How The Bitcoin Blockchain Creates An Explosive Ecosystem
Bitcoin is an ecosystem. More and more, our world is being navigated from the frame of the ecosystem — and while this has been the case since the beginning of time in the natural world, it is on the cusp of true proliferation in the human-made world. All life exists in the context of interconnected systems and networks — almost nothing exists in this world in isolation. The flow of data, information, and knowledge almost always causes complex interactions, actions, and reactions in even the most simplistic of natural world systems. The holy grail of most of modern computing, robotics, and artificial intelligence is the mimicry and replication of complex natural evolutionary ecosystems into analogous digital ones.
Described in the most rudimentary fashion, an ecosystem consists of ‘things’ and the ways to link those various ‘things’ together to facilitate some sort of contextual communication or information exchange via ‘connections’. Even at an elementary level, the existence of matter itself gives rise to ecosystems — since the matter is a ‘thing’ and communication between various matter particles via ‘connections’ are needed in order to give rise to more complex objects and structures.
While an ecosystem is nothing more than ‘things’ and ‘connection’ pipelines between those ‘things’, that is not at all meant to trivialize the power of an ecosystem.
In the digital world, the digital ecosystem world-view is one of increasing integration and a drive towards simplicity. Digital ecosystems act to redefine current human-to-machine or machine-to-machine interactions and makes possible the ideas of connected cities, smart grids, driverless cars, smart homes, and so on.
Take the smart-home for example, and the common thermostat used to regulate home temperatures. The development path of the thermostat in relation to digital ecosystems is one that is mirrored within many systems. The trajectory of the electric thermostat has remained unchanged for well over 100+ years since its invention in the 1800s — employing a simple feedback-loop mechanism. For much of its history, the thermostat acted in isolation and control of the device was only achieved by being in physical proximity to the thermostat itself. Many technologies throughout their respective histories, the thermostat included, have lived in an isolated world often disconnected from any ecosystem.
Until the proliferation of linkages and connections to allow ecosystems to form in the first place, there were high degrees of system independence in the digital-world. To that end, digital ecosystems could not really take true form until the exponential explosion of interconnectedness was achieved powered by a variety of communication pathways (Internet, 4G/5G Cellular, RFID, Bluetooth, NFC, etc.). Concretely, the creation of ecosystems is largely dependent upon the creation of adequate linkages and connections to support communication pathways and allow for interactions, actions, and reactions.
Coming back to the example of the thermostat — the thermostat now makes up one integral component of the interconnected home — allowing it to be controlled proactively from a distance to monitor and track utilization, to use this data to determine macro heating-and-cooling trends, to connect in unison with other home systems such as lighting and other electrical systems, and to employ sensors to track flow of traffic to adjust temperatures per actual physical space usage. None of these actions were possible with the standalone conventional thermostat. If the conventional thermostat has undergone this level of significant transformation, there is really nothing to stop similar levels of disruptive transformation from occurring elsewhere. In the end, all of this is powered by ecosystems and the opening up of communication pathways.
In the business world, the ecosystem also reigns supreme but in different ways. Traditional ‘Harvard-based’ business strategies offer two highly distinct and segregated confines for a business to operate within — the cost leadership regime or the differentiation regime. The general assumption underlying either of these two strategic principles was that a company could either do one or the other successfully — but not both. A business entity could either be a cost leader like Walmart, or a differentiator like Apple. There was no strategic ground in-between — no formulaic combination of both strategic spectrums that would yield any success in the form of above-average business returns.
Furthermore, business strategy in the past has also heavily relied on the siloed view of the organization as a various value-generating entities or functions, classified into primary activities and secondary activities.
From this viewpoint, the sum-total of the functional groups of an organization acts like a funnel or a pipeline to take goods and services from inception to creation, and finally to the marketplace.
In today’s age, this is an extremely disconnected view of the business organization that invites segregation, silo-thinking, and introduces fundamental barriers to innovation, collaboration, and ultimately teamwork. This outmoded view of the organization takes no advantage of the power of ecosystems. Today’s most successful global organizations have all adopted ecosystem-based business strategies — fundamentally distinct and unique from any traditional successful business strategies in the past. Indeed the best companies around the world recognize the power of ecosystems in organizational culture and management as well — adopting highly integrative agile team-based work environments based on the benefits of collective intelligence.
The shift towards an ecosystem-based business strategy is one that can encompass a lengthy discussion, but the point of this discussion is to recognize that ecosystems are extremely powerful entities. In the past, businesses ran on an ‘us vs. them’ philosophy gauging the competition as the ‘enemy’, and providing a clear division of those constituents inside the organization versus those constituents outside the organization. Company secrets were fiercely guarded since they were relied upon for value generation in terms of sales of either goods or services per unit. Supply-side economies of scale dominated. However, just in the last few years, business strategy has changed so overwhelmingly towards ecosystems, network effects, and demand-side economies of scale. This massive shift has been powered by exploiting new and existing communication pathways between a company and the broader ecosystem that the company is a part of.
Businesses are ecosystems today and are powered by the proliferation of communication pathways, analogous to the natural ecosystem and digital ecosystems already mentioned before. Today, the most successful businesses will recognize that the more communication pathways they create, the more interconnectedness they achieve, the more they open up their business to the external world, the more network effects the business will instill — the more new and powerful value generation and sales pathways they will be able to create. Examples of this ecosystem-based business strategy are encompassed by many giants of the industry today, but in this text, Uber is an ideal example for illustration.
Uber leverages an ecosystem to tap into new and powerful sources of value generation and sales. Uber has opened up communication pathways (through a mobile application) between those individuals that require vehicular transportation and those that can offer it. Uber does not have a fleet of vehicles or drivers, but they leverage individuals and assets outside of their organization to fundamentally bring in value and sales to their organization. The company is successful because of its ability to provide communication pathways to connect an ecosystem together — leveraging network effects for growth and demand-side economies of scale.
The ecosystem business model is entirely a disruptive one and another company that has successfully leveraged it is Airbnb. Airbnb’s value generation or sales translation comes from the power of the ecosystem — creating a network of houses, apartments, and spaces that can be utilized for work, for play, for leisure, and for travel in unique and interesting places around the world. In the end, Airbnb offers a global network of a ‘home away from home’. Airbnb opened up the communication channels within the ecosystem to empower transactional exchanges. Again, its individuals and assets outside of the confines of the organization that bring the most value to Airbnb as a whole.
One of the most salient characteristics of Bitcoin is the complexity of the ecosystem — the number of moving parts — and how Bitcoin opens up channels of communication between individuals and their currency assets to support transactions in a more direct method without the use of any central trusted parties.
The Bitcoin ecosystem consists of the following participants, as shown in the table that follows. Bitcoin’s unique value generation proposition is attained by challenging traditional communication and exchange pathways between two transacting parties via a digital currency that frees itself from the bounds of the existing financial services economy and centralization. It is a uniquely brilliant ecosystem.
While this book will attempt to describe this Bitcoin ecosystem to further the understanding of all the moving parts, no justice can be done to describe all the ways that Bitcoin and cryptocurrency spin-offs of Bitcoin are challenging innumerable industries and business models leading to new eras of digital technological disruption.
The emergence of the trust economy has been an interesting by-product of the increased reliance on digital social experiences and the power of social networks. Trust for the first time can be commoditized, manufactured, codified, and quantified. This is a powerful statement that requires a bit of further explanation no doubt in its relation to Bitcoin. Bitcoin forms an interesting use case derived from the manufacture of trust, and blockchain is a foundational technology that powers the economy of trust.
The concept of trust is an incredibly important one in any economy or marketplace — or indeed any interaction or exchange of value between parties or institutions. Whether it be proceeding with a financial transaction, investing in an emerging technology company, taking an Uber across town, or renting out a house half-way across the world via AirBnB — all of these actions inevitably will require the prerequisite manufacture of trust to proceed. Trust, according to the Oxford English Dictionary, is defined as: “Firm belief in the reliability, truth, or ability of someone or something”. So how does one go about manufacturing trust? Is there a concrete recipe that yields a higher degree of trustworthiness?
The first thing to note is that there is a significant difference in how trust is relayed and characterized in the real-world versus the abstractions that appear in the digital world. While in real-world trust or higher levels of trustworthiness have been associated with subjective characteristics, in the digital world, trust has become an increasingly quantified and measured via some interesting social proxies.
In the digital world, trust now can be defined in terms of social proxies or reputational capital analogies. The implicit message being that the greater in quantity (or numerics) social proxies of trust are, the more inherent trust that can be extracted. Or better stated, the greater in quantity (or numerics) social proxies of trust are, the better the likelihood of a trustful experience — true to the original intentions of the interaction between social participants.
Examples Of Quantifiable Social Proxies Of Trust Include The Following:
- 5-Star Ratings
- Social Connections
Trust, or the lack of trust, translate into impacts of real dollars and cents. Social proxies of trust form an incredible influencing factor — influencing the consumption of product, content, subscriptions, and acting as a differentiator between similar offerings. A product or service with higher quantified reputational capital will concretely perform better than its comparable peer — the differentiator being the degree of trust that can be manufactured. In other words, the trust sells. For example, between two nearly identical light fixtures that can be purchased on Amazon (as an example), the one that will have the greater likelihood of purchase will be the one with the higher level of quantified social proxies of trust in the form of positive reviews and commentary.
Trust has moved away from a subjective enterprise to a highly calculable enterprise. Most individuals put an extremely high premium on trust which translates into real decisions, with real financial consequences. This commoditization, manufacturability, codification, and quantification of trust is needed in all digital transactions. Now there are means and methods that are employed every day to quantify trust and to empower various digital economies. Digital trust fuels the gig economy, fuels the sharing economy, and fuels new and untapped sources of future value creation.
Blockchain technology that Bitcoin relies upon is an enabler of the digital trust economy. Unlike social proxies of trust which influence the likelihood of trustful interactions — blockchain technology goes one step further in the definitive enforcement of trust. With blockchain, there is no choice in being truthful or not. In the blockchain world, trust is not manufactured via reputational capital; it is manufactured via the carefully orchestrated interactions between ecosystem participants. Blockchain technology underpins the furtherance of the trust economy — establishing trust between parties and institutions to exchange value. The blockchain data structure and associated verification protocols are what TCP/IP was to the proliferation of the internet in terms of facilitating the act of communication. While the internet ultimately fueled the social economy, blockchain will further fuel the trust economy.
Bitcoin and other cryptocurrencies are one of the most uniquely complex use cases of blockchain. The Bitcoin blockchain is the first instance of trust-enforced financial interactions powered by a public ledger and verifiable transparency. In the Bitcoin world, P2P interactions proceed without the need for trustful intermediaries and trust-proxies like in the form of credit ratings, as an example. Beyond Bitcoin being seen as just a digital currency (and that is a remarkable statement in and of itself and in no way intended to minimize Bitcoin’s technological accomplishments), Bitcoin is also seen as a proponent of the trust economy.
While the internet has powered global communications ultimately creating the power behind social networks and social value chains — at the root of all social interactions remains the element of trust. Via blockchain, this element of trust can now be codified, extracted, and singled-out on its own. In simple formulaic fashion, digital social interactions are now a function of both: connection and communication, as well as trust. While the quantification of social connectedness embodies levels of trust, blockchain technology enables definitive trustful connectedness. Blockchain technology removes trust ambiguity in interactions and collapses the trust spectrum to a binary enterprise — either trust exists or it does not.
Internet Of Value
Not only does the blockchain foundationally fuel the trust economy, but blockchain technology will also inherently fuel the Internet of Value (IoV). The Internet of Value brings together seamless and simplified transactions in everyday people-to-people interactions. The Internet of Value allows transaction processing as easily as an email, message, SMS, or tweet. Whether it is processing large-scale transactions such as the sale of properties or vehicles, or very small-scale transactions fueled via micro-payments, the Internet of Value would introduce new and direct ways to interact — bringing a new dimension to social interactions through disintermediation.
Globally, the world grows more and more interconnected by the day: half the world owns a smartphone, there are more cell phones than people, and sadly there are more people will access to the internet than those that have access to running water. However, in today’s landscape, financial transactions which are the root of any economy, still are processed in very traditional means via conventional invoices, payments, bank accounts, credit cards, credit rating institutions, lenders, financial institutions, and through many self-interested intermediaries. All of this ultimately translates to slow financial transaction processing capabilities. In the financial world today, things do not often happen in real-time. However, with the blockchain fueling the Internet of Value — the financial transaction will soon see a tremendous change. The Internet of Value will form many new and imaginative value creation possibilities.
Take for instance the world of logistics and supply chains. Many companies have very complex logistics operations and supply chains. Companies will often rely on a host of third-party companies, carriers, vendors, suppliers, manufacturers, so on and so forth. Cornucopias of participants exist in any supply chain ecosystem. An ecosystem-wide blockchain would be able to reliably facilitate communications, actions, and transactions between participants. No longer will paper trails or emails or invoices be needed to track communications, actions, or transactions. A self-managing ecosystem would grow as a result. Not only does this proposed ecosystem create new ways of value capture, but positive benefits to a company’s bottom-line would also result.
These are really exciting times. Anyone who claims to know the true trajectory of the trust economy or the Internet of Value is probably wrong. However, one thing is certain, the rate and pace of change will continue to accelerate now more than ever before.