JANGLING THE BLOCKCHAIN
There’s a fifty per cent chance that you’ve heard the word blockchain, but there’s an even greater chance that you’ve heard of Bitcoin. The two have become synonymous and interchangeable, much like the terms 4G and LTE. All of that is wrong. Yes, Bitcoin is a cryptocurrency and yes, it uses blockchain technology, but limiting blockchain to Bitcoin or any cryptocurrency is a mistake that’s being made far too often.
Understanding what exactly blockchain is, is more complicated than you’d think because there is no standard definition for this rapidly emerging new technology.
The most widely used one is that blockchain is a digital ledger in which transactions are made and recorded publicly. But even that does not fully encompass the full potential of blockchain technology.
I headed to the Blockchain Africa 2018 conference, which took place at the Microsoft campus in Johannesburg recently, to find out from blockchain luminaries and industry leaders what blockchain actually is and how it will impact our lives.
Cryptocurrency and blockchain has become fairly interchangeable to the general public thanks to Bitcoin. Lately we’ve seen the rise of new cryptocurrencies which steer away from the traditional cryptocurrency model. One of the most notable being Ripple ( XRP).
Before delving into what Ripple does and how it’s different to the traditional cryptocurrency model, I asked Stefan Thomas – Ripple’s CTO (Chief Technology Officer) – what his definition of blockchain is.
“When I first joined the blockchain space, blockchain and Bitcoin were interchangeable terms, where saying things like ‘I payed you through the blockchain’ meant that I paid you through Bitcoin. Then you started seeing alt-coins (alternative cryptocurrency) and the perception was that blockchain was any kind of cryptocurrency that runs on a public shared ledger with a mining algorithm.
“Then Ripple came out and mining wasn’t part of our normal criteria, so the perception shifted to ‘now it’s any kind of public cryptocurrency system.’ Then Ethereum came out and then it was ‘well, it’s any kind of system...’ it just kept expanding. So I look at it nowadays very much like the term cloud where it’s like cloud wasn’t the first time that we used other people’s computers to host things.
“That’s not new,” he continues. “But it did represent sort of an enterprise movement where a lot of people started to rethink their business use cases and innovate. I think that something similar is happening with blockchain, where it’s like maybe the technology isn’t very consistent or very cohesive in terms of what the definition is, but there is a pretty cohesive movement around this term where people are experimenting and trying new things. So I think it’s almost more valuable in that way, because very often you get these industries which don’t change anything in twenty years and then something like this comes along and then suddenly everyone’s innovating.”
This clearly highlights the fact that blockchain is still in a fundamental startup phase, but then also makes you wonder whether blockchain is not just a very secure, shared database? What makes it so different?
“At the end of 2016, beginning of 2017 we wrote a blog post titled 2017 will be the year you realise you don’t need the blockchain. This was very much driven by the fact that we were deploying the payments solutions for banks and we moving away from this idea of a shared ledger because it just adds a lot of overhead,” he explains.
“Governance ends up being very complex and there are privacy and scalability issues. What our customers really valued about Ripple was the transparency, the consistency – the full payment executes or none of it does – and the fact that it’s instant, and that you could get feedback along the way.”
Ripple then started to redesign its solution based on maintaining those features and avoiding the other issues associated with a shared ledger.
“What we ended up with is basically applying a consensus algorithm on the transaction level as opposed to on the ledger level. For our use case it worked better, so from that point on I thought that that might be true for a lot of blockchain use cases that there is a simpler way depending on the use case, so I no longer think that blockchain is going to replace databases. I think it’s more nuanced than that,” says Thomas.
Ripple is more than just a cryptocurrency, in fact, Thomas says that Ripple doesn’t think of itself as a blockchain company, it rather identifies as a payments company. This should come as no surprise to anyone who’s kept an eye on news around Ripple lately as they’ve recently been rolling out their answer to SWIFT codes (international banking codes) for banks in China.
According to him, in 2017 banks began reaching out to Ripple asking if they could use XRP (Ripple’s brand of sky money) to help address one of the biggest problems they face today – the need to maintain correspondent relationships. If you have a relationship with a bank in a different country you need to do due diligence on them because you potentially have money deposited with them. If that bank goes under you have a massive problem, so banks would like to reduce the number of correspondent relationships. At the same time global commerce is increasing, so there’s more demand for
cross-border transactions and that’s creating the immediate tension.
Banks want fewer relationships, but customers are demanding easier cross border transactions. XRP gives you a way out.
You can create and maintain a relationship with XRP – which does involve some cost, but that potentially replaces multiple correspondent relationships that you’d have to maintain in different markets. The markets this would benefit the most are those that are potentially very difficult to reach into otherwise, like the Philippines and India.
The role of XRP in relation to Ripple has shifted over time, sort of. This was in response to the fact that you can’t just promote technology, but rather promote a useful product that people actually want to buy and use. And, in order to create a useful product, you have to find the right pain point to solve. For Ripple that was payments. The company is aiming to fix the global liquidity problem, but before it can do that it had to address the transparency and interoperability problem.
“There is currently $26-trillion that’s tied up in various company accounts around the world because it’s very time consuming to move money on demand; so you need to have money pre-funded. What would solve that is some kind of asset you could move instantly around the world and then if you have liquidity in some of the smaller, harder to reach corridors, that creates a lot of value,” he says. “The reason that the Ripple you see today is so focused on the bank solution is because that’s the necessary first step towards using XRP to solve the bigger liquidity problem. There’s a process to it and you can’t start at the end of the process.”
Ripple’s strategy is clearly a global one, but when it comes to Africa and, more importantly, South Africa, we need to look at what is being done by financial institutions in terms of adopting this new technology.
When it comes to cryptocurrency in South Africa the most well-known name in terms of exchanges and cryptocurrency wallets is Luno. If you’re looking to buy Bitcoin or Ethereum, then luno.com is the platform to go to. however those are the only two cryptocurrencies they currently offer.
“We’re building a trusted brand and we have a responsibility to make sure that people don’t lose money or get ripped off. Therefore we have to be very careful in terms of what we offer. We have criteria that we look at when selecting which cryptocurrencies we offer on Luno: Who is the founding team? What is the technology it’s built on? What’s the current distribution of it and how many people are using it? Do the use cases appear legitimate? It’s incredibly difficult to make that decision on behalf of the millions of customers that we have,” says Luno co-founder Marcus Swanepoel.
Cryptocurrency and blockchain are very much intertwined, however Swanepoel describes cryptocurrency as something that typically runs on a public blockchain, which means that anyone has access to it, no one controls it, and it’s decentralised. Luno does more than just offer a wallet and let you buy or sell Bitcoin and Ethereum.
According to him Luno has built their platform with open APIS and there are banks which are currently using those APIS. These banks are testing it for cryptocurrencies and not blockchain. Whether they launch it their customers is debatable because they are being very careful to ensure that it’s safe for their customers.
With the over-inflated hype bubble around cryptocurrency and blockchain the question is whether there’s space in the blockchain market for someone who isn’t involved in fintech or cryptocurrency?
Marvin Coleby, a venture lawyer and founder of Raise, is an advocate for blockchain’s potential in emerging markets – focusing on Africa, Asia and the Caribbean. He sees blockchain as the transfer of digitised value and a new way of establishing and communicating trust. The ties between blockchain and fintech run quite deep but that should not surprise anyone because according to him: “Everything we do has a financial element to it. Financial is not just money, it’s a transfer of something of value in exchange for something else.” This might seem to backup the interchangeability of blockchain and cryptocurrencies, but blockchain has potential for far more than that.
I asked Coleby what blockchain could be used for beyond cryptocurrency and what he’d seen in the space as a lawyer and founder of a blockchain company.
“People are building infrastructure. There are communities where you didn’t have an infrastructure for trusted, secure transfer of value – digital or not – so on the African continent, for example, you see a lot of people building basic infrastructure for finance because that’s kind of where we have to start – opposed to Canada where I live, where you already have digitised financial instruments and technology platforms. So the addition of blockchain has a modular impact, at best. Because it’s already functioned efficiently it wasn’t that big of a problem so the addition of blockchain just makes it more efficient.”
In countries like Coleby’s native Bahamas, or the African continent, the infrastructure must be built from scratch. “We’ve seen a lot of that in agriculture, finance, resource, energy and water, to make it easier for people to transact things as a basic infrastructure.”
But how do you reconcile the fluctuations and instability of cryptocurrencies with blockchain? For many of us, Bitcoin is the poster child for blockchain technology and for those of us who have invested in cryptocurrency, or spoken to people around us about cryptocurrency or blockchain, the response we get is either one of confusion or one of disbelief that we’d get involved in something that’s perceived as only being used by criminals and terrorists.
According to Coleby this type of outrage is fairly common when it comes to Bitcoin and blockchain: “Bitcoin is a scam! Okay, Bitcoin is awesome we should always buy Bitcoin! I’ve seen communities go through that phase and on the African continent. From what I understand public acceptance usually begins with blockchain for fintech and then it eventually blockchain moves into everything.”
The potential for blockchain to become the new digital infrastructure for everything is both scary and intriguing. How will we behave in a blockchain world and how do we establish governance over this supposedly secure and transparent new technology?
“There’s an erroneous assumption that we’re going to interact the same way with those platforms and digital applications as we do in the non-digital world. There are a lot of companies that are raising a lot of money on that erroneous assumption, but the value of being able to transact things directly between people in a decentralised and trustful way, is an extremely important revolution in human history,” explains Coleby
“My personal belief is that the places that will create some of the most important decentralised applications – not just the most imaginative, but necessary innovations – will be in countries like SA, countries in emerging markets where having a centralised institution has been probably the worst thing to ever happen in these places.”
Coleby isn’t against all forms of
centralised systems. He is quite complimentary of Canadian financial institute and government efficiency, but he does come down hard on emerging market decision makers.
“As for my government in my home country – the same thing as here in South Africa – our institutions have kept us down for a very long time. So necessity breeds innovation. A lot of these countries, you’re going to see governance structures that come up out of necessity because people live through the problem every single day, so finding product market fit is a not as difficult for them because they live through that every single day,” he says.
“Creating governance structures in communities where there’s been relative trust with centralised institutions will be a lot harder because people are fine with their governments. Companies in Europe and North America will have a tough time finding a product market fit, because the customers are saying ‘I’m ok with the system, it’s not that bad. My electricity doesn’t turn off every two seconds.’ Whereas in countries like ours it’s just like ‘No, I’m not happy with the status quo, it’s always sucked and I’m looking for any solution to this problem.’ It will be a lot easier for African companies to find a fit for these new governance structures built on blockchain.”
Despite the somewhat varying answers to what blockchain is, the one unanimous agreement is that interoperability and regulation is key.
Stefan Thomas explains interoperability as having two sides to it: a technical side and a legal side.
“On a technical side, the standards that win are the ones that are usually simple and cheap to adopt and widely applicable across a range of use cases. Over the past couple of decades, you see complex, bloated industry standards go up against some lightweight thing that some player came up with and the lightweight thing winning out – like Project Xanadu versus the world wide web,” he says of disruptive innovations.
“There are all these cases showing that people like pragmatic, simple solutions to their concrete problems. So I think it’s the same for blockchain. I also think that blockchain is kind of a weird vertical to talk about interoperability because actually there are smart contract blockchains and there are payments blockchains and there are other things. So I like to think of it as payments interoperability because that’s what I understand and think about, and I think that people in these other areas, like smart contracts, should also think of interoperability and that applies to them. That’s how I think of it from a technical side,” he continues.
“From a legal side it’s more the internet when it came out first. There were all sorts of legal uncertainties – if you ran an ISP you were essentially making copies of every packet that you forward, so did that mean that you were violating copyright? There had to be safe harbours created for these companies doing that in order for this wonderful technology that we now all use for our daily lives to grow,” Thomas explains.
“It’s similar with blockchain where there are certain things where we can argue one way or the other about how the current law applies to it, but really lawmakers need to think about how to create safe and productive regulations around how people use this technology. It’s obviously a tall order because it’s very difficult for these non-technical regulators to review, but it has to be a collaboration between traditional financial industries, the blockchain industry and the regulators.”
Thomas believes that siloed solutions by different vendors without blanket regulations is the way forward. “It’s not that Bitcoin is better than Ripple, Ripple is good for some use cases. There isn’t going to be one solution that’s going to fit every use case and people need to realise that. People should care about and support interoperability because that’s the thing that ultimately creates network effects that can compete with Visa or Paypal. As long as we have these little silos that have no interoperability nor crosscollaboration, neither of them is going to get anywhere. It’s just such an easy thing to do and come together and work on mutual, interoperable solutions.”
Blockchain does not have a solid definition beyond the fact that it’s an exciting, brand new technology which looks set to help establish and foster trust in an open, decentralised manner. What it will be used for other than cryptocurrencies remains to be seen.
On a technical side, the standards that win are the ones that are usually simple, cheap to adopt and widely applicable across a range of use cases... People like pragmatic, simple solutions to their concrete problems”
Stefan Thomas, Ripple CTO
Marcus Swanepoel, Luno co-founder
Marvin Coleby, Raise founder