The case for de-centralisation

2016 was all about performance and scalability, 2017 was all about security. These are technical challenges. The harder challenges are the social and political ones. One of the key unsolved challenges is the de-centralised business model. I have consistently messaged that ‘there is no point replacing one centralised business model with another’. I believe 2018 will be the year that many in the blockchain domain wake up to the fact that there is little point distributing the technology if you are not going to distribute the business model. This challenge remains within all the blockchain projects I am focused on.

If you’re still struggling with the reason why this is important, allow me to use an analogy used by the Boring Money Blog that compares the verified transactions on a blockchain to adding personalised Lego bricks to a Lego tower.

There are many advantages of having this “tower” in a de-centralised business model, including:

• Resiliency — no single point of failure
• Cheaper — no middle-man or monopoly to create fees or pricing power respectively
• Agile — no need to move at the speed of the central component
• Private — data cannot be resold or mined by the central party

However, if all of the Legos are controlled by a central entity, then these benefits could be diminished. With that said, I believe that de-centralisation should not be limited to the technology layer but should also permeate throughout the business model.

The Australian Stock Exchange (ASX) have recently announced their use of blockchain, provides a prime example of why a de-centralised business model is necessary.

A stock exchange is a collection of disparate parties who wish to exchange stocks. This has evolved from an informal gathering at a coffee house to the parties standing up a joint entity — a stock exchange company, like the ASX. The parties become clients of this new entity, which over time gains independent shareholders and then uses its position and network effect to gain pricing power over the original parties.

This problem has grown over the years, is not just limited the exchange of stocks and it is a material cost of doing business in the financial sector. What’s more, the cost is passed on to customers.

Distributed ledger technology (DLT) or blockchain, removes the need for the central database and significantly reduces the role of the central entity — the stock exchange company. Understandably, this would not be in the interest of the ASX.

So instead, they have simply replaced the existing database with a distributed ledger. The replacement is more akin to making an expensive OS or tech upgrade, and has not, unfortunately, solved the challenges of centralisation.

That is not to say that the motivations behind the ASX’s decision were not in line with the advantages listed above. However, their business model needs to change for these benefits to be fully if at all realised. And, unless an entity is willing to make those changes, there is little point in the transformation. In other words, a traditional database application will suffice if there is de-centralisation in either the technology or business model.

If ASX clients collectively begin building their own Lego tower, then I might be more inclined to say we have a de-centralised business model and know that the benefits can be realised. As ASX and similar entities have surely discovered, there is only so much fun you can have on your own with a blockchain.

Richard leads a team of engineers and innovators looking at emerging technologies and their application across financial services. His current focus is on the use of distributed ledger technology including blockchain. Richard has a 20-year career in investment banking technology, specialising in the building of financial ledgers and regulatory reporting for the largest financial service institutions.