Tokens as a Back-end: The more things change, the more they stay the same
It’s quite easy to get swept up by the hype, but remembering that tried and tested business models are difficult to disrupt, helps take a more pragmatic approach to mapping out the future landscape.
In this post, we will talk about “Tokens as a Back-end”, which is how we envision the future cryptographically enforced landscape will look like.
The Hype Cycle
First formalized by Gartner, the Hype Cycle of Emerging Technologies aims to describe the mass optimism, eventual delusion and subsequent sustainable build-out of new technologies and the buzz words that come with them.
While we don’t necessarily agree with where Blockchain / Cryptocurrencies sit within this framework, we do agree with the overarching phases Emerging Technologies seem to pass through.
We also hold the view that the same technology can go through several successive cycles of inflated expectations, disillusionment, until a pragmatic steady state emerges.
The Blindly Optimistic leading the Blind
It seems there is an article about the future of the “Token Economy” everyday. With new enthusiasts learning about the capabilities of Distributed Ledger Technology and rightfully being swept up by all the amazing possibilities that are unlocked.
That being said, blockchains are in their infancy. A lot of advertised projects cannot be implemented on today’s infrastructure.
In addition, a lot of other projects just do not belong on-chain.
But while money makes the world go ’round today, in the world of tomorrow, that task will be handled by tokens.
We think this view is a bit optimistic.
The more things change…
People seem to forget that some financial institutions have survived the discovery of electricity, the build-out of telecommunications and the disruption of the internet.
If we’ve learnt anything from history, it is that the more things change, the more they stay the same.
With every emerging technology, we see a handful of disruptive players storm the scene, but we often also observe the incumbents eventually adopting the technologies, either through greenfield build-outs or through capability enhancing acquisitions, and cementing their position / bolstering their market share.
Disruption works best when it is largely un-disruptive
Technology works best if it complements existing consumer behavior rather than completely disrupting it.
Airbnb still has users select their dates, fill their credit card information, check-in and check-out.
Uber still has users book a cab, take a ride, and settle the fare.
The mechanisms to facilitate the activities are technologically enforced, but the steps themselves remain largely unchanged.
Now we’re not saying there is no such thing as true disruption, the point we are trying to make is that disruption is most quickly accepted by the masses, when there are minor changes to the overall process and the product / offering remains largely familiar.
Technology vs. Institution: Trust is Trust
To successfully shift to a completely decentralized system, the technology needs to be able to meet all the services and comforts that current institutions provide.
For example, in the event that I accidentally transfer funds to the wrong account using traditional online banking, there is a clear plan of recourse to help me recover my funds.
In addition, my concerns are immediately (well, after significant wait times in most cases) addressed by a customer support representative.
If I accidentally send tokens to the wrong wallet, there is no procedure to help me recover my funds, and in most cases, they will be lost.
Considerations like this went into the development of the Jibrel’s Jwallet — an institutional grade token storage and transaction solution.
But this is one of many nuances that will need to be addressed if we are to transition to a decentralized economy in the medium-term.
So what does the future landscape look like?
In the short to medium term, we believe in the “Tokens as a back-end” — i.e. we believe the future landscape will not look much different from today, but that the back-end systems will rely on Distributed Ledger Technology (DLT) to capture the cost efficiencies realized by switching to a token system.
Instead of your bank balance and other account data being stored on a server, it will be stored using crypto-fiat tokens in the back-end. The bank will then be able to facilitate near-zero fee global transfers, remittances and payments for its user base, without changing consumer behavior. Further cementing their positions as the incumbents.
It is much easier for an existing financial institution to build-out crypto-capabilities, pass on the benefits (or some of the benefits) to consumers, than it is for the crypto-economy to completely disrupt a way of doing business / traditional economy that is 700 times order of magnitude larger in scale.
The same can be applied to utility tokens / services, rewards programs, sovereign identities, etc.. While token systems will help facilitate cost efficiencies and increased capabilities, the modus operandi of the underlying transaction will remain largely unchanged, at least from an end-user perspective.
If Starbucks were to implement a globally integrated rewards program, leveraging blockchain technology to track redeemable tokens, would the user need to hold the tokens directly in his wallet?
Surely, it makes more sense to have a dedicated front-end app interfacing with the Starbucks tokens in the back-end. Without the user needing to know about the token system.
While less holistically integrated, it is much less disruptive to consumer / end-user behavior. In addition, such an ecosystem would not face the scalability issues faced when trying to build everything on the same limited infrastructure.
Key Limitations for Full Decentralization
A few issues will need to be tackled before full decentralization is possible.
Sticky Consumer Behaviors
Consumer behavior is notoriously difficult to disrupt. Any solution needs to enhance user experiences rather than change them completely. For example, in building a remittance solution to remit value, the user experience should be largely familiar — i.e. the user should be able to transfer value in the same fashion he has grown accustomed to.
If the back-end of this transfer happens to be cryptographically enforced, it doesn’t necessarily need to be communicated to the end-user.
Solution: Integrate the token system as a back-end with current front-ends, unlocking the value of blockchain technology, without imposing too many changes to consumer behavior
Specific Business Requirements
Some things just don’t belong on-chain. Numerous companies have moved to put listed equities on the blockchain. But blockchains are public and slow. Meaning they are unsuitable for traditional order books due to front-running, and they’re unsuitable for high frequency trading due to block time. So its clear, some things are better left off-chain for now.
Solution: Leverage blockchain technology only where suitable / where it complements existing business models rather than trying to unnecessarily reinvents them
Blockchain capabilities today are limited. There are numerous challenges that will need to be addressed such as true privacy, scalability, compatibility, etc. before we see seriously disruptive solutions emerge.
Solution: Build products that create value today that are possible using today’s infrastructure (with an eye for the future)
So is the decentralized economy a pipe-dream?
Of course not. The capabilities and possibilities of blockchain technology and cryptocurrencies are real. While the ecosystem still needs several years to be built-out, and we are likely to experience a “Trough of Disillusionment” in the short term, the longer term prospects of a truly decentralized economy are still within sight.
Similar to how numerous Dot Com startups were launched to provide services that couldn’t be delivered seamlessly with the internet’s infrastructure still in its infancy and subsequently ended-up going under, we are likely to see the same happen to crypto-startups that are not pragmatic in their approaches and do not do their due diligence.
What is the Jibrel approach?
At Jibrel, we believe in the value crypto-currencies unlock. But we also understand that the ecosystem will require time to build-out.
In the interim, we want to bring distributed ledger technology to financial services. But consumers pay their mortgages in USD, GBP or EUR. Not BTC or ETH. In addition, users have bank accounts not wallets.
For that reason, we’re building out the infrastructure to allow for real-world transactions (consumer lending, debt securitization, trading, settlement and clearance). The key components being crypto-fiat currencies, to transact with the real-world (Jcash) and an institutional grade storage and transfer solution to remit and store value (Jwallet).
Note: we do not aim to discourage people from tackling very ambitious projects, reaching for the stars and aiming high, we just believe the current hype is spiraling out of control and it does well to keep a realistic outlook.
We’ve also had the privilege to demo and collaborate with truly disruptive projects and teams — so that’s not to say they don’t exist!
Jibrel provides traditional financial assets such as currencies, commodities, debt instruments and securities, as standard ERC-20 tokens, on the Ethereum blockchain. Jibrel is a Jibrel AG initiative. Jibrel AG is registered in Zug, Switzerland, Qubist Labs Inc is a software development company based out of New York, US.