On participating in Blockchains

When I entered the hype early 2016 I was overwhelmed by the volume of mostly tech-oriented articles on Ethereum, regarded as blockchain 2.0, surpassing Bitcoin by the introduction of smart contracts as programs residing on the blockchain, capable of executing business rules agreed upon by participants. Opening up a world of opportunities, I was sceptic how this would work in real life. Making business partners participate in shared, cross-company process chains would take a substantial change management program to start with.

What’s making people participate and share things? First there’s the what’s in it for me driver: participating in any activity obviously should be beneficial to the individual person given the opportunity. Deciding to participate means becoming a stakeholder. This will not immediately imply any active role however. There has to be some kind of other stimulus to become an active stakeholder. Let’s call it the what’s in it for us, reflecting to me driver, calling stakeholders to action instead of just joining the party and do some free riding. This driver needs a bit deeper understanding, illustrated by a small example. For instance, when we tell about our own achievements, we’d rather use the ‘we’ word for risk reduction. Success is mostly reflecting on the sender of the message, while failure reflects on the group as a whole, further dampened by recommendations why next time we will do better.

Why this philosophical angle? In search of meaning and raison d’être of private versus public blockchains like Ethereum, I feel that transparency and trust, or lack thereof, are complex interfering properties of blockchain technology. Understanding how participation works may help explaining these. One of the first things I learnt was that blockchain is a transparency machine because everybody shares the same database. While this may sound good in promising world peace, in an enterprise world you must think twice about trusting others to look into your data. Then again, modern processes are broken up between multiple parties, having to collaborate in delivering goods and services to clients. Sharing data means less friction, right? But the other thing I learnt was that parties do not have to trust each other, in fact some may be competitors. This seems confusing. How can you share without trust? Trustlessness is explained as a selling point of public blockchain, but in my opinion it’s not. True, you can exchange tokens triggered via smart contract conditions without trust. Good for you to not trust your peer and letting blockchain handle your token fee. But organisations don’t care so much about ‘trustless’ balancing their bank accounts. Improving business processes, working with and trusting their stakeholders in getting rid of administrative friction and human choke points is what’s in it for them. Clearing balances is merely a result of participants delivering to their promise. The effort put in by the individual stakeholders moving things forward has a positive effect on process throughput, efficiency and compliancy, leading to an overall satisfaction in the end.

So I defend the idea that active participants bring more value to a blockchain solution than the speculators and (free) riders of the first wave, who are just moving tokens and exercising voting power. The essence of blockchain is peer to peer, suggesting a sense of equality among the peers. Active participation means willingness to move forward and deliver, leveraging blockchain for proof of this intent by timestamping the actions, delivery and compliancy with agreed upon contract conditions. The more active the participants, the more transactions take place, encouraging hesitating stakeholders to perform better. The dynamics of peer to peer interactions is an indication of the health of the process chain as a whole, with blockchain accounting for each individual. Knowing that your actions contribute to the overall success, watched by your peers and regulators, you are building your reputation with every single transaction. The second driver of participation. Free riders on the other hand will be noticed early on and held accountable for ‘holding up the chain’.

Now what about trying this on a public chain? You have to keep in mind that, in theory, everybody could be watching your steps. Do outsiders have a special interest in your specific business? Will they value a reputation built in a specific context and should they understand compliancy in a specific sector? This is your business, not theirs. How would they know how to value your actions? Even worse, your transparency could be misused or framed in a context you’re not aware of. Why would you share your business with the whole world?

I see opportunities for private blockchains. In my previous article I wrote about a private consortium chain in project development. Abstracting away from this case you can imagine that the interaction of stakeholders and group dynamics could be interesting in the realm of DAOs. Ethereum backed DAO initiatives like The DAO, Wings and Colony focus on the first driver of participation. Collecting coins from stakeholders in exchange for voting on proposals according to their token weight. The actual work is done in selected projects, whose result will be cashed back to their investors. There are blockchain enabled checks and balances, but in the end it’s not any different from a shareholder dividend scheme. The proposition in a private blockchain context is quite the opposite. Here, crypto money is just a means to an end and that end is enabling frictionless process chains and building reputation value. Not the output of transactions or the exchange of tokens, but the properties of transactions, the order in which they happen and by whom they are initiated, are the real differentiators. We judge the blockchain by the transactions themselves. Stakeholders interacting with smart contracts build mutual trust needed for sustainable relationships. The behaviour of your peer stakeholder will lead to a make-take-or-break type of relation for doing future business.

One last thing on governance. In a private consortium chain you know your peers, so the design and maintenance of smart contracts by means of voting will be more efficient while business rules of engagement already exist. Focus is on encouraging active participation instead of having to build a governance from scratch and relying on best intent of new entrants bringing their own expectations and drivers when you’re trying ‘to DAO’ in a public setting. If I try to project where this is heading, I would argue that public DAOs may be more disruptive in a sense that such a dynamic governance will shake out incumbent processes and weak business cases, according to the first driver of participation. Private DAOs on the other hand will be more sustainable in a sense that they try to enhance existing supply/process chains by removing friction and building trust among the participants along the second driver.

I realise I have been cutting corners. Surely public chains will do quite well concerning participation, but this is just me participating in the debate wether private blockchain has added value over public blockchain. What’s your stake in this debate?