Permissionless Participation

The power of decentralized systems is in the network effects. The more systems are able to expand participation, the more valuable they become. Metcalfe’s Law, which states that the value of the network is proportional to the square of the number of connected nodes of the system, has been proven among numerous systems well beyond its original telecommunications basis.

Blockchain and Bitcoin specifically have greased the wheels of expansion by enabling “permissionless” participation, whereby anyone can join the fray. There is no gatekeeper to Bitcoin for any role in the system, from user to operator to miner to speculator. All code for the system is open sourced; anyone can examine it at any time. Even developing the core protocol is open to all—submissions are evaluated on their merit, not their source. This openness is a key factor to Bitcoin’s overall growth in value.

Projects abound that attempt to exploit the opportunity of permissionless participation., for example, has built a platform to allow anyone to submit an algorithm for the underlying investment fund to take advantage. You don’t have to be a data scientist, nor do you have to have any sort of credentials. The proof is in the result of your algorithm. The winning algorithm then participates in the real returns made by the fund. This has allowed to have an order of magnitude more people working on improving their trading algorithms as compared to the largest data scientist team of peer funds.

How can other enterprises begin to experiment with similar tactics?

Rules & Regulations

As these public blockchain systems have grown in scale, they have effectively ignored existing rules, regulations, and other guardrails that exist within their traditional counterparts. There is a host of caveats, sacrifices, and other minutiae traditional economic systems have navigated over decades (even centuries) that early Bitcoin participants effectively bulldozed, some good, some not so good.

Take traditional know-your-customer (KYC) / anti-money laundering (AML) laws, for example. Numerous stories have arisen in recent years of oppressed or disenfranchised populations excluded from any traditional financial system using Bitcoin as a means to finally and safely transact. Adhering to KYC/AML laws would effectively shut down this access.

Conversely, North Korea views Bitcoin as a means to evade sanctions. Though contrary to popular commentary, Bitcoin is not nearly as anonymous as many believe. It is a network, and once one node in the network is compromised, all nodes are effectively compromised. It is a matter of time and resources to follow the breadcrumbs. And given the immutability of the Bitcoin blockchain, those breadcrumbs remain available for analysis forever. Several projects and efforts are underway to support this sort of analyses for law enforcement entities.

It remains to be seen if the freedom to circumvent KYC/AML laws supersedes the cost of nefarious activity, and/or this nefarious activity can be mitigated through other means among permissionless blockchain systems.

Enterprises do not have the luxury of circumventing existing laws and regulations to take advantage of the features and characteristics blockchain-based systems offer, no matter how promising or revolutionary they may be. As enterprises grapple with how to adapt, the realities of how to manage these trade-offs cannot be bulldozed in similar fashion to what Bitcoin and others have done. In particular, enabling permissionless participation may simply be too difficult given KYC/AML laws and other regulations.

Conversely, the freedom Bitcoin and other public blockchain systems have enjoyed to circumvent existing laws and regulations is likely not sustainable. As more is known and understood of these systems and as these systems grow in impact, governments and other entities will react. And as actors within Bitcoin and other public blockchain systems want to transact and interact with actors of the traditional economic system, such transactions will require adherence to existing regulations and laws. For example, most cryptocurrency exchanges that allow for the exchange of US dollars to Bitcoin follow US KYC/AML laws (and the days are likely numbered for those that don’t). Infrastructure for public blockchains is coming to better support this broader need for compliance; uPort is working on providing KYC services to the Ethereum protocol, the second most valuable public blockchain system behind Bitcoin.

Will enterprises embrace open, permissionless systems and effectively navigate the guardrails that govern the traditional economic system? Or will public, permissionless blockchains connect to the traditional economic system by building features and other infrastructure to adhere to laws and regulations to enable more activity?

Open vs. Permissioned Systems

The potential for value generation through permissionless systems is vast given the network effects, though the path to execute is vague to nonexistent for most industries and use cases at this point. For most professionals, the realities of your business, your industry, and your jurisdictions of operations provide guardrails that Bitcoin and other emergent public blockchain-based systems are only now beginning to face. Is it possible for responsible business executives to jump into an open, permissionless system? Is it wise? The answers to these questions are unique for each, but the likely answer is, “I don’t know,” or at best, “not yet.”

Enter permissioned systems: opportunities to begin experimenting with blockchain technology while maintaining control so that trade-off decisions can be made deliberately. It is not in the cards for Santander, JP Morgan, or Goldman Sachs to circumvent KYC/AML laws; therefore, they are investing in closed, permissioned blockchain projects. For example, Santander is an early investor in Ripple, a public blockchain that has been built with KYC and AML requirements in mind. Like public blockchains, the source code for the protocol is open sourced, viewable by anyone. And the blockchain of transactions can be viewed as well. However, the protocol is not permissionless; Ripple currently controls who is able to participate in various aspects of its system. JP Morgan Chase and Goldman Sachs are experimenting with Digital Asset Holdings’ permissioned blockchain infrastructure. Their technology is private and permissioned. Unlike Ripple and other public blockchain systems, the code is not reviewable nor is the chain of transactions. Like Ripple, participation too is controlled.

IBM, Microsoft, and others have begun in earnest to experiment and develop blockchain infrastructure as permissioned systems for new and existing clients—still having gatekeepers at the door to ensure only the right actors participate in the right manner. All of the major consulting practices have blockchain teams with proposals at the ready for such investments. Help exists to figure out how to onboard system participants to a blockchain-based system given the unique characteristics of your business, the systems as they already exist, and the actors that should participate. When distilled to fundamentals, these efforts resemble the bread and butter of big consulting since long before blockchain hit the radar.

The truth of many of these types of incremental blockchain investments is that the resulting system ends up being very similar to traditional systems (and therefore with a similar risk profile). Such projects leverage a small portion of the anchoring characteristics of public blockchains; in return, they allow you to control for the realities you encounter and mitigate external risk.

Slow, deliberate entry into what is a nascent, early-stage technology is good for business, as such efforts help your organization learn and adapt as the landscape matures. However, there are trends within the permissioned path that will hinder or lubricate further experimentation towards permissionless systems. In parallel, understanding how existing permissionless systems are conflicting and adapting to traditional systems can also help shape your blockchain strategy. Are you fluent enough in the principles that anchor public blockchain systems? Is your team? Are your partners?

These are some of the many considerations that must be evaluated as businesses explore if and how they can leverage blockchain to enhance their operations. As with all emerging technologies, there are risks associated both by being too early and too late to adapt. The nature of blockchain, fortunately, provides several mechanisms to explore these opportunities in a low-risk fashion.