For managers, entrepreneurs and builders engaged in blockchain work, it is essential to conduct cost-benefit analysis on the implementation of distributed ledger technology (DLT).
Blockchain technology and related markets have gained tremendous momentum in the past year. In this entire emerging industry, huge developments and active funding of ideas have triggered some serious discussions about the true value of blockchain. Before implementing blockchain technology, managers, builders, and developers need to ask themselves a question, "Why use blockchain?"
Why build a decentralized system?
In order to understand how to best use blockchain technology, we must first define the trust assumptions in the system under consideration. Normally, blockchain use cases ignore the issue of third parties without considering whether the use of distributed or centralized alternatives can better meet this use case.
Standards for decentralized systems:
1) Unified acceptance of a single source of truth.
2) The system must accept input from two or more parties.
3) The parties must not trust each other, therefore, their interaction must be authenticated by a third party.
Next, we must determine whether a centralized or distributed third party can replace blockchain services. Centralized third parties not only manage transactions for customers, they also provide availability services and manage disputes. In addition, they update the agreement and ensure that the agreement remains efficient and available. The same distributed intermediaries also have all the above advantages, but they are also more efficient, and the hierarchical structure can prevent the central government from being overwhelmed.
Therefore, by choosing a distributed or centralized third party, not only can a series of token distribution and governance issues that plague modern blockchains be avoided, but also scalability challenges and regulatory obstacles can be avoided, and a reliable and productive Third party.
However, this does not mean that decentralized third parties are irrelevant. In some cases, centralized third parties cannot be trusted at all, and this is the key to understanding the benefits of blockchain. If we can build a framework to understand when (and why) centralized or distributed third parties should be avoided, then we can accurately predict when and why blockchain should be accepted. In addition, given that distributed third parties may better serve distributed networks from the beginning, we can avoid creating decentralized networks that naturally migrate to centralization.
Three criteria for untrustworthy centralized third parties
The first criterion. There needs to be a single source of truth. Due to conflicts of interest, third parties cannot conduct fair mediation between customers or parties.
Sometimes a third party cannot maintain impartiality. The intentions of such third parties may not be malicious, but in the event of a conflict, they will first satisfy their own interests. We have seen this situation time and time again in Facebook and other tech giants.
With the right incentives, decentralized governance can transform stakeholder interaction from a tit-for-tat zero-sum short-term game to a more collaborative and thorough long-term game, and reward those who are a wider range of stakeholders People who act in the best interests, not any preferred individual or group.
The second criterion. Monopoly hinders competition and cannot protect the best interests of users. The interaction in the network needs to be improved and abstracted.
As long as there is competition, market forces will strongly discourage selfish or irresponsible behavior by third parties. However, if an entity has no other choice because of the monopoly of the industry or the existence of resource constraints, the power of competition will collapse and the behavior of third parties will basically not be restricted. Apple's control of the App Store strongly illustrates why the kindness of the centralized gatekeepers would run counter to the best interests of the ecosystem they claim to support.
The third criterion. Anti-fragility is a must. The risk is too high, and the consequences of the malicious behavior of a third party will be catastrophic.
Even if the effect of competition can punish malicious behavior, the cost of a single mistake cannot be too high. Competition is a counterproductive force that will only take effect after a mistake is made. If this error cannot be tolerated under any circumstances, then preemptive measures must be taken.
This reality is reflected in supervision. For example, compared with the nuclear energy industry, governments of various countries are more willing to let the free market manage the pipeline industry. Because poor pipeline engineering will only cause some angry customers, and a nuclear accident is catastrophic.
As the world and all aspects of our lives have moved online, people are increasingly realizing that over-optimization can lead to vulnerabilities. We need to build stronger infrastructures for basic digital services, so that, ideally, these infrastructures It can become an anti-fragile system. Blockchain may become the backbone of the anti-fragile system, because it can not only survive in an adversarial environment, but also become stronger block by block from every challenge.
The above standards help us identify promising blockchain use cases.
Which blockchain use cases are ready?
Banks, markets, and other elements of the financial industry generally require third-party management to prevent counterparty risks. This situation requires an impartial third party who can manage and evaluate financial risks. The role of decentralization is to alleviate this counterparty risk by acting as a third party, adjust the incentive mechanism between market makers and users, diversify risks across the entire platform, and greatly reduce the possibility of system default. The extraordinary growth of the entire DeFi ecosystem is a powerful example of the disruptive nature of the blockchain and the successful implementation of decentralization in high-value systems.
Some use cases present promising opportunities for decentralization, but a series of technologies are needed to truly benefit a specific value chain. Supply chain is a powerful example. It is a mature super industry, but it can be subverted by blockchain-driven solutions and products. They are highly collaborative environments with very low tolerance for errors. Especially for high-risk goods such as medicines and even fresh meat, proper transportation and supply chain tracking are essential. The same is true for high-value supply chains such as diamonds and artworks, because the effectiveness of inputs varies greatly for different parties in the entire value chain.
In the process of building solutions for these value chains, blockchain cannot be the ultimate goal. It must be part of a broader overall solution to expand the scope and actual value of the supply chain itself. Blockchain will not immediately decentralize the private entities that form the supply chain, but it can interact more effectively and freely by providing a completely non-tamperable semi-centralized environment for these different entities, which will have a huge impact.
Blockchain and you
Understanding which attributes of the blockchain can bring the greatest value to the value proposition and business model of entrants or incumbents will be the first step to promote disruptive innovation through blockchain and other transformative technologies.
Quantifying the cost of trust and understanding how the characteristics of the blockchain can achieve (or improve) your business are the first steps to actually use these technologies to have a real impact and disrupt the entire industry.
