Blockchains, Cryptocurrencies & the New Decentralized Economy: Part 3 — The New Internet

By Ashley Lannquist, MBA Student at Haas School of Business, UC Berkeley. Original article published in Medium and accessible here: http://bit.ly/2DNW5Pc

Blockchain technologies and decentralized applications can together build a new Internet and, more broadly, a new economy. Part 3 of this essay explains the role of data openness and interoperability in blockchain technology and how they support the new era of heightened interaction, decentralization, and efficiency that makes up the “Web 3.0.”

3.1 The New Internet Architecture

The Old System

The current Internet and World Wide Web transmit information via traditional protocols, namely IP/TCP, HTTP, and HTTPS. These were developed in the late 1960s and 1970s by the DARPA and other U.S. research institutions. The protocols are the foundational layers upon which today’s centralized applications such as Facebook, Bank of America, Uber, Google, and others operate. The World Wide Web uses HTTP and HTTPS, which is why URLs read “https://www.facebook.com.”

In this scheme, which can also be called the client-server architecture, data is stored within applications. Specifically, the companies owning the applications (e.g., Google) store user data in their data centers and servers. As a result, they control and benefit most from the data. We can call them “centralized,” as explained in Part 2.

The Economist recently called these tech titans “giant centralized databases” whose “value derives from the fact that they control the entire database and get to decide who sees which part of it and when.” Another excellent article entitled “Mapping the Decentralized World of Tomorrow” further criticizes, “The problem with centralized systems is that they lack transparency, allow for single points of failure, censorship, abuse of power and inefficiencies.”

The New System: New Protocols

The forthcoming blockchain-based Internet runs on new protocols and has a new architecture that supports more decentralized systems to the benefit of users. Firstly, blockchains such as Bitcoin and Ethereum are their own new protocols. Additionally, developers have created complementary decentralized protocols that operate alongside or in conjunction with blockchain protocols. They provide services such as more efficient data and file storage (IPFS, Sia, Storj, and others) or payment transactions (Lightning Network, Raiden Network) than Ethereum and other blockchains.

The simplified visualization of the blockchain application stack below is taken from Joel Monegro’s article “The Blockchain Application Stack”, which I highly recommend, along with his “Fat Protocols” article. You can see the Bitcoin blockchain at the bottom. The additional decentralized protocols named above are represented by the green rectangles (they are considered “middleware”).

New Protocols: Decentralized Payments

Needless to say, since their early days, blockchains such as Bitcoin have focused on enabling cheap and efficient money transfer across borders. Blockchain protocols will continue to promote an “Internet of Value,” as Ripple calls it, with the nearly free flow of capital. Ripple uses its own private blockchain and native currency, XRP, to help banks send money overseas more efficiently.

New Protocols: Decentralized Data Management

Importantly, the new system also shifts user data (content and files like documents, large datasets, mp3s, images, etc.) from applications run by companies to the decentralized, shared data storage protocols (or “layers”) named above. Rather than stored in applications, user and product data are stored on decentralized protocol layers, whether they be blockchains like Bitcoin and Ethereum or the “middleware” layers (IPFS, Storj, Sia, etc.).

Protocol Labs’s IPFS is a leading decentralized storage protocol. It is specifically designed to be an efficient data and file storage system (images, audio and video files, documents, etc.), and it is cheaper and more efficient for this purpose than Bitcoin and Ethereum.

As stated in Part 2, decentralized apps, or “DApps,” are commonly built “on top of” blockchains (notice them on the top of the stack above). The DApps call, verify, and then deliver the user and content data from where they are stored on shared protocol layers lower in the stack. They connect to these layers with commercial or open-source APIs.

The decentralization of data and file storage and ownership, from centrally managed applications to shared protocol layers lower in the stack, has important implications for data ownership, accessibility, and interoperability.

3.2 Power to the User

In the blockchain-based Internet, users regain control and ownership over their data. Their data is stored in decentralized storage layers, where they can keep control of it, rather than in central databases owned by big tech companies. For more detail on how this works, in the case of IPFS, the content is stored on nodes in the IPFS network, and then a cryptographic hash, which is a type of unique fingerprint of the data in a small and secure form, is recorded on a blockchain to prove that the data existed at a specific time and place. That hash is referenced in order to retrieve and deliver the full content from the IPFS system.

Shifting user data to decentralized data layers allows for self-sovereign data ownership. Potentially, users can monetize their own data by selling it to interested third parties. They can also easily share their data with other applications.

3.3 Data and Transaction Interoperability

Because open protocol layers store user data, they allow for the sharing of data across applications and protocols. In other words, blockchain, or more broadly, distributed ledger technologies (DLT) can be the shared data layers where multiple applications connect. They can also be the shared money transmission layers.

Data openness and interoperability, coupled with blockchain-based payment channels, allows for sophisticated integrations that can improve user experience. As the same Joel Monero of Union Square Ventures wrote, “Applications built atop this architecture will, in most cases, work very similarly to the ones we have today — just like Coinbase works similarly to PayPal. The big difference to consumers, however, is that because they are built on decentralized protocols, they will be able to talk to each other, just like different e-mail applications and bitcoin wallets can interoperate.”

Data interoperability paired with the token-driven revenue model creates new business model opportunities, such as more direct or truer peer-to-peer (P2P) markets for the more efficient exchange of goods or information (as explained in Part 2). As an example, a media and content-sharing platform could allow users to spend the DApp’s native token to view or download content, which is stored in IPFS. The token value is sent directly to the owners and publishers of the content, who have shared it selectively with the DApp. Meanwhile, the DApp is rewarded via the token’s price appreciation when users spend tokens to access content through the application.

3.4 Interoperability Across Blockchains

In the future, decentralized apps operating on different blockchains will also be able to communicate and transfer value to one another. Interoperability will not be limited to applications on the same blockchains, just as e-mail communication is not limited between users of Gmail, Microsoft Outlook, or other programs (which use different protocols). There may even be thousands of blockchains for various purposes, all interoperable.

Cosmos and Polkadot, and Ripple’s Interledger Protocol (ILP) are among the projects addressing interactions between multiple blockchains. “Cross-chain solutions” vary in how they contribute to interoperability; Cosmos specializes in the transfer of value (sending money) across different blockchains, ILP specializes in the exchange of value, and Polkadot allows for a variety of interactions across smart contracts and blockchains.

3.5 Towards a Web 3.0

Distributed ledger technologies support a “Web 3.0”, where users own their content or data, and where users, applications, and connected devices interact with one another in new and exciting ways.

“Blockchains are far more than a technical solution to solve the double-spend in digital cash; they change the balance of power in networks, markets and even the relationship between the individual and state, all characteristics of Web 3.0”

-“Blockchain-Enabled Convergence — Understanding the Web 3.0 Economy” — Outlier Ventures Research

While the buzzwords “Web 1.0,” “2.0,” and “3.0” lack conclusive definitions, they can be briefly summarized as follows:

  • In the Web 1.0, centralized media and content sites provided information to readers. For example, MSN published the news for readers with little reader interaction. It is a “static web.”
  • In the Web 2.0, social media sites (YouTube, Medium, Facebook) and collaborative websites and services (Wikipedia, Google Docs, Dropbox) allowed users to publish, share, and collaborate on content themselves. It is the “social web.”
  • In the Web 3.0, applications, users, and connected devices interact directly with each other. Decentralized apps can call and share the same user-owned data stored on blockchains’ open data layers. Additionally, connected devices (such as home devices or autonomous cars) can transmit their data and transfer value over blockchain layers to users and other devices via smart contracts (discussed below). It is a “user-owned, decentralized web.”

In a 2001 article entitled “The Semantic Web,” Tim Berners-Lee, the creator of the World Wide Web, and his co-authors envisioned a system where computers are able to comprehend “semantic” data on websites, “better enabling computers and people to work in cooperation.” Data is encoded with specific machine-readable meaning and logic, allowing software to understand it and perform sophisticated tasks automatically. Software can then engage across applications or websites (and the users that employ them) on a vast scale. The “Semantic Web” is an early expression of a Web 3.0 system where software, applications, and users interact with one another.

Today, Protocol Labs’s IPLD is building a data model for the decentralized web that lets data structures across blockchain and web protocols be more interoperable. Perhaps future Web 3.0 applications will combine machine-readable logic, data interoperability technology such as IPLD, and modern machine learning methods to intelligently understand and traverse data from across the Internet. From there, they could intelligently interact with users, other DApps, and devices, and make recommendations or take actions (based on smart contracts and other code).

3.6 Web 3.0: Identity & M2M Transactions

The forthcoming “Internet of blockchains” supports new capabilities that are only recently becoming possible. Here are two high-impact examples:

  1. A Secure, Digital Identity

It may be possible to create digitized, self-sovereign user identities using blockchain technology. An individual could store relevant identifying and other personal information in a single, “tamper-evident” (tampering and manipulation would be apparent) blockchain-based profile or account. He or she could manage this information and send it to anyone, from decentralized apps to government agencies. The entities would be able to read and immediately verify the individual’s identity and information.

The Economist recently wrote, “if people’s identity is anchored in one or several blockchains, this would give them more control over it and their personal data. If a potential tenant, for example, wants to prove to a landlord that his income is high enough to pay the rent, he need only disclose that bit of information, instead of allowing access to his entire credit history, as is often the case today.”

 

Digital identities can be stored securely on a blockchain for a variety of uses and benefits, from the humanitarian to the commercial. They can provide much-needed identity documentation to millions of people around the world who are unable to access banking, healthcare, and legal institutions for lack of this documentation.

A blockchain-based identity can also securely link individuals to their assets, intellectual property, and their financial, educational, and medical records. Users can be more protected against identity theft. They can also more quickly and securely share medical or educational information to a doctor’s office or employer. Banks may draw on the data for AML and KYC compliance efforts.

Digital identities can also support more seamless and successful use of decentralized platforms and applications.

Here are some prominent examples of blockchain-based identity projects.

  • In June 2017, Microsoft and Accenture launched a prototype for a technology that indexes biometric information that individuals can selectively share with different agencies, organizations, and companies. The prototype, which has been deployed by the UNHCR to register 1.3 million refugees, runs on Microsoft’s Ethereum-based Azure blockchain service.
  • uPort, built on Ethereum, seeks to provide a mobile-based service for self-sovereign identity management. Users create a composite of credentials and identity information that they can selectively send to confirm their identity. It can also serve as a KYC/AML attestation system. uPort uses IPFS to store user identification data.
  • Civic is another platform for secure management of digital identities. Personal information is encrypted and stored on a mobile device, and users can share it with companies and agencies through a QR code.

We are in the very early days of exploring the use of blockchain for a universal and secure identity. Challenges abound, and industry leaders are rightfully cautious and skeptical.

  1. A Machine-to-Machine World

Distributed ledger technologies can serve as the backbone to a more connected physical world. They allow for the transfer of information or payments between connected “smart” devices and machines, such as home and industrial utilities and hardware, autonomous vehicles, and consumer wearables. They can also digitally connect users to those machines.

A device, for example an energy meter, washing machine, or autonomous car, has an embedded chip that connects to a distributed ledger. By engaging with smart contracts, it can buy or sell energy, or send data or payments, to and from users or other machines. In the inter-connected and inter-networked future, much described in the Internet of Things (IoT) paradigm, users and connected devices will be able to communicate and transmit information or payments automatically between one another using smart contracts and blockchain technology.

IOTA is a project supporting the machine-to-machine (M2M) transfer of data and payments. IOTA’s distributed ledger, called The Tangle, is designed to scale to millions of connected devices, operate with other blockchains, and support fee-less payments.

Slock.it is another notable startup building blockchain-based IoT solutions. For connected devices, it creates Ethereum-based identities and accounts to engage with smart contracts and to send and receive payments. Both IOTA and Slock.it are members of a new Trusted IoT Alliance.

When applied to automobiles, autonomous cars or trucks with DLT-based accounts could seamlessly and cost-effectively pay tolls or refuel at electric vehicle charging stations. They could also pay one another to pass each other on the highway, or to draft behind each other to increase fuel efficiency in a process called “platooning.”

In the era of distributed ledger technology, we can reformulate science fiction writer William Gibson’s famous statement to say, the future is already here, and it is widely distributed.

3.7 Challenges to an “Internet of Blockchains”

Challenges to Customer Adoption & Usability

DApps and other projects must develop more user-friendly interfaces for ease and accessibility. Ideally, blockchain protocols will be hidden behind approachable front-end interfaces and users will be unaware of the DLT underneath.

It is also important that the purchase, management, and storage of tokens becomes easier for users. The process is currently confusing, difficult, and expensive. Cryptocurrency wallet and exchange technology should continue to improve to reduce these frictions.

Decentralized browsers and browser plug-ins (to existing browsers like Chrome) are another step in the right direction. They can also be considered decentralized application portals. MetaMask, Mist, and Parity are Ethereum DApp browsers while Blockstack is a separate decentralized browser platform. They have sleek and clean user interfaces, and in one portal, they allow users to:

  • Securely store identity information (often in the form of profiles you may use for different DApps)
  • Manage cryptocurrency (or token) accounts
  • Send identity information and tokens to a variety of DApps to access and use them quickly and easily

Decentralized browsers can be seen atop a more developed Web 3.0 stack composed by prominent Ethereum developer Stephan Tual:

Challenges Related to Cryptocurrency Prices

It is hard for users to manage the costs and risks associated with cryptocurrency price fluctuations. One way this manifests is the tendency for users to avoid spending tokens in DApps when token values are rising. They prefer to hold the tokens in this case, anticipating price appreciation. We saw this practice in the Spring of 2017 with ether and DApp tokens.

Challenges to Technical Implementation

Blockchain networks must mature; they are struggling to handle the volume of transactions currently demanded in the network. They need to resolve their scalability challenges before they can support widespread app adoption.

It is also very difficult to control access to private data, such as identity data discussed above, without a centralized provider. Public-key cryptography, where a private key is required to decrypt data, can help encrypt and secure information on the blockchain. However, if the private key is lost, the data or assets tied to the account are lost forever — there is no password (or private key) recovery! Additionally, it is difficult to revoke access or to grant temporary access to encrypted data. It is also hard to guarantee that someone who is rightfully given a private key does not nefariously share it with others. uPort, mentioned above, is employing smart contracts to improve key management.

While talented researchers and developers are addressing the aforementioned difficulties, the nature and timing of implementation and widespread adoption is uncertain. No doubt, a “killer app,” or a popular application such as those related to identity or M2M transactions above, can accelerate consumer adoption (once scalability problems are resolved). On the other hand, impediments such as severe and widespread attacks or strict government regulation could derail adoption.

Conclusion

Blockchains and other distributed ledger technologies can lay the foundations for a deeply connected and decentralized economy.

Enterprises, governments, and international organizations such as the IMF and UN are currently researching and testing use cases and applications for this revolutionary technology. Meanwhile, retail investors are flocking to cryptocurrency markets, allured by eye-popping returns and exciting yet risky ICOs (Part 1).

Dozens of exciting blockchain-based startups are launching around the world. They are building decentralized applications with completely open-source code and with the help of external contributors. Each project has its own token (or cryptocurrency), which is both an access key to the software and an investable alternative asset (Part 2).

Underlying these new apps are shared data and value transfer layers operating on blockchains. They are the backbone to a new Internet, or Web 3.0, where applications, users, and connected devices all interoperate. Users and applications can interact, drawing on selectively shared data and identities stored on decentralized protocol layers. Users and smart devices can also interact with one another, sending micropayments or information across networks.

While the success of a blockchain-based Internet and economy hinges on resolving significant hurdles and avoiding impediments, the vision is both exciting and commendable. As Arthur C. Clark stated, “The only way of discovering the limits of the possible is to venture a little way past them into the impossible.”