n d o nlin e a cco unts b ecau se se rv ic e p ro vid ers o r e m plo yers i n sis t o n n oth in g s tr o nger. C onsid er t h e t y pic al f in an cia l in te rm ed ia ry : i t d oesn ’t s p ecia liz e i n d ev elo pin g s e cu re t e ch nolo gy; i t s p ecia liz es i n f in an cia l in novatio n. I n t h e y ear t h at S ato sh i p ublis h ed h is w hite p ap er, d ata b re ach es a t s u ch f in an cia l fir m s a s B N Y M ello n, C ountr y w id e, a n d G E M oney a cco unte d f o r o ver 5 0 p erc en t o f a ll i d en tity th efts r e p orte d t h at y ear, a cco rd in g t o t h e I d en tity T heft R eso urc e C en te r.

24 B y 2 014, t h at f ig ure had f a lle n t o 5 .5 p erc en t f o r t h e f in an cia l s e cto r, b ut b re ach es i n m ed ic al a n d h ealth c are j u m ped to 4 2 p erc en t o f t h e y ear’s t o ta l. I B M r e p orte d t h at t h e a v era g e c o st o f a d ata b re ach i s $ 3.8 millio n, w hic h m ean s t h at d ata b re ach es h av e c o st a t l e ast $ 1.5 b illio n o ver t h e l a st t w o y ears .

25 The a v era g e c o st t o a n i n div id ual o f m ed ic al i d en tity f ra u d i s c lo se t o $ 13,5 00, a n d o ffe n se s a re on t h e r is e . C onsu m ers d on’t k now w hic h a sp ect o f t h eir l if e w ill b e h ack ed n ex t.

26 I f t h e n ex t sta g e o f t h e d ig ita l r e v olu tio n i n volv es c o m munic atin g m oney d ir e ctly b etw een p artie s, t h en co m munic atio n n eed s t o b e h ack pro of.

Brea k th ro u gh :

S ato sh i r e q uir e d p artic ip an ts t o u se p ublic k ey i n fra str u ctu re ( P K I) f o r esta b lis h in g a s e cu re p la tf o rm . P K I i s a n a d van ced f o rm o f “ asy m metr ic ” c ry pto gra p hy, w here use rs g et t w o k ey s t h at d on’t p erfo rm t h e s a m e f u nctio n: o ne i s f o r e n cry ptio n a n d o ne f o r decry ptio n. H en ce, t h ey a re a sy m metr ic . T he b itc o in b lo ck ch ain i s n ow t h e l a rg est civ ilia n dep lo ym en t o f P K I i n t h e w orld , a n d s e co nd o vera ll t o t h e U .S . D ep artm en t o f D efe n se c o m mon access s y ste m .

27 Pio neere d i n t h e 1 970s, 28 a sy m metr ic c ry pto gra p hy g ain ed s o m e t r a ctio n i n t h e 1 990s i n t h e fo rm o f e -m ail e n cry ptio n f re ew are s u ch a s P re tty G ood P riv acy . P G P i s p re tty s e cu re , a n d p re tty much a h assle t o u se b ecau se e v ery one i n y our n etw ork n eed s t o b e u sin g i t, a n d y ou h av e t o keep t r a ck o f y our t w o k ey s a n d e v ery one’s p ublic k ey s. T here ’s n o p assw ord -re se t f u nctio n. I f you f o rg et y ours , y ou h av e t o s ta rt a ll o ver. A cco rd in g t o t h e V ir tr u C orp ora tio n, “ th e u se o f em ail e n cry ptio n i s o n t h e r is e . S till, o nly 5 0 p erc en t o f e m ails a re e n cry pte d i n t r a n sit, a n d e n d- to -e n d e m ail e n cry ptio n i s r a re r s till.” 29 S om e p eo ple u se dig ita l c ertific a te s , p ie ces o f c o de t h at pro te ct m essa g es w ith out t h e e n cry pt- d ecry pt o pera tio ns, b ut u se rs m ust a p ply ( a n d p ay a n an nual f e e) f o r t h eir i n div id ual c ertif ic ate s, a n d t h e most c o m mon e -m ail s e rv ic es— Google , Outlo ok, a n d Y ah oo!— don’t s u pport t h em .

“P ast s c h em es f a ile d b ecau se t h ey l a ck ed i n cen tiv e, a n d p eo ple n ev er a p pre cia te d p riv acy a s in cen tiv e e n ough t o s e cu re t h ose s y ste m s,” 30 A ndre as A nto nopoulo s s a id . T he b itc o in b lo ck ch ain so lv es n early a ll t h ese p ro ble m s b y p ro vid in g t h e i n cen tiv e f o r w id e a d optio n o f P K I f o r a ll tr a n sa ctio ns o f v alu e, n ot o nly t h ro ugh t h e u se o f b itc o in b ut a ls o i n t h e s h are d b itc o in p ro to co ls .

We n eed n’t w orry a b out w eak f ir e w alls , t h ie v in g e m plo yees, o r i n su ra n ce h ack ers . I f w e’re b oth usin g b itc o in , i f w e c an s to re a n d e x ch an ge b itc o in s e cu re ly , t h en w e c an s to re a n d e x ch an ge hig hly c o nfid en tia l i n fo rm atio n a n d d ig ita l a sse ts s e cu re ly o n t h e b lo ck ch ain .

Here ’s h ow i t w ork s. D ig ita l c u rre n cy i s n ’t s to re d i n a f ile p er s e . I t’ s r e p re se n te d b y tr a n sa ctio ns i n dic ate d b y a c ry pto gra p hic hash . U se rs h old t h e c ry pto key s t o t h eir o w n m oney an d t r a n sa ct d ir e ctly w ith o ne a n oth er. W ith t h is s e cu rity c o m es t h e r e sp onsib ility o f k eep in g one’s p riv ate k ey s p riv ate .

Secu rity s ta n dard s m atte r. T he b itc o in b lo ck ch ain r u ns o n t h e v ery w ell- k now n a n d esta b lis h ed S H A-2 56 p ublis h ed b y t h e U .S . N atio nal I n stitu te o f S ta n dard s a n d T ech nolo gy a n d accep te d a s a U .S . F ed era l I n fo rm atio n P ro cessin g S ta n dard . T he d if fic u lty o f t h e m an y re p etitio ns o f t h is m ath em atic al c alc u la tio n r e q uir e d t o f in d a b lo ck s o lu tio n f o rc es t h e co m puta tio nal d ev ic e t o c o nsu m e s u bsta n tia l e le ctr ic ity i n o rd er t o s o lv e a p uzzle a n d e arn n ew bitc o in . O th er a lg orith m s s u ch a s p ro of o f s ta k e b urn m uch l e ss e n erg y.

Rem em ber w hat A ustin H ill s a id a t t h e s ta rt o f t h is c h ap te r a b out n ev er usin g t h e n ew est a n d gre ate st i n a lg orith m s. H ill, w ho w ork s w ith c ry pto gra p her A dam B ack a t B lo ck str e am , ex pre sse d c o ncern o ver c ry pto cu rre n cie s t h at d on’t u se p ro of o f w ork . “ I d on’t t h in k p ro of o f sta k e u ltim ate ly w ork s. T o m e, i t’ s a s y ste m w here t h e r ic h g et r ic h er, w here p eo ple w ho h av e to ken s g et t o d ecid e w hat t h e c o nse n su s i s , w here as p ro of o f w ork u ltim ate ly i s a s y ste m r o ote d in p hysic s. I r e ally l ik e t h at b ecau se i t’ s v ery s im ila r t o t h e s y ste m f o r g old .” 31 Fin ally , t h e l o ngest c h ain i s g en era lly t h e s a fe st c h ain . T he s e cu rity o f S ato sh i’ s b lo ck ch ain ben efits g re atly f ro m i ts r e la tiv e m atu rity a n d i ts e sta b lis h ed b ase o f b itc o in u se rs a n d m in ers .

Hack in g i t w ould r e q uir e m ore c o m putin g p ow er t h an a tta ck in g s h ort c h ain s. H ill s a id , “W hen ev er o ne o f t h ese n ew n etw ork s s ta rt u p w ith a n a ll n ew c h ain , t h ere ’s a b unch o f p eo ple who d ir e ct t h eir l a te n t c o m pute r p ow er, a ll t h e c o m pute rs a n d C PU s t h at t h ey t o ok o fflin e f ro m min in g b itc o in , t h ey p oin t a t t h ese n ew n etw ork s t o m an ip ula te t h em a n d t o e sse n tia lly a tta ck t h e netw ork s.” 32 Im plic a tio n s f o r t h e B lo ck ch ain E co n om y:

In t h e d ig ita l a g e, t e ch nolo gic al s e cu rity i s obvio usly t h e p re co nditio n t o s e cu rity o f a p ers o n i n s o cie ty . T oday b its c an p ass t h ro ugh o ur fir e w alls a n d w alle ts . T hie v es c an p ic k o ur p ock ets o r h ija ck o ur c ars f ro m t h e o th er s id e o f t h e world . A s e ach o f u s r e lie s m ore o n d ig ita l t o ols a n d p la tf o rm s, s u ch t h re ats h av e m ultip lie d i n way s t h at m ost o f u s d o n ot u nders ta n d. W ith t h e b itc o in b lo ck ch ain , w ith i ts m ore s e cu re d esig n an d i ts t r a n sp are n cy , w e c an m ak e t r a n sa ctio ns o f v alu e a n d p ro te ct w hat h ap pen s t o o ur d ata .

5.

P riv acy Prin cip le :

Peo ple s h ould c o ntr o l t h eir o w n d ata . P erio d. P eo ple o ught t o h av e t h e r ig ht t o d ecid e what, w hen , h ow , a n d h ow m uch a b out t h eir i d en titie s t o s h are w ith a n ybody e ls e . R esp ectin g one’s r ig ht t o p riv acy i s n ot t h e s a m e a s a ctu ally r e sp ectin g o ne’s p riv acy . W e n eed t o d o b oth .

By e lim in atin g t h e n eed t o t r u st o th ers , S ato sh i e lim in ate d t h e n eed t o k now t h e t r u e i d en titie s o f th ose o th ers i n o rd er t o i n te ra ct w ith t h em . “ I’v e s p oken t o m an y e n gin eers a n d c o m pute r sc ie n tis ts , a n d t h ey a ll t e ll m e— ev ery s in gle o ne— ‘O f c o urs e , w e c an e m bed p riv acy i n to d ata arc h ite ctu re , i n to t h e d esig n o f t h e p ro gra m s. O f c o urs e w e c an ,’ ” 33 s a id A nn C av oukia n .

Pro b le m t o B e S olv ed :

Priv acy i s a b asic h um an r ig ht a n d t h e f o undatio n o f f re e s o cie tie s.

In t h e l a st t w en ty y ears o f t h e I n te rn et, c en tr a l data b ase s i n b oth p ublic a n d p riv ate s e cto rs h av e accu m ula te d a ll s o rts o f c o nfid en tia l i n fo rm atio n a b out i n div id uals a n d i n stitu tio ns, s o m etim es with out t h eir k now le d ge. E very w here p eo ple w orry t h at c o rp ora tio ns a re c re atin g w hat w e c o uld call cyb erc lo nes o f t h em b y f ra ck in g t h e d ig ita l w orld f o r t h eir d ata . E ven d em ocra tic govern m en ts a re c re atin g s u rv eilla n ce n atio ns, e v id en ced b y t h e r e cen t U .S . N atio nal S ecu rity Agen cy ’s o vere x te n din g i ts s u rv eilla n ce r ig hts b y c o nductin g w arra n tle ss s p yin g o ver t h e In te rn et. T hese a re d ouble p riv acy o ffe n se s, f ir s t c o lle ctin g a n d u sin g o ur d ata w ith out o ur unders ta n din g o r o ur p erm is sio n, t h en n ot p ro te ctin g t h e h oney pot f ro m h ack ers . “ It’ s a ll a b out ab an donin g z ero -s u m p urs u its , e ith er-o r p ro positio ns, w in -lo se , y ou c an h av e o ne i n te re st o r t h e oth er. T hat, t o m e, i s s o d ate d , s o y este rd ay , a n d s o c o unte rp ro ductiv e,” s a id C av oukia n . “ W e su bstitu te a p ositiv e-s u m m odel w hic h i s , e sse n tia lly , y ou c an h av e p riv acy a n d— fill i n t h e bla n k.” 34 Brea k th ro u gh :

Sato sh i i n sta lle d n o i d en tity r e q uir e m en t f o r t h e n etw ork l a y er i ts e lf , mean in g t h at n o o ne h ad t o p ro vid e a n am e, e -m ail a d dre ss, o r a n y o th er p ers o nal d ata i n o rd er t o dow nlo ad a n d u se t h e b itc o in s o ftw are . T he b lo ck ch ain d oesn ’t n eed t o k now w ho a n ybody i s .

(A nd S ato sh i d id n’t n eed t o c ap tu re a n ybody’s d ata t o m ark et o th er p ro ducts . H is o pen s o urc e so ftw are w as t h e u ltim ate i n t h ought l e ad ers h ip m ark etin g.) T hat’ s h ow t h e S ocie ty f o r World w id e I n te rb an k F in an cia l T ele co m munic atio n w ork s— if y ou p ay i n c ash , t h en S W IF T doesn ’t g en era lly a sk f o r i d en tif ic atio n— but w e’re g uessin g t h at m an y S W IF T o ffic es h av e cam era s, a n d f in an cia l i n stitu tio ns m ust c o m ply w ith a n ti– m oney l a u nderin g/k now y our cu sto m er ( A M L/K YC) r e q uir e m en ts t o j o in a n d u se S W IF T .

Additio nally , t h e i d en tif ic atio n a n d v erif ic atio n l a y ers a re s e p ara te f ro m t h e t r a n sa ctio n l a y er, mean in g t h at P arty A b ro ad casts t h e t r a n sfe r o f b itc o in s f ro m P arty A ’s a d dre ss t o P arty B ’s ad dre ss. T here ’s n o r e fe re n ce t o a n yone’s i d en tity i n t h at t r a n sa ctio n. T hen t h e n etw ork c o nfir m s th at P arty A n ot o nly c o ntr o lle d t h e a m ount o f b itc o in s p ecif ie d b ut a ls o a u th oriz ed t h e tr a n sa ctio n b efo re r e co gniz in g P arty A ’s m essa g e a s “ u nsp en t t r a n sa ctio n o utp ut” a sso cia te d with P arty B ’s a d dre ss. O nly w hen P arty B g oes t o s p en d t h at a m ount d oes t h e n etw ork v erif y th at P arty B n ow c o ntr o ls t h at b itc o in .

Com pare t h at w ith u sin g c re d it c ard s, a v ery i d en tity -c en tr ic m odel. T hat’ s w hy m illio ns o f peo ple ’s a d dre sse s a n d p hone n um bers a re s to le n ev ery t im e a d ata b ase g ets b re ach ed . C onsid er th e n um ber o f r e co rd s a tta ch ed t o a f e w o f t h e m ore r e cen t d ata b re ach es: T -M obile , 1 5 m illio n re co rd s; J P M org an C hase , 7 6 m illio n; A nth em B lu e C ro ss B lu e S hie ld , 8 0 m illio n; e B ay , 1 45 millio n; O ffic e o f P ers o nnel M an ag em en t, 3 7 m illio n; H om e D ep ot, 5 6 m illio n; T arg et, 7 0 millio n; a n d S ony, 7 7 m illio n; a n d t h ere w ere s m alle r b re ach es o f a ir lin es, u niv ers itie s, g as a n d ele ctr ic u tilitie s, a n d h osp ita l f a cilitie s, s o m e o f o ur m ost p re cio us i n fra str u ctu re a sse ts .

35 On t h e b lo ck ch ain , p artic ip an ts c an c h oose t o m ain ta in a d eg re e o f p ers o nal a n onym ity i n t h e se n se t h at t h ey n eed n’t a tta ch a n y o th er d eta ils t o t h eir i d en tity o r s to re t h ose d eta ils i n a c en tr a l data b ase . W e c an ’t u nders c o re h ow h uge t h is i s .

There a re n o h oneyp ots o f p erso nal d ata o n t h e blo ckch ain .

The b lo ck ch ain p ro to co ls a llo w u s t o c h oose t h e l e v el o f p riv acy w e’re c o m fo rta b le with i n a n y g iv en t r a n sa ctio n o r e n vir o nm en t. I t h elp s u s t o b ette r m an ag e o ur i d en titie s a n d o ur in te ra ctio n w ith t h e w orld .

A s ta rt- u p c alle d P ers o nal B la ck B ox C om pan y, L LC , i s a im in g t o h elp l a rg e c o rp ora tio ns tr a n sfo rm t h eir r e la tio nsh ip t o c o nsu m er d ata . P B B’s c h ie f m ark etin g o ffic er, H alu k K ulin , t o ld us, “ C om pan ie s s u ch a s U nile v er o r P ru den tia l a re c o m in g t o u s a n d s a y in g, ‘ W e’re v ery in te re ste d i n b uild in g b ette r d ata r e la tio nsh ip s. C an w e l e v era g e y our p la tf o rm ? W e’re v ery in te re ste d i n r e d ucin g o ur d ata l ia b ility .’ T hey ’re s e ein g t h at d ata i s i n cre asin gly a t o xic a sse t in sid e o f c o rp ora tio ns.” 36 I ts p la tf o rm g iv es c lie n ts a ccess t o a n onym ous d ata — much l ik e a clin ic al t r ia l, w here p harm aceu tic als k now o nly t h e r e le v an t a sp ects o f p atie n ts ’ h ealth — with out ta k in g o n a n y d ata s e cu rity r is k . S om e c o nsu m ers m ay g iv e a w ay m ore i n fo rm atio n i n e x ch an ge fo r b itc o in s o r o th er c o rp ora te b en efits . O n t h e b ack e n d, P B B’s p la tf o rm d ep lo ys P K I s o t h at only c o nsu m ers h av e a ccess t o t h eir d ata t h ro ugh t h eir p riv ate k ey s. N ot e v en P B B h as a ccess t o co nsu m er d ata .

The b lo ck ch ain o ffe rs a p la tf o rm f o r d oin g s o m e v ery f le x ib le f o rm s o f s e le ctiv e a n d an onym ous a tte sta tio n. A ustin H ill l ik en ed i t t o t h e I n te rn et. “ A T C P/I P a d dre ss i s n ot i d en tif ie d to a p ublic I D . T he n etw ork l a y er i ts e lf d oesn ’t k now . A nyone c an j o in t h e I n te rn et, g et a n I P ad dre ss, a n d s ta rt s e n din g a n d r e ceiv in g p ack ets f re ely a ro und t h e w orld . A s a s o cie ty , w e’v e se en a n i n cre d ib le b en efit a llo w in g t h at l e v el o f p se u donym ity . . . . B itc o in o pera te s a lm ost ex actly l ik e t h is . T he n etw ork i ts e lf d oes n ot e n fo rc e i d en tity . T hat’ s a g ood t h in g f o r s o cie ty a n d fo r p ro per n etw ork d esig n.” 37 So w hile t h e b lo ck ch ain i s p ublic — an yone c an v ie w i t a t a n y t im e b ecau se i t r e sid es o n t h e netw ork , n ot w ith in a c en tr a liz ed i n stitu tio n c h arg ed w ith a u ditin g t r a n sa ctio ns a n d k eep in g re co rd s— use rs ’ i d en titie s a re p se u donym ous. T his m ean s t h at y ou h av e t o d o a c o nsid era b le am ount o f t r ia n gula tin g o f d ata t o f ig ure o ut w ho o r w hat o w ns a p artic u la r p ublic k ey . T he se n der c an p ro vid e o nly t h e m eta d ata t h at t h e r e cip ie n t n eed s t o k now . M ore o ver, a n yone c an ow n m ultip le p ublic /p riv ate k ey s e ts , j u st a s a n yone c an h av e m ultip le d ev ic es o r a ccess p oin ts t o th e I n te rn et a n d m ultip le e -m ail a d dre sse s u nder v ario us p se u donym s.

That s a id , I n te rn et s e rv ic e p ro vid ers l ik e T im e W arn er t h at a ssig n I P a d dre sse s d o k eep re co rd s l in kin g i d en titie s t o a cco unts . L ik ew is e , i f y ou g et a b itc o in w alle t f ro m a l ic en se d o nlin e ex ch an ge s u ch a s C oin base , t h at e x ch an ge i s r e q uir e d t o d o i ts d ue d ilig en ce u nder A M L/K YC re q uir e m en ts . F or e x am ple , h ere i s C oin base ’s p riv acy p olic y : “ W e c o lle ct i n fo rm atio n s e n t t o u s th ro ugh y our c o m pute r, m obile p hone, o r o th er a ccess d ev ic e. T his i n fo rm atio n m ay i n clu de y our IP a d dre ss, d ev ic e i n fo rm atio n i n clu din g, b ut n ot l im ite d t o , i d en tif ie r, d ev ic e n am e a n d t y pe, opera tin g s y ste m , l o catio n, m obile n etw ork i n fo rm atio n a n d s ta n dard w eb l o g i n fo rm atio n, s u ch as y our b ro w se r t y pe, t r a ffic t o a n d f ro m o ur s ite a n d t h e p ag es y ou a ccesse d o n o ur w eb site .” 38 So g overn m en ts c an s u bpoen a I S Ps a n d e x ch an ges f o r t h is t y pe o f u se r d ata . B ut t h ey c an ’t su bpoen a t h e b lo ck ch ain .

It’ s a ls o i m porta n t t o k now t h at w e c an d esig n h ig her l e v els o f t r a n sp are n cy i n to a n y s e t o f tr a n sa ctio ns, a p plic atio n, o r b usin ess m odel, s h ould a ll t h e s ta k eh old ers a g re e t o d o s o . I n vary in g s itu atio ns w e w ill s e e n ew c ap ab ilitie s w here r a d ic al t r a n sp are n cy m ak es a l o t o f s e n se .

When c o m pan ie s t e ll t h e t r u th t o c u sto m ers , s h are h old ers , o r b usin ess p artn ers , t h ey b uild t r u st.

39 That i s , p riv acy f o r i n div id uals , t r a n sp are n cy f o r o rg an iz atio ns, i n stitu tio ns, a n d p ublic o ffic ia ls .

Im plic a tio n s f o r t h e B lo ck ch ain E co n om y:

To b e s u re , t h e b lo ck ch ain p ro vid es opportu nitie s t o s to p t h e s ta m ped e t o a s u rv eilla n ce s o cie ty . N ow t h in k a b out t h e p ro ble m o f co rp ora te b ig d ata f o r e ach o f u s. W hat d oes i t m ean f o r a c o rp ora tio n t o h av e p erfe ct in fo rm atio n a b out y ou? W e a re s o m e t w en ty y ears i n to t h e g lo bal I n te rn et e ra , a n d o nly a t t h e beg in nin g o f c o rp ora te a ccess t o t h e m ost i n tim ate d eta ils o f o ur p ers o nal l iv es. C om in g u p f a st are p ers o nal h ealth a n d f itn ess d ata , o ur d aily c o m in gs a n d goin gs, t h e i n ner l iv es o f o ur h om es, an d, w ell, y ou n am e i t. M an y p eo ple a re s im ply u naw are o f t h e m an y m ic ro -F au stia n d eals t h ey mak e o nlin e e v ery d ay . B y s im ply u sin g W eb s ite s, c o nsu m ers a u th oriz e t h eir o w ners t o c o nvert tr a ils o f d ig ita l c ru m bs i n to d eta ile d r o ad m ap s f o r p riv ate c o m merc ia l b en efit.

Unle ss w e s h if t t o t h e n ew p ara d ig m , i t’ s n ot s c ie n ce f ic tio n t o f o re se e h undre d s o f m illio ns of a v ata rs h um min g a w ay i n t o m orro w ’s d ata c en te rs . W ith b lo ck ch ain t e ch nolo gy, y ou c o uld ow n y our p ers o nal a v ata rs a s y ou d o i n t h e S eco nd L if e v ir tu al w orld , b ut w ith r e al- w orld im plic atio ns. T he V ir tu al Y ou c o uld p ro te ct y our p ers o nal i n fo rm atio n, g iv in g a w ay o nly t h e in fo rm atio n r e q uir e d i n a n y s o cia l o r e co nom ic e x ch an ge w ork u nder y our c o m man d a n d m ak e su re y ou r e ceiv e c o m pen sa tio n f o r a n y o f y our d ata t h at h as v alu e t o a n oth er p arty . I t’ s a s h if t fro m b ig d ata t o p riv ate d ata . C all i t “ little d ata .” 6.

R ig hts P re se rv ed Prin cip le :

Owners h ip r ig hts a re t r a n sp are n t a n d e n fo rc eab le . I n div id ual f re ed om s a re r e co gniz ed an d r e sp ecte d . W e h old t h is t r u th t o b e s e lf -e v id en t— th at a ll o f u s a re b orn w ith c erta in in alie n ab le r ig hts t h at s h ould a n d c an b e p ro te cte d .

Pro b le m t o B e S olv ed :

The f ir s t e ra o f t h e d ig ita l e co nom y w as a b out f in din g w ay s t o ex erc is e t h ese r ig hts m ore e ffic ie n tly . T he I n te rn et b ecam e a m ed iu m f o r n ew f o rm s o f a rt, n ew s, an d e n te rta in m en t, f o r e sta b lis h in g c o pyrig ht o f p oem s, s o ngs, s to rie s, p hoto gra p hs, a n d a u dio an d v id eo r e co rd in gs. W e c o uld a p ply t h e U nif o rm C om merc ia l C ode f u rth er t o d o o nlin e w hat th e c o de h ad a lr e ad y e x ped ite d i n p hysic al s p ace, w hic h w as t o e lim in ate t h e n eed t o n eg otia te an d c re ate c o ntr a cts f o r e v ery s in gle i te m , l ik e a t u be o f t o oth paste , n o m atte r h ow s m all i ts p ric e.

Even s o , w e h ad t o t r u st m id dle m en t o m an ag e t r a n sa ctio ns, a n d t h ey h ad t h e p ow er t o d en y t h e tr a n sa ctio n, d ela y i t, a n d h old t h e m oney i n t h eir o w n a cco unt ( b an kers c all t h is “ flo at” ), o r c le ar it o nly t o r e v ers e i t l a te r. T hey e x pecte d a p erc en ta g e o f p eo ple t o c h eat a n d a ccep te d a c erta in le v el o f f ra u d a s u nav oid ab le .

In t h is g re at b urs t o f e ffic ie n cy , l e g itim ate r ig hts g ot t r a m ple d , t h e r ig hts n ot o nly t o p riv acy an d s e cu rity b ut a ls o f re e s p eech , r e p uta tio n, a n d e q ual p artic ip atio n. P eo ple c o uld a n onym ously cen so r u s, d efa m e u s, a n d b lo ck u s a t l ittle c o st o r r is k t o t h em se lv es. F ilm mak ers w ho d ep en ded on re v en ues f ro m s y ndic atio n, v id eo o n d em an d, e n han ced D VD s a le s, a n d c ab le r ig hts t o f ilm s re le ase d d ecad es e arlie r f o und t h eir r e v en ue s tr e am d ry in g u p t o a t r ic k le a s t h eir f a n s u plo ad ed dig ita l f ile s f o r o th ers t o d ow nlo ad f o r f re e.

Brea k th ro u gh :

The p ro of o f w ork r e q uir e d t o m in t c o in s a ls o t im e-s ta m ps t r a n sa ctio ns, s o th at o nly t h e f ir s t s p en d o f a c o in w ould c le ar a n d s e ttle . C om bin ed w ith P K I, t h e b lo ck ch ain n ot only p re v en ts a d ouble s p en d b ut a ls o c o nfir m s o w ners h ip o f e v ery c o in i n c ir c u la tio n, a n d e ach tr a n sa ctio n i s i m muta b le a n d i r re v ocab le . I n o th er w ord s, w e c an ’t t r a d e w hat i s n ’t o urs o n t h e blo ck ch ain , w heth er i t’ s r e al p ro perty , i n te lle ctu al p ro perty , o r r ig hts o f p ers o nhood. N or c an w e tr a d e w hat w e a re n ’t a u th oriz ed t o t r a d e o n s o m eb ody e ls e ’s b eh alf i n a n a g en cy r o le , p erh ap s a s a l a w yer o r a c o m pan y m an ag er. A nd w e c an ’t s tif le p eo ple ’s f re ed om o f e x pre ssio n, a sse m bly , an d r e lig io n.

Halu k K ulin o f P ers o nal B la ck B ox s a id i t b est: “ In t h e t h ousa n ds o f y ears o f h um an s o cia l in te ra ctio n, e v ery t im e w e’v e t a k en t h e r ig ht o f p artic ip atio n f ro m t h e p eo ple , t h ey h av e c o m e back a n d b ro ken t h e s y ste m . W e’re d is c o verin g t h at, e v en i n d ig ita l, s te alin g t h eir c o nse n t i s n ot su sta in ab le .” 40 A s t h e L ed ger o f E very th in g, t h e b lo ck ch ain c an s e rv e a s a p ublic r e g is tr y th ro ugh s u ch t o ols a s P ro of o f E xis te n ce ( P oE ), a s ite t h at c re ate s a n d r e g is te rs c ry pto gra p hic dig ests o f d eed s, t itle s, r e ceip ts , o r l ic en se s o n t h e b lo ck ch ain . P ro of o f E xis te n ce d oesn ’t main ta in a c o py o f a n y o rig in al d ocu m en t; t h e h ash o f t h e d ocu m en t i s c alc u la te d o n t h e u se r’s mach in e, n ot o n t h e P oE s ite , t h us e n su rin g c o nfid en tia lity o f c o nte n t. E ven i f a c en tr a l a u th ority sh uts d ow n P ro of o f E xis te n ce, t h e p ro of r e m ain s o n t h e b lo ck ch ain .

41 S o t h e b lo ck ch ain pro vid es m ean s o f p ro vin g o w ners h ip a n d p re se rv in g r e co rd s w ith out c en so rs h ip .

On t h e I n te rn et, w e c o uld n’t n ecessa rily e n fo rc e c o ntr a ctu al r ig hts o r o vers e e im ple m en ta tio n. A nd s o , f o r m ore c o m ple x t r a n sa ctio ns i n volv in g b undle s o f r ig hts a n d m ultip le partie s, w e n ow h av e t h e sm art c o ntr a ct , a p ie ce o f s p ecia l p urp ose c o de t h at e x ecu te s a c o m ple x se t o f i n str u ctio ns o n t h e b lo ck ch ain . “ T hat i n te rs e ctio n o f l e g al d esc rip tio ns a n d s o ftw are i s fu ndam en ta l, a n d t h e s m art c o ntr a cts a re t h e f ir s t s te p i n t h at d ir e ctio n,” s a id S te v e O m ohundro , pre sid en t o f t h in k t a n k S elf -A ware S yste m s. “ O nce t h e p rin cip le s o f h ow y ou c o dif y l a w dig ita lly b eco m e m ore u nders to od, t h en I t h in k e v ery c o untr y w ill s ta rt d oin g i t. . . . E ach ju ris d ic tio n w ould en co de i ts l a w s, p re cis e ly a n d d ig ita lly , a n d t h ere w ould b e t r a n sla tio n pro gra m s b etw een t h em . . . . G ettin g r id o f t h e f ric tio n o f a ll l e g al s tu ff i s g oin g t o b e a h uge eco nom ic g ain .” 42 A s m art c o ntr a ct p ro vid es a m ean s f o r a ssig nin g u sa g e r ig hts t o a n oth er p arty , a s a c o m pose r mig ht a ssig n a c o m ple te d s o ng t o a m usic p ublis h er. T he c o de o f t h e c o ntr a ct c o uld i n clu de t h e te rm o r d ura tio n o f t h e a ssig nm en t, t h e m ag nitu de o f r o yaltie s t h at w ould f lo w f ro m t h e publis h er’s t o t h e c o m pose r’s b itc o in a cco unt d urin g t h e t e rm , a n d s o m e t r ig gers f o r t e rm in atin g th e c o ntr a ct. F or e x am ple , i f t h e c o m pose r’s a cco unt r e ceiv ed l e ss t h an a q uarte r o f a b itc o in i n a co nse cu tiv e t h ir ty -d ay p erio d, t h en a ll r ig hts w ould a u to m atic ally r e v ert t o t h e c o m pose r, a n d t h e publis h er w ould n o l o nger h av e a ccess t o t h e c o m pose r’s w ork r e g is te re d o n t h e b lo ck ch ain . T o se t t h is s m art c o ntr a ct i n m otio n, b oth t h e c o m pose r a n d t h e p ublis h er— an d p erh ap s re p re se n ta tiv es o f t h e p ublis h er’s f in an ce a n d l e g al t e am s— would s ig n u sin g t h eir p riv ate k ey s.

A s m art c o ntr a ct a ls o p ro vid es a m ean s f o r o w ners o f a sse ts t o p ool t h eir r e so urc es a n d cre ate a c o rp ora tio n o n t h e b lo ck ch ain , w here t h e a rtic le s o f i n co rp ora tio n a re c o ded i n to t h e co ntr a ct, c le arly s p ellin g o ut a n d e n fo rc in g t h e r ig hts o f t h ose o w ners . A sso cia te d a g en cy - em plo ym en t c o ntr a cts c o uld d efin e t h e d ecis io n r ig hts o f m an ag ers b y c o din g w hat t h ey c o uld an d c o uld n’t d o w ith c o rp ora te r e so urc es w ith out o w ners h ip p erm is sio n.

Sm art c o ntr a cts a re u npre ced en te d m eth ods o f e n su rin g c o ntr a ctu al c o m plia n ce, i n clu din g so cia l c o ntr a cts . “ If y ou h av e a b ig t r a n sa ctio n w ith a s p ecif ic c o ntr o l s tr u ctu re , y ou c an p re d ic t th e o utc o m e a t a n y p erio d i n t im e,” s a id A nto nopoulo s. “ If I h av e a f u lly v erif ie d s ig ned tr a n sa ctio n w ith a n um ber o f s ig natu re s i n a m ultis ig natu re a cco unt, I c an p re d ic t w heth er t h at tr a n sa ctio n w ill b e v erif ia b le b y t h e n etw ork . A nd i f i t i s v erif ia b le b y t h e n etw ork , t h en t h at tr a n sa ctio n c an b e r e d eem ed a n d i r re v ocab ly s o . N o c en tr a l a u th ority o r t h ir d p arty c an r e v oke i t, no o ne c an o verrid e t h e c o nse n su s o f t h e n etw ork . T hat’ s a n ew c o ncep t i n b oth l a w a n d f in an ce.

The b itc o in s y ste m p ro vid es a v ery h ig h d eg re e o f c erta in ty a s t o t h e o utc o m e o f a c o ntr a ct.” 43 The c o ntr a ct c o uld n’t b e s e iz ed , s to pped , o r r e d ir e cte d t o a d if fe re n t b itc o in a d dre ss. Y ou need o nly t o t r a n sm it t h e s ig ned t r a n sa ctio n t o a n y o f t h e b itc o in n etw ork n odes f ro m a n yw here usin g a n y m ed iu m . S aid Anto nopoulo s, “ P eo ple c o uld s h ut d ow n t h e I n te rn et, a n d I c o uld s till tr a n sm it t h at t r a n sa ctio n o ver s h ortw av e r a d io w ith M ors e c o de. A g overn m en t a g en cy c o uld t r y to c en so r m y c o m munic atio n, a n d I c o uld s till t r a n sm it t h at t r a n sa ctio n a s a s e rie s o f s m ile y em otic o ns o ver S kype. A s l o ng a s s o m eo ne o n t h e o th er e n d c o uld d eco de t h e t r a n sa ctio n a n d re co rd i t i n t h e b lo ck ch ain , I c o uld e ffe ct t h e [ s m art c o ntr a ct] . S o w e’v e c o nverte d s o m eth in g th at, i n l a w , i s a lm ost i m possib le t o g uara n te e i n to s o m eth in g t h at h as v erif ia b le m ath em atic al certa in ty .” 44 Consid er p ro perty r ig hts , b oth r e al a n d i n te lle ctu al: “ O wners h ip i s j u st a r e co gnitio n b y a govern m en t o r a n a g en cy t h at y ou o w n s o m eth in g a n d t h ey w ill d efe n d y our c la im s o n t h at ow ners h ip ,” s a id S te p hen P air , C EO o f B itP ay . “ T hat’ s j u st a c o ntr a ct t h at c an b e s ig ned b y whate v er a u th ority t h at w ill d efe n d y our r ig hts f o r y ou a n d t h ey s ig n i t o ver t o y our i d en tity , a n d th en o nce y ou h av e t h at, a n d t h at o w ners h ip i s r e co rd ed , y ou t h en c an t r a n sfe r i t t o o th er p eo ple .

That’ s v ery s tr a ig htf o rw ard .” 45 C om munitie s w ith s h are d r e so urc es c o uld c o nsid er a s p ectr u m o f rig hts , b orro w in g f ro m N obel P riz e– w in nin g e co nom is t E lin or O str o m ’s p yra m id o f r ig hts , a peck in g o rd er o f s o rts . A t t h e l o w est l e v el, t h ere a re a u th oriz ed u se rs w ho m ay o nly a ccess a n d with dra w r e so urc es; c la im an ts w ho h av e t h ose r ig hts b ut c an a ls o e x clu de o th ers f ro m a ccess; pro prie to rs w ho h old m an ag em en t r ig hts b ey ond a ccess a n d e x clu sio n; a n d o w ners w ho c an access, u se , e x clu de o th ers , m an ag e, a n d s e ll t h e r e so urc e ( i.e ., r ig ht o f a lie n atio n).

46 Now c o nsid er t h e r ig hts t o p riv acy a n d p ublic ity : “ O ur m odel i s r e ally r ig hts a p plie d t o t h e mark et,” s a id K ulin o f P ers o nal B la ck B ox. H is c o m pan y u se s b lo ck ch ain t e ch nolo gy t o r e p re se n t an d e n fo rc e t h e r ig hts o f i n div id uals t o e x tr a ct v alu e f ro m t h eir p ers o nal d ata . “ T he b lo ck ch ain pro vid es u s a w hole g ro up o f p eo ple w ho a re b oth m is sio n-a lig ned a n d t e ch nolo gy-a lig ned t o cre ate d if fe re n t w ay s t h at e n te rp ris e s c an l e v era g e t h ese u niq ue d ata s e ts r a th er t h an p ro te ct t h eir data s ilo s.” 47 S im ply p ut, p eo ple c re ate b ette r d ata t h an w hat a c o m pan y c an f ra ck f ro m t h em , an d c o nsu m ers a re m uch b ette r a t e m otio nally a lig nin g w ith b ra n ds a n d i n flu en cin g t h eir p eers th an c o m pan ie s a re .

Im plic a tio n s f o r t h e B lo ck ch ain E co n om y:

As a n e co nom ic d esig n p rin cip le , e n fo rc in g rig hts m ust s ta rt w ith c la rif y in g r ig hts . I n t h e f ie ld o f m an ag em en t s c ie n ce, t h e h ola cra cy movem en t i s a n i n te re stin g, i f n ot c o ntr o vers ia l, e x am ple o f h ow m em bers o f o rg an iz atio ns a re defin in g t h e work t h at n eed s t o b e d one a n d t h en a ssig nin g r ig hts a n d t h e r e sp onsib ility t o d o t h is work a s p art o f a w hole .

48 W ho d id w e a g re e s h ould h av e t h is s e t o f d ecis io ns a n d a ctiv itie s a t our c o m pan y? T he a n sw er t o t h at q uestio n c an b e c o dif ie d i n a s m art c o ntr a ct a n d p la ced o n t h e blo ck ch ain s o t h at t h e d ecis io ns, p ro gre ss t o w ard t h e g oal, a n d i n cen tiv es a re a ll t r a n sp are n t a n d re ach ed b y c o nse n su s.

To b e s u re , t h is i s n ot s im ply a b out t e ch nolo gy. I t’ s m uch b ig ger t h an p hysic al a sse ts , in te lle ctu al p ro perty , o r P ers o nal B la ck B ox’s p riv acy t o ol w ith a p ublic ity r ig hts m odule f o r t h e Kard ash ia n s. W e n eed g re ate r e d ucatio n a b out r ig hts a n d t h e d ev elo pm en t o f n ew unders ta n din gs a b out r ig hts m an ag em en t s y ste m s. W e’ll h av e v otin g r ig hts m an ag em en t s y ste m s an d p ro perty r ig hts m an ag em en t s y ste m s. S om e s ta rt- u p w ill c re ate a r ig hts d ash board t h at w ill in dic ate a p ers o n’s l e v el o f c iv ic e n gag em en t, w here v otin g i s b ut o ne o f s e v era l m easu re s, l ik e donatin g s k ills , r e p uta tio n, t im e, a n d b itc o in o r p ro vid in g f re e a ccess t o o ne’s p hysic al o r in te lle ctu al p ro perty . B uck le u p.

7.

I n clu sio n Prin cip le :

The e co nom y w ork s b est w hen i t w ork s f o r e v ery one. T hat m ean s l o w erin g t h e barrie rs t o p artic ip atio n. I t m ean s c re atin g p la tf o rm s f o r dis tr ib ute d c a pita lis m , n ot j u st a re d is tr ib ute d c ap ita lis m .

Pro b le m t o B e S olv ed :

The f ir s t e ra o f t h e I n te rn et c re ate d m an y w onders f o r m an y p eo ple .

But a s w e h av e p oin te d o ut, a m ajo rity o f t h e w orld ’s p opula tio n i s s till e x clu ded — not j u st f ro m access t o t e ch nolo gy b ut a ls o f ro m a ccess t o t h e f in an cia l s y ste m a n d e co nom ic o pportu nity .

More o ver, t h e p ro m is e t h at t h is n ew c o m munic atio ns m ed iu m w ould b rin g p ro sp erity t o a ll h as ru ng h ollo w . Y es, i t h elp ed c o m pan ie s i n t h e d ev elo ped w orld p ro vid e j o bs f o r m illio ns i n t h e em erg in g e co nom ie s. I t l o w ere d t h e b arrie rs t o e n tr y f o r e n tr e p re n eu rs a n d g av e t h e dis a d van ta g ed a ccess t o o pportu nitie s a n d b asic i n fo rm atio n.

That’ s n ot e n ough. T here a re s till t w o b illio n 49 p eo ple w ith out a b an k a cco unt, a n d i n t h e dev elo ped w orld , p ro sp erity i s a ctu ally d eclin in g a s s o cia l i n eq uality c o ntin ues t o g ro w . I n dev elo pin g e co nom ie s, m obile i s o fte n t h e o nly a ffo rd ab le m ean s o f c o nnectin g. M ost f in an cia l in stitu tio ns h av e m obile p ay m en t a p ps t h at c o m bin e c am era s a n d Q R c o des. H ow ev er, t h e f e es need ed t o s u pport t h ese i n te rm ed ia rie s m ak e m ic ro pay m en ts im pra ctic al. C onsu m ers a t t h e botto m o f t h e p yra m id s till c an ’t a ffo rd t h e m in im um a cco unt b ala n ces, m in im um p ay m en t am ounts , o r t r a n sa ctio n f e es t o u se t h e s y ste m . I ts i n fra str u ctu re c o sts m ak e m ic ro pay m en ts a n d mic ro acco unts u nfe asib le .

Brea k th ro u gh :

Sato sh i d esig ned t h e s y ste m t o w ork o n t o p o f t h e I n te rn et s ta ck ( T C P/I P ), but i t c o uld r u n w ith out t h e I n te rn et i f n ecessa ry . S ato sh i i m ag in ed t h at t h e t y pic al p ers o n w ould be i n te ra ctin g w ith t h e b lo ck ch ain t h ro ugh w hat h e c alle d “ sim plif ie d p ay m en t v erif ic atio n” (S PV ) m ode t h at c an w ork o n c ell p hones t o m obiliz e t h e b lo ck ch ain . N ow a n yone w ith a f lip phone c an p artic ip ate i n t h e e co nom y, o r i n a m ark et, a s a p ro ducer o r c o nsu m er. N o b an k acco unt r e q uir e d , n o p ro of o f c itiz en sh ip r e q uir e d , n o b ir th c ertif ic ate r e q uir e d , n o h om e a d dre ss re q uir e d , n o s ta b le l o cal c u rre n cy r e q uir e d t o u se t h e b lo ck ch ain t e ch nolo gie s. T he b lo ck ch ain dra stic ally l o w ers t h e c o st o f t r a n sm ittin g s u ch f u nds a s r e m itta n ces. I t s ig nif ic an tly l o w ers t h e barrie r t o h av in g a b an k a cco unt, o bta in in g c re d it, a n d i n vestin g. A nd i t s u pports en tr e p re n eu rs h ip a n d p artic ip atio n i n g lo bal t r a d e.

That w as p art o f S ato sh i’ s v is io n. H e u nders to od t h at, f o r p eo ple i n d ev elo pin g e co nom ie s, th e s itu atio n w as w ors e . W hen c o rru pt o r i n co m pete n t b ure au cra ts i n f a ile d s ta te s n eed f u ndin g to r u n t h e g overn m en t, t h eir c en tr a l b an ks a n d t r e asu rie s s im ply p rin t m ore c u rre n cy a n d t h en pro fit f ro m t h e d if fe re n ce b etw een t h e c o st o f m an ufa ctu rin g a n d t h e f a ce v alu e o f t h e c u rre n cy .

That’ s s e ig nio ra g e. T he i n cre ase i n t h e m oney s u pply d eb ase s t h e c u rre n cy . I f t h e l o cal e co nom y re ally t a n ked — as i t d id i n A rg en tin a a n d U ru guay , a n d m ore r e cen tly i n C ypru s a n d G re ece— th ese c en tr a l b odie s c o uld f re eze t h e b an k a sse ts o f w hoev er c o uld n’t a ffo rd a b rib e. G iv en s u ch a p ossib ility , t h e w ealth y c o uld s to re t h eir a sse ts i n m ore t r u stw orth y j u ris d ic tio ns a n d m ore sta b le c u rre n cie s.

But n ot t h e p oor. W hate v er m oney t h ey h av e b eco m es w orth le ss. O ffic ia ls c o uld s ip hon o ff in flo w s o f f o re ig n a id a n d r ib bon t h eir b ord ers w ith r e d t a p e, a d din g f ric tio n t o e v ery a tte m pt a t help in g t h eir p eo ple , f ro m m oth ers a n d c h ild re n n eed in g f o od a n d m ed ic in e t o v ic tim s o f w ar, pro lo nged d ro ught, a n d o th er n atu ra l d is a ste rs .

The A ustr a lia m ic ro pay m en t s e rv ic e m HIT s ( s h ort f o r M obile H an dse t I n itia te d Tra n sa ctio ns) h as l a u nch ed a n ew s e rv ic e, B itM oby, t h at e n ab le s c o nsu m ers i n m ore t h an o ne hundre d c o untr ie s t o t o p u p t h eir m obile p hone c re d it b y t e x tin g m HIT s a n a m ount o f b itc o in .

50 Acco rd in g t o b itc o in co re d ev elo per G av in A ndre se n , “ Y ou d on’t s e e e v ery t r a n sa ctio n; y ou s e e only t h e t r a n sa ctio ns y ou c are a b out. Y ou’re n ot t r u stin g p eers w ith y our m oney , y ou’re j u st tr u stin g t h em t o g iv e y ou t h e i n fo rm atio n t o urin g a cro ss t h e n etw ork .” 51 “T he p ote n tia l o f u sin g t h e b lo ck ch ain f o r p ro perty r e co rd s i n t h e e m erg in g w orld , w here th at’ s a h uge i s su e r e la te d t o p overty ,” i s s ig nif ic an t, s a id A ustin H ill. “ T here i s n ’t a t r u ste d en tity t h at h as g overn an ce o ver l a n d t itle , a n d s o a llo w in g p eo ple t o a ctu ally s a y , ‘ I o w n t h is pro perty ,’ a n d t h en u se t h at f o r c o lla te ra l t o i m pro ve t h em a n d t h eir f a m ily s itu atio n i s a fa sc in atin g u se c ase .” 52 On a t e ch nic al n ote , A ndre se n c alle d o n N ie ls e n ’s l a w o f I n te rn et b an dw id th , w here h ig h-e n d use r b an dw id th i n cre ase s b y 5 0 p erc en t e ach y ear, w here as t h e b an dw id th o f t h e m asse s t e n ds t o la g b y t w o o r t h re e y ears . B an dw id th l a g s b eh in d c o m pute r p ro cessin g p ow er, w hic h i n cre ase s by a b out 6 0 p erc en t a n nually ( M oore ’s l a w ). S o b an dw id th i s t h e g atin g f a cto r, a cco rd in g t o Ja k ob N ie ls e n .

53 M ost d esig ns— in te rfa ces, W eb s ite s, d ig ita l p ro ducts , s e rv ic es, o rg an iz atio ns, an d s o f o rth — will n eed t o a cco m modate t h e t e ch nolo gy o f t h e m asse s t o l e v era g e n etw ork effe cts . S o i n clu sio n m ean s c o nsid erin g t h e f u ll s p ectr u m o f u sa g e— not j u st t h e s ta te o f t h e sc ie n ce o f h ig h-e n d u se rs , b ut t h e s lo w t e ch a n d s p ora d ic p ow er o uta g es o f u se rs i n r e m ote re g io ns o f t h e w orld ’s p oore st c o untr ie s.

Im plic a tio n s f o r t h e B lo ck ch ain E co n om y:

Late r i n t h e b ook, w e t a ck le t h e i s su e o f t h e pro sp erity p ara d ox— how t h e f ir s t e ra o f t h e I n te rn et b en efite d m an y, b ut o vera ll p ro sp erity i n th e W este rn w orld f o r m ost p eo ple i s n o l o nger i m pro vin g. T he f o undatio n f o r p ro sp erity i s in clu sio n, a n d b lo ck ch ain s c an h elp . L et’ s b e c le ar t h at i n clu sio n h as m ultip le d im en sio ns. I t mean s a n e n d t o s o cia l, e co nom ic , a n d r a cia l h eg em ony, a n e n d t o d is c rim in atio n b ase d o n health , g en der, s e x ual i d en tif ic atio n, o r s e x ual p re fe re n ce. I t m ean s e n din g b arrie rs t o a ccess becau se o f w here a p ers o n l iv es, w heth er a p ers o n s p en t a n ig ht i n j a il, o r h ow a p ers o n v ote d , but a ls o a n e n d t o g la ss c eilin gs, a n d g ood o l’ b oys’ c lu bs o f c o untle ss v arie tie s.

DESIG NIN G T H E F U TU RE Our c o nvers a tio n w ith A nn C av oukia n i n sp ir e d u s t o f o llo w u p o n G erm an y’s “ N ev er a g ain ” pro m is e . W e c am e a cro ss t h e w ord s o f G erm an f e d era l pre sid en t J o ach im G au ck o n t h e D ay o f Rem em bra n ce o f t h e V ic tim s o f N atio nal S ocia lis m , v ic tim s o f H itle r’s r e g im e. “ O ur m ora l oblig atio ns c an not b e f u lf ille d s o le ly a t t h e l e v el o f r e m em bra n ce. T here a ls o e x is ts w ith in u s a deep a n d a b id in g c erta in ty t h at r e m em bra n ce b esto w s a m is sio n o n u s. T hat m is sio n t e lls u s t o pro te ct a n d p re se rv e h um an ity . I t t e lls u s t o p ro te ct a n d p re se rv e t h e r ig hts o f e v ery h um an bein g.” 54 W as h e a llu din g t o g en ocid e i n S yria , I ra q , D arfu r, S re b re n ic a, R w an da, a n d Cam bodia , a fte r t h e G erm an p eo ple h ad v ow ed , “ N ev er a g ain ”?

We b elie v e t h at b lo ck ch ain t e ch nolo gy c o uld b e a n i m porta n t t o ol f o r p ro te ctin g a n d pre se rv in g h um an ity a n d t h e r ig hts o f e v ery h um an b ein g, a m ean s o f c o m munic atin g t h e t r u th , dis tr ib utin g p ro sp erity , a n d— as t h e n etw ork r e je cts t h e f ra u dule n t t r a n sa ctio ns— of r e je ctin g th ose e arly c an cero us c ells f ro m a s o cie ty t h at c an g ro w i n to t h e u nth in kab le .

Adm itte d ly , a b old s ta te m en t. R ead o n a n d j u dge f o r y ours e lf .

Fro m a m ore p aro ch ia l a n d p ra ctic al p ers p ectiv e, t h ese s e v en p rin cip le s c an s e rv e a s a g uid e to d esig nin g t h e n ex t g en era tio n o f h ig h-p erfo rm an ce a n d i n novativ e c o m pan ie s, o rg an iz atio ns, an d i n stitu tio ns. I f w e d esig n f o r i n te g rity , p ow er, v alu e, p riv acy , s e cu rity , r ig hts , a n d i n clu sio n, th en w e w ill b e r e d esig nin g o ur e co nom y a n d s o cia l i n stitu tio ns t o b e w orth y o f t r u st. W e n ow tu rn o ur a tte n tio n t o h ow t h is c o uld r o ll o ut a n d w hat y ou s h ould c o nsid er d oin g. PA RT I I TR A NSFO RM ATIO NS T CH APT ER 3 REIN VEN TIN G F IN ANCIA L S E R V IC ES he g lo bal f in an cia l s y ste m m oves t r illio ns o f d olla rs d aily , s e rv es b illio ns o f p eo ple , a n d su pports a g lo bal e co nom y w orth m ore t h an $ 100 t r illio n.

1 I t’ s t h e w orld ’s m ost p ow erfu l i n dustr y , t h e f o undatio n o f g lo bal c ap ita lis m , a n d i ts l e ad ers a re k now n a s t h e M aste rs o f t h e U niv ers e . C lo se r u p, i t’ s a R ube G old berg c o ntr a p tio n o f u nev en d ev elo pm en ts a n d b iz arre c o ntr a d ic tio ns. F ir s t, t h e m ach in e h asn ’t h ad a n u pgra d e i n a w hile . N ew t e ch nolo gy h as b een w eld ed o nto a g in g i n fra str u ctu re h elte r-s k elte r. C onsid er t h e b an k o ffe rin g I n te rn et b an kin g b ut s till i s su in g p ap er c h eck s a n d r u nnin g m ain fra m e c o m pute rs f ro m t h e 1 970s. W hen o ne o f i ts c u sto m ers t a p s h er c re d it c ard o n a s ta te -o f-th e-a rt c ard r e ad er t o b uy a S ta rb uck s g ra n de l a tte , h er m oney p asse s t h ro ugh n o f e w er t h an f iv e d if fe re n t i n te rm ed ia rie s b efo re r e ach in g S ta rb uck s’s b an k a cco unt. T he t r a n sa ctio n t a k es s e co nds t o c le ar b ut d ay s t o s e ttle .

Then t h ere a re t h e l a rg e m ultin atio nals l ik e A pple o r G E t h at h av e t o m ain ta in h undre d s o f b an k a cco unts i n l o cal c u rre n cie s a ro und t h e w orld j u st t o f a cilita te t h eir o pera tio ns.

2 W hen s u ch a c o rp ora tio n n eed s t o m ove m oney b etw een t w o s u bsid ia rie s i n t w o d if fe re n t c o untr ie s, t h e m an ag er o f o ne s u bsid ia ry s e n ds a b an k w ir e f ro m h is o pera tio n’s b an k a cco unt t o t h e o th er s u bsid ia ry ’s b an k a cco unt. T hese t r a n sfe rs a re n eed le ssly c o m plic ate d a n d t a k e d ay s, s o m etim es w eek s t o s e ttle . D urin g t h at t im e, n eith er s u bsid ia ry c an u se t h e m oney t o f u nd o pera tio ns o r i n vestm en t, b ut t h e i n te rm ed ia rie s c an e arn i n te re st o n t h e f lo at. “ T he a d ven t o f t e ch nolo gy e sse n tia lly t o ok p ap er-b ase d p ro cesse s a n d t u rn ed t h em i n to s e m ia u to m ate d , s e m ie le ctr o nic p ro cesse s b ut t h e l o gic w as s till p ap er b ase d ,” s a id V ik ra m P an dit, f o rm er C EO o f C itig ro up.

3 Aro und e v ery c o rn er, a n oth er b iz arre p ara d ox: T ra d ers b uy a n d s e ll s e cu ritie s o n t h e w orld ’s s to ck e x ch an ges i n n an ose co nds; t h eir t r a d es c le ar i n sta n tly b ut t a k e t h re e f u ll d ay s t o s e ttle .

L ocal g overn m en ts u se n o f e w er t h an t e n d if fe re n t a g en ts — ad vis e rs , l a w yers , i n su re rs , b an kers , a n d m ore — to f a cilita te t h e i s su an ce o f a m unic ip al b ond.

4 A d ay l a b ore r i n L os A ngele s c ash es h is p ay ch eck a t a m oney m art f o r a 4 p erc en t f e e, a n d t h en w alk s h is f is tf u l o f d olla rs o ver t o a c o nven ie n ce s to re t o w ir e i t h om e t o h is f a m ily i n G uate m ala , w here h e g ets d in ged a g ain o n f la t f e es, e x ch an ge r a te s, a n d o th er h id den c o sts . O nce h is f a m ily h as d iv vie d u p t h e s u m a m ong i ts m an y m em bers , n obody h as e n ough t o o pen a b an k a cco unt o r g et c re d it. T hey a re a m ong t h e 2 .2 b illio n p eo ple w ho l iv e o n l e ss t h an t w o d olla rs a d ay .

5 T he p ay m en ts t h ey n eed t o m ak e a re t in y, t o o s m all f o r c o nven tio nal p ay m en t n etw ork s s u ch a s d eb it a n d c re d it c ard s, w here m in im um f e es m ak e s o -c alle d m ic ro pay m en ts i m possib le . B an ks s im ply d on’t v ie w s e rv in g t h ese p eo ple a s a “ p ro fita b le p ro positio n,” a cco rd in g t o a r e cen t H arv ard B usin ess S ch ool s tu dy.

6 A nd s o t h e m oney m ach in e i s n ’t t r u ly g lo bal i n s c ale a n d s c o pe. Moneta ry p olic y m ak ers a n d f in an cia l r e g ula to rs o fte n f in d t h em se lv es l a ck in g a ll t h e f a cts , th an ks t o t h e p la n ned o pacity o f m an y l a rg e f in an cia l o pera tio ns a n d t h e c o m partm en ta liz atio n o f overs ig ht. T he g lo bal f in an cia l c ris is o f 2 008 w as a c ase i n p oin t. E xcess l e v era g e, a l a ck o f tr a n sp are n cy , a n d a s e n se o f c o m pla cen cy d riv en b y s k ew ed i n cen tiv es p re v en te d a n yone f ro m id en tif y in g t h e p ro ble m u ntil i t w as n early t o o l a te . “ H ow c an y ou h av e a n yth in g w ork , f ro m t h e polic e f o rc e t o a m oneta ry s y ste m , i f y ou d on’t h av e n um bers a n d l o catio ns? ” p ondere d Hern an do d e S oto .

7 R eg ula to rs a re s till t r y in g t o m an ag e t h is m ach in e w ith r u le s d ev is e d f o r t h e in dustr ia l a g e. I n N ew Y ork S ta te , m oney t r a n sm is sio n l a w s d ate b ack t o t h e C iv il W ar w hen t h e prim ary m ean s o f m ovin g m oney a ro und w as h ors e a n d b uggy.

It’ s F ra n ken -fin an ce, f u ll o f a b su rd c o ntr a d ic tio ns, i n co ngru itie s, h ot p ip es, a n d p re ssu re pots . W hy, f o r e x am ple , d oes W este rn U nio n n eed 5 00,0 00 p oin ts o f s a le a ro und t h e w orld , when m ore t h an h alf t h e w orld ’s p opula tio n h as a s m art p hone?

8 E rik V oorh ees, a n e arly b itc o in pio neer a n d o uts p oken c ritic o f t h e b an kin g s y ste m , t o ld u s, “ It i s f a ste r t o m ail a n a n vil t o C hin a th an i t i s t o s e n d m oney t h ro ugh t h e b an kin g s y ste m t o C hin a. T hat’ s c ra zy ! M oney i s a lr e ad y dig ita l, i t’ s n ot l ik e t h ey ’re s h ip pin g p alle ts o f c ash w hen y ou d o a w ir e !” 9 Why i s i t s o i n effic ie n t? A cco rd in g t o P au l D av id , t h e e co nom is t w ho c o in ed t h e t e rm pro ductiv ity p ara dox , l a y in g n ew t e ch nolo gie s o ver e x is tin g i n fra str u ctu re i s “ n ot u nusu al d urin g his to ric al t r a n sitio ns f ro m o ne t e ch nolo gic al p ara d ig m t o t h e n ex t.” 10 F or e x am ple , man ufa ctu re rs n eed ed f o rty y ears t o e m bra ce c o m merc ia l e le ctr if ic atio n o ver s te am p ow er, a n d ofte n t h e t w o w ork ed s id e b y s id e b efo re m an ufa ctu re rs f in ally s w itc h ed o ver f o r g ood. D urin g th at p erio d o f r e tr o fittin g, p ro ductiv ity a ctu ally d ecre ase d . I n t h e f in an cia l s y ste m , h ow ev er, t h e pro ble m i s c o m pounded b ecau se t h ere h as b een n o c le an t r a n sitio n f ro m o ne t e ch nolo gy t o t h e nex t; t h ere a re m ultip le l e g acy t e ch nolo gie s, s o m e h undre d s o f y ears o ld , n ev er q uite l iv in g u p t o th eir f u ll p ote n tia l.

Why? I n p art, b ecau se f in an ce i s a m onopoly b usin ess. I n h is a sse ssm en t o f t h e f in an cia l cris is , N obel l a u re ate J o se p h S tig litz w ro te t h at b an ks “ w ere d oin g e v ery th in g t h ey c o uld t o in cre ase t r a n sa ctio n c o sts i n e v ery w ay p ossib le .” H e a rg ued t h at, e v en a t t h e r e ta il l e v el, pay m en ts f o r b asic g oods a n d s e rv ic es “ sh ould c o st a f ra ctio n o f a p en ny.” “ Y et h ow m uch d o th ey c h arg e?” h e w ondere d . “ O ne, t w o, o r t h re e p erc en t o f t h e v alu e o f w hat i s s o ld o r m ore .

Cap ita l a n d s h eer s c ale , c o m bin ed w ith a r e g ula to ry a n d s o cia l l ic en se t o o pera te a llo w s b an ks t o ex tr a ct a s m uch a s t h ey c an , i n c o untr y a fte r c o untr y , e sp ecia lly i n t h e U nite d S ta te s, m ak in g billio ns o f d olla rs o f p ro fits .” 11 H is to ric ally , t h e o pportu nity f o r l a rg e c en tr a liz ed i n te rm ed ia rie s has b een e n orm ous. N ot o nly t r a d itio nal b an ks ( e .g ., B an k o f A m eric a), b ut a ls o c h arg e c ard co m pan ie s ( V is a ), i n vestm en t b an ks ( G old m an S ach s), s to ck e x ch an ges ( N YSE ), c le arin ghouse s (C M E), w ir e /r e m itta n ce s e rv ic es ( W este rn U nio n), i n su re rs ( L lo yd’s ), s e cu ritie s l a w f ir m s (S kad den , A rp s), c en tr a l b an ks ( F ed era l R ese rv e), a sse t m an ag ers ( B la ck R ock ), a cco unta n cie s (D elo itte ), c o nsu lta n cie s ( A ccen tu re ), a n d c o m moditie s t r a d ers ( V ito l G ro up) m ak e u p t h is ex pan siv e l e v ia th an . T he g ears o f t h e f in an cia l s y ste m — pow erfu l i n te rm ed ia rie s t h at c o nso lid ate cap ita l a n d i n flu en ce a n d o fte n i m pose m onopoly e co nom ic s— mak e t h e s y ste m w ork , b ut a ls o slo w i t d ow n, a d d c o st, a n d g en era te o uts iz ed b en efits f o r t h em se lv es. B ecau se o f t h eir m onopoly positio n, m an y i n cu m ben ts h av e n o i n cen tiv e t o i m pro ve p ro ducts , i n cre ase e ffic ie n cy , i m pro ve th e c o nsu m er e x perie n ce, o r a p peal t o t h e n ex t g en era tio n. A N EW L O OK F O R T H E W ORLD ’S S E C O ND-O LD EST P R O FE SSIO N The d ay s o f F ra n ken -fin an ce a re n um bere d a s b lo ck ch ain t e ch nolo gy p ro m is e s t o m ak e t h e n ex t decad e o ne o f g re at u pheav al a n d d is lo catio n b ut a ls o i m men se o pportu nity f o r t h ose w ho s e iz e it. T he g lo bal f in an cia l s e rv ic es i n dustr y t o day i s f ra u ght w ith p ro ble m s: I t i s a n tiq uate d , b uilt o n decad es-o ld t e ch nolo gy t h at i s a t o dds w ith o ur r a p id ly a d van cin g d ig ita l w orld , m ak in g i t ofte n tim es s lo w a n d u nre lia b le . I t i s e x clu siv e, l e av in g b illio ns o f p eo ple w ith n o a ccess t o b asic fin an cia l t o ols . I t i s c en tr a liz ed , e x posin g i t t o d ata b re ach es, o th er a tta ck s, o r o utr ig ht f a ilu re .

And i t i s m onopolis tic , r e in fo rc in g t h e s ta tu s q uo a n d s tif lin g i n novatio n. B lo ck ch ain p ro m is e s t o so lv e t h ese p ro ble m s a n d m an y m ore a s i n novato rs a n d e n tr e p re n eu rs d ev is e n ew w ay s t o c re ate valu e o n t h is p ow erfu l p la tf o rm .

There a re s ix k ey r e aso ns w hy b lo ck ch ain t e ch nolo gy w ill b rin g a b out p ro fo und c h an ges t o th is i n dustr y , b ustin g t h e f in an ce m onopoly , a n d o ffe rin g i n div id uals a n d i n stitu tio ns a lik e r e al ch oic e i n h ow t h ey c re ate a n d m an ag e v alu e. I n dustr y p artic ip an ts t h e w orld o ver s h ould t a k e notic e.

Atte sta tio n :

F or t h e f ir s t t im e i n h is to ry , t w o p artie s w ho n eith er k now n or t r u st e ach oth er c an t r a n sa ct a n d d o b usin ess. V erif y in g i d en tity a n d e sta b lis h in g t r u st i s n o l o nger th e r ig ht a n d p riv ile g e o f t h e f in an cia l i n te rm ed ia ry . M ore o ver, i n t h e c o nte x t o f f in an cia l se rv ic es, t h e t r u st p ro to co l t a k es o n a d ouble m ean in g. T he b lo ck ch ain c an a ls o e sta b lis h tr u st w hen t r u st i s n eed ed b y v erif y in g t h e i d en tity a n d c ap acity o f a n y c o unte rp arty th ro ugh a c o m bin atio n o f p ast t r a n sa ctio n h is to ry ( o n t h e b lo ck ch ain ), r e p uta tio n s c o re s base d o n a g gre g ate r e v ie w s, a n d o th er s o cia l a n d e co nom ic i n dic ato rs .

Cost:

O n t h e b lo ck ch ain , t h e n etw ork b oth c le ars a n d s e ttle s p eer-to -p eer v alu e t r a n sfe rs , an d i t d oes s o c o ntin ually s o t h at i ts l e d ger i s a lw ay s u p t o d ate . F or s ta rte rs , i f b an ks harn esse d t h at c ap ab ility , t h ey c o uld e lim in ate a n e stim ate d $ 20 b illio n i n b ack -o ffic e ex pen se s with out c h angin g t h eir u nderly in g b usin ess m odel , a cco rd in g t o t h e S pan is h ban k S an ta n der, t h ough t h e a ctu al n um ber i s s u re ly m uch g re ate r.

12 W ith r a d ic ally l o w er co sts , b an ks c o uld o ffe r i n div id uals a n d b usin esse s g re ate r a ccess t o f in an cia l s e rv ic es, mark ets , a n d cap ita l i n u nders e rv ed c o m munitie s. T his c an b e a b oon n ot o nly t o in cu m ben ts b ut a ls o t o s c ra p py u psta rts a n d e n tr e p re n eu rs e v ery w here . A nyone, an yw here , w ith a s m art p hone a n d a n I n te rn et c o nnectio n c o uld t a p i n to t h e v ast a rte rie s of g lo bal f in an ce.

Speed :

T oday , r e m itta n ces t a k e t h re e t o s e v en d ay s t o s e ttle . S to ck t r a d es t a k e t w o t o th re e d ay s, w here as b an k l o an t r a d es t a k e o n a v era g e a s ta g gerin g t w en ty -th re e d ay s t o se ttle .

13 T he S W IF T n etw ork h an dle s f if te en m illio n p ay m en t o rd ers a d ay b etw een t e n th ousa n d f in an cia l i n stitu tio ns g lo bally b ut t a k es d ay s t o c le ar a n d s e ttle t h em .

14 T he sa m e i s t r u e o f t h e A uto m ate d C le arin g H ouse ( A CH ) s y ste m , w hic h h an dle s t r illio ns o f dolla rs o f U .S . p ay m en ts a n nually . T he b itc o in n etw ork t a k es a n a v era g e o f t e n m in ute s to c le ar a n d s e ttle a ll t r a n sa ctio ns c o nducte d d urin g t h at p erio d. O th er b lo ck ch ain netw ork s a re e v en f a ste r, a n d n ew i n novatio ns, s u ch a s t h e B itc o in L ig htn in g N etw ork , aim t o d ra m atic ally s c ale t h e c ap acity o f t h e b itc o in b lo ck ch ain w hile d ro ppin g se ttle m en t a n d c le arin g t im es t o a f ra ctio n o f a s e co nd.

15 “ In t h e c o rre sp ondin g b an kin g world , w here y ou h av e a s e n der i n o ne n etw ork a n d a r e ceiv er i n a n oth er, y ou h av e t o g o th ro ugh m ultip le l e d gers , m ultip le i n te rm ed ia rie s, m ultip le h ops. T hin gs c an l ite ra lly f a il in t h e m id dle . T here ’s a ll k in ds o f c ap ita l r e q uir e m en ts f o r t h at,” s a id R ip ple L ab s C EO Chris L ars e n .

16 I n deed , t h e s h if t t o i n sta n t a n d f ric tio nle ss v alu e t r a n sfe r w ould f re e u p cap ita l o th erw is e t r a p ped i n t r a n sit, b ad n ew s f o r a n yone p ro fitin g f ro m t h e f lo at.

Ris k M an agem en t:

B lo ck ch ain t e ch nolo gy p ro m is e s t o m itig ate s e v era l f o rm s o f fin an cia l r is k . T he f ir s t i s se ttle m en t r is k , t h e r is k t h at y our t r a d e w ill b ounce b ack becau se o f s o m e g litc h i n t h e s e ttle m en t p ro cess. T he s e co nd i s co unte rp arty r is k , t h e ris k t h at y our c o unte rp arty w ill d efa u lt b efo re s e ttlin g a t r a d e. T he m ost s ig nif ic an t i s sy ste m ic r is k , t h e t o ta l s u m o f a ll o uts ta n din g c o unte rp arty r is k i n t h e s y ste m . V ik ra m Pan dit c alle d t h is Hersta tt r is k , nam ed a fte r a G erm an b an k t h at c o uld n’t m eet i ts lia b ilitie s a n d s u bse q uen tly w en t u nder : “ W e f o und t h ro ugh t h e f in an cia l c ris is o ne o f th e r is k s w as, i f I ’m t r a d in g w ith s o m eb ody, h ow d o I k now t h ey ’re g oin g t o s e ttle o n t h e oth er s id e?” A cco rd in g t o P an dit, i n sta n t s e ttle m en t o n t h e b lo ck ch ain c o uld e lim in ate th at r is k c o m ple te ly . A cco unta n ts c o uld lo ok i n to t h e i n ner w ork in gs o f a c o m pan y a t an y p oin t i n t im e a n d s e e w hic h t r a n sa ctio ns w ere o ccu rrin g a n d h ow t h e n etw ork w as re co rd in g t h em . I rre v ocab ility o f a t r a n sa ctio n a n d i n sta n t r e co ncilia tio n o f f in an cia l re p ortin g w ould e lim in ate o ne a sp ect o f agen cy r is k —th e r is k t h at u nsc ru pulo us man ag ers w ill e x plo it t h e c u m bers o m e p ap er t r a il a n d s ig nif ic an t t im e d ela y t o c o nceal wro ngdoin g.

Valu e I n novatio n :

T he b itc o in b lo ck ch ain w as d esig ned f o r m ovin g b itc o in s, n ot f o r han dlin g o th er f in an cia l a sse ts . H ow ev er, t h e t e ch nolo gy i s o pen s o urc e, i n vitin g ex perim en ta tio n. S om e i n novato rs a re d ev elo pin g s e p ara te b lo ck ch ain s, k now n a s altc o in s, b uilt f o r s o m eth in g o th er t h an b itc o in p ay m en ts . O th ers a re l o okin g t o l e v era g e th e b itc o in b lo ck ch ain ’s s iz e a n d l iq uid ity t o c re ate “ sp in -o ff” c o in s o n s o -c alle d sid ech ain s t h at c an b e “ co lo re d ” t o r e p re se n t a n y a sse t o r l ia b ility , p hysic al o r d ig ita l— a co rp ora te s to ck o r b ond, a b arre l o f o il, a b ar o f g old , a c ar, a c ar p ay m en t, a r e ceiv ab le or a p ay ab le , o r o f c o urs e a c u rre n cy . S id ech ain s a re b lo ck ch ain s t h at h av e d if fe re n t fe atu re s a n d f u nctio ns f ro m t h e b itc o in b lo ck ch ain b ut t h at l e v era g e b itc o in ’s e sta b lis h ed netw ork a n d h ard w are i n fra str u ctu re w ith out d im in is h in g i ts s e cu rity f e atu re s. S id ech ain s in te ro pera te w ith t h e b lo ck ch ain t h ro ugh a t w o-w ay p eg , a c ry pto gra p hic m ean s o f tr a n sfe rrin g a sse ts o ff t h e b lo ck ch ain a n d b ack a g ain w ith out a t h ir d p arty e x ch an ge.

Oth ers s till a re t r y in g t o r e m ove t h e c o in o r t o ken a lto geth er, b uild in g t r a d in g p la tf o rm s on p riv ate b lo ck ch ain s. F in an cia l i n stitu tio ns a re a lr e ad y u sin g b lo ck ch ain t e ch nolo gy t o re co rd , e x ch an ge, a n d t r a d e a sse ts a n d l ia b ilitie s, a n d c o uld e v en tu ally u se i t t o r e p la ce tr a d itio nal e x ch an ges a n d c en tr a liz ed m ark ets , u pen din g h ow w e d efin e a n d t r a d e v alu e.

Open S ou rce:

T he f in an cia l s e rv ic es i n dustr y i s a t e ch nolo gy s ta ck o f l e g acy s y ste m s sta n din g t w en ty m ile s h ig h a n d o n t h e v erg e o f t e ete rin g o ver. C han ges a re d if fic u lt t o mak e b ecau se e ach i m pro vem en t m ust b e b ack w ard c o m patib le . A s o pen s o urc e te ch nolo gy, b lo ck ch ain c an c o nsta n tly i n novate , i te ra te , a n d i m pro ve, b ase d o n co nse n su s i n t h e n etw ork . These b en efits — atte sta tio n, d ra m atic ally l o w er c o sts , l ig htn in g s p eed , l o w er r is k s, g re at in novatio n o f v alu e, a d ap ta b ility — hav e t h e p ote n tia l t o tr a n sfo rm n ot o nly p ay m en ts , b ut a ls o th e s e cu ritie s i n dustr y , i n vestm en t b an kin g, a cco untin g a n d a u dit, v en tu re c ap ita l, i n su ra n ce, en te rp ris e r is k m an ag em en t, r e ta il b an kin g, a n d o th er p illa rs o f t h e i n dustr y . R ead o n.

TH E G OLD EN E IG HT: H OW T H E F IN ANCIA L S E R VIC ES S E C TO R W IL L C H ANG E Here a re w hat w e b elie v e t o b e t h e e ig ht c o re f u nctio ns r ip e f o r d is ru ptio n. T hey a re a ls o su m mariz ed i n t h e t a b le here .

1.

A uth en tic a tin g I d en tit y a n d V alu e:

T oday w e r e ly o n p ow erfu l i n te rm ed ia rie s t o esta b lis h t r u st a n d v erif y i d en tity i n a f in an cia l t r a n sa ctio n. T hese i n te rm ed ia rie s a re t h e ultim ate a rb ite rs f o r a ccess t o b asic f in an cia l s e rv ic es, s u ch a s b an k a cco unts a n d l o an s.

Blo ck ch ain l o w ers a n d s o m etim es e lim in ate s t r u st a lto geth er i n c erta in t r a n sa ctio ns. T he te ch nolo gy w ill a ls o e n ab le p eers t o e sta b lis h i d en tity t h at i s v erif ia b le , r o bust, a n d cry pto gra p hic ally s e cu re a n d t o e sta b lis h t r u st w hen t r u st i s n eed ed .

2.

M ovin g V alu e:

D aily , t h e f in an cia l s y ste m m oves m oney a ro und t h e w orld , m ak in g su re t h at n o d olla r i s s p en t t w ic e: f ro m t h e n in ety -n in e-c en t p urc h ase o f a s o ng o n i T unes to t h e t r a n sfe r o f b illio ns o f d olla rs t o s e ttle a n i n tr a co m pan y f u nd t r a n sfe r, p urc h ase a n asse t, o r a cq uir e a c o m pan y. B lo ck ch ain c an b eco m e t h e c o m mon s ta n dard f o r t h e movem en t o f a n yth in g o f v alu e— cu rre n cie s, s to ck s, b onds, a n d t itle s— in b atc h es b ig an d s m all, t o d is ta n ces n ear a n d f a r, a n d t o c o unte rp artie s k now n a n d u nknow n. T hus, blo ck ch ain c an d o f o r t h e m ovem en t o f v alu e w hat t h e s ta n dard s h ip pin g c o nta in er d id fo r t h e m ovem en t o f g oods: d ra m atic ally l o w er c o st, i m pro ve s p eed , r e d uce f ric tio n, a n d boost e co nom ic g ro w th a n d p ro sp erity .

3.

S to rin g V alu e:

Fin an cia l i n stitu tio ns a re t h e r e p osito rie s o f v alu e f o r p eo ple , in stitu tio ns, a n d g overn m en ts . F or t h e a v era g e J o e, a b an k s to re s v alu e i n a s a fe ty d ep osit box, a s a v in gs a cco unt, o r a c h eck in g a cco unt. F or l a rg e i n stitu tio ns t h at w an t r e ad y liq uid ity w ith t h e g uara n te e o f a s m all r e tu rn o n t h eir c ash e q uiv ale n ts , s o -c alle d r is k -fre e in vestm en ts s u ch a s m oney m ark et f u nds o r T re asu ry b ills w ill do t h e t r ic k . I n div id uals need n ot r e ly o n b an ks a s t h e p rim ary s to re s o f v alu e o r a s p ro vid ers o f s a v in gs a n d ch eck in g a cco unts , a n d i n stitu tio ns w ill h av e a m ore e ffic ie n t m ech an is m t o b uy a n d hold r is k -fre e f in an cia l a sse ts .

4.

L en din g V alu e:

Fro m h ouse h old m ortg ag es t o T -b ills , f in an cia l i n stitu tio ns f a cilita te th e i s su an ce o f c re d it s u ch a s c re d it c ard d eb t, m ortg ag es, c o rp ora te b onds, m unic ip al bonds, g overn m en t b onds, a n d a sse t- b ack ed s e cu ritie s. T he l e n din g b usin ess h as sp aw ned a n um ber o f a n cilla ry i n dustr ie s t h at p erfo rm c re d it c h eck s, c re d it s c o re s, a n d cre d it r a tin gs. F or t h e i n div id ual, i t’ s a c re d it s c o re . F or a n i n stitu tio n, i t’ s a c re d it r a tin g —fro m i n vestm en t g ra d e t o j u nk. O n t h e b lo ck ch ain , a n yone w ill b e a b le t o i s su e, t r a d e, an d s e ttle t r a d itio nal d eb t i n str u m en ts d ir e ctly , t h ere b y r e d ucin g f ric tio n a n d r is k b y in cre asin g s p eed a n d t r a n sp are n cy . C onsu m ers w ill b e a b le t o a ccess l o an s f ro m p eers . This i s p artic u la rly s ig nif ic an t f o r t h e w orld ’s u nban ked a n d f o r e n tr e p re n eu rs ev ery w here .

5.

E xch an gin g V alu e:

D aily , m ark ets g lo bally f a cilita te t h e e x ch an ge o f t r illio ns o f dolla rs o f f in an cia l a sse ts . T ra d in g i s t h e b uyin g a n d s e llin g o f a sse ts a n d f in an cia l in str u m en ts f o r t h e p urp ose o f i n vestin g, s p ecu la tin g, h ed gin g, a n d a rb itr a g in g a n d in clu des t h e p osttr a d e l if e c y cle o f c le arin g, s e ttlin g, a n d s to rin g v alu e. B lo ck ch ain c u ts se ttle m en t t im es o n a ll t r a n sa ctio ns f ro m d ay s a n d w eek s t o m in ute s a n d s e co nds. T his sp eed a n d e ffic ie n cy c re ate s o pportu nitie s f o r u nban ked a n d u nderb an ked p eo ple t o partic ip ate i n w ealth c re atio n.

6.

F undin g a n d I n vestin g:

In vestin g i n a n a sse t, c o m pan y, o r n ew e n te rp ris e g iv es a n in div id ual t h e o pportu nity t o e arn a r e tu rn , i n t h e f o rm o f c ap ita l a p pre cia tio n, d iv id en ds, in te re st, r e n ts , o r s o m e c o m bin atio n. T he i n dustr y m ak es m ark ets : m atc h in g i n vesto rs with e n tr e p re n eu rs a n d b usin ess o w ners a t e v ery s ta g e o f g ro w th — fro m a n gels t o I P O s an d b ey ond. R ais in g m oney n orm ally r e q uir e s i n te rm ed ia rie s— in vestm en t b an kers , ven tu re c ap ita lis ts , a n d l a w yers t o n am e a f e w . T he b lo ck ch ain a u to m ate s m an y o f t h ese fu nctio ns, e n ab le s n ew m odels f o r p eer-to -p eer f in an cin g, a n d co uld a ls o m ak e r e co rd in g div id en ds a n d p ay in g c o upons m ore e ffic ie n t, t r a n sp are n t, a n d s e cu re .

7.

I n su rin g V alu e a n d M an agin g R is k :

R is k m an ag em en t, o f w hic h i n su ra n ce i s a su bse t, i s i n te n ded t o p ro te ct i n div id uals a n d c o m pan ie s f ro m u ncerta in l o ss o r cata str o phe. M ore b ro ad ly , r is k m an ag em en t i n f in an cia l m ark ets h as s p aw ned m yria d deriv ativ e p ro ducts a n d o th er f in an cia l i n str u m en ts m ean t t o h ed ge a g ain st u npre d ic ta b le or u nco ntr o lla b le e v en ts . A t l a st c o unt t h e n otio nal v alu e o f a ll o uts ta n din g o ver-th e- co unte r d eriv ativ es i s $ 600 t r illio n. B lo ck ch ain s u pports d ecen tr a liz ed m odels f o r in su ra n ce, m ak in g t h e u se o f d eriv ativ es f o r r is k m an ag em en t f a r m ore t r a n sp are n t.

Usin g r e p uta tio nal s y ste m s b ase d o n a p ers o n’s s o cia l a n d e co nom ic c ap ita l, t h eir actio ns, a n d o th er r e p uta tio nal a ttr ib ute s, i n su re rs w ill h av e a m uch c le are r p ic tu re o f t h e actu aria l r is k a n d c an m ak e m ore i n fo rm ed d ecis io ns.

8.

A cco u ntin g f o r V alu e:

A cco untin g i s t h e m easu re m en t, p ro cessin g, a n d co m munic atio n o f f in an cia l i n fo rm atio n a b out e co nom ic e n titie s. I t i s a m ultib illio n- dolla r i n dustr y c o ntr o lle d b y f o ur m assiv e a u dit f ir m s— Delo itte T ouch e T ohm ats u , Pric ew ate rh ouse C oopers , E rn st & Y oung, a n d K PM G. T ra d itio nal a cco untin g p ra ctic es will n ot s u rv iv e t h e v elo city a n d c o m ple x ity o f m odern f in an ce. N ew a cco untin g meth ods u sin g b lo ck ch ain ’s d is tr ib ute d l e d ger w ill m ak e a u dit a n d f in an cia l r e p ortin g tr a n sp are n t a n d o ccu r i n r e al t im e. I t w ill a ls o d ra m atic ally i m pro ve t h e c ap acity f o r re g ula to rs a n d o th er s ta k eh old ers t o s c ru tin iz e f in an cia l a ctio ns w ith in a c o rp ora tio n.

FR O M S T O CK E X CH ANG ES T O B LO CK E X CH ANG ES “W all S tr e et h as w oken u p i n a b ig w ay ,” 17 s a id A ustin H ill o f B lo ck str e am . H e w as s p eak in g o f th e f in an cia l i n dustr y ’s d eep i n te re st i n b lo ck ch ain t e ch nolo gie s. C onsid er B ly th e M aste rs , o ne o f th e m ost p ow erfu l p eo ple o n W all S tr e et. S he b uilt J P M org an ’s d eriv ativ es a n d c o m moditie s desk i n to a g lo bal j u ggern au t a n d p io neere d t h e d eriv ativ es m ark et. A fte r a b rie f pse u dore tir e m en t, s h e j o in ed a N ew Y ork –base d s ta rt- u p, D ig ita l A sse t H old in gs, a s C EO . T he decis io n s u rp ris e d m an y. S he u nders to od t h at t h e TH E G OLD EN E IG HT Blo ck ch ain T ra n sfo rm atio ns o f F in an cia l S erv ic es FU NCTIO N BLO CK CH AIN I M PA CT ST A K EH OLD ER 1.

A uth en tic atin g I d en tity a n d V alu e Verif ia b le a n d r o bust i d en titie s, c ry pto gra p hic ally s e cu re d Ratin g a g en cie s, c o nsu m er d ata a n aly tic s, mark etin g, r e ta il b an kin g, w hole sa le b an kin g, pay m en t c ard n etw ork s, r e g ula to rs 2.

M ovin g V alu e— mak e a p ay m en t, t r a n sfe r money , a n d p urc h ase g oods a n d s e rv ic es Tra n sfe r o f v alu e i n v ery l a rg e a n d v ery s m all i n cre m en ts with out i n te rm ed ia ry w ill d ra m atic ally r e d uce c o st a n d sp eed o f p ay m en ts Reta il b an kin g, w hole sa le b an kin g, p ay m en t c ard netw ork s, m oney t r a n sfe r s e rv ic es, te le co m munic atio ns, r e g ula to rs 3.

S to rin g V alu e— cu rre n cie s, c o m moditie s, an d f in an cia l a sse ts a re s to re s o f v alu e.

Safe ty d ep osit b ox, a s a v in gs a cco unt, o r a ch eck in g a cco unt. M oney m ark et f u nds o r Tre asu ry b ills Pay m en t m ech an is m c o m bin ed w ith a r e lia b le a n d s a fe sto re o f v alu e r e d uces n eed f o r t y pic al f in an cia l s e rv ic es; ban k s a v in gs a n d c h eck in g a cco unts w ill b eco m e o bso le te Reta il b an kin g, b ro kera g es, i n vestm en t b an kin g, asse t m an ag em en t, t e le co m munic atio ns, r e g ula to rs 4.

L en din g V alu e— cre d it c ard d eb t, mortg ag es, c o rp ora te b onds, m unic ip al bonds, g overn m en t b onds, a sse t- b ack ed se cu ritie s, a n d o th er f o rm s o f c re d it Deb t c an b e i s su ed , t r a d ed , a n d s e ttle d o n t h e b lo ck ch ain ; in cre ase s e ffic ie n cy , r e d uces f ric tio n, i m pro ves s y ste m ic ris k . C onsu m ers c an u se r e p uta tio n t o a ccess l o an s f ro m peers ; s ig nif ic an t f o r t h e w orld ’s u nban ked a n d f o r en tr e p re n eu rs Whole sa le , c o m merc ia l, a n d r e ta il b an kin g, p ublic fin an ce ( i.e ., g overn m en t f in an ce), m ic ro le n din g, cro w dfu ndin g, r e g ula to rs , c re d it r a tin g a g en cie s, cre d it s c o re s o ftw are c o m pan ie s 5.

E xch an gin g V alu e— sp ecu la tin g, h ed gin g, an d a rb itr a g in g. M atc h in g o rd ers , c le arin g tr a d es, c o lla te ra l m an ag em en t a n d v alu atio n, se ttle m en t a n d c u sto dy Blo ck ch ain t a k es s e ttle m en t t im es o n a ll t r a n sa ctio ns f ro m day s a n d w eek s t o m in ute s a n d s e co nds. T his s p eed a n d effic ie n cy a ls o c re ate s o pportu nitie s f o r u nban ked a n d underb an ked t o p artic ip ate i n w ealth c re atio n In vestm en t, w hole sa le b an kin g, f o re ig n e x ch an ge tr a d ers , h ed ge f u nds, p en sio n f u nds, r e ta il bro kera g e, c le arin ghouse s, s to ck , f u tu re s, co m moditie s e x ch an ges; c o m moditie s b ro kera g es, cen tr a l b an ks, r e g ula to rs 6.

F undin g a n d I n vestin g i n a n A sse t, Com pan y, S ta rt- u p— cap ita l a p pre cia tio n, div id en ds, i n te re st, r e n ts , o r s o m e co m bin atio n New m odels f o r p eer-to -p eer f in an cin g, r e co rd in g o f co rp ora te a ctio ns s u ch a s d iv id en ds p aid a u to m atic ally th ro ugh s m art c o ntr a cts . T itle s r e g is tr y t o a u to m ate c la im s to r e n ta l i n co m e a n d o th er f o rm s o f y ie ld In vestm en t b an kin g, v en tu re c ap ita l, l e g al, a u dit, pro perty m an ag em en t, s to ck e x ch an ges, cro w dfu ndin g, r e g ula to rs 7.

I n su rin g V alu e a n d M an ag in g R is k — pro te ct a sse ts , h om es, l iv es, h ealth , b usin ess pro perty , a n d b usin ess p ra ctic es, d eriv ativ e pro ducts Usin g r e p uta tio nal s y ste m s, i n su re rs w ill b ette r e stim ate actu aria l r is k , c re atin g d ecen tr a liz ed m ark ets f o r in su ra n ce. M ore t r a n sp are n t d eriv ativ es In su ra n ce, r is k m an ag em en t, w hole sa le b an kin g, bro kera g e, c le arin ghouse s, r e g ula to rs 8.

A cco untin g f o r V alu e— new c o rp ora te govern an ce Dis tr ib ute d l e d ger w ill m ak e a u dit a n d f in an cia l r e p ortin g re al t im e, r e sp onsiv e, a n d t r a n sp are n t, w ill d ra m atic ally im pro ve c ap acity o f r e g ula to rs t o s c ru tin iz e f in an cia l actio ns w ith in a c o rp ora tio n Audit, a sse t m an ag em en t, s h are h old er w atc h dogs, re g ula to rs blo ck ch ain w ould t r a n sfo rm h er b usin ess a s t h e I n te rn et t r a n sfo rm ed o th er i n dustr ie s: “ I w ould ta k e i t a b out a s s e rio usly a s y ou s h ould h av e t a k en t h e c o ncep t o f t h e I n te rn et i n t h e 1 990s. I t’ s a big d eal a n d i t i s g oin g t o c h an ge t h e w ay o ur f in an cia l w orld o pera te s.” 18 Maste rs h ad d is m is se d m an y o f t h e e arly t a le s o f b itc o in , e x plo ite d b y d ru g d eale rs , harn esse d b y g am ble rs , a n d h aile d b y l ib erta ria n s a s c re atin g a n ew w orld o rd er. T hat c h an ged i n la te 2 014. M aste rs t o ld u s, “ I h ad a n ‘ a h a m om en t’ w here I b eg an t o a p pre cia te t h e p ote n tia l im plic atio ns o f t h e t e ch nolo gy f o r t h e w orld t h at I k new w ell. W hils t t h e c ry pto cu rre n cy ap plic atio n o f t h e d is tr ib ute d l e d gers t e ch nolo gy w as i n te re stin g a n d h ad i m plic atio ns f o r pay m en ts , t h e u nderly in g d ata b ase t e ch nolo gy i ts e lf h ad f a r b ro ad er i m plic atio ns.” 19 A cco rd in g to M aste rs , b lo ck ch ain c o uld r e d uce i n effic ie n cie s a n d c o sts “ b y a llo w in g m ultip le p artie s t o r e ly on t h e s a m e i n fo rm atio n r a th er t h an d uplic atin g a n d r e p lic atin g i t a n d h av in g t o r e co ncile i t.” A s a m ech an is m f o r s h are d , d ecen tr a liz ed , r e p lic ate d t r a n sa ctio n r e co rd s, b lo ck ch ain i s t h e “ g old en so urc e,” s h e s a y s.

20 “B ear i n m in d t h at f in an cia l s e rv ic es i n fra str u ctu re s h av e n ot e v olv ed i n d ecad es. T he f ro nt en d h as e v olv ed b ut n ot t h e b ack e n d,” s a y s M aste rs . “ It’ s b een a n a rm s r a ce i n t e ch nolo gy in vestm en t o rie n te d t o w ard s p eed in g u p t r a n sa ctio n e x ecu tio n s o t h at, n ow ad ay s, c o m petitiv e ad van ta g es a re m easu re d i n f ra ctio ns o f n an ose co nds. T he i r o ny i s t h at t h e p osttr a d e in fra str u ctu re h asn ’t r e ally e v olv ed a t a ll.” I t s till t a k es “ d ay s a n d i n s o m e c ase s w eek s o f d ela y to d o t h e p osttr a d e p ro cessin g t h at g oes i n to a ctu ally s e ttlin g f in an cia l t r a n sa ctio ns a n d k eep in g re co rd o f t h em .” 21 Maste rs i s n ot a lo ne i n h er e n th usia sm f o r b lo ck ch ain t e ch nolo gy. N ASD AQ C EO B ob Gre if e ld s a id , “ I a m a b ig b elie v er i n t h e a b ility o f b lo ck ch ain t e ch nolo gy t o e ffe ct f u ndam en ta l ch an ge i n t h e i n fra str u ctu re o f t h e f in an cia l s e rv ic e i n dustr y .” 22 G re if e ld i s i n te g ra tin g blo ck ch ain ’s d is tr ib ute d l e d ger t e ch nolo gy i n to N ASD AQ’s p riv ate m ark ets p la tf o rm t h ro ugh a pla tf o rm c alle d N ASD AQ L in q. E xch an ges a re c en tr a liz ed m ark etp la ces f o r s e cu ritie s a n d t h ey are a ls o r ip e f o r d is ru ptio n. O n J a n uary 1 , 2 016, N ASD AQ L in q c o m ple te d i ts f ir s t t r a d e o n blo ck ch ain . A cco rd in g t o B lo ck str e am ’s H ill, o ne o f t h e l a rg est a sse t m an ag ers i n t h e w orld “ h as more p eo ple d ed ic ate d t o i ts b lo ck ch ain i n novatio n g ro up t h an w e h av e i n o ur e n tir e c o m pan y.” Hill’ s c o m pan y h as r a is e d o ver $ 75 m illio n a n d e m plo ys m ore t h an t w en ty p eo ple . “ T hese g uys are s e rio us a b out m ak in g s u re th at t h ey u nders ta n d h ow t h ey c an u se t h e t e ch nolo gy t o c h an ge how t h ey d o b usin ess.” 23 T he N YSE , G old m an S ach s, S an ta n der, D elo itte , R BC, B arc la y s, U BS, an d v ir tu ally e v ery m ajo r f in an cia l f ir m g lo bally h av e t a k en a s im ila r s e rio us i n te re st. I n 2 015, Wall S tr e et’ s o pin io n o f b lo ck ch ain t e ch nolo gy b ecam e univ ersa lly positiv e: i n o ne s tu dy, 9 4 perc en t o f r e sp onden ts s a id b lo ck ch ain c o uld p la y a n i m porta n t r o le i n f in an ce.

24 Alth ough m an y o th er a p plic atio ns p iq ue t h e i n te re st o f W all S tr e et, w hat i n te re sts f in an cia l ex ecu tiv es e v ery w here i s t h e n otio n o f u sin g t h e b lo ck ch ain t o p ro cess a n y t r a d e s e cu re ly f ro m beg in nin g t o e n d, w hic h c o uld d ra m atic ally l o w er c o sts , i n cre ase s p eed a n d e ffic ie n cy , a n d mitig ate r is k i n t h eir b usin esse s. M aste rs s a id , “ T he e n tir e l if e c y cle o f a t r a d e i n clu din g i ts ex ecu tio n, t h e n ettin g o f m ultip le t r a d es a g ain st e ach o th er, t h e r e co ncilia tio n o f w ho d id w hat with w hom a n d w heth er t h ey a g re e, c an o ccu r a t t h e t r a d e e n tr y l e v el, m uch e arlie r i n t h e s ta ck of p ro cess, t h an o ccu rs i n t h e m ain str e am f in an cia l m ark et.” 25 G re if e ld p ut i t t h is w ay : “ W e cu rre n tly s e ttle t r a d es ‘ T +3’ ( th at i s , t h re e d ay s). W hy n ot s e ttle i n f iv e t o t e n m in ute s? ” 26 Wall S tr e et t r a d es i n r is k , a n d t h is t e ch nolo gy c an m ate ria lly r e d uce c o unte rp arty r is k , se ttle m en t r is k , a n d t h us s y ste m ic r is k a cro ss t h e s y ste m . J e sse M cW ate rs , f in an cia l i n novatio n le ad a t t h e W orld E co nom ic F oru m , t o ld u s, “ T he m ost e x citin g t h in g a b out d is tr ib ute d l e d ger te ch nolo gy i s h ow t r a ceab ility c an i m pro ve s y ste m ic s ta b ility .” H e b elie v es t h ese “ n ew t o ols allo w r e g ula to rs t o u se a l ig hte r t o uch .” 27 T he b lo ck ch ain ’s p ublic n atu re — its t r a n sp are n cy , i ts se arc h ab ility — plu s i ts a u to m ate d s e ttle m en t a n d i m muta b le t im e s ta m ps, a llo w r e g ula to rs t o s e e what’ s h ap pen in g, e v en s e t u p a le rts s o t h at t h ey d on’t m is s a n yth in g.

DR. F A UST ’S B LO CK CH AIN B A RG AIN Ban ks a n d t r a n sp are n cy r a re ly g o h an d i n h an d. M ost f in an cia l a cto rs g ain c o m petitiv e a d van ta g e fro m i n fo rm atio n a sy m metr ie s a n d g re ate r k now -h ow t h an t h eir c o unte rp artie s. H ow ev er, t h e bitc o in b lo ck ch ain a s c o nstr u cte d i s a r a d ic ally t r a n sp are n t s y ste m . F or b an ks, t h is m ean s open in g t h e k im ono, s o t o s p eak . S o h ow d o w e r e co ncile a n o pen p la tf o rm w ith t h e c lo se d -d oor polic y o f b an ks?

Austin H ill c alle d i t W all S tr e et’ s “ F au stia n b arg ain ,” a n o nero us tr a d e-o ff.

28 “ P eo ple l o ve th e i d ea o f n ot h av in g t o w ait t h re e d ay s t o s e ttle t r a n sa ctio ns b ut h av in g t h em c le are d w ith in min ute s a n d k now in g t h at t h ey ’re f in al a n d t h at t h ey ’re t r u e,” s a id H ill. “ T he c o unte rp art t o t h at is a ll t r a n sa ctio ns o n t h e [ b itc o in ] b lo ck ch ain a re c o m ple te ly p ublic . T hat t e rrif ie s a n um ber o f peo ple o n W all S tr e et.” T he s o lu tio n? C onfid en tia l t r a n sa ctio ns o n s o -c alle d p erm is sio ned blo ck ch ain s, a ls o k now n a s p riv ate b lo ck ch ain s. W here as t h e b itc o in b lo ck ch ain i s e n tir e ly o pen an d perm is sio nle ss —th at i s , a n yone c an a ccess i t a n d i n te ra ct w ith i t— perm is sio ned blo ck ch ain s re q uir e u se rs t o h av e c erta in c re d en tia ls , g iv in g t h em a l ic en se t o o pera te o n t h at p artic u la r blo ck ch ain . H ill h as d ev elo ped t h e t e ch nolo gy w here b y o nly a f e w s ta k eh old ers s e e t h e v ario us co m ponen ts o f a t r a n sa ctio n a n d c an e n su re i ts i n te g rity .

At f ir s t b lu sh , p riv ate a n d p erm is sio ned b lo ck ch ain s w ould a p pear t o h av e a f e w c le ar ad van ta g es. F or o ne, i ts m em bers c an e asily c h an ge t h e r u le s o f t h e b lo ck ch ain i f t h ey s o d esir e .

Costs c an b e k ep t d ow n a s t r a n sa ctio ns n eed o nly v alid atio n f ro m t h e m em bers t h em se lv es, re m ovin g t h e n eed f o r a n onym ous m in ers w ho u se l o ts o f e le ctr ic ity . A ls o , b ecau se a ll p artie s a re tr u ste d , a 5 1 p erc en t a tta ck i s u nlik ely . N odes c an b e t r u ste d t o b e w ell c o nnecte d , a s i n m ost u se case s t h ey a re l a rg e f in an cia l i n stitu tio ns. F urth erm ore , t h ey a re e asie r f o r r e g ula to rs t o m onito r.

How ev er, t h ese a d van ta g es a ls o c re ate w eak nesse s. T he e asie r i t i s t o c h an ge t h e r u le s, t h e m ore lik ely a m em ber i s t o f lo ut t h em . P riv ate b lo ck ch ain s a ls o p re v en t t h e n etw ork e ffe cts t h at e n ab le a t e ch nolo gy t o s c ale r a p id ly . I n te n tio nally l im itin g c erta in f re ed om s b y c re atin g n ew r u le s c an in hib it n eu tr a lity . F in ally , w ith n o o pen v alu e i n novatio n, t h e t e ch nolo gy i s m ore l ik ely t o sta g nate a n d b eco m e v uln era b le .

29 T his i s n ot t o s a y p riv ate b lo ck ch ain s w on’t f lo uris h , b ut fin an cia l s e rv ic es s ta k eh old ers m ust s till t a k e t h ese c o ncern s s e rio usly .

Rip ple L ab s, w hic h h as g ain ed t r a ctio n w ith in b an kin g c ir c le s, i s d ev elo pin g o th er c le v er way s t o r e lie v e F au st. “ R ip ple L ab s i s a im ed a t w hole sa le b an kin g, a n d w e u se a c o nse n su s meth od, r a th er t h an a p ro of-o f-w ork s y ste m ,” s a id C EO C hris L ars e n , m ean in g n o m in ers a n d n o an onym ous n odes a re v alid atin g t r a n sa ctio ns.

30 T he c o m pan y C hain h as i ts o w n s tr a te g y. W ith $30 m illio n i n f u ndin g f ro m V is a , N ASD AQ, C iti, C ap ita l O ne, F is e rv , a n d O ra n ge, C hain p la n s on b uild in g e n te rp ris e -fo cu se d b lo ck ch ain s o lu tio ns, t a rg etin g t h e f in an cia l s e rv ic es i n dustr y fir s t, w here i t a lr e ad y h as a d eal w ith N ASD AQ. “ A ll a sse ts i n t h e f u tu re w ill b e d ig ita l b eare r in str u m en ts r u nnin g o n m ultip le b lo ck ch ain s,” a rg ued C hain C EO A dam L udw in . B ut t h is w on’t be t h e s ilo ed w orld W all S tr e et i s a ccu sto m ed t o , “ b ecau se e v ery one i s b uild in g o n t h e s a m e open s p ecs.” 31 W all S tr e ete rs m ig ht w an t t o c ap tu re t h is t e ch nolo gy, b ut t h ey w ill h av e t o co nte n d w ith t h e v alu e i n novatio n i t e n ab le s, s o m eth in g t h ey c an ’t c o ntr o l o r p re d ic t.

Maste rs a ls o s e es t h e v ir tu es o f p erm is sio ned b lo ck ch ain s. F or h er, o nly a s m all c o te rie o f tr a d in g p artn ers , s o m e v en dors a n d o th er c o unte rp artie s, a n d r e g ula to rs n eed h av e a ccess. T hose se le ct f e w c h ose n w ill b e g ra n te d b lo ck ch ain c re d en tia ls . T o M aste rs , “ p erm is sio ned l e d gers hav e t h e a d van ta g e o f n ev er e x posin g a r e g ula te d f in an cia l i n stitu tio n t o t h e r is k o f e ith er tr a n sa ctin g w ith a n u nknow n p arty , a n u naccep ta b le a ctiv ity f ro m a r e g ula to ry p oin t o f v ie w , o r cre atin g a d ep en den cy u pon a n u nknow n s e rv ic e p ro vid er s u ch a s a t r a n sa ctio n p ro cesso r, a ls o unaccep ta b le f ro m a r e g ula to ry p oin t o f v ie w .” 32 T hese p erm is sio ned b lo ck ch ain s, o r priv a te ch ain s, a p peal t o t r a d itio nal f in an cia l i n stitu tio ns w ary o f b itc o in a n d e v ery th in g a sso cia te d w ith it.

While B ly th e M aste rs i s t h e C EO o f a s ta rt- u p, h er k een i n te re st r e p re se n ts b ro ad er in volv em en t o f t r a d itio nal f in an cia l a cto rs i n t h is s e cto r. T his e m bra ce o f n ew t e ch nolo gy r e fle cts a g ro w in g c o ncern t h at t e ch s ta rt- u ps c an a ls o u pen d h ig h f in an ce. F or E ric P is c in i o f D elo itte , whose c lie n ts h av e u nderg one a g re at a w ak en in g o ver t h e p ast y ear, t h e “ su dden i n te re st i n t e ch was n ot s o m eth in g t h at a n yone w as e x pectin g.” 33 T he e n th usia sm i s s p re ad in g l ik e a c o nta g io n in to s o m e o f t h e l a rg est a n d o ld est f in an cia l i n stitu tio ns i n t h e w orld .

Barc la y s i s o ne o f d ozen s o f f in an cia l i n stitu tio ns e x plo rin g o pportu nitie s i n b lo ck ch ain te ch nolo gy. A cco rd in g t o D ere k W hite , B arc la y s’s c h ie f d esig n a n d d ig ita l o ffic er, “ te ch nolo gie s lik e t h e b lo ck ch ain a re g oin g t o r e sh ap e o ur i n dustr y .” W hite i s b uild in g a n o pen i n novatio n pla tf o rm t h at w ill a llo w t h e b an k t o e n gag e a w id e a rra y o f b uild ers a n d t h in kers i n t h is i n dustr y .

“W e’re k een t o b e s h ap ers . B ut w e’re a ls o k een t o c o nnect w ith t h e s h ap ers o f t h e t e ch nolo gie s an d t h e t r a n sla to rs o f t h ose t e ch nolo gie s,” h e s a id .

34 B arc la y s i s p uttin g i ts m oney w here i ts mouth i s , c u ttin g t e n s o f t h ousa n ds o f j o bs i n t r a d itio nal a re as a n d d oublin g d ow n o n t e ch nolo gy, nota b ly b y l a u nch in g t h e B arc la y s A ccele ra to r. A cco rd in g t o W hite , “ th re e o ut o f t h e t e n co m pan ie s i n o ur l a st c o hort w ere b lo ck ch ain o r b itc o in c o m pan ie s. B lo ck ch ain i s t h e g re ate st ev id en ce o f t h e w orld m ovin g f ro m clo se d s y ste m s t o o pen s y ste m s a n d h as h uge p ote n tia l im pact o n t h e f u tu re o f n ot j u st f in an cia l s e rv ic es b ut m an y i n dustr ie s.” 35 B an ks t a lk in g a b out open s y ste m s— mon D ie u !

The F in an cia l U tilit y In t h e a u tu m n o f 2 015, n in e o f t h e w orld ’s l a rg est b an ks— Barc la y s, J P M org an , C re d it S uis se , Gold m an S ach s, S ta te S tr e et, U BS, R oyal B an k o f S co tla n d, B BV A, a n d C om monw ealth B an k of A ustr a lia — an nounced a p la n t o c o lla b ora te o n c o m mon s ta n dard s f o r b lo ck ch ain t e ch nolo gy, dubbed t h e R 3 C onso rtiu m . T hir ty -tw o m ore h av e s in ce j o in ed t h e e ffo rt a n d e v ery f e w w eek s a new b atc h o f t h e i n dustr y ’s W ho’s W ho s ig ns u p.

36 Q uestio ns r e m ain a b out h ow s e rio usly t h ese ban ks a re t a k in g t h e i n itia tiv e. A fte r a ll, t h e b arrie r t o j o in in g t h e g ro up i s a c o m mitm en t o f o nly $250,0 00, y et R 3’s f o rm atio n m ark s a c le ar l e ap f o rw ard f o r t h e i n dustr y . S ettin g s ta n dard s i s critic al t o a ccele ra te a d optio n a n d u sa g e o f a n ew t e ch nolo gy a n d s o w e a re o ptim is tic a b out t h e in itia tiv e. R 3 h as p oach ed s o m e o f t h e l e ad in g v is io narie s a n d t e ch nic al p ra ctitio ners i n t h e s e cto r to m ove t h e b all f o rw ard . M ik e H earn j o in ed i n N ovem ber, a d din g t o a t e am t h at i n clu des Ric h ard G en dal B ro w n, f o rm erly t h e e x ecu tiv e a rc h ite ct f o r b an kin g i n novatio n a t I B M , a n d Ja m es C arly le , n ow c h ie f e n gin eer o f R 3 a n d e x –ch ie f e n gin eer a t B arc la y s.

37 In D ecem ber 2 015, t h e L in ux F oundatio n, i n c o lla b ora tio n w ith a h uge g ro up o f y et m ore blu e-c h ip c o rp ora te p artn ers , l a u nch ed a n oth er b lo ck ch ain i n itia tiv e, d ubbed t h e H yperle d ger Pro je ct. T his i s n ot a c o m petito r t o R 3; i n deed , H yperle d ger P ro je ct c o unts R 3 a s a f o undin g mem ber, a lo ng w ith A ccen tu re , C is c o , C LS, D eu ts c h e B örs e , D ig ita l A sse t H old in gs, D TC C, Fujits u L im ite d , I C 3, I B M , I n te l, J P M org an , t h e L ondon S to ck E xch an ge G ro up, M its u bis h i U FJ Fin an cia l G ro up ( M UFG ), S ta te S tr e et, S W IF T , V M ware , a n d W ells F arg o.

38 S till, i t dem onstr a te s h ow s e rio usly t h e i n dustr y i s t a k in g t h is t e ch nolo gy a n d a ls o h ow r e lu cta n t i t i s t o em bra ce f u lly o pen , d ecen tr a liz ed b lo ck ch ain s l ik e b itc o in . U nlik e R 3, H yperle d ger P ro je ct i s a n open s o urc e p ro je ct t h at h as t a sk ed a c o m munity t o d ev elo p a “ b lo ck ch ain f o r b usin ess.” T his i s certa in ly l a u dab le a n d m ay v ery w ell w ork . B ut d on’t b e m is ta k en : T his i s a n o pen s o urc e p ro je ct desig ned t o b uild gate d t e ch nolo gie s b y, f o r e x am ple , l im itin g t h e n um ber o f n odes i n a n etw ork or re q uir in g c re d en tia ls . A s w ith R 3, o ne o f H yperle d ger’s p rio ritie s i s s ta n dard s e ttin g. D av id Tre at o f A ccen tu re , a f o undin g m em ber o f t h e g ro up, s a id , “ K ey t o t h is j o urn ey i s t o h av e sta n dard s a n d s h are d p la tf o rm s t h at a re u tiliz ed a cro ss i n dustr y p artic ip an ts .” Blo ck ch ain h as a ls o o pen ed u p a b ro ad er d is c u ssio n a b out t h e r o le o f g overn m en ts i n overs e ein g t h e f in an cia l s e rv ic es i n dustr y . A “ u tility ” c o nju re s i m ag es o f n atu ra l m onopolie s, hig hly r e g ula te d b y t h e s ta te . H ow ev er, b ecau se b lo ck ch ain t e ch nolo gy p ro m is e s t o r e d uce r is k s an d i n cre ase t r a n sp are n cy a n d r e sp onsiv en ess, s o m e i n dustr y p la y ers s u ggest t h at t h e t e ch nolo gy its e lf fu nctio ns l ik e a r e g ula tio n.

39 I f r e g ula to rs c an p eer i n to t h e i n ner w ork in gs o f b an ks a n d mark ets , t h en s u re ly w e c an s im plif y s o m e l a w s a n d r e p eal o th ers , r ig ht? T his i s a t r ic k y q uestio n to a n sw er. O n t h e o ne h an d, r e g ula to rs w ill h av e t o r e th in k t h eir o vers ig ht r o le , g iv en t h e bre ak neck p ace o f i n novatio n. O n t h e o th er h an d, b an ks h av e a t r a ck r e co rd o f a ctin g w ith out in te g rity w hen g overn m en t s te p s a w ay .

Will t h e b ig b an ks r e ig n s u pre m e b y d ep lo yin g t h e b lo ck ch ain w ith out b itc o in , c h erry - pic k in g e le m en ts o f d is tr ib ute d l e d ger t e ch nolo gy a n d w eld in g t h em t o e x is tin g b usin ess m odels ?

R3 i s o nly o ne o f m an y s ig ns b an ks a re m ovin g i n t h is d ir e ctio n. O n N ovem ber 1 9, 2 015, Gold m an S ach s f ile d a p ate n t f o r “ m eth ods f o r s e ttlin g s e cu ritie s i n f in an cia l m ark ets u sin g dis tr ib ute d , p eer-to -p eer a n d c ry pto gra p hic t e ch niq ues,” u sin g a p ro prie ta ry c o in c alle d SE TLco in .

40 T he i r o ny o f a b an k pate n tin g a t e ch nolo gy o rig in ally i n te n ded a s a n o pen s o urc e gif t t o t h e w orld i s n ot l o st o n u s, n or s h ould i t b e o n y ou. P erh ap s t h is i s w hat A ndre as Anto nopolo us f e are d w hen h e w arn ed a n a u die n ce t h at b an ks w ould t u rn b itc o in f ro m “ p unk ro ck t o s m ooth j a zz”?

41 O r p erh ap s b an ks w ill h av e t o c o m pete w ith b est- in -c la ss p ro ducts a n d se rv ic es a m id r a d ic ally d if fe re n t t y pes o f o rg an iz atio ns w hose l e ad ers o ppose e v ery th in g t h ese co m pan ie s r e p re se n t.

The f in an cia l u tility o f t h e f u tu re c o uld b e a w alle d a n d w ell- g ro om ed g ard en , h arv este d b y a cab al o f i n flu en tia l s ta k eh old ers , o r i t c o uld b e a n o rg an ic a n d s p acio us e co sy ste m , w here peo ple ’s e co nom ic f o rtu nes g ro w w here v er t h ere i s l ig ht. T he d eb ate r a g es o n, b ut i f t h e ex perie n ce o f t h e f ir s t g en era tio n o f t h e I n te rn et h as t a u ght u s a n yth in g, i t’ s t h at o pen s y ste m s sc ale m ore e asily t h an c lo se d o nes.

TH E B A NK A PP: W HO W IL L W IN I N R ETA IL B A NK IN G The G oogle o f C ap ita l— th at’ s w hat J e re m y A lla ir e i s b uild in g, “ a c o nsu m er f in an ce c o m pan y pro vid in g p ro ducts t o c o nsu m ers t o h old m oney , s e n d m oney , s e n d a n d r e ceiv e p ay m en ts ; t h e fu ndam en ta l u tilitie s t h at p eo ple e x pect o ut o f r e ta il b an kin g.” 42 H e s e es i t a s a p ow erfu l, i n sta n t, an d f re e u tility f o r a n yone w ith a ccess t o a n I n te rn et- e n ab le d d ev ic e. H is c o m pan y, C ir c le In te rn et F in an cia l, i s o ne o f t h e l a rg est a n d b est- fu nded v en tu re s i n t h e s p ace.

Call C ir c le w hat y ou l ik e, j u st d on’t c all i t a b itc o in c o m pan y. “ A m azo n w as n ot a n H TTP co m pan y a n d G oogle w as n ot a n S M TP c o m pan y. C ir c le i s n ot a b itc o in c o m pan y,” s a id A lla ir e .

“W e l o ok a t b itc o in a s a n ex t g en era tio n o f f u ndam en ta l I n te rn et p ro to co ls t h at a re u se d i n so cie ty a n d t h e e co nom y.” 43 Alla ir e s e es f in an cia l s e rv ic es a s t h e l a st h old outs , a n d p erh ap s t h e l a rg est p riz e, t o b e fu ndam en ta lly t r a n sfo rm ed b y t e ch nolo gy. “ If y ou l o ok a t r e ta il b an kin g, t h ere a re t h re e o r f o ur th in gs t h at r e ta il b an ks d o. O ne i s t h at t h ey p ro vid e a p la ce t o s to re v alu e. A s e co nd i s t h at t h ey pro vid e s o m e k in d o f p ay m en t u tility . B ey ond t h at, t h ey e x te n d c re d it a n d p ro vid e a p la ce f o r you t o s to re w ealth a n d g en era te p ote n tia l i n co m e.” 44 H is v is io n: “ W ith in t h re e t o f iv e y ears , a pers o n s h ould b e a b le t o d ow nlo ad a n a p p, s to re v alu e d ig ita lly i n w hate v er c u rre n cy t h ey w an t —dolla rs , e u ro , y en , r e n m in bi, a s w ell a s d ig ita l c u rre n cy — an d b e a b le t o m ak e p ay m en ts in sta n tly o r n early i n sta n tly w ith g lo bal i n te ro pera b ility , w ith a v ery h ig h l e v el o f s e cu rity a n d with out p riv acy l e ak ag e. M ost i m porta n tly , i t w ill b e f re e.” 45 A s t h e I n te rn et t r a n sfo rm ed in fo rm atio n s e rv ic es, t h e b lo ck ch ain w ill t r a n sfo rm f in an cia l s e rv ic es, i n stig atin g u nim ag in ed new c ate g orie s o f c ap ab ility .

Acco rd in g t o A lla ir e , t h e b en efits o f b lo ck ch ain t e ch nolo gy— in sta n t s e ttle m en t, g lo bal in te ro pera b ility , h ig h l e v els o f s e cu rity , a n d n early n o-c o st t r a n sa ctio ns— ben efit e v ery one wheth er y ou’re a p ers o n o r a b usin ess. A nd w hat o f h is p la n t o m ak e i t a ll f re e? H ere sy ! s a y t h e world ’s b an kers . S ure ly , G old m an S ach s a n d t h e C hin ese v en tu re f ir m I D G d id n ot c o m mit $ 50 millio n t o c re ate a n onpro fit o r p ublic b en efit c o m pan y!

46 “ If w e’re s u ccessfu l i n b uild in g o ut a glo bal f ra n ch is e w ith t e n s o f m illio ns o f u se rs a n d w e’re s ittin g a t t h e c en te r o f t r a n sa ctio n beh av io r o f u se rs , t h en w e a re s ittin g o n s o m e p ow erfu l a sse ts .” A lla ir e e x pects C ir c le t o h av e “th e underly in g c ap ab ilitie s t o d eliv er o th er f in an cia l p ro ducts .” T hough h e w ould n’t s p eak t o i t sp ecif ic ally , t h e f in an cia l d ata o f m illio ns o f c u sto m ers c o uld b eco m e m ore v alu ab le t o t h e co m pan y t h an t h eir f in an cia l a sse ts . “ W e w an t t o r e in ven t t h e c o nsu m ers ’ e x perie n ce a n d t h eir re la tio nsh ip t o m oney a n d g iv e t h em t h e c h oic e o f h ow t h eir m oney i s u se d a n d a p plie d a n d h ow th ey c an g en era te m oney f ro m t h eir m oney .” 47 L ead ers o f t h e o ld p ara d ig m , t a k e n otic e.

Com pan ie s l ik e C ir c le a re u nburd en ed b y l e g acy a n d c u ltu re . T heir f re sh a p pro ach c an b e a big a d van ta g e. M an y o f t h e g re at i n novato rs o f t h e p ast w ere c o nsu m mate o uts id ers . N etf lix wasn ’t i n ven te d b y B lo ck buste r. i T unes w asn ’t i n ven te d b y T ow er R eco rd s. A m azo n w asn ’t in ven te d b y B arn es & N oble — you g et t h e i d ea.

Ste p hen P air , C EO o f B itP ay , a n e arly m over i n t h e i n dustr y , b elie v es n ew co m ers h av e a dis tin ct a d van ta g e. “ Is su in g f u ngib le a sse ts l ik e e q uitie s, b onds, a n d c u rre n cie s o n t h e b lo ck ch ain an d b uild in g t h e n ecessa ry i n fra str u ctu re t o s c ale i t a n d m ak e i t c o m merc ia l d on’t r e q uir e a ban ker’s C V ,” h e s a id . F or o ne, “ Y ou d on’t r e q uir e a ll t h e l e g acy i n fra str u ctu re o r i n stitu tio ns th at m ak e u p W all S tr e et t o day . . . . N ot o nly c an y ou i s su e t h ese a sse ts o n t h e b lo ck ch ain , b ut you c an c re ate s y ste m s w here I c an h av e a n i n sta n ta n eo us a to m ic t r a n sa ctio n w here I m ig ht h av e Apple s to ck i n m y w alle t a n d I w an t t o b uy s o m eth in g f ro m y ou. B ut y ou w an t d olla rs . W ith t h is pla tf o rm I c an e n te r a s in gle a to m ic t r a n sa ctio n ( i.e ., a ll o r n one) a n d u se m y A pple s to ck t o s e n d you d olla rs .” 48 Is i t r e ally t h at e asy ? T he b attle t o r e in ven t t h e f in an cia l s e rv ic es i n dustr y d if fe rs f ro m t h e battle f o r e -c o m merc e i n t h e e arly d ay s o f t h e W eb . F or b usin esse s l ik e A lla ir e ’s t o s c ale , t h ey must f a cilita te o ne o f t h e l a rg est v alu e t r a n sfe rs i n h um an h is to ry , m ovin g t r illio ns o f d olla rs fro m m illio ns o f t r a d itio nal b an k a cco unts t o m illio ns o f C ir c le w alle ts . N ot s o e asy . B an ks, desp ite t h eir e n th usia sm f o r b lo ck ch ain , h av e b een w ary o f t h ese c o m pan ie s, a rg uin g b lo ck ch ain busin esse s a re “ h ig h-ris k ” m erc h an ts . P erh ap s t h eir r e lu cta n ce s te m s f ro m t h e f e ar o f h aste n in g th eir o w n d em is e . I n te rm ed ia rie s h av e s p ru ng u p b etw een t h e o ld a n d n ew w orld s. V ogogo, a Can ad ia n c o m pan y, i s a lr e ad y w ork in g w ith C oin base , K ra k en , B itP ay , B its ta m p, a n d o th ers t o open b an k a cco unts , m eet c o m plia n ce s ta n dard s, a n d e n ab le c u sto m ers t o m ove m oney in to bitc o in w alle ts t h ro ugh t r a d itio nal p ay m en t m eth ods.

49 O h, t h e i r o ny. W here as A m azo n c o uld le ap fro g in cu m ben t r e ta ile rs w ith e ase , t h e l e ad ers o f t h is n ew p ara d ig m m ust p la y n ic e w ith t h e le ad ers o f t h e o ld .

Perh ap s w e n eed a b an ker w ith S ilic o n V alle y ’s w illin gness t o e x perim en t. S ure sh Ram am urth i f its t h at b ill. T he I n dia n -b orn f o rm er G oogle e x ecu tiv e a n d s o ftw are e n gin eer su rp ris e d m an y w hen h e d ecid ed t o b uy C BW B an k i n W ie r, K an sa s, p opula tio n 6 50. F or h im , th is s m all l o cal b an k w as a l a b ora to ry f o r u sin g t h e b lo ck ch ain p ro to co l a n d b itc o in -b ase d pay m en t r a ils f o r f re e c ro ss-b ord er r e m itta n ce p ay m en ts . I n h is v ie w , w ould -b e b lo ck ch ain en tr e p re n eu rs w ho d on’t u nders ta n d t h e n uan ces o f f in an cia l s e rv ic es a re d oom ed t o f a il. H e s a id , “T hey a re d ra w in g a w in dow o n t h e b uild in g. M ak in g i t l o ok n ic e a n d c o lo rfu l. B ut y ou c an ’t asse ss t h e p ro ble m f ro m t h e o uts id e. Y ou n eed t o t a lk t o s o m eo ne f ro m i n sid e t h e b uild in g, w ho know s t h e p lu m bin g.” 50 I n t h e p ast f iv e y ears , S ure sh h as s e rv ed a s t h e b an k’s C EO , C IO , c h ie f co m plia n ce o ffic er, t e lle r, j a n ito r, a n d, y es, p lu m ber. S ure sh n ow k now s t h e p lu m bin g o f ban kin g.

Man y W all S tr e et v ete ra n s d on’t s e e a b attle b etw een o ld a n d n ew . B ly th e M aste rs b elie v es th ere a re “ at l e ast a s m an y w ay s f o r b an ks t o i m pro ve t h e e ffic ie n cy a n d o pera tio ns o f W all Str e et a s t h ere a re o pportu nitie s f o r d is ru ptio n f ro m n ew e n tr a n ts .” 51 W e c an ’t h elp f e elin g t h e tid es t u rn in g t o w ard t h e r a d ic ally n ew . T hat’ s w hy t h e B ig T hre e T V n etw ork s d id n’t c o m e u p with Y ouT ube, w hy t h e B ig T hre e a u to m ak ers d id n’t c o m e u p w ith U ber, w hy t h e B ig T hre e hote l c h ain s d id n’t c o m e u p w ith A ir b nb. B y t h e t im e t h e C -s u ite s o f t h e F ortu ne 1 000 d ecid e t o purs u e a n ew a v en ue o f g ro w th , a n ew e n tr a n t h as b ro ad sid ed t h em w ith s p eed , a g ility , a n d a su perio r o ffe rin g. R eg ard le ss o f w ho l a n ds o n t o p, t h e c o llis io n b etw een t h e u nsto ppab le f o rc e o f te ch nolo gic al c h an ge a n d t h e i m movab le o bje ct o f f in an cia l s e rv ic es, t h e m ost e n tr e n ch ed in dustr y i n t h e w orld , p ro m is e s t o b e a n i n te n se o ne.

GOOGLE T R ANSL A TE F O R B U SIN ESS: N EW F R AM EW ORK S F O R A CCO UNTIN G AND C O RPO RATE G OVER NANCE “A cco unta n ts a re l ik e m ush ro om s— th ey ’re k ep t i n t h e d ark a n d f e d s h it,” 52 s a id T om M orn in i, CEO o f S uble d ger, a s ta rt- u p t a rg etin g t h e a cco untin g i n dustr y . A cco untin g h as b eco m e k now n as t h e l a n guag e o f f in an ce, unin te llig ib le t o a ll b ut a f e w d is c ip le s. I f e v ery t r a n sa ctio n i s av aila b le o n a s h are d , g lo bally d is tr ib ute d l e d ger, t h en w hy w ould w e n eed p ublic a cco unta n cie s to t r a n sla te f o r u s?

Modern a cco untin g s p ra n g f ro m t h e c u rio us m in d o f L uca P acio li i n I ta ly d urin g t h e f if te en th cen tu ry . H is d ecep tiv ely s im ple i n ven tio n w as a f o rm ula k now n a s d ouble -e n tr y a cco untin g, where e v ery t r a n sa ctio n h as t w o e ffe cts o n e ach p artic ip an t, t h at i s , e ach m ust e n te r b oth a d eb it an d a c re d it o nto t h e b ala n ce s h eet, t h e l e d ger o f c o rp ora te a sse ts a n d l ia b ilitie s. B y c o dif y in g th ese r u le s, P acio li p ro vid ed o rd er t o a n o th erw is e a d h oc p ra ctic e t h at p re v en te d e n te rp ris e s fro m s c alin g.

Ronald C oase t h ought a cco untin g w as c u ltlik e. W hile a s tu den t a t t h e L ondon S ch ool o f Eco nom ic s, C oase s a w “ asp ects o f a r e lig io n” i n t h e p ra ctic e. “ T he b ooks e n tr u ste d t o t h e acco unta n ts ’ k eep in g w ere a p pare n tly s a cre d b ooks.” A cco untin g s tu den ts d eem ed h is c h alle n ges “sa crile g io us.” 53 H ow d are h e q uestio n t h eir “ m an y m eth ods o f c alc u la tin g d ep re cia tio n, v alu in g in ven to rie s, a llo catin g o n-c o sts , a n d s o o n, a ll o f w hic h g av e d if fe re n t r e su lts b ut a ll o f w hic h were p erfe ctly a ccep ta b le a cco untin g p ra ctic es,” a n d o th er nea rly id en tic al p ra ctic es t h at w ere noneth ele ss d eem ed e n tir e ly “ u nre sp ecta b le .” S o T om M orn in i i s b y n o m ean s t h e f ir s t t o critic iz e t h e p ro fe ssio n.

We s e e f o ur p ro ble m s w ith m odern a cco untin g. F ir s t, t h e c u rre n t r e g im e r e lie s u pon man ag ers t o s w ear t h at t h eir b ooks a re i n o rd er. D ozen s o f h ig h-p ro file c ase s— Enro n, A IG , Leh m an B ro th ers , W orld C om , T yco , a n d T osh ib a— sh ow t h at m an ag em en t d oesn ’t a lw ay s a ct with i n te g rity . G re ed t o o o fte n g ets t h e b est o f p eo ple . C ro nyis m , c o rru ptio n, a n d f a ls e r e p ortin g pre cip ita te b an kru ptc ie s, j o b l o sse s, a n d m ark et c ra sh es, b ut a ls o h ig h c o sts o f c ap ita l a n d t ig hte r re in s o n e q uity .

54 Seco nd, h um an e rro r i s a l e ad in g c au se o f a cco untin g m is ta k es, a cco rd in g t o Acco untin gW EB . O fte n t h e p ro ble m s b eg in w hen R an dy i n f in an ce f a t- fin gers a n um ber i n to a sp re ad sh eet a n d, l ik e a b utte rfly f la p pin g i ts w in gs, t h e s m all m is ta k e b eco m es a b ig p ro ble m a s it f a cto rs i n to c alc u la tio ns a cro ss f in an cia l s ta te m en ts .

55 N early 2 8 p erc en t o f p ro fe ssio nals re p orte d t h at p eo ple p lu gged i n co rre ct d ata i n to t h eir f ir m ’s e n te rp ris e s y ste m .

56 Thir d , n ew r u le s s u ch a s S arb an es-O xle y h av e d one l ittle t o c u rb a cco untin g f ra u d. I f an yth in g, t h e g ro w in g c o m ple x ity o f c o m pan ie s, m ore m ultif a cete d t r a n sa ctio ns, a n d t h e s p eed of m odern c o m merc e c re ate n ew w ay s t o h id e w ro ngdoin g.

Fourth , t r a d itio nal a cco untin g m eth ods c an not r e co ncile n ew b usin ess m odels . T ak e mic ro tr a n sa ctio ns. M ost a u dit s o ftw are a llo w s f o r t w o d ecim al p la ces ( i.e ., o ne p en ny), u se le ss fo r m ic ro tr a n sa ctio ns o f a n y k in d.

Acco untin g— th e m easu re m en t, p ro cessin g, a n d c o m munic atio n o f f in an cia l i n fo rm atio n— is not t h e p ro ble m . I t p erfo rm s a c ritic al f u nctio n i n t o day ’s e co nom y. H ow ev er, t h e im ple m en ta tio n o f a cco untin g m eth ods m ust c atc h u p w ith t h e m odern e ra . C onsid er t h at i n Pacio li’ s d ay , a u dits w ere d one d aily . T oday t h ey h ap pen w ith t h e c y cle s o f t h e m oon a n d t h e se aso ns. N am e a n oth er i n dustr y w here f iv e h undre d y ears o f t e ch nolo gic al a d van cem en t h av e in cre a se d t h e t im e i t t a k es t o c o m ple te a t a sk b y 9 ,0 00 p erc en t.

The W orld W id e L ed ger Today , c o m pan ie s r e co rd a d eb it a n d c re d it w ith e ach t r a n sa ctio n— tw o e n tr ie s, h en ce d ouble - en tr y a cco untin g. T hey c o uld e asily a d d a t h ir d e n tr y t o t h e W orld W id e L ed ger, i n sta n tly accessib le t o t h ose w ho n eed t o s e e i t— th e c o m pan y’s s h are h old ers , a u dito rs , o r r e g ula to rs .

Im ag in e t h at w hen a m assiv e c o m pan y l ik e A pple s e lls p ro ducts , b uys r a w m ate ria ls , p ay s i ts em plo yees, o r a cco unts f o r a sse ts a n d l ia b ilitie s o n i ts b ala n ce s h eet, t h e W orld W id e L ed ger re co rd ed t h e t r a n sa ctio n a n d p ublis h ed a t im e-s ta m ped r e ceip t t o a b lo ck ch ain . T he f in an cia l re p orts f o r a c o m pan y w ould b eco m e a l iv in g l e d ger— au dita b le , s e arc h ab le , a n d v erif ia b le .

Gen era tin g a n y u p-to -th e-m in ute f in an cia l s ta te m en t s h ould b e a s s im ple a s a s p re ad sh eet fu nctio n, w here t h e c lic k o f a b utto n g iv es y ou a n i m muta b le , c o m ple te , a n d s e arc h ab le f in an cia l sta te m en t, f re e o f e rro r. C om pan ie s m ig ht n ot w an t e v ery one s e ein g t h ese n um bers , a n d s o ex ecu tiv es m ig ht g iv e o nly r e g ula to rs , m an ag ers , a n d o th er k ey s ta k eh old ers p erm is sio ned access.

Man y i n t h e i n dustr y s e e t h e i n here n t i m plic atio ns o f t h is W orld W id e L ed ger f o r acco untin g. A cco rd in g t o S im on T ay lo r o f B arc la y s, s u ch a l e d ger c o uld s tr e am lin e b an k co m plia n ce w ith r e g ula to rs a n d r e d uce r is k . “ W e d o a l o t o f r e g ula to ry r e p ortin g w here w e’re basic ally s a y in g, h ere ’s e v ery th in g w e’v e d one, b ecau se w hat w e’v e d one s its i n sid e a s y ste m th at n obody e ls e c an s e e.” 57 A W orld W id e L ed ger a n d a t r a n sp are n t r e co rd o f e v ery th in g “m ean s t h at a r e g ula to r w ould h av e a ccess t o t h e s a m e b ase l a y er o f d ata . T hat w ould m ean l e ss work , l e ss c o st, a n d w e c o uld b e h eld t o a cco unt i n n ear r e al t im e. T hat’ s r e ally p ow erfu l.” 58 F or Je re m y A lla ir e of C ir c le , r e g ula to rs b en efit t h e m ost. “ B an k e x am in ers h av e h ad t o r e ly u pon opaq ue, p riv ate ly c o ntr o lle d , p ro prie ta ry l e d gers a n d f in an cia l a cco untin g s y ste m s t o d o t h eir work — th e ‘ b ooks a n d r e co rd s,’ ” s a id A lla ir e . “ W ith a s h are d p ublic l e d ger, a u dito rs a n d b an k ex am in ers c o uld h av e a u to m ate d f o rm s o f e x am in atio n t o l o ok a t t h e u nderly in g h ealth o f a bala n ce s h eet a n d t h e s tr e n gth o f a c o rp ora tio n— a p ow erfu l i n novatio n t h at c o uld a u to m ate mean in gfu l p arts o f r e g ula tio n a s w ell a s a u dit a n d a cco untin g.” 59 It b ak es i n te g rity i n to t h e s y ste m . “ A ll f ra u d w ould b e m uch h ard er. Y ou h av e t o d o f ra u d o n an o ngoin g b asis a n d a t n o p oin t c an y ou g o b ack a n d c h an ge y our r e co rd s,” s a id C hris tia n Lundkvis t, o f B ala n c3 , a n E th ere u m -b ase d t r ip le -e n tr y a cco untin g s ta rt- u p.

60 A ustin H ill a rg ued , “A p ublic l e d ger t h at i s c o nsta n tly a u dite d a n d v erif ie d m ean s y ou d on’t h av e t o t r u st t h e b ooks of y our p artn er; t h ere i s i n te g rity i n t h e s ta te m en ts o r t h e t r a n sa ctio n l o gs, b ecau se t h e n etw ork its e lf i s v erif y in g i t. I t’ s l ik e a c o ntin uous a p rio ri a u dit t h at i s d one c ry pto gra p hic ally . Y ou’re n ot re ly in g o n P ric ew ate rh ouse C oopers o r D elo itte . T here i s n o c o unte rp arty r is k . I f t h e l e d ger s a y s th is i s t r u e, t h en i t’ s t r u e.” 61 Delo itte , o ne o f t h e w orld ’s B ig F our a cco untin g f ir m s, h as b een t r y in g t o u nders ta n d t h e im pact o f b lo ck ch ain . E ric P is c in i, w ho h ead s u p t h e D elo itte c ry pto cu rre n cy c en te r, t e lls c lie n ts th at t h e b lo ck ch ain i s “ a b ig r is k f o r y our o w n b usin ess m odel b ecau se n ow t h e b usin ess o f ban kin g i s t o m an ag e r is k . I f t o m orro w t h at r is k d is a p pears , w hat a re y ou g oin g t o d o?” 62 Overrip e f o r d is ru ptio n i s t h e a u dit b usin ess, a n d a u dit i s a t h ir d o f D elo itte ’s r e v en ue.

63 P is c in i sa id , “ T hat’ s a d is ru ptio n t o o ur o w n b usin ess m odel, r ig ht? T oday w e s p en d a l o t o f t im e au ditin g c o m pan ie s, a n d w e c h arg e f e es a cco rd in gly . T om orro w , i f t h at p ro cess i s c o m ple te ly str e am lin ed b ecau se t h ere i s a t im e s ta m p i n t h e b lo ck ch ain , t h at c h an ges t h e w ay w e a u dit co m pan ie s.” 64 O r p erh ap s e lim in ate s t h e a u dit f ir m a lto geth er?

Delo itte h as d ev elo ped a s o lu tio n c alle d P erm aR ec ( fo r P erm an en t R eco rd ) w here b y “D elo itte w ould r e co rd t h ose t r a n sa ctio ns i n to t h e b lo ck ch ain a n d w ould t h en b e a b le t o a u dit one o f t h e t w o p artn ers , o r b oth o f t h em , v ery q uic k ly , b ecau se t h at t r a n sa ctio n i s r e co rd ed .” 65 But i f t h e t h ir d e n tr y o n t h e b lo ck ch ain — tim e-s ta m ped a n d r e ad y f o r a ll t o s e e— hap pen s au to m atic ally , a n yone, a n yw here , c o uld d ete rm in e w heth er t h e b ooks b ala n ced . C onvers e ly , t h e fa ste st a re a o f g ro w th f o r D elo itte a n d t h e o th er big t h re e a u dit f ir m s i s c o nsu ltin g s e rv ic es.

Man y c lie n ts a re a lr e ad y s c ra tc h in g t h eir h ead s o ver t h e b lo ck ch ain . T his b ew ild erm en t p ro vid es opportu nitie s f o r m ig ra tio n u p t h e a d vis o ry v alu e c h ain .

Morn in i, a p lu ck y e n tr e p re n eu r a n d s e lf -d esc rib ed “ ete rn al o ptim is t,” l ik en ed p erio dic acco untin g t o “ w atc h in g a p ers o n s ta n d u p a n d d an ce i n f ro nt o f a s tr o be l ig ht. Y ou k now t h ey ’re dan cin g, b ut y ou c an ’t q uite f ig ure o ut w hat’ s g oin g o n. A nd i t l o oks i n te re stin g, b ut i t’ s h ard t o fig ure o ut a ll t h e s te p s i n b etw een .” 66 P erio dic a cco untin g g iv es a s n ap sh ot. A udit i s , b y defin itio n, a b ack w ard -lo okin g p ro cess. C re atin g a c o m ple te p ic tu re o f a c o m pan y’s f in an cia l health b y l o okin g a t p erio dic f in an cia l s ta te m en ts i s l ik e t u rn in g a h am burg er i n to a c o w .

Acco rd in g t o M orn in i, m ost l a rg e c o rp ora tio ns w ould n ev er w an t a c o m ple te ly t r a n sp are n t acco untin g r e co rd i n t h e p ublic d om ain o r e v en r e ad ily a ccessib le b y p eo ple w ith s p ecia l priv ile g es, s u ch a s a u dito rs o r r e g ula to rs . A c o m pan y’s f in an cia ls a re o ne o f i ts m ost g uard ed se cre ts . F urth erm ore , m an y c o m pan ie s w an t t o e n su re t h at m an ag em en t h as a c erta in d eg re e o f fle x ib ility i n h ow i t a cco unts f o r c erta in i te m s, s u ch a s h ow t o r e co gniz e r e v en ue, d ep re cia te a n asse t, o r a cco unt f o r a g oodw ill c h arg e.

But M orn in i b elie v es t h at c o m pan ie s w ould b en efit f ro m g re ate r t r a n sp are n cy — not o nly i n te rm s o f s tr e am lin in g t h eir f in an ce d ep artm en t o r l o w erin g t h e c o st o f a u dit, b ut i n h ow t h e mark et v alu es t h eir c o m pan y. H e s a id , “ T he f ir s t p ublic c o m pan y w ith t h is s y ste m i n p la ce w ill se e a s ig nif ic an t p ric e p er s h are a d van ta g e, o r p ric e t o e arn in gs r a tio a d van ta g e, o ver o th er co m pan ie s w here i n vesto rs h av e t o a n xio usly a w ait t h e d rib ble o f f in an cia l i n fo rm atio n t h at t h ey are p ro vid ed q uarte rly .” A fte r a ll, h e a rg ues, “ W ho i s g oin g t o i n vest i n a c o m pan y t h at s h ow s you w hat’ s g oin g o n q uarte rly , c o m pare d t o o ne t h at s h ow s y ou w hat’ s g oin g o n a ll t h e t im e?” 67 Will i n vesto rs d em an d t r ip le -e n tr y a cco untin g t o m eet c o rp ora te g overn an ce s ta n dard s? I t’ s not a f a r-fe tc h ed q uestio n. M an y i n stitu tio nal i n vesto rs , s u ch a s t h e C alif o rn ia P ublic E m plo yees’ Retir e m en t S yste m , h av e d ev elo ped s tr ic t c o rp ora te g overn an ce s ta n dard s, a n d w ill n ot i n vest i n a c o m pan y u nle ss t h ose s ta n dard s a re m et.

68 T rip le -e n tr y a cco untin g c o uld b e n ex t.

Trip le -E ntr y A cco u ntin g: P riv acy I s f o r I n div id uals , N ot C orp ora tio n s Trip le -e n tr y a cco untin g i s n ot w ith out s k ep tic s. I z ab ella K am in sk a, a Fin ancia l T im es r e p orte r, belie v es m an datin g t r ip le -e n tr y a cco untin g w ill l e ad t o a n i n cre asin g n um ber o f t r a n sa ctio ns movin g o ff b ala n ce s h eets . “ T here w ill a lw ay s b e t h ose w ho r e fu se t o f o llo w t h e p ro to co l, w ho ab sc o nd a n d h id e s e cre t v alu e i n p ara lle l o ff-g rid n etw ork s, w hat w e c all t h e b la ck m ark et, o ff bala n ce s h eet, s h ad ow b an kin g.” 69 How d oes o ne r e co ncile n on-tr a n sa ctio n-b ase d a cco untin g m easu re s, p artic u la rly t h e re co gnitio n o f i n ta n gib le a sse ts ? H ow a re w e g oin g t o t r a ck i n te lle ctu al p ro perty r ig hts , b ra n d valu e, o r e v en c ele b rity s ta tu s— th in k T om H an ks? H ow m an y b ad f ilm s m ust t h is O sc ar w in ner mak e b efo re t h e b lo ck ch ain i m pair s t h e H an ks b ra n d v alu e?

The a rg um en t f o r t r ip le -e n tr y a cco untin g i s n ot a g ain st t r a d itio nal a cco untin g. T here w ill alw ay s b e a re as w here w e w ill n eed c o m pete n t a u dito rs . B ut i f t r ip le -e n tr y a cco untin g c an v astly in cre ase t r a n sp are n cy a n d r e sp onsiv en ess t h ro ugh r e al- tim e a ccru als , v erif ia b le t r a n sa ctio n re co rd s, a n d i n sta n t a u dit, t h en t h e b lo ck ch ain c o uld s o lv e m an y o f a cco untin g’s b ig gest pro ble m s. D elo itte w ill n eed s o m eo ne t o a sse ss i n r e al t im e t h e v alu e o f i n ta n gib le s a n d p erfo rm th e o th er a cco untin g f u nctio ns t h at t h e b lo ck ch ain c an not, r a th er t h an a l a rg e t a sk f o rc e o f au dito rs .

Fin ally , i s a n i m muta b le r e co rd o f e v ery th in g t r u ly d esir a b le ? I n E uro pe, c o urts a re uphold in g t h e “ rig ht t o b e f o rg otte n ,” e n fo rc in g p eo ple ’s p etitio ns t o r e m ove t h eir h is to ry f ro m th e I n te rn et. S hould n’t t h e s a m e p rin cip le a p ply t o c o rp ora tio ns? N o. W hy d o U ber d riv ers g et ra te d o n c u sto m er s a tis fa ctio n b ut c o rp ora te e x ecu tiv es g et a p ass? I m ag in e a m ech an is m — le t’ s call i t a t r u st a p p— to r e co rd f e ed back i n a p ublic l e d ger a n d m ain ta in a n i n dep en den t, s e arc h ab le sc o re f o r c o rp ora te i n te g rity . I n sid e t h e b la ck b ox o f c o rp ora tio ns, s u nsh in e i s t h e b est dis in fe cta n t.

Trip le -e n tr y a cco untin g i s t h e f ir s t o f m an y b lo ck ch ain i n novatio ns i n c o rp ora te g overn an ce.

Lik e m an y i n stitu tio ns i n s o cie ty , o ur c o rp ora tio ns a re s u ffe rin g f ro m a c ris is o f l e g itim acy .

Share h old er a ctiv is t R obert M onks w ro te , “ C ap ita lis m h as b eco m e a k le p to cra cy , r u n b y a n d f o r th e e n ric h m en t o f C EO s, o r w hat I t e rm m an ag er-k in gs.” 70 The b lo ck ch ain r e tu rn s p ow er t o s h are h old ers . I m ag in e t h at a t o ken re p re se n tin g a c la im o n an a sse t, a “ b its h are ,” c o uld c o m e w ith a v ote o r m an y v ote s, e ach c o lo re d t o a p artic u la r co rp ora te d ecis io n. P eo ple c o uld v ote t h eir p ro xie s i n sta n tly f ro m a n yw here , t h ere b y m ak in g t h e votin g p ro cess f o r m ajo r c o rp ora te a ctio ns m ore r e sp onsiv e, m ore i n clu siv e, a n d l e ss s u bje ct t o man ip ula tio n. D ecis io ns w ith in c o m pan ie s w ould r e q uir e r e al c o nse n su s, m ultip le s ig natu re s o n an i n dustr ia l s c ale , w here e ach s h are h old er h eld a k ey t o t h e c o m pan y’s f u tu re . O nce t h e v ote s are i n , t h e d ecis io n a s w ell a s t h e b oard m eetin g m in ute s w ould b e t im e-s ta m ped a n d r e co rd ed i n an i m muta b le l e d ger.

Should n’t c o rp ora tio ns h av e a r ig ht t o c h an ge t h eir h is to ry , t o b e f o rg otte n ?

71 N o. A s artif a cts o f s o cie ty , c o m pan ie s h av e r e sp onsib ilitie s t h at a cco m pan y t h eir l ic en se t o o pera te .

In deed , c o rp ora tio ns h av e a n o blig atio n t o s o cie ty t o p ublis h a n y a n d a ll i n fo rm atio n a b out t h eir dealin gs. S ure , c o rp ora tio ns h av e a r ig ht a n d o blig atio n t o p ro te ct t r a d e s e cre ts a n d t h e p riv acy o f th eir e m plo yees, s ta ff, a n d o th er s ta k eh old ers . B ut t h at’ s d if fe re n t f ro m p riv acy . I n cre asin g tr a n sp are n cy i s a h uge o pportu nity f o r m an ag ers e v ery w here : u phold t h e h ig hest s ta n dard s o f co rp ora te g overn an ce, s e iz e t h e m an tle o f t r u st a s c o rp ora te l e ad ers , a n d d o i t b y e m bra cin g t h e blo ck ch ain .

REPU TA TIO N: Y O U A RE Y O UR C RED IT S C O RE Wheth er y ou’re a p ply in g f o r y our f ir s t c re d it c ard o r s e ek in g a l o an , t h e b an k w ill v alu e o ne num ber a b ove a ll e ls e : y our c re d it s c o re . T his n um ber i s m ean t t o r e fle ct y our c re d itw orth in ess an d t h ere fo re y our r is k o f d efa u lt. I t i s t h e a m alg am atio n o f a n um ber o f i n puts , f ro m h ow l o ng you’v e b orro w ed t o y our p ay m en t t r a ck r e co rd . M ost r e ta il c re d it d ep en ds o n i t. B ut t h e calc u la tio n i s d eep ly f la w ed . F ir s t, i t i s i n cre d ib ly n arro w . A y oung p ers o n w ith n o c re d it h is to ry mig ht h av e a s te rlin g r e p uta tio n, a t r a ck r e co rd o f f u lf illin g c o m mitm en ts , o r a r ic h a u nt. N one fa cto rs i n to a c re d it s c o re . S eco nd, t h e s c o re c re ate s p erv ers e i n cen tiv es f o r i n div id uals .

In cre asin gly , p eo ple u se d eb it c ard s, t h at i s , t h e c ash i n t h eir a cco unt. B ecau se t h ey h av e n o cre d it s c o re , t h ey g et p en aliz ed . Y et c re d it c ard f ir m s e n co ura g e i n div id uals w ith out r e so urc es t o ap ply f o r c re d it c ard s a n yw ay . T hir d , s c o re s a re v ery l a g gy: d ata i n puts c an b e o utd ate d a n d h av e little r e le v an ce. A l a te p ay m en t a t t h e a g e o f t w en ty h as l ittle b earin g o n o ne’s c re d it r is k a t f if ty .

FIC O , a n A m eric an c o m pan y o rig in ally c alle d F air , I s a ac a n d C om pan y, d om in ate s t h e U .S .

mark et f o r c re d it s c o re s, y et i t d oesn ’t f a cto r m ost r e le v an t i n fo rm atio n i n to i ts a n aly sis . M arc Andre esse n s a id , “ P ay P al c an d o a r e al- tim e c re d it s c o re i n m illis e co nds, b ase d o n y our e B ay purc h ase h is to ry — an d i t t u rn s o ut t h at’ s a b ette r s o urc e o f i n fo rm atio n t h an t h e s tu ff u se d t o gen era te y our F IC O s c o re .” 72 T hese f a cto rs , c o m bin ed w ith t r a n sa ctio n a n d b usin ess d ata a n d oth er a ttr ib ute s g en era te d b y b lo ck ch ain t e ch nolo gy, c an e n ab le a f a r m ore r o bust a lg orith m f o r is su in g c re d it a n d m an ag in g r is k .

What’ s y our r e p uta tio n? W e a ll h av e a t l e ast o ne. R ep uta tio n i s c ritic al t o t r u st i n b usin ess an d i n e v ery day l if e . T o d ate , f in an cia l i n te rm ed ia rie s h av e n ot u se d r e p uta tio n a s t h e b asis f o r esta b lis h in g t r u st b etw een i n div id uals a n d b an ks. C onsid er a s m all b usin ess o w ner w ho w an ts t o get a l o an . M ore o fte n t h an n ot, t h e l o an o ffic er w ill b ase t h e d ecis io n o n t h e p ers o n’s docu m en ta tio n, a o ne-p oin t p ers p ectiv e o f i d en tity , a n d t h eir c re d it s c o re . O f c o urs e , a h um an bein g i s m ore t h an t h e s u m o f a S ocia l S ecu rity n um ber, p la ce o f b ir th , p rim ary r e sid en ce, a n d cre d it h is to ry . H ow ev er, t h e b an k d oes n ot k now , a n d d oes n ot c are , w heth er y ou’re a r e lia b le em plo yee, a n a ctiv e v olu nte er, a n e n gag ed c itiz en , o r t h e c o ach o f y our k id ’s s o ccer t e am . T he lo an o ffic er m ig ht a p pre cia te y our a ctin g w ith i n te g rity , b ut t h e b an k’s s c o rin g s y ste m d oes n ot.

These c o m ponen ts o f r e p uta tio n a re s im ply d if fic u lt t o f o rm ula te , d ocu m en t, a n d u se a s s o cia l an d e co nom ic s y ste m s a re c u rre n tly c o nstr u cte d . M ost o f t h ese a re e th ere al a n d e p hem era l.

So w hat d o t h e b illio ns o f p eo ple d o w ho h av e n o r e p uta tio n b ey ond t h eir i m med ia te s o cia l cir c le ? W here f in an cia l s e rv ic es a re a v aila b le t o t h e g lo bal p oor, m an y c an ’t m eet t h e r e q uis ite id en tity t h re sh old s, s u ch a s I D c ard s, p ro of o f r e sid en ce, o r f in an cia l h is to ry . T his i s a p ro ble m i n th e d ev elo ped w orld t o o. I n D ecem ber 2 015, m an y l a rg e U .S . b an ks r e je cte d t h e n ew ly f o rm ed New Y ork I D c ard s a s a v alid c re d en tia l t o o pen a b an k a cco unt, d esp ite t h e f a ct t h at m ore t h an 670,0 00 p eo ple s ig ned u p f o r t h em a n d t h e b an ks’ f e d era l r e g ula to rs h ad a p pro ved t h eir u se .

73 Blo ck ch ain c o uld s o lv e t h is p ro ble m b y e m pow erin g p eo ple t o f o rm u niq ue i d en titie s w ith a varie ty o f a ttr ib ute s, p re v io us t r a n sa ctio n h is to ry a m ong t h em , a n d g iv e t h em n ew a lte rn ativ es bey ond t h e t r a d itio nal b an kin g s y ste m .

There a re s till m an y u se c ase s— partic u la rly i n c re d it— where t h e blo ck ch ain e sta b lis h es t r u st betw een p artie s w hen t r u st i s n eed ed . B lo ck ch ain t e ch nolo gy n ot o nly w ork s t o e n su re t h at l o an fu nds m ove t o t h e b orro w er, b ut a ls o a ssu re s t h at t h e b orro w er r e p ay s w ith i n te re st. I t e m pow ers both p artie s w ith t h eir o w n d ata , s tr e n gth en s t h eir p riv acy , a n d g en era te s a n ew k in d o f p ers is te n t eco nom ic i d en tity b ase d o n f a cto rs s u ch a s o ne’s p ast e co nom ic h is to ry o n t h e b lo ck ch ain a n d one’s s o cia l c ap ita l. P atr ic k D eeg an , C TO a t i d en tity s ta rt- u p P ers o nal B la ck B ox, s a id t h at in div id uals w ill s o m ed ay “ d ep lo y a n d m an ag e t h eir o w n i d en tity , a n d f o rm t r u ste d c o nnectio ns with o th er p eers a n d n odes,” t h an ks t o b lo ck ch ain t e ch nolo gy.

74 B ecau se t h e b lo ck ch ain r e co rd s an d s to re s a ll t r a n sa ctio ns i n a n i m muta b le r e co rd , e v ery t r a n sa ctio n c an c o unt i n cre m en ta lly to w ard r e p uta tio n a n d c re d itw orth in ess. F urth er, i n div id uals c an d ecid e w hic h p ers o na i n te ra cts with w hic h i n stitu tio n. D eeg an s a id , “ I c an c re ate d if fe re n t p ers o nas t h at r e p re se n t d if fe re n t s id es of m yse lf , a n d I c h oose t h e p ers o na t h at i n te ra cts w ith t h e c o m pan y.” 75 B an ks a n d o th er co m pan ie s o n t h e b lo ck ch ain o ught n ot a sk f o r a n d a g gre g ate m ore i n fo rm atio n t h an t h ey n eed t o pro vid e s e rv ic e.

This m odel h as p ro ven t o w ork . B TC ja m i s a p eer-to -p eer l e n din g p la tf o rm t h at u se s re p uta tio n a s t h e b asis f o r e x te n din g c re d it. U se rs c an l in k t h eir p ro file o n B TC ja m t o F aceb ook, Lin ked In , e B ay , o r C oin base t o a d d m ore d ep th a n d t e x tu re . F rie n ds c an v olu nte er re co m men datio ns f ro m F aceb ook. Y ou c an e v en s u bm it y our a ctu al c re d it s c o re a s o ne o f m an y attr ib ute s. N one o f t h is p riv ate i n fo rm atio n i s r e le ase d . U se rs s ta rt o n t h e p la tf o rm w ith a l o w cre d it s c o re . B ut y ou c an q uic k ly b uild a r e p uta tio n b y s h ow in g y ou a re a r e lia b le b orro w er. T he best s tr a te g y i s t o s ta rt w ith a “ re p uta tio n l o an ” t o p ro ve y ou’re r e lia b le . A s a u se r, y ou w ill h av e to r e sp ond t o i n vesto r q uestio ns d urin g t h e f u ndin g p ro cess. I g norin g t h ese q uestio ns i s a r e d fla g ; t h e c o m munity w ill h esita te t o f u nd y ou. W ith y our f ir s t l o an , s ta rt w ith a m an ag eab le am ount, a n d p ay i t b ack o n t im e. O nce y ou h av e, y our q uan tita tiv e s c o re w ill i m pro ve, a n d o th er mem bers i n t h e c o m munity m ig ht g iv e y ou a p ositiv e r e v ie w . A s o f S ep te m ber 2 015, B TC ja m had f u nded e ig hte en t h ousa n d l o an s i n e x cess o f $ 14 m illio n.

76 Entr e p re n eu r E rik V oorh ees c alle d f o r c o m mon s e n se : “ W ith a r e p uta tio n-b ase d s y ste m , peo ple w ho a re m ore l ik ely t o b e a b le t o a ffo rd a h ouse s h ould b e a b le t o p urc h ase o ne m ore easily . T hose w ho a re l e ss l ik ely s h ould h av e a h ard er t im e g ettin g a l o an .” T o h im , t h is m eth od “w ill d riv e dow n c o sts f o r g ood a cto rs a n d d riv e u p c o sts f o r o ur b ad a cto rs , w hic h i s t h e p ro per in cen tiv e.” 77 I n r e p uta tio n s y ste m s, y our c re d itw orth in ess i s d eriv ed n ot f ro m a F IC O s c o re , b ut fro m a n a m alg am atio n o f a ttr ib ute s t h at f o rm y our i d en tity a n d i n fo rm y our a b ility t o r e p ay a lo an . C re d it r a tin gs f o r c o m pan ie s w ill a ls o c h an ge t o r e fle ct n ew i n fo rm atio n a n d i n sig ht m ad e possib le b y b lo ck ch ain . I m ag in e t o ols t h at c an a g gre g ate r e p uta tio n a n d t r a ck d if fe re n t re p uta tio nal a sp ects , s u ch a s f in an cia l t r u stw orth in ess, v ocatio nal c o m pete n ce, a n d s o cia l co nsc io usn ess. I m ag in e g ettin g c re d it b ase d o n s h are d v alu es, w here t h e p eo ple l o an in g y ou money a p pre cia te y our r o le i n t h e c o m munity a n d y our g oals .

TH E B LO CK CH AIN I P O The w eek o f A ugust 1 7, 2 015, w as a n u gly o ne: T he C hin ese s to ck m ark et c ra sh ed , t h e S & P 5 00 had i ts w ors t p erfo rm an ce i n f o ur y ears , a n d f in an cia l p undits e v ery w here w ere t a lk in g a b out an oth er g lo bal e co nom ic s lo w dow n a n d p ossib le c ris is . T ra d itio nal I P O s w ere p ulle d f ro m t h e mark et, m erg ers w ere s ta lle d , a n d S ilic o n V alle y w as g ettin g a n ts y a b out t h e o verin fla te d valu atio n o f i ts c h eris h ed u nic o rn s, p riv ate c o m pan ie s v alu ed a t m ore t h an $ 1 b illio n.

Am id t h e c arn ag e, a n e n te rp ris e c alle d A ugur l a u nch ed o ne o f t h e m ost s u ccessfu l cro w dfu ndin g c am paig ns i n h is to ry . I n t h e f ir s t w eek , m ore t h an 3 ,5 00 p eo ple f ro m t h e U nite d Sta te s, C hin a, J a p an , F ra n ce, G erm an y, S pain , t h e U nite d K in gdom , K ore a, B ra zil, S outh A fric a, Ken ya, a n d U gan da c o ntr ib ute d a t o ta l o f $ 4 m illio n. T here w as n o b ro kera g e, n o i n vestm en t ban k, n o s to ck e x ch an ge, n o m an dato ry f ilin gs, n o r e g ula to r, a n d n o l a w yers . T here w asn ’t e v en a K ic k sta rte r o r I n die g ogo. L ad ie s a n d g en tle m en , w elc o m e t o t h e b lo ck ch ain I P O .

Matc h in g i n vesto rs w ith e n tr e p re n eu rs i s o ne o f t h e e ig ht f u nctio ns o f t h e f in an cia l s e rv ic es in dustr y m ost l ik ely t o b e d is ru pte d . T he p ro cess o f r a is in g e q uity c ap ita l— th ro ugh p riv ate pla cem en ts , i n itia l p ublic o ffe rin gs, s e co ndary o ffe rin gs, a n d p riv ate i n vestm en ts i n p ublic eq uitie s ( P IP E s)— has n ot c h an ged s ig nif ic an tly s in ce t h e 1 930s.

78 Than ks t o n ew c ro w dfu ndin g p la tf o rm s, s m all c o m pan ie s c an a ccess c ap ita l u sin g t h e In te rn et. T he O cu lu s R if t a n d t h e P eb ble W atc h w ere e arly s u ccesse s o f t h is m odel. S till, partic ip an ts c o uld n’t b uy e q uity d ir e ctly . T oday , t h e U .S . J u m psta rt O ur B usin ess S ta rtu ps A ct allo w s s m all in vesto rs t o m ak e d ir e ct i n vestm en ts i n c ro w dfu ndin g c am paig ns, b ut i n vesto rs a n d en tr e p re n eu rs s till n eed i n te rm ed ia rie s s u ch a s K ic k sta rte r o r I n die g ogo, a n d a c o nven tio nal pay m en t m eth od, t y pic ally c re d it c ard s a n d P ay P al, t o p artic ip ate . T he i n te rm ed ia ry i s t h e ultim ate a rb ite r o f e v ery th in g, i n clu din g w ho o w ns w hat.

The b lo ck ch ain I P O t a k es t h e c o ncep t f u rth er. N ow , c o m pan ie s c an r a is e f u nds “ o n t h e blo ck ch ain ” b y i s su in g t o ken s, o r c ry pto se cu ritie s, o f s o m e v alu e i n t h e c o m pan y. T hey c an re p re se n t e q uity , b onds, o r, i n t h e c ase o f A ugur, m ark et- m ak er s e ats o n t h e p la tf o rm , g ra n tin g ow ners t h e r ig ht t o d ecid e w hic h p re d ic tio n m ark ets t h e c o m pan y w ill o pen . E th ere u m w as a n ev en g re ate r s u ccess t h an A ugur, f u ndin g t h e d ev elo pm en t o f a w hole n ew b lo ck ch ain t h ro ugh a cro w d s a le o f i ts n ativ e t o ken , e th er. T oday E th ere u m i s t h e s e co nd-lo ngest a n d f a ste st- g ro w in g public b lo ck ch ain . T he a v era g e i n vestm en t i n t h e A ugur c ro w dfu ndin g w as $ 750, b ut o ne c an easily i m ag in e m in im um s u bsc rip tio ns o f a d olla r o r e v en t e n c en ts . A nyone i n t h e w orld — ev en th e p oore st a n d m ost r e m ote p eo ple — co uld b eco m e s to ck m ark et i n vesto rs .

Overs to ck , t h e e -re ta ile r, i s l a u nch in g p erh ap s t h e m ost a m bitio us c ry pto se cu rity i n itia tiv e yet. O vers to ck ’s f o rw ard -th in kin g f o under, P atr ic k B yrn e, b elie v es b lo ck ch ain “ can d o f o r t h e cap ita l m ark ets w hat t h e I n te rn et h as d one f o r c o nsu m ers .” T he p ro je ct, d ubbed M ed ic i, e n ab le s co m pan ie s t o i s su e s e cu ritie s o n t h e b lo ck ch ain a n d r e cen tly r e ceiv ed t h e s u pport o f t h e Secu ritie s a n d E xch an ge C om mis sio n.

79 T he c o m pan y b eg an i s su in g i ts f ir s t b lo ck ch ain -b ase d se cu ritie s, s u ch a s t h e $ 5 m illio n c ry pto bond f o r a n a ffilia te o f F N Y C ap ita l, i n 2 015.

80 Overs to ck c la im s m an y f in an cia l s e rv ic es f ir m s a n d o th er c o m pan ie s a re l in in g u p t o u se t h e pla tf o rm . S ure ly , t h e t a cit a p pro val o f t h e S E C w ill g iv e O vers to ck a h ead s ta rt o n w hat i s s u re t o be a l o ng j o urn ey .

Should b lo ck ch ain I P O s c o ntin ue t o g ain t r a ctio n, t h ey w ill u ltim ate ly d is ru pt m an y o f t h e ro le s i n t h e g lo bal f in an cia l s y ste m — bro kers , i n vestm en t b an kers , a n d s e cu ritie s l a w yers — an d ch an ge t h e n atu re o f i n vestm en t. B y i n te g ra tin g b lo ck ch ain I P O s w ith n ew p la tf o rm s f o r v alu e ex ch an ge s u ch a s C ir c le , C oin base ( th e m ost w ell- fu nded b itc o in e x ch an ge s ta rt- u p), S m artw alle t (a g lo bal a sse t e x ch an ge f o r a ll f o rm s o f v alu e), a n d o th er e m erg in g c o m pan ie s, w e e x pect a dis tr ib ute d v ir tu al e x ch an ge t o e m erg e. T he o ld g uard i s t a k in g n otic e. T he N YSE i n veste d i n Coin base a n d N ASD AQ i s i n te g ra tin g b lo ck ch ain t e ch nolo gy i n to i ts p riv ate mark et. B ob Gre if e ld , C EO o f N ASD AQ, i s s ta rtin g s m all, u sin g b lo ck ch ain t o “ str e am lin e f in an cia l r e co rd keep in g w hile m ak in g i t c h eap er a n d m ore a ccu ra te ,” 81 b ut e v id en tly N ASD AQ a n d o th er in cu m ben ts h av e b ig ger p la n s.

TH E M ARK ET F O R P R ED IC TIO N M ARK ETS Augur i s b uild in g a d ecen tr a liz ed p re d ic tio n m ark et p la tf o rm t h at r e w ard s u se rs f o r c o rre ctly pre d ic tin g f u tu re e v en ts — sp ortin g e v en ts , e le ctio n r e su lts , n ew p ro duct l a u nch es, t h e g en ders o f cele b rity b ab ie s. H ow d oes i t w ork ? A ugur u se rs c an p urc h ase o r s e ll s h are s i n t h e o utc o m e o f a fu tu re e v en t, t h e v alu e o f w hic h i s a n e stim ate o f t h e p ro bab ility o f a n e v en t h ap pen in g. S o i f th ere a re e v en o dds ( i.e ., 5 0/5 0), t h e c o st o f b uyin g a s h are w ould b e f if ty c en ts .

Augur r e lie s o n “ th e w is d om o f t h e c ro w d,” t h e s c ie n tif ic p rin cip le t h at a l a rg e g ro up o f peo ple c an o fte n p re d ic t t h e o utc o m e o f a f u tu re e v en t w ith f a r g re ate r a ccu ra cy t h an o ne o r m ore ex perts .

82 I n o th er w ord s, A ugur b rin gs t h e s p ir it o f t h e m ark et t o b ear o n t h e a ccu ra cy o f pre d ic tio ns. T here h av e b een a f e w a tte m pts a t c en tr a liz ed p re d ic tio n m ark ets , s u ch a s t h e Holly w ood S to ck E xch an ge, I n tr a d e, a n d H ed geS tr e et ( n ow N ad ex ), b ut m ost h av e b een s h ut dow n o r f a ile d t o l a u nch o ver r e g ula to ry a n d l e g al c o ncern s. T hin k a ssa ssin atio n c o ntr a cts a n d te rro ris m f u tu re s.

Usin g b lo ck ch ain t e ch nolo gy m ak es t h e s y ste m m ore r e silie n t t o f a ilu re , m ore a ccu ra te , a n d more r e sis ta n t t o c ra ck dow ns, e rro r, c o erc io n, l iq uid ity c o ncern s, a n d w hat t h e A ugur t e am c alls eu phem is tic ally “ d ate d j u ris d ic tio nal r e g ula tio n.” T he a rb ite rs o n t h e A ugur p la tf o rm a re k now n as r e fe re es a n d t h eir l e g itim acy d eriv es f ro m t h eir r e p uta tio n p oin ts . F or d oin g t h e r ig ht t h in g— th at i s , c o rre ctly s ta tin g t h at a n e v en t h ap pen ed , w ho w on a s p ortin g m atc h , o r w ho w on a n ele ctio n— th ey r e ceiv e m ore r e p uta tio n p oin ts . M ain ta in in g t h e i n te g rity o f t h e s y ste m h as o th er moneta ry b en efits : t h e m ore r e p uta tio n p oin ts y ou h av e, t h e m ore m ark ets y ou c an m ak e, a n d th us t h e m ore f e es y ou c an c h arg e. I n A ugur’s w ord s, “ o ur p re d ic tio n m ark ets e lim in ate co unte rp arty r is k s, c en tr a liz ed s e rv ers , a n d c re ate a g lo bal m ark et b y e m plo yin g c ry pto cu rre n cie s in clu din g b itc o in , e th er, a n d s ta b le c ry pto cu rre n cie s. A ll f u nds a re s to re d i n s m art c o ntr a cts , an d no o ne c an s te al t h e m oney .” 83 A ugur r e so lv es t h e i s su e o f u neth ic al c o ntr a cts b y h av in g a z ero - to le ra n ce p olic y f o r c rim e.

To A ugur’s l e ad ers h ip t e am , h um an i m ag in atio n i s t h e o nly p ra ctic al l im it t o t h e u tility o f pre d ic tio n m ark ets . O n A ugur, a n yone c an p ost a c le arly d efin ed p re d ic tio n a b out a n yth in g w ith a c le ar e n d d ate — fro m t h e t r iv ia l, “ W ill B ra d P itt a n d A ngelin a J o lie d iv orc e?” t o t h e v ita l, “ W ill th e E uro pean U nio n d is so lv e b y J u ne 1 , 2 017?” T he i m plic atio ns f o r t h e f in an cia l s e rv ic es in dustr y , f o r i n vesto rs , e co nom ic a cto rs , a n d e n tir e m ark ets , a re h uge. C onsid er t h e f a rm er i n Nic ara g ua o r K en ya w ho h as n o r o bust t o ols t o h ed ge a g ain st c u rre n cy r is k , p olitic al r is k , o r ch an ges t o t h e w eath er a n d c lim ate . A ccessin g p re d ic tio n m ark ets w ould a llo w t h at p ers o n t o mitig ate t h e r is k o f d ro ught o r d is a ste r. F or e x am ple , h e c o uld b uy a p re d ic tio n c o ntr a ct t h at p ay s out i f a c ro p y ie ld i s b elo w a c erta in l e v el, o r i f t h e c o untr y g ets l e ss t h an a p re d ete rm in ed am ount o f r a in .

Pre d ic tio n m ark ets a re u se fu l f o r i n vesto rs w ho w an t t o p la ce b ets o n t h e o utc o m e o f s p ecif ic ev en ts s u ch a s “ W ill I B M b eat i ts e arn in gs b y a t l e ast t e n c en ts t h is q uarte r? ” T oday t h e r e p orte d “estim ate ” f o r c o rp ora te e arn in gs i s n oth in g m ore t h an t h e m ean o r m ed ia n o f a f e w s o -c alle d ex pert a n aly sts . B y h arn essin g t h e w is d om o f t h e c ro w ds, w e c an f o rm m ore r e alis tic p re d ic tio ns of t h e f u tu re , l e ad in g t o m ore e ffic ie n t m ark ets . P re d ic tio n m ark ets c an s e rv e a s a h ed ge a g ain st glo bal u ncerta in ty a n d “ b la ck s w an ” e v en ts : “ W ill G re ece’s e co nom y s h rin k b y m ore t h an 1 5 perc en t t h is y ear? ” 84 T oday , w e r e ly o n a f e w t a lk in g h ead s t o s o und t h e a la rm s; a p re d ic tio n mark et w ould a ct m ore i m partia lly a s a n e arly w arn in g s y ste m f o r i n vesto rs g lo bally .

Pre d ic tio n m ark ets c o uld c o m ple m en t a n d u ltim ate ly t r a n sfo rm m an y a sp ects o f t h e f in an cia l sy ste m . C onsid er p re d ic tio n m ark ets o n t h e o utc o m es o f c o rp ora te a ctio ns— earn in gs r e p orts , merg ers , a cq uis itio ns, a n d c h an ges i n m an ag em en t. P re d ic tio n m ark ets w ould i n fo rm t h e in su ra n ce o f v alu e a n d t h e h ed gin g o f r is k , p ote n tia lly e v en d is p la cin g e so te ric f in an cia l in str u m en ts l ik e o ptio ns, i n te re st r a te s w ap s a n d c re d it d efa u lt s w ap s.

Of c o urs e , n ot e v ery th in g n eed s a p re d ic tio n m ark et. E nough p eo ple n eed t o c are t o m ak e i t liq uid e n ough t o a ttr a ct a tte n tio n. S till, t h e p ote n tia l i s v ast, t h e o pportu nity s ig nif ic an t, a n d access a v aila b le t o a ll.

RO AD M AP F O R T H E G OLD EN E IG HT Blo ck ch ain t e ch nolo gie s w ill i m pact e v ery f o rm a n d f u nctio n o f t h e f in an cia l s e rv ic es i n dustr y — fro m r e ta il b an kin g a n d c ap ita l m ark ets t o a cco untin g a n d r e g ula tio n. T hey w ill a ls o f o rc e u s t o re th in k t h e r o le o f b an ks a n d f in an cia l i n stitu tio ns i n s o cie ty . “ B itc o in c an not h av e b ail- in s, b an k holid ay s, c u rre n cy c o ntr o ls , b ala n ce f re ezes, w ith dra w al l im its , b an kin g h ours ,” 85 s a id A ndre as Anto nopoulo s.

Where as t h e o ld w orld w as h ie ra rc h ic al, s lo w -m ovin g, r e lu cta n t t o c h an ge, c lo se d a n d opaq ue, a n d c o ntr o lle d b y p ow erfu l i n te rm ed ia rie s, t h e n ew o rd er w ill b e f la tte r, o ffe rin g a p eer- to -p eer s o lu tio n; m ore p riv ate a n d s e cu re ; t r a n sp are n t, i n clu siv e, a n d i n novativ e. T o b e s u re , th ere w ill b e d is lo catio n a n d d is ru ptio n, b ut t h ere i s a ls o a r e m ark ab le o pportu nity f o r t h e in dustr y ’s l e ad ers t o d o s o m eth in g a b out i t t o day . T he f in an cia l s e rv ic es i n dustr y w ill b oth s h rin k an d g ro w o ver t h e c o m in g y ears ; f e w er i n te rm ed ia rie s w ill b e a b le t o o ffe r m ore p ro ducts a n d se rv ic es a t a m uch l o w er c o st t o a m uch l a rg er p opula tio n. T hat’ s a g ood t h in g. W heth er perm is sio ned a n d c lo se d b lo ck ch ain s w ill f in d a p la ce i n a d ecen tr a liz ed w orld i s u p f o r d eb ate .

Barry S ilb ert, w ho f o unded S eco ndM ark et a n d i s n ow C EO o f t h e D ig ita l C urre n cy G ro up, s a id , “I h av e a v ery c y nic al v ie w o f t h e o bje ctiv itie s p ut f o rw ard b y l a rg e f in an cia l i n cu m ben ts . W hen all y ou h av e i s a h am mer, e v ery th in g l o oks l ik e a n ail.” 86 W e b elie v e t h at t h e u nsto ppab le f o rc e of b lo ck ch ain t e ch nolo gy i s b arre lin g d ow n o n t h e e n tr e n ch ed , r e g ula te d , a n d o ssif ie d in fra str u ctu re o f m odern f in an ce.

87 T heir c o llis io n w ill r e sh ap e t h e l a n dsc ap e o f f in an ce f o r decad es t o c o m e. W e w ould l ik e i t t o f in ally t r a n sfo rm f ro m a n i n dustr ia l a g e m oney m ach in e in to a p ro sp erity p la tf o rm .

J CH APT ER 4 RE-A RCH IT EC TIN G T H E F IR M :

TH E C O RE A ND T H E E D GES B U IL D IN G C O NSE N SY S uly 3 0, 2 015, w as a b ig d ay f o r a g lo bal g ro up o f c o ders , i n vesto rs , e n tr e p re n eu rs , a n d co rp ora te s tr a te g is ts w ho t h in k t h at E th ere u m i s t h e n ex t b ig t h in g— not j u st f o r b usin ess, b ut p ossib ly f o r c iv iliz atio n. E th ere u m , t h e b lo ck ch ain p la tf o rm e ig hte en m onth s i n t h e m ak in g, w en t l iv e.

We w itn esse d t h e l a u nch f ir s th an d i n t h e B ro okly n o ffic e o f C onse n su s S yste m s ( C onse n S ys), o ne o f t h e f ir s t E th ere u m s o ftw are d ev elo pm en t c o m pan ie s. A ro und 1 1:4 5 a .m ., t h ere w ere h ig h f iv es a ll a ro und a s t h e E th ere u m n etw ork c re ate d i ts “ g en esis b lo ck ,” a fte r w hic h a f re n zy o f m in ers r a ced t o w in t h e f ir s t b lo ck o f e th er, E th ere u m ’s c u rre n cy . T he d ay w as e erily s u sp en se fu l. A m assiv e t h unders to rm b ro ke o ver t h e E ast R iv er, t r ig gerin g l o ud a n d r a n dom e m erg en cy f lo od w arn in gs o n e v ery one’s s m art p hones.

Acco rd in g t o i ts W eb s ite , E th ere u m i s a p la tf o rm t h at r u ns d ecen tr a liz ed a p plic atio ns, n am ely s m art c o ntr a cts , “ ex actly a s p ro gra m med w ith out a n y p ossib ility o f d ow ntim e, c en so rs h ip , f ra u d, o r t h ir d p arty i n te rfe re n ce.” E th ere u m i s l ik e b itc o in i n t h at i ts e th er m otiv ate s a n etw ork o f p eers t o v alid ate t r a n sa ctio ns, s e cu re t h e n etw ork , a n d a ch ie v e c o nse n su s a b out w hat e x is ts a n d w hat h as o ccu rre d . B ut u nlik e b itc o in i t c o nta in s s o m e p ow erfu l t o ols t o h elp d ev elo pers a n d o th ers c re ate s o ftw are s e rv ic es r a n gin g f ro m d ecen tr a liz ed g am es t o s to ck e x ch an ges.

Eth ere u m w as c o nceiv ed i n 2 013 b y t h en -n in ete en -y ear-o ld V ita lik B ute rin , a C an ad ia n o f R ussia n d esc en t. H e h ad a rg ued t o t h e b itc o in c o re d ev elo pers t h at t h e p la tf o rm n eed ed a m ore r o bust s c rip tin g l a n guag e f o r dev elo pin g a p plic atio ns. W hen t h ey r e je cte d h im , h e d ecid ed t o c ra ft h is o w n p la tf o rm . C onse n S ys w as f ir s t o ff t h e b lo ck , s o t o s p eak , l a u nch ed t o c re ate E th ere u m -b ase d a p ps. F la sh -fo rw ard a c o uple o f y ears a n d t h e a n alo gy i s c le ar: L in us T orv ald s i s t o L in ux w hat V ita lik B ute rin i s t o E th ere u m .

When d is c u ssin g t h e r is e o f b lo ck ch ain a n d E th ere u m t e ch nolo gy, J o se p h L ubin , C onse n S ys’s c o fo under, s a id , “ It b ecam e c le ar t o m e t h at i n ste ad o f p eo ple w astin g t h eir t im e w alk in g d ow n t h e s tr e et w ith p oste rs o n s tic k s, w e c o uld a ll w ork t o geth er t o j u st b uild t h e n ew s o lu tio ns t o t h is b ro ken e co nom y a n d s o cie ty .” 1 D on’t o ccu py W all S tr e et. I n ven t o ur o w n s tr e et.

Lik e m an y e n tr e p re n eu rs , L ubin h as a b old m is sio n, n ot j u st t o b uild a g re at c o m pan y b ut t o s o lv e i m porta n t p ro ble m s i n t h e w orld . H e d ead pan s t h at t h e c o m pan y i s a “ b lo ck ch ain v en tu re p ro ductio n s tu dio , b uild in g d ecen tr a liz ed a p plic atio ns, m ostly o n E th ere u m .” P re tty l o w -k ey .

B ut, i f i m ple m en te d , t h e a p plic atio ns t h at C onse n S ys i s b uild in g w ould s h ak e t h e w in dow s a n d ra ttle t h e w alls o f a d ozen i n dustr ie s. P ro je cts i n clu de a d is tr ib ute d t r ip le -e n tr y a cco untin g sy ste m ; a d ecen tr a liz ed v ers io n o f t h e m assiv ely p opula r R ed dit d is c u ssio n f o ru m , p la g ued o f la te b y c o ntr o vers y o ver i ts c en tr a liz ed c o ntr o l; a d ocu m en t f o rm atio n a n d m an ag em en t s y ste m fo r s e lf -e n fo rc in g c o ntr a cts ( a k a s m art c o ntr a cts ); p re d ic tio n m ark ets f o r b usin ess, s p orts , a n d en te rta in m en t; a n o pen e n erg y m ark et; a d is tr ib ute d m usic m odel t o c o m pete w ith A pple a n d Spotif y , t h ough t h ose t w o f ir m s c o uld u se i t t o o; 2 a n d a s u ite o f b usin ess t o ols f o r m ass co lla b ora tio n, m ass c re atio n, a n d m ass m an ag em en t o f a m an ag em en t- le ss c o m pan y.

Our s to ry o f C onse n S ys i s n ot s o m uch a b out i ts a m bitio us b lo ck ch ain -b ase d p ro ducts o r se rv ic es. I t’ s a b out i ts e ffo rts t o c u ltiv ate a c o m pan y o f i ts o w n, p io neerin g i m porta n t n ew gro und i n m an ag em en t s c ie n ce a lo ng t h e l in es o f h ola cra cy , a c o lla b ora tiv e r a th er t h an hie ra rc h ic al p ro cess f o r d efin in g a n d a lig nin g t h e w ork t o b e d one. “ W hile I d on’t w an t u s t o im ple m en t h ola cra cy a s i s — it f e els w ay t o o r ig id a n d s tr u ctu re d t o m e— we a re w ork in g t o in co rp ora te m an y o f i ts p hilo so phie s i n o ur s tr u ctu re a n d p ro cesse s,” s a id L ubin . A m ong t h ose hola cra tic t e n ets a re “ d ynam ic r o le s r a th er t h an t r a d itio nal j o b d esc rip tio ns; d is tr ib ute d , n ot dele g ate d a u th ority ; t r a n sp are n t r u le s r a th er t h an o ffic e p olitic s; a n d r a p id r e ite ra tio ns r a th er t h an big r e o rg an iz atio ns,” a ll o f w hic h d esc rib e h ow b lo ck ch ain te ch nolo gie s w ork . H ow C onse n S ys is s tr u ctu re d , h ow i t c re ate s v alu e, a n d h ow i t m an ag es i ts e lf d if fe rs n ot o nly f ro m t h e i n dustr ia l co rp ora tio n b ut a ls o f ro m t h e t y pic al d ot- c o m .

Jo e L ubin i s n ot a n i d eo lo gue, a n d c erta in ly n ot a n a n arc h is t o r l ib erta ria n a s s o m e i n t h e cry pto cu rre n cy m ovem en t a re . B ut h e d oes t h in k t h at w e n eed t o c h an ge c ap ita lis m i f w e w an t i t to s u rv iv e, s p ecif ic ally t o m ove a w ay f ro m t h e c o m man d-a n d-c o ntr o l h ie ra rc h ie s i n ap pro pria te fo r a n etw ork ed w orld . H e n ote s t h at t o day , e v en t h ough v ast n etw ork s e n m esh t h e w orld a n d en ab le u s a ll t o c o m munic ate i n ex pen siv ely , r ic h ly , a n d i m med ia te ly , h ie ra rc h ie s p re v ail.

Blo ck ch ain t e ch nolo gy i s t h e c o unte rv ale n ce: “ G lo bal h um an s o cie ty c an n ow a g re e o n t h e t r u th an d m ak e d ecis io ns i n t e n m in ute s, o r t e n s e co nds. T his s u re ly c re ate s a n o pportu nity t o h av e a more e n fra n ch is e d s o cie ty ,” h e s a id . T he g re ate r t h e e n gag em en t, t h e g re ate r t h e p ro sp erity .

The E nd o f M an agers. L on g L iv e M an agem en t Conse n S ys o pera te s a cco rd in g t o a p la n t h at a ll e m plo yees ( “ m em bers ” ) d ev elo ped , m odif ie d , vote d o n, a n d a d opte d . J o e L ubin d esc rib es i ts s tr u ctu re a s a “ h ub” r a th er t h an a h ie ra rc h y, a n d each o f i ts p ro je cts i s a “ sp oke” i n w hic h m ajo r c o ntr ib uto rs h old e q uity .

For t h e m ost p art, m em bers o f C onse n S ys c h oose w hat t h ey w ork o n. N o t o p-d ow n assig nm en ts . L ubin s a id , “ W e s h are a s m uch a s p ossib le , i n clu din g s h are d s o ftw are c o m ponen ts .

We b uild s m all a g ile t e am s b ut t h ere i s c o lla b ora tio n a m ong t h em . W e h av e t o ns o f i m med ia te , open , r ic h c o m munic atio n.” M em bers c h oose t o w ork o n t w o t o f iv e p ro je cts . W hen s o m eo ne se es a p ie ce o f w ork t h at n eed s t o g et d one, h e o r s h e j u m ps i n a n d p ush es i t a l ittle o r a l o t fa rth er i n a v alu ab le d ir e ctio n, a s a p pro pria te f o r h er r o le . “ W e t a lk a b out t h in gs q uite a b it s o peo ple a re a w are o f t h e m an y t h in gs t h at c o uld b e p ush ed f o rw ard ,” h e s a id . B ut t h ese m an y th in gs c an a n d d o c h an ge c o nsta n tly . “ P art o f b ein g a g ile m ean s t h at p rio ritie s a re d ynam ic .” Lubin i s n ot t h e b oss. H is m ain o pera tio nal r o le i s a d vis o ry : “ In m an y c ase s, i n div id uals a sk me o r o th ers w hat w ould b e g ood t o w ork o n,” h e s a id . T hro ugh S la ck 3 a n d G itH ub, 4 h e s u ggests dir e ctio ns t h ey m ig ht p urs u e “ to b uild a ll t h e s e rv ic es a n d p la tf o rm s t h at w e w an t t o b uild , a n d man y t h at w e w an t t o b uild b ut d on’t k now i t y et.” Mem ber o w ners h ip e x plic itly i n cen tiv iz es t h is b eh av io r. E very one o w ns a p ie ce o f e v ery pro je ct d ir e ctly o r i n dir e ctly : t h e E th ere u m p la tf o rm i s su es t o ken s t h at m em bers c an e x ch an ge fo r e th er a n d t h en c o nvert i n to a n y o th er c u rre n cy . “ O ur g oal i s t o a ch ie v e a n ic e b ala n ce betw een i n dep en den ce a n d i n te rd ep en den ce,” L ubin s a id . “ W e v ie w o urs e lv es a s a c o lle ctiv e o f clo se ly c o lla b ora tin g e n tr e p re n eu rlik e a g en ts . A t s o m e p oin t, i t m ay p ro ve n ecessa ry t o s u ggest th at a c erta in t h in g r e ally n eed s t o g et d one a n d i f n obody s te p s u p, t o h ir e s o m eo ne i n itia lly f o r th at r o le o r i n cen tiv iz e i n te rn al p eo ple t o d o i t,” s a id L ubin . B ut, o vera ll, “ ev ery one i s a s e lf - man ag ed a d ult. D id I m en tio n w e c o m munic ate a l o t? T hen w e a ll m ak e o ur o w n d ecis io ns.” The w atc h w ord s a re agility , open ness , a n d co nse n su s : i d en tif y t h e w ork t o b e d one, dis tr ib ute t h e l o ad a m ong t h e p eo ple e ag er a n d a b le t o d o i t, a g re e o n t h eir r o le s, r e sp onsib ilitie s, an d c o m pen sa tio n, a n d t h en c o dif y t h ese r ig hts i n “ ex plic it, d eta ile d , u nam big uous, s e lf - en fo rc in g a g re em en ts t h at c an s e rv e a s t h e g lu e t o h old a ll o f t h e b usin ess a sp ects o f o ur re la tio nsh ip s t o geth er,” h e s a id . S om e a g re em en ts p ay f o r p erfo rm an ce, o th ers m ete o ut a n nual sa la ry i n e th er, a n d s till o th ers a re m ore l ik e “ re q uests f o r p artic ip atio n” w ith b ountie s a tta ch ed t o ta sk c o m ple tio n s u ch a s w ritin g a l in e o f c o de. I f t h e c o de p asse s t h e t e st, t h en t h e b ounty i s au to m atic ally r e le ase d . “ E very th in g c an b e s u rfa ced a n d a p pro pria te ly t r a n sp are n t. I n cen tiv es a re ex plic it a n d g ra n ula r,” h e s a id . “ T his l e av es u s f re e t o c o m munic ate , b e c re ativ e, a n d a d ap t b ase d on t h ese e x pecta tio ns.” Dare w e c o in t h e n eo lo gis m blo ckco m , a c o m pan y f o rm ed a n d f u nctio nin g o n b lo ck ch ain te ch nolo gie s? T hat’ s t h e g oal, t o r u n a s m uch o f C onse n S ys a s p ossib le o n E th ere u m , f ro m govern an ce a n d d ay -to -d ay o pera tio ns t o p ro je ct m an ag em en t, s o ftw are d ev elo pm en t a n d t e stin g, hir in g a n d o uts o urc in g, c o m pen sa tio n, a n d f u ndin g. T he b lo ck ch ain a ls o e n ab le s r e p uta tio n sy ste m s w here m em bers c an r a te o ne a n oth er’s p erfo rm an ce a s c o lla b ora to rs , t h ere b y sy ndic atin g t r u st i n t h e c o m munity . L ubin s a id , “ P ers is te n t d ig ita l i d en tity o r p ers o na a n d re p uta tio n s y ste m s w ill k eep u s m ore h onest a n d w ell b eh av ed t o w ard o ne a n oth er.” These c ap ab ilitie s b lu r t h e b oundarie s o f a c o m pan y. T here a re n o d efa u lt s e ttin gs f o r in co rp ora tio n. M em bers o f t h e C onse n S ys e co sy ste m c an f o rm s p okes b y r e ach in g c o nse n su s o n str a te g y, a rc h ite ctu re , c ap ita l, p erfo rm an ce, a n d g overn an ce. T hey m ay d ecid e t o l a u nch a co m pan y t h at co m pete s w ith in a n e x is tin g m ark et o r p ro vid es a n i n fra str u ctu re f o r a n ew m ark et.

Once i t i s l a u nch ed , t h ey c an a d ju st t h ose s e ttin gs.

Decen tr a liz in g t h e E nte rp ris e The b lo ck ch ain w ill r e d uce f ric tio n f o r c o m pan ie s e v ery w here . “ L ow er f ric tio n m ean s l o w er co sts a s t h e p ric e o f v alu ab le i n te rm ed ia tio n i s d ete rm in ed v ia t h e m ost e ffic ie n t p ric e d is c o very mech an is m : d ecen tr a liz ed f re e m ark ets . N o l o nger w ill i n cu m ben ts b e a b le t o l e v era g e l e g al, re g ula to ry , i n fo rm atio nal, a n d p ow er a sy m metr ie s t o e x tr a ct f a r m ore v alu e f ro m a t r a n sa ctio n i n th eir r o le a s i n te rm ed ia ry t h an t h ey a d d t o i t,” L ubin s a id .

Could C onse n S ys b uild s o m e k in d o f t r u ly d ecen tr a liz ed a u to nom ous o rg an iz atio n o w ned an d c o ntr o lle d b y i ts n onhum an v alu e c re ato rs , g overn ed t h ro ugh s m art c o ntr a cts r a th er t h an hum an a g en cy ? “ A ll t h e w ay !” s a id L ubin . “ M assiv e i n te llig en ce o n a d ecen tr a liz ed g lo bal co m puta tio nal s u bstr a te , a n u nderly in g l a y er, s h ould c h an ge t h e a rc h ite ctu re o f t h e f ir m f ro m a la rg e c o lle ctio n o f s p ecia liz ed d ep artm en ts r u n b y h um an s t o s o ftw are a g en ts t h at c an c o opera te an d c o m pete i n f re e m ark ets .” S om e a g en ts w ill o rg an iz e f o r l o nger p erio ds o f t im e t o s e rv e ongoin g c u sto m er n eed s, s u ch a s u tility a n d m ain te n an ce. O th ers w ill s w arm a ro und a s h ort- te rm pro ble m , s o lv e i t, a n d d is so lv e j u st a s q uic k ly , h av in g s e rv ed t h eir p urp ose .

Is t h ere a r is k t h at r a d ic al d ecen tr a liz atio n a n d a u to m atio n r e m oves h um an a g en cy i n decis io n m ak in g ( e .g ., t h e r is k o f r o gue a lg orith m s)? “ I a m n ot c o ncern ed a b out m ach in e in te llig en ce. W e w ill e v olv e w ith i t a n d f o r a l o ng t im e i t w ill b e i n t h e s e rv ic e o f, o r a n a sp ect of, Hom o s a pie n s c yb ern etic a . I t m ay e v olv e b ey ond u s b ut t h at i s f in e,” L ubin s a id . “ If s o , i t will o ccu py a d if fe re n t e co lo gic al n ic h e. I t w ill o pera te a t d if fe re n t s p eed s a n d d if fe re n t r e le v an t tim e s c ale s. I n t h at c o nte x t, a rtif ic ia l i n te llig en ce w ill n ot d is tin guis h b etw een h um an s, a r o ck , o r a g eo lo gic al p ro cess. W e e v olv ed p ast l o ts o f s p ecie s, m an y o f w hic h a re d oin g f in e ( in t h eir pre se n t f o rm s).” Conse n S ys i s s till a t in y c o m pan y. I ts g ra n d e x perim en t m ay o r m ay n ot s u cceed . B ut i ts sto ry p ro vid es a g lim pse i n to r a d ic al c h an ges i n c o rp ora te a rc h ite ctu re t h at m ay h elp u nle ash in novatio n a n d h arn ess t h e p ow er o f h um an c ap ita l f o r n ot j u st w ealth c re atio n b ut p ro sp erity .

Blo ck ch ain t e ch nolo gy i s e n ab lin g n ew f o rm s o f e co nom ic o rg an iz atio n a n d n ew p ortf o lio s o f valu e. T here a re d is tr ib ute d m odels o f t h e f ir m e m erg in g— ow ners h ip , str u ctu re , o pera tio ns, re w ard s, a n d g overn an ce— th at g o f a r b ey ond e n han cin g i n novatio n, e m plo yee m otiv atio n, a n d co lle ctiv e a ctio n. T hey m ay b e t h e l o ng-a w aite d p re co nditio n f o r a m ore p ro sp ero us a n d in clu siv e e co nom y.

Busin ess l e ad ers h av e a n oth er o pportu nity t o r e th in k h ow t h ey o rg an iz e v alu e c re atio n. T hey co uld n eg otia te , c o ntr a ct, a n d e n fo rc e t h eir a g re em en ts o n t h e b lo ck ch ain ; d eal s e am le ssly w ith su pplie rs , c u sto m ers , e m plo yees, c o ntr a cto rs , a n d a u to nom ous a g en ts ; a n d m ain ta in a f le et o f th ese a g en ts f o r o th ers t o u se , a n d t h ese a g en ts c o uld r e n t o ut o r l ic en se a n y e x cess c ap acity i n th eir v alu e c h ain .

CH ANG IN G T H E B O UNDARIE S O F T H E F IR M Thro ughout t h e f ir s t e ra o f t h e I n te rn et, m an ag em en t t h in kers ( D on i n clu ded ) t a lk ed u p t h e netw ork ed e n te rp ris e , t h e f la t c o rp ora tio n, o pen i n novatio n, a n d b usin ess e co sy ste m s a s su ccesso rs t o t h e h ie ra rc h ie s o f i n dustr ia l p ow er. H ow ev er, t h e a rc h ite ctu re o f t h e e arly - tw en tie th -c en tu ry c o rp ora tio n r e m ain s p re tty m uch i n ta ct. E ven t h e b ig d ot- c o m s a d opte d a t o p- dow n s tr u ctu re w ith s u ch d ecis io n m ak ers a s J e ff B ezo s, M aris sa M ay er, a n d M ark Z uck erb erg .

So w hy w ould a n y e sta b lis h ed f ir m — partic u la rly o nes t h at m ak e t h eir m oney o ff o th er p eo ple ’s data , o pera te l a rg ely b eh in d c lo se d d oors , a n d s u ffe r s u rp ris in gly l ittle i n d ata b re ach a fte r d ata bre ach — wan t t o l e v era g e b lo ck ch ain t e ch nolo gie s t o d is tr ib ute p ow er, i n cre ase t r a n sp are n cy , re sp ect u se r p riv acy a n d a n onym ity , a n d i n clu de f a r m ore p eo ple w ho c an a ffo rd f a r l e ss t h an th ose a lr e ad y s e rv ed ?

Tra n sa ctio n C osts a n d t h e S tr u ctu re o f t h e F ir m Let’ s s ta rt w ith a l ittle e co nom ic s. I n 1 995, D on u se d N obel P riz e– w in nin g e co nom is t R onald Coase ’s t h eo ry o f t h e f ir m t o e x pla in h ow t h e I n te rn et w ould a ffe ct t h e a rc h ite ctu re o f t h e co rp ora tio n. I n h is 1 937 p ap er “ T he N atu re o f t h e F ir m ,” C oase i d en tif ie d t h re e t y pes o f c o sts i n th e e co nom y: t h e c o sts o f s e arc h ( fin din g a ll t h e r ig ht i n fo rm atio n, p eo ple , r e so urc es t o c re ate so m eth in g); c o ord in atio n ( g ettin g a ll t h ese p eo ple t o w ork t o geth er e ffic ie n tly ); a n d c o ntr a ctin g (n eg otia tin g t h e c o sts f o r l a b or a n d m ate ria ls f o r e v ery a ctiv ity i n p ro ductio n, k eep in g t r a d e se cre ts , a n d p olic in g a n d en fo rc in g t h ese a g re em en ts ). H e p osite d t h at a f ir m w ould e x pan d u ntil th e c o st o f p erfo rm in g a t r a n sa ctio n i n sid e t h e f ir m e x ceed ed t h e c o st o f p erfo rm in g t h e tr a n sa ctio n o uts id e t h e f ir m .

5 Don a rg ued t h at t h e I n te rn et w ould r e d uce a f ir m ’s i n te rn al t r a n sa ctio n c o sts s o m ew hat; b ut we t h ought, b ecau se o f i ts g lo bal a ccessib ility , i t w ould r e d uce c o sts i n t h e o vera ll e co nom y e v en more , i n t u rn l o w erin g b arrie rs t o e n tr y f o r m ore p eo ple . Y es, i t d id d ro p s e arc h c o sts , t h ro ugh bro w se rs a n d t h e W orld W id e W eb . I t a ls o d ro pped c o ord in atio n c o sts t h ro ugh e -m ail, d ata pro cessin g a p plic atio ns l ik e E R P, s o cia l n etw ork s, a n d c lo ud c o m putin g. M an y c o m pan ie s ben efite d f ro m o uts o urc in g s u ch u nits a s c u sto m er s e rv ic e a n d a cco untin g. M ark ete rs e n gag ed cu sto m ers d ir e ctly , e v en t u rn in g c o nsu m ers i n to p ro ducers ( p ro su m ers ). P ro duct p la n ners cro w dso urc ed i n novatio ns. M an ufa ctu re rs l e v era g ed v ast s u pply n etw ork s.

How ev er, t h e s u rp ris in g r e ality i s t h at t h e I n te rn et h as h ad p erip hera l i m pact o n c o rp ora te arc h ite ctu re . T he i n dustr ia l- a g e h ie ra rc h y i s p re tty m uch i n ta ct a s t h e r e co gniz ab le f o undatio n o f cap ita lis m . S ure , t h e n etw ork s h av e e n ab le d c o m pan ie s t o o uts o urc e t o l o w -c o st g eo gra p hie s.

But t h e I n te rn et d ro pped t r a n sa ctio n c o sts i n sid e t h e f ir m a s w ell.

Fro m H ie ra rch y t o M on op oly So c o m pan ie s t o day r e m ain h ie ra rc h ie s, a n d m ost a ctiv itie s o ccu r w ith in c o rp ora te b oundarie s.

Man ag ers s till v ie w t h em a s a b ette r m odel f o r o rg an iz in g t a le n t a n d i n ta n gib le a sse ts s u ch a s bra n ds, i n te lle ctu al p ro perty , k now le d ge, a n d c u ltu re , a s w ell a s f o r m otiv atin g p eo ple . C orp ora te board s s till c o m pen sa te e x ecu tiv es a n d C EO s f a r b ey ond a n y r e aso nab le m easu re o f t h e v alu e th ey c re ate . N ot i n cid en ta lly , t h e i n dustr ia l c o m ple x c o ntin ues t o g en era te w ealth , b ut n ot pro sp erity . I n f a ct, a s w e h av e p oin te d o ut, t h ere i s s tr o ng e v id en ce o f a g ro w in g c o ncen tr a tio n o f pow er a n d w ealth i n c o nglo m era te s a n d e v en m onopolie s.

Anoth er N obel l a u re ate , O liv er W illia m so n, p re d ic te d a s m uch , 6 a n d p oin te d o ut t h e n eg ativ e effe cts o n p ro ductiv ity : “ S uffic e i t t o o bse rv e h ere t h at t h e m ove f ro m a u to nom ous s u pply ( b y th e c o lle ctio n o f s m all f ir m s) t o u nif ie d o w ners h ip ( in o ne l a rg e f ir m ) i s u nav oid ab ly a tte n ded b y ch an ges i n b oth i n cen tiv e i n te n sity ( in cen tiv es a re w eak er i n t h e i n te g ra te d f ir m ) a n d ad m in is tr a tiv e c o ntr o ls ( c o ntr o ls a re m ore e x te n siv e).” 7 P ete r T hie l, co fo under o f P ay P al, w ro te in p ra is e o f m onopolie s i n h is e n orm ously r e ad ab le a n d e q ually c o ntr o vers ia l b ook, Zero t o O ne .

A R an d P au l s u pporte r, T hie l s a id , “ C om petitio n i s f o r l o se rs . . . . C re ativ e m onopolie s a re n ’t ju st g ood f o r t h e r e st o f s o cie ty ; t h ey ’re p ow erfu l e n gin es f o r m ak in g i t b ette r.” 8 While T hie l m ig ht b e r ig ht a b out s tr iv in g t o d om in ate o ne’s i n dustr y o r m ark et, h e p ro vid ed no r e al e v id en ce t h at m onopolie s a re g ood f o r c o nsu m ers o r s o cie ty a s a w hole . T o t h e c o ntr a ry , th e e n tir e b ody o f c o m petitio n l a w i n m ost d em ocra tic c ap ita lis t c o untr ie s d eriv es f ro m a co ntr a ry n otio n. T he i d ea o f f a ir c o m petitio n d ate s b ack t o R om an t im es, w ith t h e d eath p en alty fo r s o m e v io la tio ns.

9 W hen f ir m s h av e n o r e al c o m petitio n, t h ey c an g ro w a s i n effic ie n t a s t h ey wan t, r a is in g p ric es i n a n d o uts id e t h e f ir m . L ook a t g overn m en ts . E ven i n t h e t e ch nolo gy in dustr y , m an y a rg ue t h at m onopolie s m ay h elp w ith i n novatio n i n t h e s h ort t e rm b ut m ay h arm so cie ty i n t h e l o ng t e rm . C om pan ie s m ay a m ass m onopoly p ow er t h ro ugh c o ol p ro ducts a n d se rv ic es t h at c u sto m ers l o ve, b ut t h e h oney m oon e v en tu ally e n ds. I t’ s n ot s o m uch t h at t h eir in novatio ns n o l o nger d elig ht; i t’ s t h at t h e c o m pan ie s t h em se lv es b eg in t o o ssif y . Most t h in kers u nders ta n d t h at i n novatio n t y pic ally c o m es f ro m t h e e d ge o f t h e f ir m , n ot f ro m its c o re . H arv ard U niv ers ity l a w p ro fe sso r Y och ai B en kle r a g re es: “ M onopolie s m ay h av e l o ts o f money t o i n vest i n R & D b ut t y pic ally n ot t h e i n te rn al c u ltu re o f p ure a n d o pen e x plo ra tio n t h at i s re q uir e d f o r i n novatio n. T he W eb d id n’t c o m e f ro m m onopolie s; i t c am e f ro m t h e e d ge. G oogle did n ot c o m e f ro m M ic ro so ft. T w itte r d id n ot c o m e f ro m A T& T, o r f o r t h at m atte r e v en f ro m Faceb ook.” 10 I n m onopolie s, l a y ers o f b ure au cra cy d is ta n ce t h e e x ecu tiv es a t t h e t o p f ro m mark et s ig nals a n d e m erg en t t e ch nolo gy a t t h e e d ges, w here c o m pan ie s b um p u p a g ain st o ne an oth er a n d o th er m ark ets , o th er i n dustr ie s, o th er g eo gra p hie s, o th er i n te lle ctu al d is c ip lin es, oth er g en era tio ns. A cco rd in g t o J o hn H ag el a n d J o hn S eely B ro w n, “ T he p erip hery o f t o day ’s glo bal b usin ess e n vir o nm en t i s w here i n novatio n p ote n tia l i s t h e h ig hest. I g nore i t a t y our peril.” 11 Execu tiv es s h ould b e e x cite d a b out b lo ck ch ain t e ch nolo gy, b ecau se t h e w av e o f i n novatio n co m in g f ro m t h e e d ge m ay w ell b e u npre ced en te d . F ro m t h e m ajo r c ry pto cu rre n cie s— Bitc o in , Bla ck C oin , D ash , N xt, a n d R ip ple — to t h e m ajo r b lo ck ch ain p la tf o rm s— Lig hth ouse f o r p eer-to - peer c ro w dfu ndin g, F acto m a s a d is tr ib ute d r e g is tr y , G em s f o r d ecen tr a liz ed messa g in g, Maid S afe f o r d ecen tr a liz ed a p plic atio ns, S to rj f o r a d is tr ib ute d c lo ud, a n d T ezo s f o r decen tr a liz ed v otin g t o n am e a f e w — th e n ex t e ra o f t h e I n te rn et h as r e al v alu e a tta ch ed t o i t a n d re al i n cen tiv es t o p artic ip ate . T hese p la tf o rm s h old p ro m is e f o r p ro te ctin g u se r i d en tity , re sp ectin g u se r p riv acy a n d o th er r ig hts , e n su rin g n etw ork s e cu rity , a n d d ro ppin g t r a n sa ctio n co sts s o t h at e v en t h e u nban ked c an t a k e p art.

Unlik e i n cu m ben t f ir m s, t h ey d on’t n eed a b ra n d t o c o nvey t h e t r u stw orth in ess o f t h eir tr a n sa ctio ns. B y g iv in g a w ay t h eir s o urc e c o de f o r f re e, s h arin g p ow er w ith e v ery one o n t h e netw ork , u sin g c o nse n su s m ech an is m s t o e n su re i n te g rity , a n d c o nductin g t h eir b usin ess o pen ly on t h e b lo ck ch ain , t h ey a re m ag nets o f h ope f o r t h e m an y d is illu sio ned a n d d is e n fra n ch is e d . A s su ch , b lo ck ch ain t e ch nolo gy o ffe rs a c re d ib le a n d e ffe ctiv e m ean s n ot o nly o f c u ttin g o ut in te rm ed ia rie s, b ut a ls o o f r a d ic ally l o w erin g t r a n sa ctio n c o sts , t u rn in g f ir m s i n to n etw ork s, dis tr ib utin g e co nom ic p ow er, a n d e n ab lin g b oth w ealth c re atio n a n d a m ore p ro sp ero us f u tu re .

1.

S earc h C osts — How D o W e F in d N ew T ale n t a n d N ew C usto m ers ?

How d o w e f in d t h e p eo ple a n d i n fo rm atio n w e n eed ? H ow d o w e d ete rm in e i f t h eir s e rv ic es, goods, a n d c ap ab ilitie s a re b est f o r u s a s w e s e ek t o b rin g t h e t o nic o f t h e m ark et t o b ear o n o ur in te rn al o pera tio ns?

Alth ough t h e a rc h ite ctu re o f t h e f ir m i s b asic ally i n ta ct, t h e f ir s t e ra o f t h e I n te rn et d ro pped su ch c o sts s ig nif ic an tly a n d e n ab le d i m porta n t c h an ges. O uts o urc in g w as r e ally j u st t h e beg in nin g. T ap pin g i n to i d eag ora s ( o pen m ark ets f o r b ra in pow er), c o m pan ie s l ik e P ro cte r & Gam ble a re f in din g u niq uely q ualif ie d m in ds t o i n novate a n ew p ro duct o r p ro cess. I n f a ct, 6 0 perc en t o f P & G’s i n novatio ns c o m e f ro m o uts id e t h e c o m pan y, b y b uild in g o r h arn essin g id eag ora s l ik e I n noC en tiv e o r i n no360. O th er f ir m s l ik e G old co rp h av e c re ate d g lo bal c h alle n ges to s e arc h f o r t h e b est m in ds t o s o lv e t h eir t o ughest p ro ble m s. G old co rp , w hic h p ublis h ed i ts geo lo gic al d ata a n d t a le n t o uts id e i ts b oundarie s, d is c o vere d $ 3.4 b illio n w orth o f g old , r e su ltin g in a h undre d fo ld i n cre ase i n t h e c o m pan y’s m ark et v alu e.

Now i m ag in e t h e o pportu nitie s t h at a ris e f ro m t h e a b ility t o s e arc h t h e W orld W id e L ed ger, a decen tr a liz ed d ata b ase o f m uch o f t h e w orld ’s s tr u ctu re d i n fo rm atio n. W ho s o ld w hic h d is c o very to w hom ? A t w hat p ric e? W ho o w ns t h is i n te lle ctu al p ro perty ? W ho i s q ualif ie d t o h an dle t h is pro je ct? W hat m ed ic al s k ills d oes o ur h osp ita l h av e o n s ta ff? W ho p erfo rm ed w hat t y pe o f su rg ery w ith w hat o utc o m es? H ow m an y c arb on c re d its h as t h is c o m pan y s a v ed ? W hic h su pplie rs h av e e x perie n ce i n C hin a? W hat s u bco ntr a cto rs d eliv ere d o n t im e a n d o n b udget acco rd in g t o t h eir s m art c o ntr a cts ? T he r e su lts o f t h ese q uerie s w on’t b e r é su m és, a d vertis in g lin ks, o r o th er p ush ed c o nte n t; t h ey ’ll b e t r a n sa ctio n h is to rie s, p ro ven t r a ck r e co rd s o f i n div id uals an d e n te rp ris e s, r a n ked p erh ap s b y r e p uta tio n s c o re . G et t h e p ic tu re ? S aid V ita lik B ute rin , fo under o f t h e E th ere u m b lo ck ch ain , “ B lo ck ch ain s w ill d ro p s e arc h c o sts , c au sin g a k in d o f deco m positio n t h at a llo w s y ou t o h av e m ark ets o f e n titie s t h at a re h oriz o nta lly s e g re g ate d a n d vertic ally s e g re g ate d . T hat n ev er r e ally e x is te d b efo re . I n ste ad y ou h ad k in d o f m onolith s t h at d o ev ery th in g.” 12 Sev era l c o m pan ie s a re w ork in g o n s e arc h e n gin es f o r b lo ck ch ain s, g iv en t h e p ote n tia l bonan za. G oogle ’s m is sio n i s t o o rg an iz e t h e w orld ’s i n fo rm atio n, s o i t w ould m ak e s e n se f o r i t to a ssig n c o nsid era b le m an pow er t o i n vestig ate t h is .

There a re t h re e k ey d is tin ctio ns b etw een I n te rn et s e arc h a n d b lo ck ch ain s e arc h . F ir s t i s u se r priv acy . W hile t r a n sa ctio ns a re t r a n sp are n t, p eo ple o w n t h eir p ers o nal d ata a n d c an d ecid e w hat to d o w ith i t. T hey c an p artic ip ate a n onym ously o r a t l e ast p se u donym ously ( a n onym ity t h ro ugh a f a ls e n am e) o r q uasin ym ously ( p artia l a n onym ity ). I n te re ste d p artie s w ill b e a b le t o s e arc h f o r in fo rm atio n t h at u se rs h av e m ad e o pen . A ndre as A nto nopoulo s s a id , “ T ra n sa ctio ns a re an onym ous i f y ou w an t t h em t o b e a n onym ous. . . . b ut t h e b lo ck ch ain e n ab le s r a d ic al tr a n sp are n cy a l o t e asie r t h an i t e n ab le s r a d ic al a n onym ity .” 13 Man y f ir m s w ill n eed t o r e th in k a n d r e d esig n t h e r e cru itin g p ro cess. F or e x am ple , h um an re so urc es o r p ers o nnel s ta ff w ill n eed t o l e arn h ow t o q uery t h e b lo ck ch ain w ith y es/n o questio ns: A re y ou a h um an b ein g? H av e y ou e arn ed a P hD i n a p plie d m ath em atic s? C an y ou co de i n S cry pt, P yth on, J a v a, C ++? A re y ou a v aila b le t o w ork f u ll t im e f ro m J a n uary t h ro ugh Ju ne n ex t y ear? A nd o th er q ualif ic atio ns. T hese q uerie s w ill s c u rry a b out t h e b la ck b oxes o f peo ple o n t h e j o b m ark et a n d y ie ld a l is t o f p eo ple w ho m eet t h ese q ualif ic atio ns. T hey c o uld als o p ay p ro sp ectiv e t a le n t t o p la ce p ertin en t p ro fe ssio nal i n fo rm atio n o n a b lo ck ch ain p la tf o rm where t h ey c an s o rt t h ro ugh i t. H R s ta ff m ust m aste r t h e u se o f r e p uta tio n s y ste m s, m ovin g fo rw ard w ith c an did ate s w ith out k now in g a n yth in g i r re le v an t t o th e j o b, s u ch a s a g e, g en der, ra ce, c o untr y o f o rig in . T hey a ls o n eed s e arc h e n gin es t h at c an n av ig ate v ario us d eg re es o f open ness, f ro m f u lly p riv ate t o f u lly p ublic i n fo rm atio n. T he u psid e i s a n e n d t o s u bco nsc io us o r ev en i n stitu tio nal b ia s a n d h ead hunte r o r e x ecu tiv e r e cru itin g f e es. T he d ow nsid e i s t h at p re cis e querie s l e ad t o p re cis e r e su lts . T here i s l e ss p ossib ility o f s e re n dip ity , t h e d is c o very o f a can did ate w ho l a ck s t h e q ualif ic atio ns b ut h as g re at c ap acity t o l e arn a n d t o m ak e t h e r a n dom cre ativ e c o nnectio ns t h at a f ir m d esp era te ly n eed s.

Ditto f o r m ark etin g. F ir m s m ay h av e t o p ay j u st t o q uery a p ro sp ectiv e c u sto m er’s b la ck b ox, to s e e w heth er t h at c u sto m er m eets a f ir m ’s t a rg et a u die n ce. T hat c u sto m er m ay d ecid e g lo bally to w ith hold c erta in d ata s u ch a s g en der, b ecau se a n o a n sw er i s s till v alu ab le . B ut i n s o d oin g, t h e fir m w ill l e arn n oth in g m ore a b out t h e p ro sp ect b ey ond t h e y es/n o r e su lts o f t h e q uery . C hie f mark etin g o ffic ers a n d m ark etin g a g en cie s w ill n eed t o r e th in k a n y s tr a te g y b ase d o n e -m ail, so cia l m ed ia , a n d m obile m ark etin g: w here t h e i n fra str u ctu re m ay l o w er c o m munic atio ns c o sts t o zero , c u sto m ers w ill r a is e c o sts t o a f ig ure t h at m ak es r e ad in g a f ir m ’s m essa g e w orth t h eir while . I n o th er w ord s, y ou’ll b e p ay in g c u sto m ers t o l is te n t o y our e le v ato r p itc h , b ut y ou w ill hav e t a ilo re d y our q uery t o p itc h o nly t o a s h arp ly d efin ed a u die n ce s o t h at y ou w ill b e r e ach in g ex actly t h e p eo ple y ou w an t t o r e ach w ith out i n vad in g t h eir p riv acy . Y ou c an t e st d if fe re n t querie s t o l e arn a b out d if fe re n t m ic ro nic h es a t e v ery s ta g e o f n ew p ro duct d ev elo pm en t. L et’ s call i t bla ck b ox m ark etin g .

The s e co nd d is tin ctio n i s t h at s e arc h c an b e m ultid im en sio nal. W hen y ou s e arc h t h e W orld Wid e W eb t o day , y ou s e arc h a s n ap sh ot i n t im e, a s i n dex ed o ver t h e l a st s e v era l w eek s.

14 Com pute r t h eo ris t A nto nopoulo s c alle d t h is t w o-d im en sio nal s e arc h :

horiz o nta l , a w id e s e arc h acro ss t h e W eb , a n d vertic a l , a d eep s e arc h o f a p artic u la r W eb s ite . T he t h ir d d im en sio n i s se q uen ce , t o s e e t h ese i n t h e o rd er o f u plo ad in g o ver t im e. “ T he b lo ck ch ain c an a d d t h e ad ditio nal d im en sio n o f t im e,” h e s a id . T he o pportu nity t o s e arc h a c o m ple te r e co rd o f ev ery th in g t h at e v er h ap pen ed i n t h re e d im en sio ns i s p ro fo und. T o m ak e h is p oin t, A nto nopoulo s se arc h ed t h e b itc o in b lo ck ch ain t o f in d i ts f a m ous f ir s t c o m merc ia l t r a n sa ctio n, t h e p urc h ase o f tw o p iz zas d one b y s o m eo ne n am ed “ L aslo ” f o r 1 0,0 00 b itc o in s. “ T he b lo ck ch ain p ro vid es a n alm ost a rc h aeo lo gic al r e co rd , a d eep f in d, p re se rv in g i n fo rm atio n f o re v er.” ( T o s a v e y ou f ro m doin g th e m ath , i f t h e p iz za c o sts $ 5 w hen $ 1 w as e q ual t o 2 ,5 00 b itc o in s, t h at w ould b e w orth $3.5 m illio n a s o f t h e w ritin g o f t h is b ook . . . b ut w e d ig re ss.) For f ir m s, t h is m ean s a n eed f o r b ette r j u dgm en t: m an ag ers n eed t o h ir e p eo ple w ho h av e dem onstr a te d g ood j u dgm en t, b ecau se t h ere ’s n o w alk in g b ack p oor d ecis io ns, n o s p in nin g t h e ord er o f e v en ts , n o d en yin g a n e x ecu tiv e’s d is re p uta b le b eh av io r. F or r e ally i m porta n t d ecis io ns, fir m s c o uld i m ple m en t i n te rn al c o nse n su s m ech an is m s w here b y a ll s ta k eh old ers v ote o n mis sio n-c ritic al d ecis io ns t o e n d t h e c h oru s o f i g nora n ce a n d d en ia l o f p rio r k now le d ge. O r u se pre d ic tio n m ark ets t o t e st s c en ario s. I f y ou’re a n e x ecu tiv e o f a f u tu re E nro n, n o s c ap eg oatin g.

As f o r N ew J e rs e y g overn or C hris C hris tie , g ood l u ck t e llin g a p ro se cu to r t h at y ou k new n oth in g of p la n s t o c lo se t h e G eo rg e W ash in gto n B rid ge.

The t h ir d d is tin ctio n i s v alu e: w here i n fo rm atio n o n t h e I n te rn et i s a b undan t, u nre lia b le , a n d peris h ab le , i t i s s c arc e, t a m perp ro of, a n d p erm an en t o n t h e b lo ck ch ain . T o t h is l a st c h ara cte ris tic , Anto nopoulo s n ote s: “ If t h ere i s e n ough f in an cia l i n cen tiv e t o p re se rv e t h is b lo ck ch ain i n to t h e fu tu re , t h e p ossib ility o f i t e x is tin g f o r t e n s, h undre d s, o r e v en t h ousa n ds o f y ears c an not b e dis c o unte d .” What a n a m azin g c o ncep t. T he b lo ck ch ain a s p art o f t h e a rc h aeo lo gic al r e co rd , l ik e t h e orig in al s to ne t a b le ts o f M eso pota m ia . P ap er r e co rd s a re e p hem era l a n d t e m pora ry , w here as (ir o nic ally ) t h e o ld est f o rm o f r e co rd in g i n fo rm atio n, t a b le ts , i s t h e m ost p erm an en t. T he im plic atio ns f o r c o rp ora te a rc h ite ctu re a re c o nsid era b le . I m ag in e a p erm an en t, s e arc h ab le r e co rd of i m porta n t h is to ric al i n fo rm atio n, l ik e t h e h is to ry o f f in an ce. C orp ora te s ta ff r e sp onsib le f o r dev elo pin g f in an cia l s ta te m en ts , a n nual r e p orts , r e p orts t o g overn m en ts o r d onors , m ark etin g mate ria ls f o r p ro sp ectiv e e m plo yees, c lie n ts , a n d c o nsu m ers — will s ta rt w ith t h is p ublic , in dis p uta b le v ie w o f t h eir f ir m , m ay be e v en c re atin g a f ilte r t h at e n ab le s s ta k eh old ers t o s e e w hat th ey s e e a t t h e p re ss o f a b utto n. C om pan ie s c o uld h av e t r a n sa ctio n t ic k er t a p es a n d d ash board s, so m e f o r i n te rn al m an ag eria l u se a n d s o m e p ublic . R est a ssu re d : A ll y our c o m petito rs w ill co nstr u ct s u ch f e ed s a n d d ash board s o f y our f ir m a s p art o f t h eir c o m petitiv e i n te llig en ce pro gra m s. S o w hy n ot p ut t h ose o n y our W eb s ite a n d d ra w e v ery one t o y ou?

This p ro vid es e n orm ous i n cen tiv e f o r f ir m s t o l o ok f o r r e so urc es outs id e t h eir b oundarie s, a s th ey h av e a lm ost i n fin ite ly b ette r i n fo rm atio n a b out t h e q ualitie s a n d r e co rd o f c an did ate s, b e th ey i n div id uals o r c o m pan ie s. Com pan ie s l ik e C onse n S ys a re d ev elo pin g i d en tity s y ste m s w here j o b p ro sp ects o r pro sp ectiv e c o ntr a cto rs w ill p ro gra m t h eir o w n p ers o nal a v ata rs t o d is c lo se p ertin en t i n fo rm atio n to e m plo yers . T hey c an ’t b e h ack ed l ik e a c en tr a liz ed d ata b ase c an . U se rs a re m otiv ate d t o co ntr ib ute i n fo rm atio n t o t h eir o w n a v ata rs b ecau se t h ey o w n a n d c o ntr o l t h em , t h eir p riv acy i s co m ple te ly c o nfig ura b le , a n d t h ey c an m onetiz e t h eir o w n d ata . T his i s v ery d if fe re n t f ro m , s a y , Lin ked In , a c en tr a l d ata b ase o w ned , m onetiz ed , a n d y et n ot e n tir e ly s e cu re d b y a p ow erfu l co rp ora tio n.

Could C oase a n d W illia m so n h av e i m ag in ed a p la tf o rm t h at c o uld d ro p s e arc h c o sts s o t h at fir m s c o uld f in d c ap ab ility o uts id e t h eir b oundarie s t h at c o st l e ss a n d c o uld p erfo rm b ette r?

2.

C ontr a ctin g C osts — What D o W e A gre e t o D o, A nyw ay ?

How d o w e c o m e t o t e rm s w ith o th er p artie s o r e n te r i n to a n a g re em en t? I t’ s o ne t h in g t o l o w er th e c o sts o f f in din g p eo ple a n d r e so urc es t h at c an d o t h e j o b. B ut t h at’ s n ot e n ough t o s h rin k a fir m s ig nif ic an tly . A ll p artie s m ust a g re e t o w ork t o geth er. T he s e co nd r e aso n w hy w e h av e f ir m s is c o ntr a ctu al c o sts , s u ch a s n eg otia tin g t h e p ric e, e sta b lis h in g c ap acity , a n d s p ellin g o ut t h e co nditio ns o f a s u pplie r’s g oods o r s e rv ic es; p olic in g t h em a n d e n fo rc in g t h e t e rm s; a n d h an dlin g re m ed ie s i f p artie s d on’t d eliv er a s p ro m is e d .

We’v e a lw ay s h ad s o cia l c o ntr a cts , u nders ta n din gs o f r e la tio nsh ip s i n t h e s p ecia liz atio n o f ro le s w here s o m e p eo ple i n t h e t r ib e h unte d a n d p ro te cte d t h e t r ib e, a n d o th ers g ath ere d a n d sh elte re d t h e t r ib e. P eo ple h av e t r a d ed p hysic al o bje cts i n r e al t im e s in ce t h e d aw n o f m odern man . C ontr a cts a re a m ore r e cen t p hen om en on, a s w e b eg an t r a d in g p ro m is e s, n ot p ro perty . O ra l ag re em en ts p ro ved e asily m an ip ula te d o r m is re m em bere d , a n d e y ew itn esse s w ere u nre lia b le .

Doubt a n d d is tr u st t e m pere d c o lla b ora tio n w ith s tr a n gers . C ontr a cts h ad t o b e f u lf ille d im med ia te ly , a n d t h ere w ere n o f o rm al m ech an is m s f o r e n fo rc em en t o f t h e t e rm s b ey ond w hat you c o uld t a k e b y f o rc e. T he w ritte n c o ntr a ct w as a w ay o f c o dif y in g a n o blig atio n, o f esta b lis h in g t r u st a n d s e ttin g e x pecta tio ns. W ritte n c o ntr a cts p ro vid ed g uid an ce w hen s o m eo ne did n ot h old u p h is e n d o f t h e b arg ain , o r s o m eth in g u nex pecte d h ap pen ed . B ut t h ey c o uld n’t ex is t i n a vacu um ; t h ere h ad t o b e s o m e l e g al f ra m ew ork t h at r e co gniz ed c o ntr a cts a n d e n fo rc ed each p arty ’s r ig hts .

Today c o ntr a cts a re s till m ad e o f a to m s ( p ap er), n ot b its ( s o ftw are ). A s s u ch t h ey h av e h uge lim ita tio ns, s e rv in g t o s im ply d ocu m en t a n a g re em en t. A s w e s h all s e e, i f c o ntr a cts w ere so ftw are — sm art a n d d is tr ib ute d o n t h e b lo ck ch ain — th ey c o uld o pen a w orld o f p ossib ilitie s, n ot th e l e ast o f w hic h i s t o m ak e i t e asie r f o r c o m pan ie s t o c o lla b ora te w ith e x te rn al r e so urc es. A nd ju st i m ag in e h ow t h e U nif o rm C om merc ia l C ode m ig ht l o ok o n t h e b lo ck ch ain .

Coase a n d h is s u ccesso rs a rg ued t h at c o ntr a ctin g c o sts a re l o w er i n sid e t h e b oundarie s o f fir m s r a th er t h an o uts id e i n t h e m ark et— th at a f ir m i s e sse n tia lly a v eh ic le f o r c re atin g l o ng-te rm co ntr a cts w hen s h ort- te rm c o ntr a cts a re t o o m uch e ffo rt.

Willia m so n a d van ced t h is i d ea b y a rg uin g t h at f ir m s e x is t t o r e so lv e c o nflic ts , l a rg ely th ro ugh m ak in g c o ntr a cts w ith v ario us p artie s i n sid e t h e f ir m . I n t h e o pen m ark et, t h e o nly dis p ute m ech an is m i s t h e c o urt— co stly , t im ely , a n d o fte n u nsa tis fa cto ry . F urth er, h e a rg ued t h at in s o m e c ase s l ik e f ra u d, o th er i lle g al a cts , o r c o nflic t o f i n te re st, t h ere i s n o m ark et d is p ute mech an is m a t a ll. “ In e ffe ct, t h e c o ntr a ct l a w o f i n te rn al o rg an iz atio n i s t h at o f f o rb eara n ce, acco rd in g t o w hic h a f ir m b eco m es i ts o w n c o urt o f u ltim ate a p peal. F ir m s, f o r t h is r e aso n, a re ab le t o e x erc is e f ia t t h at t h e m ark ets c an not.” 15 W illia m so n c o nceiv ed o f t h e f ir m a s “ a govern an ce s tr u ctu re ” f o r c o ntr a ctu al a rra n gem en ts . H e s a id t h at o rg an iz atio nal s tr u ctu re m atte rs in r e d ucin g t h e c o sts o f m an ag in g t r a n sa ctio ns a n d t h at “ re co urs e t o t h e l e n s o f c o ntr a ct, a s ag ain st t h e l e n s o f c h oic e, f re q uen tly d eep en s o ur u nders ta n din g o f c o m ple x e co nom ic org an iz atio n.” 16 T his i s a r e cu rrin g t h em e i n m an ag em en t t h eo ry , p erh ap s m ost p ow erfu lly ex pla in ed b y e co nom is ts M ic h ael J e n se n a n d W illia m M eck lin g. T hey a rg ued t h at e n titie s a re noth in g m ore t h an a c o lle ctio n o f c o ntr a cts a n d r e la tio nsh ip s.

17 Today , s o m e e ru dite b lo ck ch ain t h in kers h av e p ic k ed u p o n t h is v ie w . E th ere u m i n ven to r Vita lik B ute rin a rg ues t h at c o rp ora te a g en ts ( i.e ., e x ecu tiv es) c o uld u se c o rp ora te a sse ts o nly f o r certa in p urp ose s a p pro ved b y, s a y , a b oard o f d ir e cto rs , w ho i n t u rn a re s u bje ct t o s h are h old er ap pro val. “ If a c o rp ora tio n d oes s o m eth in g, i t’ s b ecau se i ts b oard o f d ir e cto rs h as a g re ed t h at i t sh ould b e d one. I f a c o rp ora tio n h ir e s e m plo yees, i t mean s t h at t h e e m plo yees a re a g re ein g t o pro vid e s e rv ic es t o t h e c o rp ora tio n’s c u sto m ers u nder a p artic u la r s e t o f r u le s, p artic u la rly in volv in g p ay m en t,” B ute rin w ro te . “ W hen a c o rp ora tio n h as l im ite d l ia b ility , i t m ean s t h at sp ecif ic p eo ple h av e b een g ra n te d e x tr a p riv ile g es t o a ct w ith r e d uced f e ar o f l e g al p ro se cu tio n by t h e g overn m en t— a g ro up o f p eo ple w ith m ore r ig hts t h an o rd in ary p eo ple a ctin g a lo ne, b ut ultim ate ly p eo ple n oneth ele ss. I n a n y c ase , i t’ s n oth in g m ore t h an p eo ple a n d c o ntr a cts a ll t h e way d ow n.” 18 That’ s w hy t h e b lo ck ch ain , b y r e d ucin g c o ntr a ctin g c o sts , e n ab le s f ir m s t o o pen u p a n d dev elo p n ew r e la tio nsh ip s o uts id e t h eir b oundarie s. C onse n S ys, f o r e x am ple , c an a rc h ite ct co m ple x r e la tio nsh ip s w ith a d iv ers e s e t o f m em bers , s o m e i n sid e i ts b oundarie s, s o m e o uts id e, an d s o m e s tr a d dlin g w alls , b ecau se s m art c o ntr a cts g overn t h ese r e la tio nsh ip s r a th er t h an tr a d itio nal m an ag ers . M em bers s e lf -a ssig n t o p ro je cts , d efin e a g re ed -u pon d eliv era b le s, a n d g et paid w hen t h ey d eliv er— all o n t h e b lo ck ch ain .

Sm art C on tr a cts The r a te o f c h an ge i s i n cre asin gly s e ttin g t h e s ta g e f o r s m art c o ntr a cts . M ore p eo ple a re dev elo pin g n ot o nly c o m pute r l ite ra cy , b ut a ls o f lu en cy . A s f a r a s e v id en cin g t r a n sa ctio ns g oes, th is n ew d ig ita l m ed iu m h as s ig nif ic an tly d if fe re n t p ro pertie s f ro m i ts p ap er p re d ecesso rs . A s cry pto gra p her N ic k S zab o h ig hlig hte d , n ot o nly c an t h ey c ap tu re a g re ate r a rra y o f i n fo rm atio n (s u ch a s n onlin guis tic s e n so ry d ata ) b ut t h ey a re d ynam ic : t h ey c an t r a n sm it i n fo rm atio n a n d ex ecu te c erta in k in ds o f d ecis io ns. I n S zab o’s w ord s, “ D ig ita l m ed ia c an p erfo rm c alc u la tio ns, dir e ctly o pera te m ach in ery , a n d w ork t h ro ugh s o m e k in ds o f r e aso nin g m uch m ore e ffic ie n tly th an h um an s.” 19 For t h e p urp ose s o f t h is d is c u ssio n, s m art c o ntr a cts a re c o m pute r p ro gra m s t h at s e cu re , en fo rc e, a n d e x ecu te s e ttle m en t o f r e co rd ed a g re em en ts b etw een p eo ple a n d o rg an iz atio ns. A s su ch , t h ey a ssis t i n n eg otia tin g a n d d efin in g t h ese a g re em en ts . S zab o c o in ed t h e p hra se i n 1 994, th e s a m e y ear t h at N ets c ap e, t h e f ir s t W eb b ro w se r, h it t h e m ark et:

A s m art c o ntr a ct i s a c o m pute riz ed t r a n sa ctio n p ro to co l t h at e x ecu te s t h e t e rm s o f a co ntr a ct. T he g en era l o bje ctiv es o f s m art c o ntr a ct desig n a re t o s a tis fy c o m mon co ntr a ctu al c o nditio ns ( s u ch a s p ay m en t t e rm s, l ie n s, c o nfid en tia lity , a n d e v en en fo rc em en t) , m in im iz e e x cep tio ns b oth m alic io us a n d a ccid en ta l, a n d m in im iz e t h e need f o r t r u ste d i n te rm ed ia rie s. R ela te d e co nom ic g oals i n clu de l o w erin g f ra u d l o ss, arb itr a tio n a n d e n fo rc em en t c o sts , a n d o th er t r a n sa ctio n c o sts .

20 Back t h en , s m art c o ntr a cts w ere a n i d ea a ll d re sse d u p w ith n ow here t o g o, a s n o a v aila b le te ch nolo gy c o uld d ep lo y t h em a s S zab o d esc rib ed . T here w ere c o m pute r s y ste m s s u ch a s ele ctr o nic d ata i n te rc h an ge ( E D I) t h at p ro vid ed s ta n dard s f o r t h e c o m munic atio n o f s tr u ctu re d data b etw een t h e c o m pute rs o f b uyers a n d s e lle rs , b ut n o t e ch nolo gy t h at c o uld a ctu ally t r ig ger pay m en ts a n d c au se m oney t o b e e x ch an ged .

Bitc o in a n d t h e b lo ck ch ain c h an ged a ll t h at. N ow p artie s c an m ak e a g re em en ts a n d au to m atic ally e x ch an ge b itc o in w hen t h ey m eet t h e t e rm s o f t h e a g re em en t. M ost s im ply , y our bro th er-in -la w c an ’t w ease l o ut o f a h ock ey b et. L ess s im ply , w hen y ou p urc h ase a s to ck , t h e tr a d e s e ttle s i n sta n tly a n d t h e s h are s a re i m med ia te ly t r a n sfe rre d t o y ou. E ven l e ss s im ple , w hen co ntr a cto rs d eliv er t h e s o ftw are c o de t h at m eets t h e n ecessa ry s p ecif ic atio ns, t h ey g et p aid .

The t e ch nolo gic al m ean s o f e x ecu tin g l im ite d s m art c o ntr a cts h as e x is te d f o r s o m e t im e. A co ntr a ct i s a b arg ain ed -fo r e x ch an ge e n fo rc eab le b efo re t h e e x ch an ge. A ndre as A nto nopoulo s ex pla in ed w ith a s im ple e x am ple : “ S o i f y ou a n d I w ere t o a g re e r ig ht n ow t h at I w ould p ay y ou fif ty d olla rs f o r t h e p en o n y our d esk , t h at’ s a p erfe ctly e n fo rc eab le c o ntr a ct. W e c an j u st s a y , ‘ I pro m is e t o p ay y ou f if ty d olla rs f o r t h e p en o n y our d esk ,’ a n d y ou w ould r e sp ond, ‘ Y es, I w ould lik e t h at.’ T hat t u rn s o ut t o b e ‘ o ffe r a ccep ta n ce a n d c o nsid era tio n.’ W e’v e g ot a d eal, a n d i t c an be e n fo rc ed i n a c o urt. T hat h as n oth in g t o d o w ith t h e t e ch nolo gic al m ean s o f i m ple m en ta tio n o f th e p ro m is e s t h at w e h av e m ad e.” What i n te re sts A ndre as a b out t h e b lo ck ch ain i s t h at w e c an e x ecu te t h is f in an cia l o blig atio n in a d ecen tr a liz ed t e ch nolo gic al e n vir o nm en t w ith a b uilt- in s e ttle m en t s y ste m . “ T hat’ s r e ally co ol,” h e s a id , “ b ecau se I c o uld a ctu ally p ay y ou f o r t h e p en r ig ht n ow , y ou w ould s e e t h e m oney in sta n tly , y ou w ould p ut t h e p en i n t h e m ail, a n d I c o uld g et a v erif ic atio n o f t h at. I t’ s m uch m ore lik ely t h at w e c an d o b usin ess.” The l a w p ro fe ssio n i s s lo w ly p lu ggin g i n to t h is o pportu nity . L ik e ev ery one i n t h e m id dle , la w yers m ay b eco m e s u bje ct t o d is in te rm ed ia tio n a n d w ill e v en tu ally n eed t o a d ap t. E xpertis e i n sm art c o ntr a cts c o uld b e a b ig o pportu nity f o r l a w f ir m s t h at w an t t o l e ad i n novatio n i n c o ntr a ct la w . H ow ev er, t h e p ro fe ssio n i s n ’t k now n f o r b re ak in g n ew g ro und. L eg al e x pert A aro n W rig ht, co au th or o f a n ew b ook a b out t h e b lo ck ch ain , t o ld u s, “ L aw yers a re l a g gard s.” 21 Mult is ig n atu re: S m art C om ple x C on tr a cts But, y ou s a y , w ould n’t t h e c o sts o f c o m ple x a n d t im e-c o nsu m in g n eg otia tio ns o f s m art c o ntr a cts outw eig h t h e b en efits o f o pen b oundarie s? T he a n sw er a t t h is p oin t a p pears t o b e n o. I f p artn ers sp en d m ore t im e u p f ro nt d ete rm in in g t h e t e rm s o f a n a g re em en t, t h e m onito rin g, e n fo rc em en t, an d s e ttle m en t c o sts d ro p s ig nif ic an tly , p erh ap s t o z ero . F urth er, s e ttle m en t c an o ccu r i n r e al tim e, p ossib ly i n m ic ro se co nds t h ro ughout t h e d ay d ep en din g o n t h e d eal. M ost i m porta n t, b y partn erin g w ith s u perio r t a le n t, c o m pan ie s c an a ch ie v e b ette r i n novatio n a n d b eco m e m ore co m petitiv e.

Let’ s c o nsid er t h e u se o f i n dep en den t c o ntr a cto rs . I n t h e e arly d ay s o f d ig ita l t r a d e, t h e blo ck ch ain a cco m modate d o nly t h e s im ple st t w o-p arty t r a n sa ctio ns. F or i n sta n ce, i f A lic e n eed ed so m eo ne t o c o m ple te a p ie ce o f c o de q uic k ly , s h e w ould p ost a n a n onym ous “ co der n eed ed ” re q uest o n a n a p pro pria te d is c u ssio n b oard . B ob w ould s e e i t.

22 I f t h e p ric e a n d t im in g w ere rig ht, h e w ould s e n d w ork s a m ple s. I f h is s a m ple s m et A lic e’s n eed s, t h en s h e m ad e B ob a n offe r. T hey a g re ed o n t e rm s: A lic e w ould s e n d h alf t h e f e e i m med ia te ly a n d h alf u pon r e ceip t o f co m ple tio n a n d s u ccessfu l t e st o f t h e c o de.

Their c o ntr a ct w as s tr a ig htf o rw ard — an o ffe r t o h ir e a n d a n a ccep ta n ce t o d o t h e j o b, a n d i t need n’t h av e b een i n w ritin g, t h ough t h eir i n te ra ctio ns o n t h e b lo ck ch ain m ad e i t s o . T heir ow ners h ip o f b itc o in s w as a sso cia te d w ith d ig ita l a d dre sse s ( lo ng s tr in gs o f n um bers ) t h at h ad tw o c o m ponen ts : a p ublic k ey t h at s e rv ed a s a n a d dre ss, a n d a p riv ate k ey t h at g av e i ts o w ner ex clu siv e a ccess t o a n y c o in s a sso cia te d w ith t h at a d dre ss. B ob s e n t A lic e h is p ublic k ey , a n d s h e dir e cte d t h e f ir s t p ay m en t t h ere . T he n etw ork r e co rd ed t h e t r a n sfe r a n d a sso cia te d t h ose b itc o in s to B ob’s p ublic k ey w alle t.

What i f , a t t h is p oin t, B ob d ecid ed t h at h e d id n’t w an t t o d o t h e pro je ct? I n t h is t w o-p arty tr a n sa ctio n, A lic e w ould h av e l ittle r e co urs e . S he c o uld n’t g o t o h er c re d it c ard c o m pan y t o re v ers e t h e t r a n sa ctio n. S he c o uld n’t ( y et) g o t o c iv il c o urt a n d s u e B ob f o r b re ach o f c o ntr a ct.

Bey ond a r a n dom ly g en era te d a lp han um eric c o de a n d a n o nlin e a d vertis e m en t, s h e w ould h av e no w ay o f i d en tif y in g B ob u nle ss h e’d p oste d h is a d o n a c en tr a liz ed p la tf o rm t h at c o uld t r a ck Bob d ow n, o r t h ey ’d e x ch an ged e -m ails t h ro ugh a c en tr a liz ed s e rv ic e. S he c o uld , h ow ev er, in dic ate t h at h is p ublic k ey w as n ot t o b e t r u ste d , t h us l o w erin g h is r e p uta tio n s c o re a s a c o der.

With out a ssu ra n ces o f t h e o th er p arty ’s t r u stw orth in ess i n f u lf illin g o ff-c h ain a ctio ns, t h e deal w as a p ris o ner’s d ile m ma o f s o rts : i t s till r e q uir e d s o m e t r u st. R ep uta tio n s y ste m s c o uld mitig ate t h is u ncerta in ty t o s o m e e x te n t. B ut w e n eed ed t o i n tr o duce t r u st a n d s e cu rity i n to t h is an onym ous a n d o pen s y ste m .

In 2 012, “ co re d ev elo per” G av in A ndre se n i n tr o duced a n ew t y pe o f b itc o in a d dre ss t o t h e bitc o in p ro to co ls c alle d “ p ay t o s c rip t h ash ” ( P 2S H ). I ts p urp ose w as t o a llo w o ne p arty “ to f u nd an y a rb itr a ry t r a n sa ctio n, n o m atte r h ow c o m plic ate d .” 23 P artie s u se m ultip le a u th en tic atin g sig natu re s o r k ey s r a th er t h an a s in gle p riv ate k ey t o c o m ple te a t r a n sa ctio n. T he c o m munity usu ally r e fe rs t o t h is m ultip le -s ig natu re f e atu re a s s im ply “ m ultis ig .” In a m ultis ig t r a n sa ctio n, p artie s a g re e o n t h e t o ta l n um ber o f k ey s g en era te d ( N ) a n d h ow man y w ill b e r e q uir e d t o c o m ple te a t r a n sa ctio n ( M ). T his i s c alle d a n M -o f-N s ig natu re s c h em e or s e cu rity p ro to co l. T hin k o f a l o ck box r e q uir in g m ultip le p hysic al k ey s t o o pen . W ith t h is fe atu re , B ob a n d A lic e w ould a g re e i n a d van ce t o e m plo y a n eu tr a l, d is in te re ste d t h ir d -p arty arb itr a to r t o h elp t h em c o m ple te t h eir t r a n sa ctio n. E ach o f t h e t h re e p artie s w ould h old o ne o f th re e p riv ate k ey s, t w o o f w hic h a re n eed ed t o a ccess t h e t r a n sfe rre d f u nds. A lic e w ould s e n d h er bitc o in t o a p ublic a d dre ss. A t t h is p oin t, t h ose f u nds c an b e v ie w ed b y a n yone, b ut a ccesse d b y no o ne. O nce B ob s e es t h e f u nds h av e b een p oste d , h e f u lf ills h is e n d o f t h e b arg ain . I f, u pon re ceip t o f B ob’s g ood o r s e rv ic e, A lic e i s u nsa tis fie d a n d f e els c h eate d , s h e c o uld r e fu se t o pro vid e B ob w ith t h e s e co nd k ey . T he t w o p artie s w ould t h en l o ok t o t h e a rb itr a to r, h old er o f t h e th ir d k ey , t o h elp t h em r e so lv e t h eir d is a g re em en t. T he i n te rv en tio n o f s u ch a rb itr a to rs i s c alle d fo r o nly i n c ase s o f d is p ute s l ik e t h ese , a n d a t n o p oin t d o t h ey t h em se lv es h av e a ccess t o t h e fu nds— a m ech an is m e n ab lin g t h e r is e o f “ sm art c o ntr a cts .” To c o ntr a ct r e m ote ly , l e t a lo ne a u to m atic ally , y ou n eed a c erta in d eg re e o f t r u st t h at t h e sy ste m w ill e n fo rc e y our r ig hts u nder t h e d eal. I f y ou c an ’t t r u st t h e o th er p arty , y ou h av e t o t r u st th e d is p ute r e so lu tio n m ech an is m s a n d/o r l e g al s y ste m b eh in d i t. M ultis ig t e ch nolo gy a llo w s th ese d elib era te ly d is in te re ste d t h ir d p artie s t o b rin g s e cu rity a n d t r u st t o a n onym ous tr a n sa ctio ns.

Multis ig a u th en tic atio n i s g ro w in g i n p opula rity . A s ta rt- u p c alle d H ed gy i s u sin g m ultis ig te ch nolo gy t o c re ate f u tu re s c o ntr a cts : p artie s a g re e o n a p ric e o f b itc o in t h at w ill b e t r a d ed i n t h e fu tu re , o nly e v er e x ch an gin g t h e p ric e d if fe re n ce. H ed gy n ev er h old s c o lla te ra l. T he p artie s p la ce it i n a m ultis ig w alle t u ntil t h e e x ecu tio n d ate . H ed gy’s g oal i s t o u se m ultis ig a s a f o undatio n f o r sm art c o ntr a cts t h at a re c o m ple te ly s e lf -e x ecu ta b le a n d f u lly e v id en ced o n t h e b lo ck ch ain .

24 Thin k o f t h e b lo ck ch ain a s a d ia le ctic b etw een a n onym ity a n d o pen ness, w here t h e m ultis ig fe atu re r e co ncile s t h e t w o w ith out l o ss o f e ith er.

Am ong o th er t h in gs, t h e s m art c o ntr a ct c h an ges t h e r o le o f t h ose w ith in f ir m s w ho a re i n t h e busin ess o f f in din g a n d c o ntr a ctin g f o r t a le n t. H R d ep artm en ts n eed t o u nders ta n d t h at t a le n t i s outs id e t h eir b oundarie s, n ot j u st i n sid e. T hey n eed t o s te p u p t o t h e c h alle n ges o f u sin g s m art co ntr a cts t o l o w er t h e c o sts o f b uild in g r e la tio nsh ip s w ith e x te rn al r e so urc es.

3.

C oord in atio n C osts — How S hould W e A ll W ork T ogeth er?

So w e’v e f o und t h e r ig ht p eo ple a n d y ou’v e c o ntr a cte d w ith t h em . H ow d o y ou m an ag e t h em ?

Thro ughout h is w ritin gs, C oase d is c u sse d c o sts o f c o ord in atin g, m esh in g, o r o th erw is e orc h estr a tin g t h e d if fe re n t p eo ple , p ro ducts , a n d p ro cesse s i n to a n e n te rp ris e t h at c an e ffe ctiv ely cre ate v alu e. A gain st t r a d itio nal e co nom is ts w ho a rg ued t h at t h ere w ere i n te rn al m ark ets w ith in fir m s, C oase s a id t h at w hen “ a w ork m an m oves f ro m d ep artm en t Y t o d ep artm en t X , h e d oes n ot go b ecau se o f a c h an ge i n r e la tiv e p ric es, b ut b ecau se h e i s o rd ere d t o d o s o .” 25 I n o th er w ord s, mark ets a llo cate r e so urc es v ia t h e p ric e m ech an is m , b ut f ir m s a llo cate r e so urc es v ia a u th orita tiv e dir e ctio n.

Willia m so n w en t o n t o e x pla in t h at t h ere a re t w o s ig nif ic an t c o ord in atin g s y ste m s. F ir s t i s th e p ric e s y ste m f o r d ecen tr a liz ed r e so urc e a llo catio n n eed s a n d o pportu nitie s ( th e m ark et) . B ut se co nd, ( tr a d itio nal) “ fir m s e m plo y a d if fe re n t o rg an iz in g p rin cip le — th at o f h ie ra rc h y— where u pon au th ority i s u se d t o a ffe ct r e so urc e a llo catio n.” O ver t h e l a st f e w d ecad es, h ie ra rc h ie s hav e c o m e u nder s c ru tin y a s s tr u ctu re s f o r k illin g c re ativ ity , u nderm in in g i n itia tiv e, dis e m pow erin g h um an c ap ita l, a n d s c ap eg oatin g r e sp onsib ility t h ro ugh o pacity . T o b e s u re , man y m an ag em en t h ie ra rc h ie s h av e b eco m e u npro ductiv e b ure au cra cie s. H ow ev er, h ie ra rc h y a s a c o ncep t h as g otte n a b ad r a p , a s h as i ts m ost e lo quen t d efe n der, C an ad ia n -b orn p sy ch olo gis t Ellio t J a q ues. I n a c la ssic 1 990 Harv a rd B usin ess R evie w a rtic le , J a q ues a rg ued , “ 3 5 y ears o f re se arc h h av e c o nvin ced m e t h at m an ag eria l h ie ra rc h y i s t h e m ost e ffic ie n t, t h e h ard ie st, a n d i n fa ct t h e m ost n atu ra l s tr u ctu re e v er d ev is e d f o r l a rg e o rg an iz atio ns. P ro perly s tr u ctu re d , h ie ra rc h y can r e le ase e n erg y a n d c re ativ ity , r a tio naliz e p ro ductiv ity , a n d a ctu ally i m pro ve m ora le .” 26 The t r o uble i s t h at, i n r e cen t b usin ess h is to ry , m an y h ie ra rc h ie s h av e n ot b een e ffe ctiv e, t o th e p oin t o f r id ic u le . E xhib it A i s The D ilb ert P rin cip le , m ost l ik ely o ne o f t h e b est- s e llin g man ag em en t b ooks o f a ll t im e, b y S co tt A dam s. H ere ’s D ilb ert o n b lo ck ch ain t e ch nolo gy f ro m a re cen t c arto on:

Man ag er: I t h in k w e s h ould b uild a b lo ck ch ain .

Dilb ert: U h-o h. D oes h e u nders ta n d w hat h e s a id o r i s i t s o m eth in g h e s a w i n a t r a d e mag azin e a d ?

Dilb ert: W hat c o lo r d o y ou w an t y our b lo ck ch ain ? Man ag er: I t h in k m au ve h as t h e m ost R A M .

In t h e c arto on, A dam s c ap tu re s o ne o f t h e m ark s o f h ie ra rc h ie s g one w ro ng— th at m an ag ers ofte n r is e t o a l e v el o f p ow er w here t h ey l a ck t h e k now le d ge r e q uir e d f o r e ffe ctiv e l e ad ers h ip .

Com bin ed w ith p ro gre ssiv e m an ag em en t t h in kin g a b out h ow t o b uild e ffe ctiv e, i n novativ e org an iz atio ns, t h e f ir s t g en era tio n o f t h e I n te rn et e n ab le d p ro gre ssiv e t h in kin g m an ag ers t o ch an ge t h e t o p-d ow n a ssig nm en t o f w ork a n d a p pro pria tio n o f c re d it, r e co gnitio n, a n d pro m otio n.

For b ette r o r f o r w ors e , c en tr a liz ed h ie ra rc h ie s a re t h e n orm . D ecen tr a liz atio n, n etw ork in g, an d e m pow erm en t h av e b een s e n sib le s in ce t h e e arly d ay s o f t h e I n te rn et. T eam s a n d p ro je cts hav e b eco m e t h e f o undatio n o f i n te rn al o rg an iz atio n. E -m ail e n ab le d p eo ple t o c o lla b ora te a cro ss org an iz atio nal s ilo s. S ocia l m ed ia d ro pped s o m e c o lla b ora tio n c o sts i n te rn ally a n d d ro pped tr a n sa ctio n c o sts a n d m ad e t h e b oundarie s o f c o rp ora tio ns more p oro us a s c o m pan ie s c o uld l in k up w ith s u pplie rs , c u sto m ers , a n d p artn ers m ore e asily .

How ev er, t o day ’s c o m merc ia l s o cia l m ed ia t o ols a re h elp in g m an y f ir m s a ch ie v e n ew l e v els of i n te rn al c o lla b ora tio n. E m pow erm en t, t h e r e al d ecen tr a liz atio n o f p ow er, i s a n i m porta n t f o cu s in b usin ess; a n d c o m pan ie s h av e e x perim en te d o r i m ple m en te d n ew c o ncep ts r a n gin g f ro m matr ix m an ag em en t t o h ola cra cy — with v ary in g d eg re es o f s u ccess.

In f a ct, t h ere i s w id esp re ad a g re em en t t h at w hen f ir m s d is tr ib ute r e sp onsib ility , a u th ority , an d p ow er, t h e r e su lt w ill t y pic ally b e p ositiv e: b ette r b usin ess f u nctio n, c u sto m er s e rv ic e, a n d in novatio n. B ut t h is p ra ctic e i s e asie r s a id t h an d one.

The I n te rn et a ls o h asn ’t d ro pped w hat e co nom is ts c all “ ag en cy c o sts ” — th e c o st o f m ak in g su re t h at e v ery body i n sid e t h e f ir m i s a ctin g i n t h e o w ner’s i n te re st. I n f a ct, a n oth er N obel P riz e– win nin g e co nom is t ( y es, t h ere d o s e em t o b e a l o t o f t h em i n t h is s to ry ), J o se p h S tig litz , a rg ued th at t h e s h eer s iz e a n d s e em in g c o m ple x ity o f t h ese f ir m s h av e i n cre ase d a g en cy c o sts e v en a s a fir m ’s t r a n sa ctio n c o sts h av e p lu m mete d . H en ce, t h e h uge p ay g ap b etw een C EO a n d f ro nt l in e.

So w here d oes b lo ck ch ain t e ch nolo gy c o m e i n a n d h ow c an i t c h an ge h ow f ir m s a re man ag ed a n d c o ord in ate d i n te rn ally ? W ith s m art c o ntr a cts a n d u npre ced en te d t r a n sp are n cy , t h e blo ck ch ain s h ould n ot o nly r e d uce t r a n sa ctio n c o sts i n sid e a n d o uts id e o f t h e f ir m , b ut i t s h ould als o d ra m atic ally r e d uce a g en cy c o sts a t a ll l e v els o f m an ag em en t. T hese c h an ges w ill i n t u rn mak e i t h ard er t o g am e t h e s y ste m . S o f ir m s c o uld g o b ey ond t r a n sa ctio n c o st t o t a ck le t h e ele p han t i n t h e b oard ro om — ag en cy c o st. Y och ai B en kle r t o ld u s, “ W hat’ s e x citin g t o m e a b out blo ck ch ain t e ch nolo gy i s t h at i t c an e n ab le p eo ple t o f u nctio n t o geth er w ith t h e p ers is te n ce a n d sta b ility o f a n o rg an iz atio n, b ut w ith out t h e h ie ra rc h y.” 27 It a ls o s u ggests t h at m an ag ers s h ould b ra ce t h em se lv es f o r r a d ic al t r a n sp are n cy i n h ow t h ey do c o ord in ate a n d c o nduct t h em se lv es b ecau se s h are h old ers w ill n ow b e a b le t o s e e t h e in effic ie n cie s, t h e u nnecessa ry c o m ple x ity , a n d t h e h uge g ap b etw een e x ecu tiv e p ay a n d t h e valu e e x ecu tiv es a ctu ally c o ntr ib ute . R em em ber, m an ag ers a re n ’t a g en ts o f o w ners ; t h ey ’re in te rm ed ia rie s.

4.

C osts o f ( R e-)B uild in g T ru st— Why S hould W e T ru st O ne A noth er?

As w e h av e e x pla in ed , t r u st i n b usin ess a n d s o cie ty i s t h e e x pecta tio n th at a n oth er p arty w ill be h onest, c o nsid era te , a cco unta b le , a n d t r a n sp are n t— th at h e o r s h e w ill a ct w ith i n te g rity .

28 I t’ s a l o t o f w ork t o e sta b lis h t r u st, a n d m an y e co nom is ts a n d o th er a cad em ic s a rg ue t h at w e h av e vertic ally i n te g ra te d f ir m s b ecau se e sta b lis h in g t r u st i s e asie r w ith in c o rp ora te b oundarie s t h an i n an o pen m ark et. W ith t r u st a t a n a ll- tim e l o w , t h e c h alle n ge f o r f ir m s i s n ot s im ply f ig urin g o ut whom t o t r u st, b ut h ow t o g et o uts id e c ap ab ility t o t r u st t h em .

In deed , e co nom is t M ic h ael J e n se n a n d c o lle ag ues m ad e t h e c ase t h at in te g rity i s a f a cto r o f pro ductio n. N ot t h e f ir s t b ut a m ong t h e m ost e lo quen t o n t h e t o pic , t h ey e x pla in t h at t h e se em in gly n ev er-e n din g s c an dals i n t h e w orld o f f in an ce w ith t h eir d am ag in g e ffe cts o n v alu e an d h um an w elf a re a rg ue s tr o ngly f o r t h e a d ditio n o f i n te g rity t o f in an cia l o pera tio ns. T o t h em th is i s n ot a n i s su e o f v ir tu e, b ut a n o pportu nity i n f in an cia l e co nom ic s t o “ cre ate s ig nif ic an t in cre ase s i n e co nom ic e ffic ie n cy , p ro ductiv ity , a n d a g gre g ate h um an w elf a re .” T o t h em , “In te g rity . . . o n t h e p art o f i n div id uals o r o rg an iz atio ns h as e n orm ous e co nom ic i m plic atio ns (fo r v alu e, p ro ductiv ity , q uality o f l if e , e tc .) . I n deed , i n te g rity i s a f a cto r o f p ro ductio n a s im porta n t a s l a b or, c ap ita l, a n d t e ch nolo gy.” 29 Wall S tr e et l o st t r u st ( a n d n early k ille d c ap ita lis m ) b ecau se o f a s e t o f i n te g rity v io la tio ns.

But h as i t c h an ged ? A nd w ill i t c h an ge? I n t h e p ast, c o rp ora te s o cia l r e sp onsib ility a d vocate s arg ued t h at c o m pan ie s “ d o w ell b y d oin g g ood.” W e h av en ’t s e en t h e e v id en ce. M an y c o m pan ie s did w ell b y d oin g b ad —by h av in g b ad l a b or p ra ctic es i n t h e d ev elo pin g w orld , b y e x te rn aliz in g th eir c o sts o nto s o cie ty s u ch a s p ollu tio n, b y b ein g m onopolie s a n d g ougin g c u sto m ers . T he co lla p se o f 2 008 t a u ght u s f o r s u re t h at c o m pan ie s “ d o b ad ly b y b ein g b ad .” T he m ajo r b an ks fo und t h is o ut t h e h ard w ay . P rio r t o 2 008 m an y w ere m ak in g u pw ard s o f 2 0 p erc en t r e tu rn o n eq uity . F or m an y t o day i t i s w ell b elo w 5 p erc en t, w ith s o m e n ot e v en m ak in g t h eir c o st o f cap ita l. F ro m a s h are h old er p ers p ectiv e, t h ey s h ould n o l o nger e x is t.

30 What a re t h e c h an ces, r e alis tic ally , t h at W all S tr e et w ill w ak e u p t o J e n se n ’s e x horta tio ns an d a ct w ith i n te g rity ? S ure ly , e x ped ie n ce a n d s h ort- te rm g ain a re c o ded i n to t h e D NA o f t h e Weste rn f in an cia l s y ste m .

Ente r b lo ck ch ain t e ch nolo gy a n d d ig ita l c u rre n cie s. W hat i f p artie s d id n’t h av e t o t r u st o ne an oth er, b ut c o uld s till a ct w ith h onesty , a cco unta b ility , c o nsid era tio n, a n d t r a n sp are n cy b ecau se it w as t h e f o undatio n o f t h e t e ch nolo gic al p la tf o rm o f f in an ce?

Ste v e O m ohundro g av e u s a c o m pellin g e x am ple . “ If s o m eb ody f ro m N ig eria w an ts t o b uy so m eth in g t h at I ’m s e llin g, I ’m g oin g t o b e v ery s k ep tic al, I ’m n ot g oin g t o a ccep t a c re d it c ard or a c h eck f ro m N ig eria . W ith t h e n ew p la tf o rm , I k now I c an t r u st i t a n d I d on’t h av e t o i n cu r th e c o sts o f e sta b lis h in g t r u st. S o i t e n ab le s t r a n sa ctio ns w hic h s im ply c o uld n’t h ap pen oth erw is e .” 31 So W all S tr e et b an ks d on’t h av e t o s p lic e i n te g rity i n to t h eir D NA a n d b eh av io r; t h e fo unders o f b lo ck ch ain s h av e c o ded i t i n to t h eir s o ftw are p ro to co ls a n d d ep lo yed i t a cro ss t h e netw ork — en ab lin g a n ew u tility f o r t h e f in an cia l s e rv ic es i n dustr y . T he g ood n ew s i s t h at t h e in dustr y c an r e esta b lis h t r u st a n d m ain ta in i t i n a n o ngoin g w ay .

With b lo ck ch ain t e ch nolo gy c au sin g t h e c o sts o f s e arc h in g, c o ntr a ctin g, c o ord in atin g, a n d cre atin g t r u st t o p lu m met, i t s h ould b e e asie r f o r f ir m s n ot j u st t o o pen u p, b ut a ls o t o f o rg e tr u stin g r e la tio nsh ip s w ith e x te rn al p artie s. A ctin g i n o ne’s s e lf -in te re st s e rv es e v ery body’s in te re sts . C heatin g t h e s y ste m c o sts m ore t h an u sin g i t a s d esig ned .

This i s n ot t o s a y t h at c o rp ora te b ra n ds o r f o r t h at m atte r a ctin g e th ic ally i s u nim porta n t o r n o lo nger r e q uir e d . B lo ck ch ain h elp s e n su re i n te g rity a n d t h ere fo re t r u st i n t r a n sa ctio ns b etw een peers . I t a ls o h elp s a ch ie v e t r a n sp are n cy — a c ritic al f a cto r i n t r u st. H ow ev er, a s a u th or a n d te ch nolo gy t h eo ris t D av id T ic o ll s a y s: “ T ru st a n d b ra n d a re a b out m ore t h an v ouch sa fin g a tr a n sa ctio n. T hey a re a ls o a b out q uality , e n jo ym en t, s a fe ty o f a d ev ic e o r s e rv ic e, c ach et a n d co oln ess. I n t o day ’s C O P21 w orld , t h e b est b ra n ds t r a n sp are n tly a n d v erif ia b ly s ig nif y o utc o m es th at a re e n vir o nm en ta lly , s o cia lly , a n d e co nom ic ally r e sp onsib le .” 32 Still, t h ro ugh s m art c o ntr a cts , e x ecu tiv es c an b e h eld a cco unta b le — th ey m ust a b id e b y t h eir co m mitm en ts a s e n fo rc ed a n d s e ttle d b y s o ftw are . C om pan ie s c an p ro gra m r e la tio nsh ip s w ith ra d ic al t r a n sp are n cy s o e v ery one h as a b ette r u nders ta n din g a b out w hat e ach p arty h as s ig ned u p to d o. A nd o vera ll, l ik e i t o r n ot, t h ey m ust c o nduct b usin ess i n a w ay t h at i s c o nsid era te o f t h e in te re sts o f o th er p artie s. T he p la tf o rm d em an ds i t.

DETER M IN IN G C O RPO RATE B O UNDARIE S Overa ll, t h e b oundarie s t h at s e p ara te a c o m pan y f ro m i ts v en dors , c o nsu lta n ts , c u sto m ers , ex te rn al p eer c o m munitie s, a n d o th ers w ill b eco m e h ard er t o d efin e. P erh ap s a s i m porta n t, t h ey will c o nsta n tly c h an ge.

Fir m s w ill s till e x is t, b lo ck ch ain n otw ith sta n din g, b ecau se t h e m ech an is m s f o r s e arc h in g, co ntr a ctin g, c o ord in atin g, a n d e sta b lis h in g t r u st w ith in c o rp ora te b oundarie s w ill b e m ore c o st- effe ctiv e t h an t h ose i n t h e o pen m ark et, a t l e ast f o r m an y a ctiv itie s. T he i d ea o f t h e s o -c alle d f re e ag en t n atio n, w here i n div id uals e x ecu te w ork o uts id e t h e b oundarie s o f c o rp ora tio ns, i s i llu so ry .

Mela n ie S w an , w ho f o unded t h e I n stitu te f o r B lo ck ch ain S tu die s, s a id , “ W hat’ s t h e r ig ht s iz e o f th e c o rp ora tio n f o r o ptim al t r a n sa ctib ility ? W ell, i t’ s n ot a u nita ry t h in g, o f p eo ple w ork in g o nly as i n div id uals o r e -la n cers .” T o h er, t h ere w ill b e n ew k in ds o f “ fle x ib le b usin ess e n titie s o f in div id uals a n d g ro ups p artn erin g a ro und p ro je cts .” S he v ie w s t h e n ew m odel o f t h e f ir m m ore lik e t h e g uild , t h e p re in dustr ia l a sso cia tio ns o f m erc h an ts o r t r a d esm en w ho w ork ed t o geth er i n a partic u la r t o w n. “ W e s till n eed o rg an iz atio ns a ctin g a s c o ord in atin g m ech an is m s. B ut t h e n ew models o f t e am c o lla b ora tio n a re n ot y et f u lly c le ar.” 33 Today w e o fte n h ear t h at f ir m s s h ould f o cu s o n t h eir c o re . B ut w hen c o nsid erin g h ow blo ck ch ain t e ch nolo gy d ro ps t r a n sa ctio n c o sts , w hat i s c o re ? A nd h ow d o y ou d efin e t h at w hen a co m pan y’s c o re i s c o nsta n tly c h an gin g?

It s e em s t h at e v ery one h as a d if fe re n t d efin itio n o f w hat t h e o ptim al f ir m s iz e s h ould b e t o max im iz e p ro ductiv ity a n d c o m petitiv e a d van ta g e. M an y f ir m s w e e x am in ed d id n’t h av e a c le ar vie w , s e em in g t o c h oose t h e B ob D yla n a p pro ach t o d ete rm in in g w hat’ s i n a n d w hat s h ould b e out ( “ Y ou d on’t n eed a w eath erm an t o k now w hic h w ay t h e w in d b lo w s” ). B ack -o ffic e pro cessin g, f o r e x am ple , w as d esc rib ed a s a n o-b ra in er, w ith out a n y c le ar c rite ria a s t o w hy.

Som e a re m ore r ig oro us. F ro m t h e c o re c o m pete n cie s v ie w d ev elo ped b y G ary H am el a n d C .

K. P ra h ala d , f ir m s g ain c o m petitiv e a d van ta g e t h ro ugh c o m pete n ce m aste ry . T hose c o m pete n cie s maste re d a re c en tr a l t o t h e f ir m , w hile o th ers c an b e a cq uir e d f ro m o uts id e.

34 H ow ev er, a f ir m may h av e m aste ry o ver s o m e a ctiv itie s t h at a re n ot m is sio n c ritic al. S hould t h ey s till b e k ep t in sid e?

Str a te g is t M ic h ael P orte r h as a n i m plic it v ie w t h at c o m petitiv e a d van ta g e s te m s f ro m activ itie s, i n p artic u la r f ro m n etw ork s o f r e in fo rc in g a ctiv itie s t h at a re h ard t o r e p lic ate i n t h eir to ta lity . I t’ s n ot t h e i n div id ual p arts o f t h e b usin ess t h at m atte r, b ut h ow t h ey a re s tr u ng t o geth er an d b uilt t o r e in fo rc e o ne a n oth er i n a u niq ue a ctiv ity s y ste m . C om petitiv e ad van ta g e c o m es fro m t h e e n tir e s y ste m o f a ctiv itie s; w hile a n y i n div id ual a ctiv ity w ith in t h e s y ste m m ay b e co pie d , c o m petito rs c an not p ro duce t h e s a m e b en efit u nle ss t h ey m an ag e t o d uplic ate t h e e n tir e sy ste m .

35 Oth ers a rg ue t h at c o m pan ie s s h ould a lw ay s r e ta in f u nctio ns o r c ap ab ilitie s t h at a re m is sio n critic al— th ose t h at f ir m s m ust a b so lu te ly g et r ig ht f o r s u rv iv al a n d s u ccess. B ut m ak in g co m pute rs i s m is sio n c ritic al f o r c o m pute r c o m pan ie s; y et D ell, H P, a n d I B M o uts o urc e m uch o f th is a ctiv ity t o e le ctr o nic s m an ufa ctu rin g s e rv ic es c o m pan ie s l ik e C ele stic a, F le x tr o nic s, o r J a b il.

Fin al a sse m bly o f v eh ic le s i s m is sio n c ritic al f o r a n a u to m an ufa ctu re r; y et B M W a n d M erc ed es co ntr a ct w ith M ag na t o d o t h is a ctiv ity .

Sta n fo rd G ra d uate S ch ool o f B usin ess p ro fe sso r S usa n A th ey a rg ues p ers u asiv ely : “ T here may b e s o m e m is sio n-c ritic al f u nctio ns, l ik e t h e c o lle ctio n a n d a n aly sis o f b ig d ata , t h at a re j u st to o r is k y t o m ove o uts id e c o rp ora te b oundarie s, e v en i f y ou d on’t h av e u niq ue a b ilitie s i n t h at are a.” 36 T ru e, t h ere m ay b e s o m e f u nctio ns l ik e d ata a n aly tic s w here s u rv iv al d ep en ds o n b ein g uniq uely g ood, a n d t h ere m ay b e e x is te n tia l r is k s o f p artn erin g. S till, e x te rn al r e so urc es c an b e dep lo yed s tr a te g ic ally t o b uild i n te rn al c ap ab ility .

Our v ie w i s t h at t h e s ta rtin g p oin t f o r c o rp ora te b oundary d ecis io ns i s t o u nders ta n d y our in dustr y , c o m petito rs , a n d o pportu nitie s f o r p ro fita b le g ro w th — an d u se t h is k now le d ge a s t h e basis f o r d ev elo pin g a b usin ess s tr a te g y. F ro m t h ere , t h e b lo ck ch ain o pen s u p n ew o pportu nitie s fo r n etw ork in g t h at e v ery m an ag er a n d k now le d ge w ork er n eed s t o c o nsid er a t a ll t im es.

Boundary c h oic es a re n ot s im ply f o r s e n io r e x ecu tiv es, t h ey a re f o r a n yone w ho c are s a b out mars h alin g t h e b est c ap ab ility f o r i n novatio n a n d h ig h p erfo rm an ce. W e s h ould a d d— an d t h is i s no s m all p oin t— th at y ou c an ’t o uts o urc e y our c o rp ora te c u ltu re .

Ente r t h e M atr ix Tak in g i n to a cco unt h ow b lo ck ch ain t e ch nolo gy c an e n ab le a ccess t o u niq ue c ap ab ilitie s o uts id e co rp ora te b oundarie s, f ir m s c an n ow d efin e t h ose b usin ess a ctiv itie s o r f u nctio ns t h at a re fu ndam en ta l t o c o m petitiv en ess— th at a re b oth m is sio n c ritic al a n d a ls o u niq ue e n ough t o e n su re dif fe re n tia te d v alu e. How ev er, t h is I n -O ut M atr ix i s j u st a s ta rtin g p oin t f o r d efin in g c o rp ora te b oundarie s a t a n y giv en p oin t. W hat o th er f a cto rs s h ould f ir m s c o nsid er i n d ete rm in in g w hat i s f u ndam en ta l? W hat ex te n uatin g c ir c u m sta n ces a re t h ere t h at m ig ht a ffe ct c h oic es t o o uts o urc e o r n urtu re i n te rn ally ?

Hack in g Y ou r F utu re: B ou ndary D ecis io n s When m ak in g b oundary c h oic es, f ir m s s h ould s ta rt u sin g t h e b lo ck ch ain t o m ars h al a 3 60-d eg re e vie w a n d r e ach c o nse n su s o n w hat i s u niq ue a n d w hat i s m is sio n c ritic al i n t h eir b usin ess. L et’ s re tu rn t o J o e L ubin a n d C onse n S ys, a s t h ey f o re sh ad ow t h e m odus o pera n di o f t h e b lo ck ch ain - base d e n te rp ris e . R em em ber t h at C onse n S ys i s i n i ts i n fa n cy , a n d m uch c an g o w ro ng t o underm in e i ts b usin ess. W e c an s till l e arn f ro m t h is c o m pan y’s e x am ple .

1.

A re t h ere p ossib le p artn ers w ho c o uld d o t h e w ork b ette r? I n p artic u la r, c o uld w e ben efit f ro m h arn essin g n ew p eer p ro ductio n c o m munitie s, i d eag ora s, o pen p la tf o rm s, an d o th er b lo ck ch ain b usin ess m odels ? T he c o m pan y C onse n S ys i s a b le t o o rc h estr a te ex tr a o rd in ary e x pertis e t o d o i ts w ork , e v en t h ough m an y a re o uts id e i ts b oundarie s. 2.

G iv en b lo ck ch ain t e ch nolo gy, w hat a re t h e n ew e co nom ic s o f c o rp ora te b oundarie s— th e t r a n sa ctio n c o sts o f p artn erin g, v ers u s k eep in g/d ev elo pin g i n -h ouse ? C an y ou dev elo p a s u ite o f s m art c o ntr a cts w hose c o re e le m en ts a re m odula r a n d r e u sa b le ?

Conse n S ys u se s s m art c o ntr a cts t o r e d uce c o ord in atio n c o sts .

3.

W hat i s t h e e x te n t o f t e ch nolo gic al i n te rd ep en den ce v ers u s m odula rity ? I f y ou c an defin e b usin ess c o m ponen ts t h at a re m odula r, t h en y ou c an e asily r e co nfig ure t h em outs id e c o rp ora te b oundarie s. C onse n S ys s e ts s ta n dard s f o r s o ftw are d ev elo pm en t a n d pro vid es a ccess t o v ario us s o ftw are m odule s t h at i ts p artn ers c an b uild u pon.

4.

W hat a re y our f ir m ’s c o m pete n cie s w ith r e g ard t o t h e m an ag in g o f o uts o urc ed w ork ?

Can s m art c o ntr a cts e n han ce t h ose c o m pete n cie s a n d l o w er c o sts ? F ro m t h e g et- g o, Conse n S ys w as a b lo ck ch ain b usin ess. C EO J o e L ubin e m bra ces t h e t e ch nolo gy a n d a modif ie d h ola cra cy , a n d w e c an s e e t h e s e v en d esig n p rin cip le s a t w ork .

5.

W hat a re t h e r is k s o f o pportu nis m w here a p artn er m ig ht e n cro ach o n f u ndam en ta l parts o f y our b usin ess, a s s o m e h av e s u ggeste d F oxco nn m ay d o t o s m art p hone co m pan ie s? C onse n S ys t r ie s t o m itig ate t h is c h alle n ge b y b uild in g l o yalty t h ro ugh in cen tiv e s tr u ctu re s w here b y i ts t a le n t s h are s i n t h e w ealth t h ey c re ate .

6.

A re t h ere l e g al, r e g ula to ry , o r p olitic al o bsta cle s t o d eep er n etw ork in g ( a n d s h rin kin g) of t h e o rg an iz atio n? N ot a p ro ble m f o r C onse n S ys y et.

7.

S peed a n d p ace o f i n novatio n a re i m porta n t t o b oundary d ecis io ns. S om etim es f ir m s hav e n o c h oic e b ut t o p artn er f o r a s tr a te g ic f u nctio n b ecau se t h ey c an not d ev elo p i t i n - house f a st e n ough. A p artn er a rra n gem en t c an b e a p la ceh old er. W ill p artn erin g h elp u s build a n e co sy ste m t h at w ill i m pro ve o ur c o m petitiv e a d van ta g e? T his i s C onse n S ys’s str a te g y: b uild a n etw ork o f c o lla b ora to rs a ro und t h e E th ere u m p la tf o rm , g ro w t h e pla tf o rm a n d e co sy ste m , a n d i n cre ase t h e p ro bab ility o f s u ccess f o r a ll c o m ponen ts .

8.

I s t h ere a d an ger o f l o sin g c o ntr o l o f s o m eth in g f u ndam en ta l— fo r e x am ple , a p ro duct or n etw ork a rc h ite ctu re ? F ir m s m ust h av e a s e n se o f w hic h p arts o f t h e v alu e c h ain w ill be k ey t o c re atin g a n d c ap tu rin g v alu e i n t h e f u tu re . I f t h ese a re f a rm ed o ut, t h e f ir m w ill lo se . T he E th ere u m p la tf o rm p ro vid es a b asic a rc h ite ctu re f o r C onse n S ys.

9.

I s t h ere a c ap ab ility , l ik e t h e e x plo ita tio n o f d ata a sse ts , t h at m ust b e p art o f t h e fa b ric o f y our e n te rp ris e a n d a ll i ts o pera tio ns? E ven t h ough y ou l a ck a u niq ue cap ab ility , y ou s h ould v ie w p artn erin g a s a t r a n sitio nal t a ctic t o d ev elo p e x tr a o rd in ary in te rn al e x pertis e a n d c ap acity . B lo ck ch ain t e ch nolo gie s w ill i n tr o duce a n ew s e t o f cap acitie s t h at n eed t o r e sid e i n t h e c ra n iu m o f e v ery e m plo yee. Y ou c an ’t m ove cu ltu re o uts id e y our b oundarie s.

F CH APT ER 5 NEW B U SIN ESS M ODELS:

MAKIN G I T R A IN O N T H E B LO CK CH AIN ounded a m onth b efo re t h e m ark et c ra sh ed i n 2 008, A ir b nb h as b eco m e a $ 25 b illio n pla tf o rm , n ow t h e w orld ’s l a rg est s u pplie r o f r o om s a s m easu re d b y m ark et v alu e a n d r o om s o ccu pie d . B ut t h e p ro vid ers o f r o om s r e ceiv e o nly p art o f t h e v alu e t h ey c re ate . I n te rn atio nal p ay m en ts g o t h ro ugh W este rn U nio n, w hic h t a k es $ 10 o f e v ery t r a n sa ctio n a n d b ig f o re ig n e x ch an ge o ff t h e t o p. S ettle m en ts t a k e a l o ng t im e. A ir b nb s to re s a n d m onetiz es a ll t h e d ata .

B oth r e n te rs a n d c u sto m ers a lik e h av e c o ncern s a b out p riv acy .

We b ra in sto rm ed w ith b lo ck ch ain e x pert D in o M ark A ngaritis t o d esig n a n A ir b nb c o m petito r o n t h e b lo ck ch ain . W e d ecid ed t o c all o ur n ew b usin ess b A ir b nb. I t w ould l o ok m ore l ik e a m em ber-o w ned c o opera tiv e. A ll r e v en ues, e x cep t f o r o verh ead , w ould g o t o i ts m em bers , w ho w ould c o ntr o l t h e p la tf o rm a n d m ak e d ecis io ns.

B A IR BN B V ER SU S A IR BN B b A ir b nb i s a dis tr ib ute d a pplic a tio n ( D App), a s e t o f s m art c o ntr a cts t h at s to re s d ata o n a h om e- l is tin gs b lo ck ch ain . T he b A ir b nb a p p h as a n e le g an t i n te rfa ce: o w ners c an u plo ad i n fo rm atio n a n d p ic tu re s o f t h eir p ro perty .

1 T he p la tf o rm m ain ta in s r e p uta tio n s c o re s o f b oth p ro vid ers a n d r e n te rs t o i m pro ve e v ery one’s b usin ess d ecis io ns.

When y ou w an t t o r e n t, t h e b A ir b nb s o ftw are s c an s a n d f ilte rs t h e b lo ck ch ain f o r a ll t h e l is tin gs t h at m eet y our c rite ria ( e .g ., t e n m ile s f ro m th e E if fe l T ow er, t w o b ed ro om s, f o ur-p lu s s ta r r a tin gs o nly ). Y our u se r e x perie n ce i s i d en tic al t o t h at i n A ir b nb, e x cep t t h at y ou c o m munic ate p eer t o p eer o n t h e n etw ork , t h ro ugh e n cry pte d a n d c ry pto gra p hic ally s ig ned m essa g es n ot s to re d i n A ir b nb’s d ata b ase .

2 Y ou a n d t h e r o om o w ner a re t h e o nly t w o p eo ple w ho c an r e ad t h ese m essa g es. Y ou c an s w ap p hone n um bers , a n e x ch an ge t h at A ir b nb b lo ck s t o p re se rv e f u tu re r e v en ues. O n b A ir b nb y ou a n d t h e o w ner c o uld c o m munic ate o ff-c h ain a n d c o m ple te t h e t r a n sa ctio n e n tir e ly o ff-c h ain , b ut y ou a re b ette r o ff c o m ple tin g t h e t r a n sa ctio n o n- c h ain f o r a f e w r e aso ns.

Rep uta tio n :

B ecau se t h e n etw ork r e co rd s t h e t r a n sa ctio n o n t h e b lo ck ch ain , a p ositiv e r e v ie w f ro m e ach u se r i m pro ves y our r e sp ectiv e r e p uta tio ns. T he r is k o f a n eg ativ e r e v ie w m otiv ate s e ach p arty t o r e m ain h onest. R em em ber, p eo ple w ith g ood r e p uta tio ns c an u se t h e s a m e p ers o na a cro ss m ultip le D Apps a n d b en efit f ro m c o ntin uity a s a g ood p ers o n. Id en tit y V erif ic a tio n :

B ecau se w e a re n ot d ealin g w ith a c en tr a liz ed s y ste m t h at c h eck s I D on o ur b eh alf , e ach p arty n eed s t o c o nfir m t h e o th er p arty ’s i d en tity . T he b lo ck ch ain c alls u p a co ntr a ct f ro m a “ V erif y ID ” a p plic atio n, o ne o f m an y c o ntr a cts t h at b A ir b nb, S U ber ( b lo ck ch ain Uber), a n d o th er D Apps u se t o v erif y r e al- w orld i d en tity .

Priv acy P ro te ctio n :

V erif y ID d oesn ’t t r a ck a n d s to re a ll t r a n sa ctio ns i n a d ata b ase . I t s im ply re tu rn s a T R U E o r F A LSE w hen i t r e ceiv es a r e q uest f o r v erif ic atio n o f a p ublic k ey ( p ers o na).

Dif fe re n t k in ds o f D Apps c an c all V erif y ID , b ut V erif y ID n ev er k now s d eta ils o f t r a n sa ctio ns.

This s e p ara tio n o f i d en tity f ro m a ctiv ity g re atly i m pro ves y our p riv acy .

Ris k R ed uctio n :

H om e o w ners c u rre n tly s to re c u sto m er i d en titie s a n d f in an cia l d ata o n t h eir ow n s e rv ers , w hic h c an b e h ack ed a n d l e ak ed , e x posin g o w ners t o l itig atio n a n d l a rg e l ia b ilitie s.

On t h e b lo ck ch ain , y ou n eed n’t t r u st a v en dor w ith y our d ata ; t h ere i s n o c en tr a l d ata b ase t o h ack an d l e ak . T here a re o nly i n div id ual p eer-to -p eer p se u donym ous t r a n sa ctio ns.

In su ra n ce:

T oday A ir b nb o ffe rs $ 1 m illio n i n su ra n ce f o r o w ners a n d c o m pen sa te s t h em f o r th eft a n d d am ag e. O n b A ir b nb, o w ners c an g et t h e b A ir b nb i n su ra n ce D App. R en te rs w ith g ood re p uta tio ns l ik e y ou h av e l o w er i n su ra n ce r a te s a n d n eed n’t s u bsid iz e r e n te rs w ho l a ck c au tio n, sc ru tin y o f p ro sp ects , o r p oor t r e atm en t o f p ro perty . W hen y ou s u bm it a b ookin g r e q uest, bA ir b nb s e n ds y our p ublic k ey ( p ers o na) t o t h e i n su ra n ce co ntr a ct f o r a q uote . T he i n su ra n ce DApp c o nta cts a l is t o f t r u ste d p ro vid ers ; f a k e i n su re rs n eed n ot a p ply . I n su re rs p erfo rm t h eir ow n c alc u la tio ns i n r e al t im e t h ro ugh a u to nom ous a g en t s o ftw are b ase d o n t h e i n puts t o t h e co ntr a ct— su ch a s t h e m ark et v alu e o f t h e o w ner’s h ouse , h ow m uch t h e o w ner w an ts i n su re d , ow ner r e p uta tio n, y our r e p uta tio n a s a r e n te r, a n d r e n ta l p ric e. b A ir b nb t a k es t h e b est b id a n d ad ds i t t o t h e n ig htly f e e t h e o w ner w an ts t o c h arg e. T he b lo ck ch ain p ro cesse s t h is c alc u la tio n i n th e b ack gro und; o w ners a n d r e n te rs h av e a c o m para b le u se r e x perie n ce t o t h at o f A ir b nb b ut a su perio r a n d m ore e q uita b le v alu e e x ch an ge.

Paym en t S ettle m en t:

O f c o urs e , o n t h e b lo ck ch ain , y ou t r a n sfe r f u nds t o t h e o w ner i n se co nds, n ot d ay s a s w ith A ir b nb. O wners c an m an ag e s e cu rity d ep osits m ore e asily w ith s m art co ntr a cts . S om e p artie s u se e sc ro w a cco unts t o r e le ase p ay m en ts p artia lly ( n ig htly , w eek ly , hourly , e tc .) o r i n f u ll a s t h e p artie s a g re e. I n d is p ute s i n volv in g s m art c o ntr a cts , p artie s c an c all fo r a rb itr a tio n.

Pro p erty A ccess U sin g S m art L ock s ( I o T d ev ic e):

A s m art l o ck c o nnecte d t o t h e blo ck ch ain k now s w hen y ou h av e p aid . W hen y ou a rriv e, y our n ear-fie ld c o m munic atio n- en ab le d s m art p hone c an s ig n a m essa g e w ith y our p ublic k ey a s p ro of o f p ay m en t, a n d t h e s m art lo ck w ill o pen f o r y ou. O wners n eed n ot d ro p k ey s o ff t o y ou o r v is it t h e p ro perty u nle ss t h ey wan t t o s a y h ello o r a d dre ss s o m e e m erg en cy .

You a n d t h e o w ner h av e n ow s a v ed m ost o f t h e 1 5 p erc en t A ir b nb f e e. S ettle m en ts a re assu re d a n d i n sta n t. T here a re n o f o re ig n e x ch an ge f e es f o r i n te rn atio nal c o ntr a cts . Y ou n eed n ot worry a b out s to le n i d en tity . L ocal g overn m en ts i n o ppre ssiv e r e g im es c an not s u bpoen a b A ir b nb fo r a ll i ts r e n ta l h is to ry d ata . T his i s t h e r e al s h arin g-o f-v alu e e co nom y; b oth c u sto m ers a n d se rv ic e p ro vid ers a re t h e w in ners .

GLO BA L C O M PU TIN G : T H E R IS E O F D IS T R IB U TED A PPL IC ATIO NS Befo re w e e x am in e t h e o th er p ossib le d is tr ib ute d b usin ess e n titie s l ik e b A ir b nb, a w ord o n h ow th e u nderly in g t e ch nolo gy e n ab le s d ecen tr a liz atio n. U ntil t h e b lo ck ch ain , c en tr a liz ed org an iz atio ns h av e h eld c o ncen tr a te d c o m putin g p ow er.

In t h e f ir s t d ecad es o f e n te rp ris e c o m putin g, a ll s o ftw are a p plic atio ns (a p ps) r a n o n t h e co m pute rs o f t h eir o w ners . G M , C itib an k, U .S . S te el, U nile v er, a n d t h e U .S . f e d era l g overn m en t ow ned h uge d ata c en te rs t h at r a n p ro prie ta ry s o ftw are . C om pan ie s r e n te d o r “ tim e s h are d ” co m pute r p ow er f ro m p ro vid ers l ik e t h e 1 980s g ia n t C om puS erv e t o r u n t h eir o w n a p plic atio ns.

As t h e p ers o nal c o m pute r m atu re d , t h e s o ftw are m ark et s p ecia liz ed : s o m e d ev elo ped c lie n t ap ps ( th e P C ) a n d s o m e, s e rv er a p ps ( a h ost c o m pute r). W ith w id esp re ad a d optio n o f t h e In te rn et, s p ecif ic ally t h e W orld W id e W eb , i n div id uals a n d c o m pan ie s c o uld u se t h eir c o m pute rs to s h are i n fo rm atio n— in itia lly a s t e x t d ocu m en ts a n d l a te r a s i m ag es, v id eo s, o th er m ultim ed ia co nte n t, a n d e v en tu ally s o ftw are a p ps.

3 S harin g b eg an t o d em ocra tiz e t h e i n fo rm atio n l a n dsc ap e.

But i t w as s h ort- liv ed .

In t h e 1 990s, a n ew v aria n t o f t im e-s h arin g a p peare d , i n itia lly c alle d vir tu al p riv a te n etw ork s (V PN s) a n d t h en clo ud c o m putin g . C lo ud c o m putin g e n ab le d u se rs a n d c o m pan ie s t o s to re a n d pro cess t h eir s o ftw are a n d d ata i n t h ir d -p arty d ata c en te rs . N ew t e ch nolo gy c o m pan ie s l ik e Sale sfo rc e.c o m b uilt f o rtu nes b y h arn essin g t h e c lo ud m odel t o s a v e c u sto m ers t h e b ig c o sts o f dev elo pin g a n d r u nnin g t h eir o w n s o ftw are . C lo ud s e rv ic e p ro vid ers l ik e A m azo n a n d I B M b uilt gin orm ous m ultib illio n-d olla r b usin esse s. D urin g t h e 2 000s, s o cia l m ed ia c o m pan ie s l ik e Faceb ook a n d G oogle c re ate d s e rv ic es t h at r a n o n t h eir o w n v ast d ata c en te rs . A nd t o c o ntin ue th is t r e n d o f c en tr a liz ed c o m putin g, c o m pan ie s l ik e A pple m oved a w ay f ro m t h e W eb ’s dem ocra tiz in g a rc h ite ctu re t o p ro prie ta ry p la tf o rm s l ik e t h e A pple S to re w here c u sto m ers acq uir e d p ro prie ta ry a p ps, n ot o n t h e o pen W eb b ut i n e x clu siv e w alle d g ard en s.

Again a n d a g ain i n t h e d ig ita l a g e, l a rg e c o m pan ie s h av e c o nso lid ate d — cre ate d , p ro cesse d , an d o w ned o r a cq uir e d — ap plic atio ns o n t h eir o w n l a rg e s y ste m s. C en tr a liz ed c o m pan ie s h av e beg otte n c en tr a liz ed c o m putin g a rc h ite ctu re s t h at h av e, i n t u rn , c en tr a liz ed t e ch nolo gic al a n d eco nom ic p ow er.

Som e r e d f la g s: W ith s in gle p oin ts o f c o ntr o l, c o m pan ie s t h em se lv es a re v uln era b le t o cata str o phic c ra sh es, f ra u d, a n d s e cu rity b re ach es. I f y ou w ere a c u sto m er o f T arg et, e B ay , JP M org an C hase , H om e D ep ot, o r A nth em , o r f o r t h at m atte r A sh le y M ad is o n, t h e U .S . O ffic e of P ers o nnel M an ag em en t ( s e co nd b re ach !), a n d e v en U ber, y ou f e lt t h e p ain o f h ack in g i n 2015.

4 S yste m s o f d if fe re n t p arts o f a c o m pan y s till h av e b ig c h alle n ges co m munic atin g w ith o ne an oth er, l e t a lo ne w ith s y ste m s o uts id e t h e f ir m . F or u s u se rs , i t m ean s t h at w e’v e n ev er r e ally had c o ntr o l. O th ers d efin e o ur s e rv ic es w ith t h eir i m plic it v alu es a n d g oals t h at m ay c o nflic t w ith ours . A s w e g en era te r e am s o f v alu ab le d ata , o th ers o w n i t a n d a re b uild in g v ast f o rtu nes— perh ap s t h e g re ate st i n h is to ry — while m ost o f u s r e ceiv e l ittle b en efit o r c o m pen sa tio n. W ors t o f all, c en tr a l p ow ers a re u sin g o ur d ata t o c re ate m ir ro r i m ag es o f e ach o f u s a n d m ay u se t h ese t o se ll u s s tu ff o r t o s p y o n u s.

Alo ng c o m es b lo ck ch ain t e ch nolo gy. A nyone c an u plo ad a p ro gra m o nto t h is p la tf o rm a n d le av e i t t o s e lf -e x ecu te w ith a s tr o ng c ry pto eco nom ic al 5 g uara n te e t h at t h e p ro gra m w ill c o ntin ue to p erfo rm s e cu re ly a s i t w as i n te n ded . T his p la tf o rm i s p ublic , n ot i n sid e a n o rg an iz atio n, a n d i t co nta in s a g ro w in g s e t o f r e so urc es s u ch a s d ig ita l m oney t o i n cen t a n d r e w ard c erta in b eh av io r.

We’re m ovin g i n to a n ew e ra i n t h e d ig ita l r e v olu tio n w here w e c an p ro gra m a n d s h are so ftw are t h at’ s d is tr ib ute d . J u st a s t h e b lo ck ch ain p ro to co l i s d is tr ib ute d , a d is tr ib ute d a p plic atio n or D App r u ns a cro ss m an y c o m putin g d ev ic es r a th er t h an o n a s in gle s e rv er. T his i s b ecau se a ll th e c o m putin g r e so urc es t h at a re r u nnin g a b lo ck ch ain c o nstitu te a c o m pute r. B lo ck ch ain dev elo per G av in W ood m ak es t h is p oin t d esc rib in g t h e E th ere u m b lo ck ch ain a s a p la tf o rm f o r pro cessin g. “ T here i s o nly o ne E th ere u m c o m pute r i n t h e w orld ,” h e s a id . “ It’ s a ls o m ultiu se r— an yone w ho e v er u se s i t i s a u to m atic ally s ig ned i n .” B ecau se E th ere u m i s d is tr ib ute d a n d b uilt t o th e h ig hest s ta n dard s o f c ry pto se cu rity , “ all c o de, p ro cessin g, a n d s to ra g e e x is ts w ith in i ts o w n en cap su la te d s p ace a n d n o o ne c an e v er m ess w ith t h at d ata .” H e a rg ued t h at c ritic al r u le s a re built i n to t h e c o m pute r, c o m parin g i t t o “ v ir tu al s ilic o n.” 6 As f o r D Apps, t h ere h av e b een w arm -u p a cts p rio r t o b lo ck ch ain s. B itT orre n t, t h e p eer-to - peer f ile -s h arin g a p p, d em onstr a te s t h e p ow er o f D Apps a s i t c u rre n tly c o nsu m es o ver 5 p erc en t of a ll I n te rn et t r a ffic .

7 L overs o f m usic , f ilm , a n d o th er m ed ia s h are t h eir f ile s f o r f re e, w ith n o cen tr a l s e rv er f o r a u th oritie s t o s h ut d ow n. I c o nocla stic p ro gra m mer B ra m C ohen , w ho in cid en ta lly i s l e ss t h an e n th usia stic a b out b itc o in b ecau se o f a ll t h e c o m merc ia l a ctiv ity a ro und it, d ev elo ped B itT orre n t. “ T he r e v olu tio n w ill n ot b e m onetiz ed ,” h e s a id .

8 Most o f u s t h in k t h at g en era tin g r e v en ue a n d e co nom ic v alu e t h ro ugh te ch nolo gic al in novatio n i s p ositiv e, a s l o ng a s t h e r e v olu tio n i s n ot m onetiz ed b y t h e f e w . W ith b lo ck ch ain te ch nolo gy t h e p ossib ilitie s f o r D Apps a re a lm ost u nlim ite d , b ecau se i t t a k es D Apps t o a n ew le v el. I f, a s t h e s o ng s a y s, “ L ove a n d m arria g e, l o ve a n d m arria g e, g o t o geth er l ik e a h ors e a n d carria g e,” t h en s o d o D Apps a n d b lo ck ch ain s. T he c o m pan y S to rj i s a d is tr ib ute d c lo ud s to ra g e pla tf o rm a n d a s u ite o f D Apps t h at a llo w u se rs t o s to re d ata s e cu re ly , i n ex pen siv ely , a n d priv ate ly . N o c en tr a liz ed a u th ority h as a ccess t o a u se r’s e n cry pte d p assw ord . T he s e rv ic e elim in ate s t h e h ig h c o sts o f c en tr a liz ed s to ra g e f a cilitie s; i t’ s s u perfa st; a n d i t p ay s u se rs f o r re n tin g t h eir e x tr a d is k s p ace. I t’ s l ik e A ir b nb f o r y our c o m pute r’s s p are m em ory s p ace.

TH E D APP K IN G S: D IS T R IB U TED B U SIN ESS E N TIT IE S How d o D Apps i n fu se g re ate r e ffic ie n cy , i n novatio n, a n d r e sp onsiv en ess i n to t h e s tr u ctu re o f t h