Blockchain in 2017: Do We Know What We Don't Know?

William Mougayar is the author of "The Business Blockchain" and a board advisor to, and investor in, various blockchain projects and startups (See: Disclosures).

In this CoinDesk 2016 in Review piece, Mougayar reviews what we do and don't know about the real-world uses and likely effectiveness of blockchain technology.

Self-awareness is bliss, in life and in business. Part therapy, part philosophy, it is a psychological state of mind that carries with it several benefits. For one, the more you know about yourself, the better you are at adapting to changes.

The blockchain is no different. Left to its own devices, the blockchain space has plenty of reality distortions.

To kick-off this year-end series, I'm going to try and provide a balanced reality check about where we are in the blockchain’s evolution, as I ask a simple, yet inquisitive question:

As we enter 2017, do we know what we don’t know about the blockchain?

No predictions. Just reflections.

To answer the above question, I will highlight a few areas while categorizing topics along two dimensions: the strategic and the tactical.

Strategic unknowns

Where are we in the cycle?

Pick your flavor of cycle theories- Gartner’s hype cycle, Carlota Perez’s theory of economic development, or Geoffrey Moore’s crossing the chasm. There is no disputing we are in the formative years of any one of these cycles, but where exactly?

When will blockchain adoption take off in terms of users, applications variety, steadiness and predictability of growth patterns? From my vantage point, we haven’t crossed the chasm, nor are we in the wide installation phase of the technology, and we aren’t even past the peak of inflated expectations.

To be more accurate, where we are exactly will be visible only in the rear-view mirror, when we’ll be able to look back. In the meantime, we’ll need to keep plowing, knocking every obstacle, and picking ourselves up at every seemingly failing moment.

Will we need a real crash in order to adjust our expectations?

If the Internet is a precursor of blockchain history, the year 2000 crash was a momentous event because it flushed out what was hyped, reset expectations, and allowed cool heads to prevail during a new and renewed phase that ensued.

That new phase was dubbed Web 2.0 and appeared around 2003, ushering an ever-lasting phase of Web prosperity and growth thereafter. In retrospect, that was about seven years into the Web’s 1993 real appearance.

With the blockchain, some have already started using the label Crypto 2.0, but that might be a premature moniker for where we are in the blockchain’s life.

I firmly believe we are still exploiting a Blockchain 1.0 era of sorts, despite the nuances of its own evolution. Perhaps only a real crash would shake things up enough and substantiate a real entry into the new phase of Blockchain 2.0.

What are the blockchain’s boundaries?

Do we know where the blockchain will apply and where it won't? What will work and what will never work? We really don’t know, but we need to keep pushing the envelope and going off the edges in order to realize where the limits are.

I am seeing many cases where the blockchain is being thought of, but it looks like a solution waiting for a problem that is not there.

For example, the healthcare field as a whole has been touted as a perfect sector for the blockchain, but we have not seen real progress or practical blockchain implementations.

Specifically, I often hear that the blockchain is going to solve the synchronization issues in the patient medical record, yet there is little realization that solving the medical record puzzle has other non-blockchain related issues that must be addressed first.

Will the blockchain have an impact on the firm?

Distributed Autonomous Organizations (DAO’s) put into question our traditional thinking about managing organizations, but we still don’t know if these early implementations could propagate into any traditional organization, or if they would remain in the domain of blockchain-based businesses.

Will the concept of decentralized organizations that are tied to blockchain technology influence how a firm is organized? And to what degree? We haven’t yet totally figured out blockchain governance, yet we want these early examples to model how the firm needs to be run.

Automating governance and automating operations are not the same thing, but in both cases, we need more experience in modeling and running parallel systems before declaring that we know how the firm’s organization will change.

What will be the blockchain’s contribution to the GDP?

We have no idea. For comparison, in developed countries, the Internet economy contributes anywhere from 5 to 12% of a nation’s GDP, and that was accomplished 23 years after the Web’s advent.

Yes, cryptocurrency-based companies are emerging, but what will be the compound effect on real wealth creation across countries, industries and economies? We know that the total value of cryptocurrencies hovers roughly at the $15bn mark as of the end of 2016, but that is the only quantifiably measurable metric relating to wealth creation.

Will the crypto-tech economy follow a similar path as the Web economy in being its own force of economic strength? I certainly hope so, but we are in the early innings of this evolution.

Will blockchain-based identities have a future?

How many blockchain identities

will we have is an interesting question. One answer is that we’ll likely have as many blockchain identities as we currently can hold real ID cards in our physical wallets, combined with the number of online identities we possess. This is because a blockchain identity crosses the physical to online world due to the potential melding of the trust factor between these two semi-artificial boundaries.

Blockchain-based identity holds a promise, which is to allow us to consume a number of services in a trusted manner, without the need to assert our physical presence, like remote voting for example.

What will be the killer app for blockchain-based identity: voting, trading, social applications, e-commerce, consumer services, or others? Are we going to end-up with a variety of identities or will a handful emerge? Will bonding our reputation be a romantic linkage, or will it have a real value?

Can we really codify law?

There are big expectation for blockchain-based smart contracts. Will they be able to dispense money, change conditions, and enact decisions? Maybe it’s easier to codify existing law and we should start there, instead of creating new laws while we also attempt to codify them before they are proven.

Can smart contracts govern company operations, decisions, stakeholders, and future directions? We must be careful in not rushing smart contracts implementations where we don’t fully understand the implications of their potential failures.

In the case of the much publicized DAO rise and fall, too much autonomy was entrusted into fledgeling smart contracts, and the process took a turn that was humanly unstoppable (except via a hardfork).

Autonomy seems to be a stubborn goal of DAO’s, as zealous engineers want to give power to their smart contracts, just because money, business rules, responsibilities and decision-making can now be programmed all together in a big mashup.

Will we see the equivalent of a smart contrast in-chief that governs other smart contracts? Is Turing completeness a benefit or weakness of smart contracts?

Will blockchain networks be more secure than existing banking networks?

In light of the continued blockchain-related security hacks (eg: The DAO and Bitfinex, to name just two recently visible ones), a fundamental question is front and center: will we eventually take blockchain security for granted, just as we take bank grade security for granted? Or is it too early in the maturity cycle of blockchains to expect total security resiliency?

There is no reason why we shouldn’t expect blockchains to be as trusted as what is commonly referred as “bank grade security”, although we are not there yet, today. However, we should be reminded that real banks have had a rich history of robberies starting with the 1800’s during the Wild West era in the US, and there are continued successful bank robberies, thefts and hacking exploit, up this day.

Eventually, the frequency of blockchain security vulnerabilities should be an artifact of the past, because security is an essential condition if blockchains want to become big.

How will blockchains interact with each other and with the physical world?

That is a loaded question that we are barely starting to tackle and with expected breakthroughs in 2017.

Will there be standard way to access off-chain data? Will decentralized oracles become provably honest retrieval sources by centralized services? Will various blockchains inter-operate with each other at the asset exchange level or via other types of linkages? Will the Internet of Things take off when we connect it to blockchains? Will there be other flavors of blockchains in addition to the popular public and private one? How will the blockchain record and update physical status? Or should we optimize for on-blockchain activity? Will moving assets across blockchains be like the nightmare of integrating multiple databases or will it be a lot easier?

Will big companies play outside their operations?

The innovator's dilemma is an omnipresent hurdle for large companies. The Internet was no exception to it, as we saw few large players reinvent themselves with the Web era. Instead, a number of industry sectors were hit broadside by the Internet: newspapers, retailers, bookstores, travel agents, stock brokers, lenders, payment processors, post offices, and others saw their business radically altered by the Internet.

With blockchain implementations, large companies could keep busy for the next 10 years, reengineering their operations to benefit from cost savings and process improvements due to blockchain-based solutions, but will they go further outside of their comfort zones? Will they implement what’s under their nose and in their current operations?

If central banks who have been tinkering with the blockchain adopt cryptocurrency, will it be as an experiment or as something they truly believe is in their future?

Tactical Unknowns

When will we see widespread consumer adoption?

Where are the consumer applications that don’t require users to have any technical knowledge of the blockchain? Early cryptocurrency wallets are very natively close to the blockchain and not user-friendly enough, at least not for mass consumption.

Maybe there’s a Web equivalent to the blockchain that we are still waiting for. It was the World Wide Web that provided this user-friendly layer where users didn’t have to worry about connecting computers together in order to benefit from the information availability.

Will we be able to shift the conversations from the technical realm into the business one?

What will be the regulators’ role and impact?

For the most part, regulators have not been too heavy-handed yet. But they are bound to place their marks on the blockchain, eventually. What is not known is whether they will innovate, update, experiment, support or tamper with blockchain innovation.

The right regulatory updates could provide a great boost to blockchain implementations. There are new theories for blockchain regulations that place regulators as a node on the network, just like any other peer, allowing it visibility and transparency into a slice of transactions which they can observe and react to.

However, we have yet to see official regulators taking these types of positions, and we still need to see more regulatory sandbox experiments bear their fruit.

Does proof of work have a long-term future?

Will proof of work (POW) scale indefinitely or will a new consensus method such as proof of stake or delegated proof of stake replace it? Do we know all we need to know about the economics and safety of this popular consensus method?

A corollary to that first question follows: will miners continue to play a key role or will their place become threatened? Furthermore, will it be possible to create a public blockchain that isn't dominated by a few mining interests?

Let us be reminded of what Tim Berners-Lee said when they decided to make the Web technologies totally open: “You can’t propose that something be a universal space and at the same time keep control of it.”

Finally, will it be possible to have a secure blockchain without a valuable token as the incentive to secure it, without calling that a permissioned private blockchain?

Are ICOs a boon or will they bust?

Currently, new Initial Cryptocurrency Offerings (ICOs) are launching with a frenzy not unlike the Internet rush to IPO’s during 1999, when half-baked companies or ideas hurried to get listed, only to later face the ugly brutalities of public markets.

Choosing the ICO route via a public crowdfunding campaign is almost like being a public company from day one. It’s not easy being in the public eye, and companies that can’t deliver high standards of transparency shouldn’t take that path.

Amidst the uncertainties in evaluating ICOs, we really don't know if this trend will become a normative way to raise funds when a cryptocurrency is involved.

Furthermore, we are still trying to validate the various roles that a cryptocurrency (or token) plays in it: is it a proxy for network effects, an intrinsic utility, a reward, or a speculative instrument?

What standards will emerge?

In 2016, waiting for blockchain standards has been like waiting for Godot, but that was not such a bad thing. Imposing standards too early may be hurtful to the blockchain industry, because we need to see the technology blossom a little further.

The topic of blockchain standards is complicated, and it extends beyond just seeing it as an interoperability challenge. We will probably need a set of technical, business and legal types of standards, but we really don’t know which ones they are yet, or which existing ones need to be updated instead of being completely re-thought of.

Technology innovation will always outpace regulatory and standards bodies who want to freeze-frame it in order to put their stamp on it. But if you try to frame a moving picture too early, the resulting optic will be distorted and you will want to replace it soon after.

What will be the impact of quantum computing on the blockchain?

In theory, quantum computing could lower the security resiliency of blockchains because it threatens to break the strength of encryption.

Will quantum computing be a force to reckon with, or will blockchain encryption also benefit from it and strengthen itself accordingly, rendering the net impact as a neutral one?

What will the new intermediaries look like?

We define the blockchain as being a peer-to-peer network for value flow without central intermediaries, but the reality is that new intermediaries are emerging.

Much of the blockchain activity is focused on financial services, as many startups see banks as the disappearing intermediaries, but outside of financial services, what other industry sector will show good use cases for the blockchain? Government, energy, healthcare are good contenders, but real implementations are few and far in-between.

Will linking physical assets to blockchains get accomplished without introducing trusted third parties?

Will consortia succeed or be a stepping stone?

There are at least 25 various consortia across various sectors and industries, all of them vying to provide collective benefits to their members.

Consortia are hard. Pulling diverse companies to work together is not easy. You need disciplined processes, persistence, patience, a tolerance for some politics and lots of maturity.

At best, they level the playing field among participants and help to move forward collectively. Therefore, consortium work doesn’t offer a competitive advantage, which is why most participants will need other blockchain initiatives in parallel.

Will group initiatives deliver on their promises or will they end up being a bridge into other types of activities?

Will cryptocurrency redefine the attention economy?

We are increasingly spending our time in online activities that we don’t get paid for, but will we continue to give our time away for free?

Social media for example is a benevolent time consuming activity that has no direct financial paybacks. What if we injected cryptocurrency into these activities as a new unit of value? Will it be a good enough incentive that brings benefits and quality improvements?

Is cryptocurrency the missing fuel that could re-energize the attention economy?

What will the shape of private blockchains be?

What does a world of competing blockchains look like? Or will they all work together harmoniously?

If there were more than one Internet, it would have undoubtedly not blossomed the way it did. Certainly, the path to multiple blockchains and distributed ledgers is currently being paved, but we still don’t fully understand how the needed network effects would be affected by a multiplicity of blockchain networks.

Is the only form of private blockchain the consortium one, or will there be other forms perhaps similar to the private website where one firm runs its own blockchain application to serve its private customers?

Keep looking further ahead

The intent of this reality check was not to be negative, but to be grounded.

It’s always good to know about the headwinds you face, even when experiencing the feelings of hope and excitement.

Optimists would like you to believe. Skeptics want you to forget. Realists (like me) encourage you to think hard and be aware.

The proverbial jury is still out for many of the issues that I have enumerated. To bring these thoughts into the practical, I encourage you to take on a personal assignment for whatever blockchain activities you are involved in: make your own list of unknowns, and think of a path to remove uncertainties and turn them into known issues.

Then, talk to people outside of your blockchain spaces. Ask them what they think of your projects and ideas. Like kids, they’ll say the darndest things, but they will tell the truth and ground you back to reality.

After more than two decades in operation, we can say today that the Web has been largely tamed, as there are few unknowns to it (except perhaps for the vague mysteries of hacking). In contrast, the blockchain terrain is boiling with uncertainties, although not insurmountable ones, and will remain so for a few more years, until a given maturity is reached.

Uncovering the known unknowns was only the easy part. The harder part will be to discover the unknown unknowns, but to get there, we will need to wait yet another year!

(Thanks to Fred Wilson, Daniel James, Yondon Fu, Soumitra Mandhata, Susanne Tarkowski Tempelhof, Matt Moynihan, Brian Hoffman and several followers for providing input or feedback that I took into consideration.)

Have an opinion on blockchain in 2016? A prediction for the year ahead? Email editors@coindesk.com to learn how you can contribute to our series.

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