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Don Tapscott

Paradigm Shift: The New Promise of Information Technology (1993) Coauthor, Art Caston

The Digital Economy: Promise and Peril in the Age of Networked Intelligence (1995)

Growing Up Digital: The Rise of the Net Generation (1997)

Who Knows: Safeguarding Your Privacy in a Networked World (1997) Coauthor, Ann Cavoukian

Digital Capital: Harnessing the Power of Business Webs (2000) Coauthors, David Ticoll and Alex Lowy

The Naked Corporation: How the Age of Transparency Will Revolutionize Business (2003)

Coauthor, David Ticoll

Wikinomics: How Mass Collaboration Changes Everything (2006) Coauthor, Anthony D. Williams

Grown Up Digital: How the Net Generation Is Changing the World (2008)

Macrowikinomics: New Solutions for a Connected Planet (2010) Coauthor, Anthony D. Williams

Portfolio/Penguin An imprint of Penguin Random House LLC

375 Hudson Street New York, New York 10014

Copyright © 2016, 2018 by Don Tapscott and Alex Tapscott Penguin supports copyright. Copyright fuels creativity, encourages diverse voices, promotes free speech, and creates a vibrant culture. Thank you for buying an authorized edition of this

book and for complying with copyright laws by not reproducing, scanning, or distributing any part of it in any form without permission. You are supporting writers and allowing Penguin to

continue to publish books for every reader.

ISBN 9781101980149 (trade paperback)

Library of Congress Cataloging-in-Publication Data

Names: Tapscott, Don, 1947– author | Tapscott, Alex, author. Title: Blockchain revolution : how the technology behind bitcoin is changing money, business,

and the world / Don Tapscott and Alex Tapscott. Description: New York : Portfolio, [2016] | Includes bibliographical references and index.

Identifiers: LCCN 2016008427 (print) | LCCN 2016014933 (ebook) | ISBN 9781101980156 (ebook) | ISBN 9781101980132 (hardcover) | ISBN 9780399564062 (international edition)

Subjects: LCSH: Electronic funds transfers. | Bitcoin. | Electronic commerce. | Mobile commerce. | Banks and banking—Technological innovations. | Financial institutions—

Technological innovations. Classification: LCC HG1710 (ebook) | LCC HG1710.T385 2016 (print) | DDC 332.1/78—dc23

LC record available at https://lccn.loc.gov/2016008427

First Portfolio/Penguin hardcover edition: May 2016 First Portfolio/Penguin trade paperback edition: June 2018

While the author has made every effort to provide accurate telephone numbers, Internet addresses, and other contact information at the time of publication, neither the publisher nor the author assumes any responsibility for errors, or for changes that occur after publication. Further, the publisher does not have any control over and does not assume any responsibility for author

or third-party websites or their content.

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https://lccn.loc.gov/2016008427
To Ana Lopes and Amy Welsman for enabling this book, and for understanding that “it’s all about the blockchain.”

“A masterpiece. Gracefully dissects the potential of blockchain technology to take on today’s most pressing global challenges.”

—Hernando De Soto, Economist and President, Institute for Liberty and Democracy, Peru

“The blockchain is to trust as the Internet is to information. Like the original Internet, blockchain has potential to transform everything. Read this book and you will understand.”

—Joichi Ito, Director, MIT Media Lab

“In this extraordinary journey to the frontiers of finance, the Tapscotts shed new light on the blockchain phenomenon and make a compelling case for why we all need to better understand its power and potential.”

—Dave McKay, President and CEO, Royal Bank of Canada

“Deconstructs the promise and peril of the blockchain in a way that is at once accessible and erudite. Blockchain Revolution gives readers a privileged sneak peak at the future.”

—Alec Ross, author, The Industries of the Future

“If ever there was a topic for demystification, blockchain is it. Together, the Tapscotts have achieved this comprehensively and in doing so have captured the excitement, the potential, and the importance of this topic to everyone.”

—Blythe Masters, CEO, Digital Asset Holdings

“This is a book with the predictive quality of Orwell’s 1984 and the vision of Elon Musk. Read it or become extinct.”

—Tim Draper, Founder, Draper Associates, DFJ, and Draper University

“Blockchain is a radical technological wave and, as he has done so often, Tapscott is out there, now with son Alex, surfing at dawn. It’s quite a ride.”

—Yochai Benkler, Berkman Professor of Entrepreneurial Legal Studies, Harvard Law School

“If you work in business or government, you need to understand the blockchain revolution. No one has written a more thoroughly researched or engaging book on this topic than Tapscott and Tapscott.”

—Erik Brynjolfsson, Professor at MIT; coauthor of The Second Machine Age

“An indispensable and up-to-the-minute account of how the technology underlying bitcoin could—and should—unleash the true potential of a digital economy for distributed prosperity.”

—Douglas Rushkoff, author of Present Shock and Throwing Rocks at the Google Bus

“Technological change that used to develop over a generation now hits us in a relative blink of the eye, and no one tells this story better than the Tapscotts.”

—Eric Spiegel, President and CEO, Siemens USA

“Few leaders push us to look around corners the way Don Tapscott does. With Blockchain Revolution he and his son Alex teach us, challenge us, and show us an entirely new way to

think about the future.” —Bill McDermott, CEO, SAP SE

“Blockchain Revolution is a brilliant mix of history, technology, and sociology that covers all aspects of the blockchain protocol—an invention that in time may prove as momentous as the invention of printing.”

—James Rickards, author of Currency Wars and The Death of Money

“Blockchain Revolution serves as an atlas to the world of digital money, masterfully explaining the current landscape while simultaneously illuminating a path forward toward a more equitable, efficient, and connected global financial system.”

—Jim Breyer, CEO, Breyer Capital

“Blockchain Revolution is the indispensable and definitive guide to this world-changing technology.”

—Jerry Brito, Executive Director, Coin Center

“Incredible. Really incredible. The Tapscotts’ examination of the blockchain as a model for inclusion in an increasingly centralized world is both nuanced and extraordinary.”

—Steve Luczo, Chairman and CEO, Seagate Technology

“Makes a powerful case for blockchain’s ability to increase transparency but also ensure privacy. In the authors’ words, ‘The Internet of Things needs a Ledger of Things.’”

—Chandra Chandrasekaran, CEO and Managing Director, Tata Consultancy Services

“The epicenter of trust is about to diffuse! The definitive narrative on the revolutionary possibilities of a decentralized trust system.”

—Frank D’Souza, CEO, Cognizant

“Identifies a profound new technology movement and connects it to the deepest of human needs: trust. Thoroughly researched and provocatively written. Every serious businessperson and policy maker needs to read Blockchain Revolution.”

—Brian Fetherstonhaugh, Chairman and CEO, OgilvyOne Worldwide

“Blockchain Revolution sets the table for a wave of technological advancement that is only just beginning.”

—Frank Brown, Managing Director and Chief Operating Office, General Atlantic

“A must read. You’ll gain a deep understanding of why the blockchain is quickly becoming one of the most important emerging technologies since the Internet.”

—Brian Forde, Director of Digital Currency Initiative, MIT Media Lab

“Blockchain technology has the potential to revolutionize industry, finance, and government—a must read for anyone interested in the future of money and humanity.”

—Perianne Boring, Founder and President, Chamber of Digital Commerce

“When generational technology changes the world in which we live, we are truly fortunate to have cartographers like Don Tapscott, and now his son Alex, to explain where we’re going.”

—Ray Lane, Managing Partner, GreatPoint Ventures; Partner Emeritus, Kleiner Perkins

“Don and Alex have written the definitive guidebook for those trying to navigate this new and promising frontier.”

—Benjamin Lawsky, Former Superintendent of Financial Services, State of New York; CEO of The Lawsky Group

“Blockchain Revolution is an illuminating, critically important manifesto for the next digital age.”

—Dan Pontefract, author of The Purpose Effect; Chief Envisioner, TELUS

“The most well-researched, thorough, and insightful book on the most exciting new technology since the Internet. A work of exceptional clarity and astonishingly broad and deep insight.”

—Andreas Antonopoulos, author of Mastering Bitcoin

“Blockchain Revolution beautifully captures and illuminates the brave new world of decentralized, trustless money.”

—Tyler Winklevoss, Cofounder, Gemini and Winklevoss Capital

“A fascinating—and reassuring—insight into a technology with the power to remake the global economy. What a prize. What a book!”

—Paul Polman, CEO, Unilever

CONTENTS

Also by Don Tapscott Title Page Copyright Dedication Praise for Don Tapscott and Alex Tapscott Acknowledgments Preface

PART I: Say You Want a Revolution

CHAPTER 1: The Trust Protocol In Search of the Trust Protocol How This Worldwide Ledger Works A Rational Exuberance for the Blockchain Achieving Trust in the Digital Age Return of the Internet Your Personal Avatar and the Black Box of Identity A Plan for Prosperity Promise and Peril of the New Platform

CHAPTER 2: Bootstrapping the Future: Seven Design Principles of the Blockchain Economy The Seven Design Principles

1. Networked Integrity 2. Distributed Power 3. Value as Incentive 4. Security 5. Privacy 6. Rights Preserved 7. Inclusion

Designing the Future

PART II: Transformations

CHAPTER 3: Reinventing Financial Services A New Look for the World’s Second-Oldest Profession The Golden Eight: How the Financial Services Sector Will Change From Stock Exchanges to Block Exchanges Dr. Faust’s Blockchain Bargain The Bank App: Who Will Win in Retail Banking Google Translate for Business: New Frameworks for Accounting and Corporate Governance Reputation: You Are Your Credit Score The Blockchain IPO The Market for Prediction Markets Road Map for the Golden Eight

CHAPTER 4: Re-architecting the Firm: The Core and the Edges Building ConsenSys Changing the Boundaries of the Firm Determining Corporate Boundaries

CHAPTER 5: New Business Models: Making It Rain on the Blockchain

bAirbnb Versus Airbnb Global Computing: The Rise of Distributed Applications The DApp Kings: Distributed Business Entities Autonomous Agents Distributed Autonomous Enterprises The Big Seven: Open Networked Enterprise Business Models Hacking Your Future: Business Model Innovation

CHAPTER 6: The Ledger of Things: Animating the Physical World Power to the People The Evolution of Computing: From Mainframes to Smart Pills The Internet of Things Needs a Ledger of Things The Twelve Disruptions: Animating Things The Economic Payoff The Future: From Uber to SUber Hacking Your Future for a World of Smart Things

CHAPTER 7: Solving the Prosperity Paradox: Economic Inclusion and Entrepreneurship A Pig Is Not a Piggy Bank The New Prosperity Paradox Road Map to Prosperity Remittances: The Story of Analie Domingo Blockchain Humanitarian Aid Safe as Houses? The Road to Asset Ownership Implementation Challenges and Leadership Opportunities

CHAPTER 8: Rebuilding Government and Democracy Something Is Rotten in the State

High-Performance Government Services and Operations Empowering People to Serve Selves and Others The Second Era of Democracy Blockchain Voting Alternative Models of Politics and Justice Engaging Citizens to Solve Big Problems Wielding Tools of Twenty-first-Century Democracy

CHAPTER 9: Freeing Culture on the Blockchain: Music to Our Ears Fair Trade Music: From Streaming Music to Metering Rights Artlery for Art Lovers: Connecting Artists and Patrons Privacy, Free Speech, and Free Press on the Blockchain Getting the Word Out: The Critical Role of Education Culture on the Blockchain and You

PART III: Promise and Peril

CHAPTER 10: Overcoming Showstoppers: Ten Implementation Challenges 1. The Technology Is Not Ready for Prime Time 2. The Energy Consumed Is Unsustainable 3. Governments Will Stifle or Twist It 4. Powerful Incumbents of the Old Paradigm Will Usurp It 5. The Incentives Are Inadequate for Distributed Mass Collaboration 6. The Blockchain Is a Job Killer 7. Governing the Protocols Is Like Herding Cats 8. Distributed Autonomous Agents Will Form Skynet 9. Big Brother Is (Still) Watching You

10. Criminals Will Use It Reasons Blockchain Will Fail or Implementation Challenges?

CHAPTER 11: Leadership for the Next Era Who Will Lead a Revolution? The Blockchain Ecosystem: You Can’t Tell the Players Without a Roster A Cautionary Tale of Blockchain Regulation The Senator Who Would Change the World Central Banks in a Decentralized Economy Regulation Versus Governance A New Framework for Blockchain Governance A New Agenda for the Next Digital Age The Trust Protocol and You

Afterword Notes Index

ACKNOWLEDGMENTS

This book came from the meeting of two minds and two life trajectories. Don had been leading a $4 million syndicated research program called Global Solution Networks (GSN) at the Rotman School of Management, University of Toronto. The initiative was investigating new, networked models of global problem solving and governance. He researched how the Internet was governed by a multistakeholder ecosystem and became interested in digital currencies and their governance. Meanwhile, Alex was an executive with the investment bank Canaccord Genuity. He noticed the growing enthusiasm for early-stage bitcoin and blockchain companies in 2013 and began leading his firm’s efforts in the space. During a father-son ski trip to Mont-Tremblant in early 2014, we brainstormed over dinner about collaborating on this topic, and Alex agreed to lead a research project on the governance of digital currencies, culminating in his white paper, titled A Bitcoin Governance Network. The more we dug into the issues, the more we concluded that this could be the next big thing.

Meanwhile our agent, Wes Neff at the Leigh Bureau, along with Don’s publisher Adrian Zackheim at Portfolio/Penguin (Wikinomics, Macrowikinomics), was encouraging Don to formulate a new book concept. When Alex’s paper became widely recognized as leading thinking in this area, Don approached Alex to be his coauthor. Adrian, to his credit, made us an offer we couldn’t refuse and the book never went to auction, as is normally the case.

We then made what in hindsight was a smart decision. We approached the best book editor we knew, Kirsten Sandberg, formerly of Harvard Business School Press, and asked her to edit our book proposal. She did a spectacular job and our collaboration was so effortless that we asked her to be a full-time member of the book research team. Kirsten participated with us in more than one hundred interviews and collaborated in real time as we tried to understand the myriad issues on the table and develop helpful formulations to

explain this extraordinary set of developments to a nontechnical audience. She helped us bring the story to life. In that sense, she was our coauthor and this book would not have appeared, at least in its current comprehensible form, without her. For that, and for all the stimulation and laugh lines, we are very grateful.

Our heartfelt thanks to the people below who generously shared their time and insights with us and without whom this book would not be possible. In alphabetical order:

Jeremy Allaire, Founder, Chairman, and CEO, Circle Marc Andreessen, Cofounder, Andreessen Horowitz Gavin Andresen, Chief Scientist, Bitcoin Foundation Dino Angaritis, CEO, Smartwallet Andreas Antonopoulos, Author, Mastering Bitcoin Federico Ast, CrowdJury Susan Athey, Economics of Technology Professor, Stanford Graduate School

of Business Adam Back, Cofounder and President, Blockstream Bill Barhydt, CEO, Abra Christopher Bavitz, Managing Director, Cyberlaw Clinic, Harvard Law

School Geoff Beattie, Chairman, Relay Ventures Steve Beauregard, CEO and Founder, GoCoin Mariano Belinky, Managing Partner, Santander InnoVentures Yochai Benkler, Berkman Professor of Entrepreneurial Studies, Harvard Law

School Jake Benson, CEO and Founder, LibraTax Tim Berners-Lee, Inventor, World Wide Web Doug Black, Senator, Canadian Senate, Government of Canada Perriane Boring, Founder and President, Chamber of Digital Commerce David Bray, 2015 Eisenhower Fellow and Harvard Visiting Executive in

Residence Jerry Brito, Executive Director, Coin Center Paul Brody, Americas Strategy Leader, Technology Group, EY (formerly IoT

at IBM)

Richard G. Brown, CTO, R3 CEV (former Executive Architect for Industry Innovation and Business Development, IBM)

Vitalik Buterin, Founder, Ethereum Patrick Byrne, CEO, Overstock Bruce Cahan, Visiting Scholar, Stanford Engineering; Stanford Sustainable

Banking Initiative James Carlyle, Chief Engineer, MD, R3 CEV Nicolas Cary, Cofounder, Blockchain Ltd. Toni Lane Casserly, CEO, CoinTelegraph Christian Catalini, Assistant Professor, MIT Sloan School of Management Ann Cavoukian, Executive Director, Privacy and Big Data Institute, Ryerson

University Vint Cerf, Co-creator of the Internet and Chief Internet Evangelist, Google Ben Chan, Senior Software Engineer, BitGo Robin Chase, Cofounder and Former CEO, Zipcar Fadi Chehadi, CEO, ICANN Constance Choi, Principal, Seven Advisory John H. Clippinger, CEO, ID3, Research Scientist, MIT Media Lab Bram Cohen, Creator, BitTorrent Amy Cortese, Journalist, Founder, Locavest J-F Courville, Chief Operating Officer, RBC Wealth Management Patrick Deegan, CTO, Personal BlackBox Primavera De Filippi, Permanent Researcher, CNRS and Faculty Associate at

the Berkman Center for Internet and Society at Harvard Law School Hernando de Soto, President, Institute for Liberty and Democracy Peronet Despeignes, Special Ops, Augur Jacob Dienelt, Blockchain Architect and CFO, itBit and Factom Joel Dietz, Swarm Corp Helen Disney, (formerly) Bitcoin Foundation Adam Draper, CEO and Founder, Boost VC Timothy Cook Draper, Venture Capitalist; Founder, Draper Fisher Jurvetson Andrew Dudley, Founder and CEO, Earth Observation Joshua Fairfield, Professor of Law, Washington and Lee University Grant Fondo, Partner, Securities Litigation and White Collar Defense Group,

Privacy and Data Security Practice, Goodwin Procter LLP Brian Forde, Former Senior Adviser, The White House; Director, Digital

Currency, MIT Media Lab Mike Gault, CEO, Guardtime George Gilder, Founder and Partner, Gilder Technology Fund Geoff Gordon, CEO, Vogogo Vinay Gupta, Release Coordinator, Ethereum James Hazard, Founder, Common Accord Imogen Heap, Grammy-Winning Musician and Songwriter Mike Hearn, Former Google Engineer, Vinumeris/Lighthouse Austin Hill, Cofounder and Chief Instigator, Blockstream Toomas Hendrik Ilves, President of Estonia Joichi Ito, Director, MIT Media Lab Eric Jennings, Cofounder and CEO, Filament Izabella Kaminska, Financial Reporter, Financial Times Paul Kemp-Robertson, Cofounder and Editorial Director, Contagious

Communications Andrew Keys, Consensus Systems Joyce Kim, Executive Director, Stellar Development Foundation Peter Kirby, CEO and Cofounder, Factom Joey Krug, Core Developer, Augur Haluk Kulin, CEO, Personal BlackBox Chris Larsen, CEO, Ripple Labs Benjamin Lawsky, Former Superintendent of Financial Services for the State

of New York; CEO, The Lawsky Group Charlie Lee, Creator, CTO; Former Engineering Manager, Litecoin Matthew Leibowitz, Partner, Plaza Ventures Vinny Lingham, CEO, Gyft Juan Llanos, EVP of Strategic Partnerships and Chief Transparency Officer,

Bitreserve.org Joseph Lubin, CEO, Consensus Systems Adam Ludwin, Founder, Chain.com Christian Lundkvist, Balanc3 David McKay, President and Chief Executive Officer, RBC Janna McManus, Global PR Director, BitFury Mickey McManus, Maya Institute Jesse McWaters, Financial Innovation Specialist, World Economic Forum Blythe Masters, CEO, Digital Asset Holdings

Alistair Mitchell, Managing Partner, Generation Ventures Carlos Moreira, Founder, Chairman, and CEO, WISeKey Tom Mornini, Founder and Customer Advocate, Subledger Ethan Nadelmann, Executive Director, Drug Policy Alliance Adam Nanjee, Head of Fintech Cluster, MaRS Daniel Neis, CEO and Cofounder, KOINA Kelly Olson, New Business Initiative, Intel Steve Omohundro, President, Self-Aware Systems Jim Orlando, Managing Director, OMERS Ventures Lawrence Orsini, Cofounder and Principal, LO3 Energy Paul Pacifico, CEO, Featured Artists Coalition Jose Pagliery, Staff Reporter, CNNMoney Stephen Pair, Cofounder and CEO, BitPay Inc. Vikram Pandit, Former CEO, Citigroup; Coinbase Investor, Portland Square

Capital Jack Peterson, Core Developer, Augur Eric Piscini, Principal, Banking/Technology, Deloitte Consulting Kausik Rajgopal, Silicon Valley Office Leader, McKinsey and Company Suresh Ramamurthi, Chairman and CTO, CBW Bank Sunny Ray, CEO, Unocoin.com Caterina Rindi, Community Manager, Swarm Corp Eduardo Robles Elvira, CTO, Agora Voting Keonne Rodriguez, Product Lead, Blockchain Ltd. Matthew Roszak, Founder and CEO, Tally Capital Colin Rule, Chairman and CEO, Modria.com Marco Santori, Counsel, Pillsbury Winthrop Shaw Pittman LLP Frank Schuil, CEO, Safello Barry Silbert, Founder and CEO, Digital Currency Group Thomas Spaas, Director, Belgium Bitcoin Association Balaji Srinivasan, CEO, 21; Partner, Andreessen Horowitz Lynn St. Amour, Former President, The Internet Society Brett Stapper, Founder and CEO, Falcon Global Capital LLC Elizabeth Stark, Visiting Fellow, Yale Law School Jutta Steiner, Ethereum/Provenance Melanie Swan, Founder, Institute for Blockchain Studies Nick Szabo, GWU Law

Ashley Taylor, Conensys Systems Simon Taylor, VP Entrepreneurial Partnerships, Barclays David Thomson, Founder, Artlery Michelle Tinsley, Director, Mobility and Payment Security, Intel Peter Todd, Chief Naysayer, CoinKite Jason Tyra, CoinDesk Valery Vavilov, CEO, BitFury Ann Louise Vehovec, Senior Vice President, Strategic Projects, RBC

Financial Group Roger Ver, “The Bitcoin Jesus,” Memorydealers KK Akseli Virtanen, Hedge Fund Manager, Robin Hood Asset Management Erik Voorhees, CEO and Founder, ShapeShift Joe Weinberg, Cofounder and CEO, Paycase Derek White, Chief Design and Digital Officer, Barclays Bank Ted Whitehead, Senior Managing Director, Manulife Asset Management Zooko Wilcox-O’Hearn, CEO, Least Authority Enterprises Carolyn Wilkins, Senior Deputy Governor, Bank of Canada Robert Wilkins, CEO, myVBO Cameron Winklevoss, Founder, Winklevoss Capital Tyler Winklevoss, Founder, Winklevoss Capital Pindar Wong, Internet Pioneer, Chairman of VeriFi Gabriel Woo, Vice President of Innovation, RBC Financial Group Gavin Wood, CTO, Ethereum Foundation Aaron Wright, Professor, Cardozo Law School, Yeshiva University Jonathan Zittrain, Harvard Law School

Also special thanks to a few people who really rolled up their sleeves to help. Anthony Williams and Joan Bigham of the GSN project worked closely with Alex on the original digital currencies governance paper. Former Cisco executive Joan McCalla did deep research for the chapters on the Internet of Things and also Government and Democracy. We received a lot of familial support. IT executive Bob Tapscott spent many days downloading and getting under the hood of the entire bitcoin blockchain to give us firsthand insights on some of the technical issues. Technology entrepreneur Bill Tapscott came up with the revolutionary idea of a blockchain-based personal carbon credit trading system, and technology executive Niki Tapscott and her

husband, financial analyst James Leo, have been great sounding boards throughout. Katherine MacLellan of the Tapscott Group (conveniently a lawyer) tackled some of the tougher issues around smart contracts as well as managing the interview process. Phil Courneyeur was on the lookout daily for juicy material, and David Ticoll provided helpful insights about the state of the digital age so far. Wes Neff and Bill Leigh of the Leigh Bureau helped us craft the book concept (how many books is this, guys?). As always (now more than twenty years), Jody Stevens flawlessly managed the administration for the entire project including databases, finances, and document management, as well as the proofreading and production process—a full-time job, in addition to her other full-time jobs at the Tapscott Group.

Special thanks to Dino Mark Angaritis, the CEO of blockchain company Smartwallet; Joseph Lubin, CEO of the Ethereum development studio Consensus Systems; and Carlos Moreira of fast-growing security company WISeKey—who each spent considerable time with us brainstorming ideas. They are each brilliant and so kind to help us out. Now we get to enjoy witnessing the success of each of their businesses in this space. Also big thanks to the great team at Penguin Random House led by our editor Jesse Maeshiro and overseen by Adrian Zackheim.

Most important, we’d like to give our heartfelt thanks to our wives, Ana Lopes (Don) and Amy Welsman (Alex), who more than tolerated our obsession with cracking this big nut over the better part of a year. We are both very fortunate to have such wonderful life partners.

Writing this book has been a joyous experience for both of us and it’s fair to say that we loved every minute of it. As someone famous once said, “If two people agree on everything, one of them is unnecessary.” We challenged each other daily to test our beliefs and assumptions, and this book is living proof of that healthy and vigorous collaboration. Mind you, collaborating does seem effortless when you share so much DNA and have a shared thirty- year history of exploring the world together. We do hope you find the product of this collaboration important and helpful.

Don Tapscott and Alex Tapscott, January 2016

PREFACE TO THE PAPERBACK EDITION Don Tapscott and Alex Tapscott

CONTENTS

The Big Ideas Cryptoassets and the New Revolution in Financial Services

1. Cryptocurrencies 2. Platforms 3. Utility Tokens (App Coins) 4. Security Tokens 5. Natural Asset Tokens and Commodity Tokens 6. Crypto Collectibles: Virtual and IRL 7. Crypto Fiat Currencies and Stablecoins

Permissioned Networks Introducing the Menome: Identity on the Blockchain Smart Contracts Come of Age Asset Chains: When Blockchain Meets Supply and Procurement Blockchain and the C-Suite Governance and Leadership for the New Era

Stewarding the Blockchain Revolution Profile of a Blockchain Hotbed: Seven Conditions for Succes Leadership of Nations: The Ten Ahead What Leaders Can Do

THE BIG IDEAS

When we wrote Blockchain Revolution, we got off to a good start by characterizing blockchain—the underlying technology of cryptocurrencies— as the Internet of value. We explained that, for nearly four decades, we’ve had the Internet of information. It vastly improved the flow of data within and among firms and people, but it hasn’t transformed how we do business. That’s because the Internet was designed to move information—not value— from person to person. When we e-mail someone a document, photograph, or audio file, we’re really sending a copy of our original. This information is abundant, unreliable, and perishable. Anyone else can copy, change, and send it to somebody else. In many cases, it’s legal and advantageous to share these copies.

In contrast, to expedite a business transaction, we cannot e-mail money directly to someone—not just because copying money is illegal but because we can’t be 100 percent sure our recipient is who he says he is. Information about identity needs to be scarce, permanent, and unchangeable. So we go through powerful intermediaries to establish trust and maintain integrity. Banks, governments, and even big technology companies confirm our identities and enable us to transfer assets; they clear and settle transactions and keep records of these transfers. But the limitations of these intermediaries —their operational opacity and their vulnerability to hackers, rogue employees, and equally vulnerable suppliers—are becoming more apparent. We need a new way forward.

Blockchain solves the double-spend problem, as cryptographers call it. Now for the first time ever we have a native digital medium for value, through which we can manage, store, and transfer any asset—from money and music to votes and Stradivarius violins—peer to peer in a secure and private way. Trust is achieved not necessarily by intermediaries but by cryptography, collaboration, and clever code. We almost titled the book The Trust Protocol.

It seems that Blockchain Revolution was a clearer title—it’s still a best seller, as of this writing. The response to it has both encouraged and delighted us. It received widespread coverage from such respected media as the Financial Times, Forbes, Fortune, The Guardian, Harvard Business Review, Newsweek, NPR’s All Things Considered, Reuters, Time, and The Wall Street Journal and was a feature article in The New York Review of Books and the subject of a PBS television special.

It’s gone global, too—translated into fifteen languages so far and, as of now, a best seller in five Asian languages alone. Don’s second TED talk (TED’s first on blockchain) has received well over three million views. At 2017 TEDxSanFrancisco, Alex spoke on blockchain and financial services; his has become one of the most watched talks on the topic, too.

When we first published in May 2016, ours was one of a handful of serious books about the topic. Now several important new works have entered the market such as Michael Casey and Paul Vigna’s The Truth Machine, Chris Burniske and Jack Tatar’s Cryptoassets, and Primavera De Filippi and Aaron Wright’s Blockchain and the Law, to name a few.

Our book continues to hold its own as the bestselling book on blockchain. We receive positive comments on a number of its big ideas:

1. The book underscores the importance of identity and the end of digital feudalism. What some called “surfing the Internet,” we viewed as “serfing the Internet,” throwing off our data for the Internet landowners to expropriate and monetize. The notion of a self-sovereign identity for each of us, with our personal data stored in a virtual black box, is one of the most foundational concepts of our time. Realizing this “Virtual You” through blockchain technologies could restore our control over our own identities, the data we create, and the rest of our rights. No serf surfing, we say.

2. As a thought experiment, we tried to get inside Satoshi’s mind and tease out his design principles for blockchain. It turns out there were seven. That chapter (chapter 2) was technical, appealing more to technologists and business engineers. We applied these seven principles to seven domains —financial services (chapter 3), the architecture of the firm (chapter 4), business model innovation (chapter 5), the Internet of Things (chapter 6), economic inclusion (chapter 7), government and democracy (chapter 8), and the creative industries (chapter 9)—and argued that blockchain would create seven new substructures for a distributed economy.

3. We dubbed the financial services industry a Rube Goldberg contraption, a ridiculously complex system that actually performs eight basic functions. That taxonomy has proven helpful for industry executives and regulators alike. Do take a look at chapter 3 and the Golden Eight. Smart contracts (aka distributed applications) on a blockchain could, in theory, do each of these eight to disintermediate incumbents. Conversely, incumbents could transform their businesses for the better, if they embrace blockchain.

4. Nobel Prize–winning economist Ronald Coase’s theory on the firm proved quite applicable to an analysis of blockchain’s impact on corporate architecture. We explained how blockchain would radically reduce the transaction costs of search, coordination, contracting, and building trust in an open market. Inexorably, this efficiency will lead to more decentralized models for orchestrating the capabilities needed to create new products, services, and wealth. The new “blockchain business models” that we described hold up well, and many new ones have emerged since the book’s publication. Decentralized business models are subject to network effects so that, when the number of nodes increases, so does the network. This in part explains the rapid growth of cryptoassets.

5. Blockchain can help us solve the prosperity paradox, where developed economies grow but the middle class and prosperity for most stagnates. Rather than the usual solution—the redistribution of wealth through taxation—we explained how blockchain could help us predistribute wealth by including billions of people in the global economy. For example, we could protect property rights through immutable land titles, create a true sharing economy through shared, open, and distributed platforms, empower diasporas to remit funds through low-fee mobile payment systems, and endow entrepreneurs with the same capabilities as large companies.

6. Soon most transactions will occur between things, not people. We can instill intelligence into our infrastructure by adding smart devices—sensors, cameras, microphones, global positioning chips, gyroscopes—that reconfigure themselves according to availability of bandwidth, storage, or other capacity, and therefore resist interruption. Blockchain is critical. This Internet of Things depends on a Ledger of Things to track every node, ensure its security and reliability, record its production and consumption, and schedule and pay for its maintenance or replacement. There are potential applications across every sector.

7. Our work on blockchain applications in government, democracy, and culture has received much attention. Since Donald Trump’s inauguration as U.S. president, our insights seem even more prescient. Engaged citizens and dedicated public servants everywhere are exploring how blockchain can help them reinvent government, protect the free press, restore legitimacy to democratic institutions, and find common ground in public discourse on the Internet. The technology also helps not only journalists to quash claims of “fake news” but also creators of such cultural assets as songs and art to receive fair compensation for their work.

8. We were reluctant to include a chapter on leadership and governance, but we’re glad we did. The space is full of formal and informal leaders, that is, those with executive roles in start-ups, blockchain consortia, and regulatory bodies, and those whose vision and talent are both compelling and influential. That said, concerted effort to transform obstacles into opportunities has been the most important factor in the blockchain’s success thus far. So crucial is blockchain stewardship that the World Economic Forum asked us to write a special report on governance and launched important programs based on that work.

We also cofounded the Blockchain Research Institute (BRI), a think tank on distributed ledger technology, to investigate blockchain use cases, transformative thought leadership, and implementation challenges. The multimillion-dollar program includes some seventy-five projects across ten industry verticals and seven C-suite roles in both public and private sectors. Many of the quotes in this new preface come from the leaders of these projects.

BRI membership consists of large corporations, governments, nonprofits, and members of the start-up community. Some of our founding members include IBM, Accenture, Capgemini, SAP, NASDAQ, CIBC, PepsiCo, Liberty Global, Tencent, Fujitsu, FedEx, Thomson Reuters, and Centrica, along with the governments of several countries. To our delight, our institute’s editor-in-chief is Kirsten Sandberg, who was the original editor of Blockchain Revolution.

Notwithstanding all this goodness, a lot of water has gone under the bridge. While the book holds up well, we wanted to report on our latest discoveries in this new edition. Rather than revise the whole manuscript, we are consolidating our findings in this new preface and an afterword. This new material derives from our ongoing research, investments in the space, and speaking engagements around the world. We welcome your feedback (www.blockchainresearchinstitute.org/contact-us).

CRYPTOASSETS AND THE NEW REVOLUTION IN FINANCIAL SERVICES

When Blockchain Revolution went to print in May 2016, the entire cryptoasset market had a value of $9 billion. Ethereum had just crossed $1 billion in network value, becoming the second blockchain unicorn (after bitcoin). These were early days. Had the cryptoasset market been a public company, it would barely have cracked the S&P 500 index.1 Fewer than two years later, the cryptoasset market is $420 billion in size.2

This explosion of value in cryptoassets has captured the imagination of developers, entrepreneurs, nongovernment organizations, and the media, not to mention governments, central banks, the investing public, and regulators. It has also thrust these digital assets (and the underlying blockchain

http://www.blockchainresearchinstitute.org/contact-us
technology), once the domain of a few passionate technologists, into mainstream interest. It has made enthusiasts euphoric, Nobel laureates skeptical, and old-school billionaires dyspeptic.3 Charlie Munger of Berkshire Hathaway went so far as to call bitcoin “noxious poison.”4 (Is there any other kind of poison?)

Vitalik Buterin, Ethereum’s inventor, captured the dissonance in late 2017 when the cryptoasset market cap hit half a trillion dollars. He tweeted, “Have We *Earned* It?”5 “How many unbanked people have we banked?”6 “How much value is stored in smart contracts that actually do anything interesting?”7 Buterin pointed out that the level of activity is positive, but perhaps not significant enough to warrant the size of the market. “The answer to all of these questions is definitely not zero, and in some cases, it’s quite significant,” he added. “But not enough to say it’s $0.5T levels of significant. Not enough.”8

To be sure, there is a lot of hype in this market. For every cryptoasset that succeeds, many fail. Scammers have an outsized negative effect on the space as a whole. According to Reuters, “Twitter Inc. will start banning cryptocurrency advertising . . . joining Facebook and Google in a clampdown that seeks to avoid giving publicity to potential fraud or large investor losses.”9 Moreover, the industry must confront serious challenges. How will these technologies scale? How will incumbents react? What will governments and regulators do? We have good reason to believe this industry urgently needs sound regulation to protect investors and thwart fraudsters, or at least hold them accountable for their crimes. Moreover, to continue investing and building in this technology, market participants need to understand the rules of the road. On the other hand, bad regulations (even with the best intentions) can have unintended consequences and stifle innovation. In some countries, multiple regulators with overlapping mandates are sending conflicting messages. Regulators are not in an easy position. Some jurisdictions, such as Switzerland and Singapore, have emerged as favorable locations for companies to locate and operate with positive outcomes for the local economy. By one (informal) estimate, three thousand jobs have been created in the so-called “Crypto Valley” around Zug and Zurich in the past few years. The Crypto Valley Association has over six hundred members. Smaller and nimbler, these jurisdictions have been able to capitalize on a new industry,

though they remain the exception, not the norm. For now, the lack of regulatory clarity in general has created uncertainty.

These are such important issues that we dedicated all of chapter 10 to them, “Overcoming Showstoppers: Ten Implementation Challenges.” We continue to view them as implementation challenges to overcome. If we look beyond the hype and mania (not to mention fear, uncertainty, and doubt), we see something profound happening. Bitcoin was the first move in a long campaign to create an entirely new technology stack for the Internet, enabling the first native digital medium for value. That’s what blockchain is, and it’s limited only by our imagination. Some inventors have imagined a whole new asset class with what we think are at least seven types:

Cryptocurrencies (bitcoin, Zcash, Monero, and Dash)

Protocol tokens (ether, ICON, Aion, COSMOS, NEO)

Utility tokens (Golem, BAT, Spank)

Securities tokens (cryptoequities, cryptobonds)

Natural asset tokens

Crypto collectibles (CryptoKitties, Rare Pepe)

Crypto fiat currencies and stablecoins (Fedcoin proposal, Singapore’s Project Ubin, MakerDAO)

We are witnessing one of the largest transformations of wealth in human history, from paper-based analog assets to digital ones. To be sure, $265 billion is a lot of money. But in terms of all the assets in the world—from stocks, bonds, and mortgages to carbon, land, and water—we have barely scratched the surface of what we can create with crypto.

Is this all a bubble? Possibly. Joseph Lubin, CEO of Consensys and cofounder of Ethereum, says, “We will see bubble after bubble in our space, each one with higher highs and higher lows. I think that’s perfectly reasonable. People claim that the dot-com era of boom and bust was destructive, but I would call it creatively destructive.”10 It may have harmed those looking only to make a quick buck, but it otherwise sorted out the

sustainable business models from the unsustainable ones, and it weeded out inefficient operations. Perhaps more important, talent shifted to this new area of the economy, and the excitement of the Internet era precipitated billions of dollars of investment in new technology infrastructure.

However, blockchain differs from the Internet in two important ways. First, where the Internet was a free utility built by a diverse group of stakeholders, many of them volunteers with little financial incentive, blockchain provides huge financial rewards for those who can build successful, scalable, and widely used technology through the appreciation of underlying cryptoassets. The early Internet pioneers probably would have appreciated some upside from building a utility worth trillions of dollars, but that was impossible.

Blockchain is different—creators and early adopters can participate directly and financially in the growth of the second era of the Internet. As a result, there is no “one blockchain” but an explosion of competing, overlapping, complementary platforms, all driven by incentives.

Second, blockchain is tackling value industries such as financial services and supply chains, far larger than information industries like media and publishing. So not only will the impact be greater but the aggregate value will be, too. The excitement is indeed palpable. But, as the saying goes, sometimes we need a little irrational exuberance to build the future.

1. Cryptocurrencies

When Blockchain Revolution came out, bitcoin was worth around $7 billion. Today it’s more than twenty-two times that. Bitcoin is the workhorse of the cryptocurrency world and the cryptocurrency that launched a thousand ships. Bitcoin has become: a store of hundreds of billions of dollars of value on the most robust computer network ever formed (and entirely bootstrapped), a secure payment system that enables billions of dollars in daily on-chain transactions, a reserve currency for the burgeoning cryptoasset world, a final settlement layer when it’s time to cash out, and a favorite punching bag for every armchair analyst in the world. Paradoxically, bitcoin’s meteoric price rise makes it easier, not harder, for new investors to justify stepping in because it has become an asset class too big to ignore. Moreover, the bigger it

gets, the more utility it has. With the launch of the Lightning Network and other scaling solutions in 2018, bitcoin may also fulfill the promise of its most ardent supporters and obliterate the need for traditional financial intermediaries (chapter 3).

To wit, consider the recent shift in tone of some of the biggest banks. When Blockchain Revolution went to print, most banks were tactfully supporting the potential for blockchain but dismissing bitcoin (and its crypto brethren) out of hand. “Bitcoin bad, blockchain good” became cliché. As late as 2017, Jamie Dimon, CEO of JPMorgan Chase, was calling bitcoin a fraud. (He has subsequently changed his mind.) Times have changed. In February 2018, Goldman Sachs–backed Circle acquired Poloniex, one of the world’s largest cryptocurrency exchanges, suggesting that it sees risks and opportunities in cryptoassets. In its 2017 annual report, JPMorgan echoed Bank of America in acknowledging that cryptocurrencies could pose a risk to its business: “Both financial institutions and their non-banking competitors face the risk that payment processing and other services could be disrupted by technologies, such as cryptocurrencies, that require no intermediation.”11

Taken alone, bitcoin’s impact on culture and the economy has been extraordinary. Its endowment to the world will continue to be profound. More recently, an emphasis on privacy has shaped newer entrants in the currency use case for cryptoassets. New cryptocurrencies such as Zcash and other “privacy coins” have emerged that build upon bitcoin’s principles but add this new functionality.12 This is not just the domain of cypherpunks and other Internet communities: JPMorgan integrated Zcash’s core anonymity technology (zero-knowledge proofs) into its own Quorum blockchain for use cases in a range of asset classes and business functions.13 That JPMorgan was spending time, energy, and capital pushing the boundaries of this technology’s wildest frontier, while its CEO was simultaneously denouncing it, suggests that (at least until recently) the bank’s technologists understood the potential of blockchain more than its management did. Another intriguing new entrant is Metronome, which can be “imported and exported across chains,” with the initial issuance happening on the bitcoin, Ethereum, Ethereum Classic, and Qtum networks.14 As we will see in the next section on platforms, interoperability is a big challenge and opportunity in this space. Zcash and Metronome join Dash, Monero, and others vying for market share

in the cryptocurrency sphere of this market. But currencies as a use case are the beginning of this story. Consider Ethereum.

2. Platforms

To the outside world looking in, Ethereum and bitcoin could be mistaken for two sides of the same coin—cryptocurrencies designed to function as cash for the Internet. This view couldn’t be further from the truth. Whereas bitcoin serves such a purpose, Ethereum is a platform technology, designed from the outset to enable distributed applications (DApps), what Nick Szabo calls “an application that runs in a distributed and trust-minimized manner on a blockchain.”15 At the core of distributed applications are smart contracts, software that mimics the logic of a business agreement. Because they are decentralized and running on blockchains, they minimize the need for intermediaries (banks, brokers, lawyers, courts, escrow agents, corporations) to guarantee execution.

The promise of Ethereum was basically theoretical when we were writing the book: it launched only weeks before our first draft had gone to the editor. Yet today, Ethereum’s native token (ether) has a market value of $70 billion. More important, Ethereum emerged as the leading platform for ICOs, where a project can raise millions of dollars peer to peer from a global community of investors and supporters. To date, dozens of new distributed applications have been launched on the Ethereum network. In aggregate, some $3 billion have been raised on Ethereum using its ERC-20 protocol, making Ethereum the proto–investment bank for the digital economy. By some estimates, 70 percent of all distributed applications now run on the Ethereum blockchain, giving it powerful network effects that will be hard to dislodge. Ethereum has also galvanized such large enterprises as Microsoft, JPMorgan, and BP, which collectively established the Enterprise Ethereum Alliance in 2017.

As expected, some of these distributed apps have made a great deal of progress, while many others have floundered. For every great start-up that changes the world, countless others fail and most are forgotten. Platforms like Ethereum, however, are largely agnostic to the success of any one distributed application, so long as the next big thing is built on them. The more DApps built on the network, the more demand for the associated platform token,

ether. If Ethereum is the city grid, and the DApp is the car, then ether is the fuel, or “gas” in crypto parlance. We pay in ether to use the network for running the smart contract that powers the DApp. But will Ethereum be the platform for the next generation of distributed applications? Will it be one of the core protocols of the new Internet of Value, or will something else take its place? It’s currently the best candidate for a “flippening,” the point at which an alternative blockchain displaces bitcoin as the network with the most participants and most capital.16 Massive work is under way to expand Ethereum’s capability, including Casper, sharding, and a shift to proof of stake.

A number of other emerging platforms could challenge or complement it. DApp-focused platforms such as NEO (China), ICON (South Korea), and other regional leaders have emerged. Protocols such as Aion designed with large-scale enterprise applications in mind—a huge but generally untapped market—have also emerged, while some of the biggest hype is reserved for still-unreleased protocols like Polkadot and Cosmos, which promise to eliminate scalability and interoperability bottlenecks and unite all blockchains into a giant seamless web of blockchains. All protocols will not succeed, but some will, and those that remedy the showstoppers (chapter 10) will form the backbone of the next era of the Internet.

3. Utility Tokens (App Coins)

In chapter 3, we wrote about Augur, a prediction market designed to harness the wisdom of crowds in order to make markets in virtually anything. To us, Augur illustrated the potential power of blockchain technology. It was also among the first projects to issue funds in a crowdsale on the blockchain. (We dubbed it the “blockchain IPO,” but the term never took off. Instead, people latched on to “initial coin offering,” a misnomer if ever there was one.) Augur proved a harbinger of what was to come. In 2016, roughly $165 million was raised in ICOs, which was interesting but not really enough to raise eyebrows outside the blockchain community. By 2017, the figure had reached at least $3 billion, perhaps as much as $7 billion. Joe Lubin believes this new fund-raising mechanism is “democratizing the ability for projects to fund themselves either via tokenized securities issued in a global context or

by selling utility tokens that provide consumer membership, consumer access to services, or access to scarce resources . . . basically preselling something and using those proceeds to build what you need or to take it from a rudimentary stage to a more sophisticated stage.”17

Augur’s native token is not equity but a utility token required by users to interact with the network—in effect, a programmable blockchain asset that has functionality in the distributed application. Most ICOs in 2018 were “utility tokens,” though many were probably also securities. Consider Golem, a decentralized alternative to today’s centralized clouds run by such digital conglomerates as Amazon and Apple. Golem aims to harness the power of the billions of devices used daily to distribute computation. For its model to work, it needs an incentive for participation. So in 2017, Golem issued a utility token that allows users to pay and get paid on its platform. If Golem works, it could disrupt cloud computing as we know it.

Another example is Sweetbridge, which originated the concept of a “discount token,” where users receive a monthly discount on goods and services as long as they hold the token in a Sweetbridge wallet. “The amount of the discount is controlled by the revenue in the network and the number of discount tokens held in their wallet. This means that discount tokens have an intrinsic value that increases as more customers use the network, says Scott Nelson of Sweetbridge. “Discount tokens change the business from driven by shareholder value to [driven by] customer value, making the customer the center of the focus of a business.”18 Others are pioneering myriad so-called cryptoeconomic models for utility tokens in virtually every industry.

Utility tokens are usually not stand-alone blockchains. Rather, they run on top of platforms like Ethereum, ICON, and EOS. To be clear, the borders between utility tokens and the underlying platform tokens can be porous. After all, protocol tokens also have utility, as with the ether used to pay transaction fees on the Ethereum network. Some protocols today have only one application. Tomorrow, they may have a lot more. Filecoin, a distributed file sharing system, completed its own ICO in the summer of 2017. However, because it is an open network, developers will ultimately be able to build any number of applications on it. Exceptions notwithstanding, we believe most utility tokens will be application-based and run on networks such as Ethereum.

4. Security Tokens

Though not insignificant, the $265 billion cryptoasset market is a small fraction of the value of virtually any other major asset class. The global equity market, for example, is more than $100 trillion. However, the underlying technology of cryptocurrencies, blockchain, is broadly applicable to basically any asset in the world.

The next ten years will see today’s cryptoassets lose their monopoly as securities, particularly nonphysical securities like stocks and bonds, migrate to this technology and increasingly dominate the market. After all, why should a stock trade settle T+3 and involve a handful of intermediaries when buyer and seller can conduct the same transaction peer to peer and settle T+0 on a decentralized exchange? Why shouldn’t all stocks, bonds, dividends, futures, forwards, swaps, options, and other financial assets exist in purely digital form on blockchains? An “equity token,” for example, is not merely a thumbprint on a blockchain representing some off-chain asset but a native digital asset that we can trade peer to peer without custodians, clearinghouses, brokers, exchanges, and banks.

ICOs have already upended venture capital. Wall Street could be next. To wit, Fidelity, Wellington, and other giants of asset management have taken steps to prepare themselves for this brave new world.

While projects and companies like Polymath, Overstock’s tZero, the Jibrel Network (a platform for security token offerings using ERC-20), and the Canadian Securities Exchange build out the technology infrastructure for such a historic transformation, the industry awaits the regulatory infrastructure to give it clarity. This gulf between technology and rule setting creates what legal scholar and blockchain expert Primavera De Filippi calls a “regulatory lag” or “governance gap,” which “has resulted in the destabilization of traditional mechanisms of adjudication and rule-making, and the erosion of public confidence in the ‘state of play’—that is, what is permissible and what is not.”19 Security tokens could help bridge this divide by defining themselves by what they are not. They are not cryptocurrencies, protocols, or utility tokens but “digital bearer assets” (securities) native to blockchains. The offspring of ICOs, security token offerings (STOs), will become ubiquitous in venture capital and financial services more generally.

This great migration of value from analog to digital will transform the roles of markets and intermediaries as we know them.

5. Natural Asset Tokens and Commodity Tokens

Natural assets such as water, carbon, and air are foundational to the economy and essential for life on earth. However, with the exception of some nascent carbon trading schemes, these assets have largely remained immune to market-based forces. This has led to overuse and exploitation of these resources, with costs borne by society in the form of what economists call “negative externalities.” Sociologist Garrett Hardin describes this as the tragedy of the commons—a situation where a shared common resource is depleted because there is no system to govern its use or consumption.

Michael Casey, coauthor of The Truth Machine, uses the work of Hardin as a jumping-off point to examine the role of blockchain in helping to solve this problem of governance. He writes, “With the advent of blockchain technology and the cryptocurrencies, cryptotokens, and other digital assets that it has engendered, we may be moving toward a model of programmable money that can deliver a more automated system of internal governance over common resources.” Indeed, in much the same way that we can tokenize technology protocols, applications, and securities, so too can we tokenize physical assets in the real world. “The great promise of the token economy is that it might solve the Tragedy of the Commons,” writes Casey.20

Mostly, entrepreneurs and enterprises have applied this concept to traditional commodities with established markets, such as gold, oil, natural gas, etc. Indeed, it’s true that we can apply the same principle of security tokens to physical commodities like these. Replicating the business logic of an oil-futures contract on the blockchain is feasible as blockchain start-up Nuco demonstrated with the TMX Group, owner of the Toronto Stock Exchange. Even though someone still needs to take physical possession when the contract expires, we can still simplify the mechanism of clearing and settling a trade in an underlying physical asset. In many ways, we could use a token backed by gold as a less volatile and more liquid medium of exchange (see section 7). For example, the Royal Mint partnered with the Chicago

Mercantile Exchange to create Royal Mint Gold, a digital gold token backed by physical gold held in the Royal Mint’s vaults.21

To be sure, we have opportunities to streamline and simplify existing markets. However, as with all technologies, the bigger opportunities are in new and previously impossible use cases. To wit, today’s carbon trading schemes create a marketplace for carbon and reward companies for good behavior, allowing them to earn credits for reducing their carbon footprint. If companies can be rewarded for good behavior, why can’t people? As it exists today, the market is weighed down by a lack of standards and highly fragmented and regional marketplaces.

Blockchain could change that by aligning incentives with a common and collective goal, such as reducing carbon emissions.22 Companies like CarbonX (Canada) and Veridium (United States) are tackling this market by tokenizing carbon into fungible liquid tokens. By reducing their footprint, individuals can earn carbon credits redeemable for real value. Compared with cryptocurrencies, utility tokens, and even security tokens, natural asset tokens are a tiny market. Most of what has been proposed is theoretical, and there are real challenges such as government policy and regulations that blockchain alone cannot hope to solve. However, with a massive and untapped underlying market and pressing social, economic, and environmental reasons to move forward, it is only a matter of time before this becomes one of the largest cryptoasset types.

6. Crypto Collectibles: Virtual and IRL

In December 2017, the crypto world caught CryptoKitty fever. CryptoKitties are unique, tradable virtual pets that people can purchase, raise, and even breed with other CryptoKitties. As of January 2018, CryptoKitties had more than 235,000 users and had processed $52 million in transactions. CryptoKitties became so popular that the Ethereum network, on which this particular DApp was running, initially struggled to keep up, surely a sign of both the powerful network effects of popular apps and the current limitations of the underlying platform technology. At its peak, the dearest CryptoKitties were selling for more than $100,000. The phenomenon became personal when a close friend told us that he and a new girlfriend were considering

taking their relationship to the next step by breeding their CryptoKitties to create a cryptobaby—surely a novel and modern spin on “Let’s get a dog.” Such “silly and fun things are important” in engaging people with breakthrough technology, said Elon Musk as he blasted his sports car into space.23 So it is with CryptoKitties, an example of crypto collectibles.

There are two kinds of crypto collectibles. The first are native digital assets that have no equivalent in real life. CryptoKitties and virtual trading cards (such as Rare Pepe) spring to mind. So, too, do in-game purchases of unique assets of virtually any kind. Artists are applying cryptoeconomics to their virtual art. Art derives much of its value because it is scarce. But the Internet of information allowed us to copy free forms of expression, such as images and songs, ad infinitum, reducing the value to zero and losing track of the original. The blockchain connects the creative work to a unique and scarce token. In The New York Times, Scott Reyburn recently wrote, “Will cryptocurrencies be the art market’s next big thing?” He explored a number of artists working solely in the virtual world.24 The opportunities are tantalizing. As art and other forms of expression increasingly begin as a digital medium, whole new categories of virtual art, collectibles, and other unique assets could explode in value. The second kind of crypto collectible represents a claim on something tangible. Whereas we will eventually have 21 million bitcoin in circulation, each CryptoKitty is unique, as is every Rothko, Picasso, Monet, and Pollock. In chapter 9, we wrote about a company called Artlery, which employs an art-backed cryptocurrency called the CLIO to register physical artwork in the real world. More have joined the fray, including Dada.nyc.25 While virtual art is a growing market, the existing art market is enormous. Total sales in 2016 of fine art and antiques was $45 billion.26 Notoriously opaque, this market is beginning to benefit from the disinfecting sunlight of blockchain. Artwork can get a digital fingerprint through a cryptoasset that allows us to trace, track, and authenticate it.

7. Crypto Fiat Currencies and Stablecoins

In 2017, Venezuela announced that it was launching a new cryptocurrency, dubbed “The Petro,” backed by its vast oil reserves. The reaction from the

cryptocurrency community was a mix of dumbfoundedness and anger. Why would a corrupt and antidemocratic government, which had plunged its own currency into a hyperinflationary death spiral, co-opt this technology if not to exploit its association with trust, security, and immutability? According to analysts, it has three strikes against its credibility: there is no evidence that the Petro is actually backed by oil, there is little technical information online about how it works or which blockchain it runs on, and it is controlled by the same people who collapsed the bolívar.27

Unbowed by the criticism, the government moved ahead and raised $735 million, according to officials but not corroborated by any other evidence. News of the Petro was quickly followed by reports that lawmakers in Iran and Russia were also considering their own fiat cryptocurrency. All of these countries have three traits in common: they are authoritarian (or deeply undemocratic), they have a lot of oil, and they are under sanctions. So necessity is the mother of invention after all.

Why does this matter? Most obviously, it shows how rogue governments could use their cryptocurrencies to undermine international law, treaties, and sanctions and further destabilize their already weak economies. The Brookings Institution wrote that the Petro would harm other legitimate cryptocurrencies and undermine international sanctions.28

More important, it demonstrates that governments can actually do this. In chapter 11, we ruminated on the idea of a government-backed cryptocurrency, though none existed at the time. Indeed, the most promising candidates—august institutions like the Bank of England, Bank of Canada, and Federal Reserve—have made little headway in this regard, with some even backtracking. They should reconsider.

Crypto fiat currencies will probably not be fully decentralized and censorship resistant, like bitcoin. However, implemented properly, they can still make markets more efficient through real-time settlement, improve inclusion by reducing barriers to entry, improve transparency into our institutions, and make central bank policy more effective by improving responsiveness. Consider the example that Bitt is setting in the Caribbean. The company is working with the region’s financial heads to create a digital dollar standard that has a number of benefits to the economy. CEO Gabriel Abed explains, “This is what the Caribbean needs. It’s the entire world in one

little melting pot, yet there is no cross-border system for payments. . . . The goal is to enable movement of money between two central banks using smart contracts and digital dollars built by Bitt or others that follow a digital dollar standard.”29 There are economic and social reasons to make this happen. Abed says, “Remittances are expensive because interregional settlement is not existent. Forty percent of Caribbeans don’t have access to banking. Three percent fees are being taxed by foreign bankers on merchant charges using credit cards.” A digital dollar standard for the region could help alleviate these problems.

Another benefit is price stability. Media of exchange are generally not as volatile as bitcoin has been historically. A crypto fiat currency could help solve this. Some crypto diehards will balk. So be it. We still believe that bitcoin (or something like it) will continue to be a legitimate alternative to fiat currencies.

Stablecoins—cryptocurrencies that try to maintain the same value over time by pegging themselves to some underlying asset, such as a fiat currency or gold, or by managing price through an ever-changing supply—could emerge as a hybrid. Mostly these have been the brainchild of entrepreneurs running private companies. The largest of these today is Tether (USDT). Its creators say that Tether is backed dollar for dollar with USD reserves, though analysts have openly questioned this assertion.30 Others such as MakerDao, BitCNY, and basecoin (backed by Andreesen Horowitz and other prominent VCs) have also emerged. Stablecoins could gain traction if we assume that existing cryptocurrencies such as bitcoin will remain highly volatile and governments will not create their own fiat currencies. At least for now, both conditions exist, and so stablecoins will continue to be an interesting area of innovation. Still, doubts linger. Stablecoins like Tether “decentralize the dollar but centralized the issuance. You have to trust a single entity who now becomes the monetary authority.” Abed asks, “Are you better than the Federal Reserve?”31

Ultimately, however, we think governments will move into this market and that the future reserve currencies of the world will likely be a mix of crypto fiat currencies (digital dollars and such) and decentralized cryptocurrencies like bitcoin. Regional hybrids like the digital dollar standard

in the Caribbean are likely to succeed, too. Don’t count on the Petro joining their ranks.

PERMISSIONED NETWORKS

As we were submitting the final manuscript, forces were coalescing not only around the concept of the Fourth Industrial Revolution but also around special-purpose blockchains for industries such as the Industrial Internet of Things.

Ripple, typically one of the three largest cryptoassets by market cap, is an enterprise-friendly alternative to bitcoin, geared toward displacing SWIFT and other global payment networks. Ripple’s architecture—relying on a handful of trusted nodes rather than on miners to secure the blockchain— gives it the ability to process more transactions but also makes it more centralized, which, in the eyes of some critics, makes it more vulnerable to attack and capricious and arbitrary behavior. Still, Ripple has been very successful in courting large banks and other potential enterprise users to employ their products and services and, to a lesser extent, use the native token of the network, called XRP.

The Linux Foundation, famous for building ecosystems around open source projects, had been looking at distributed ledger technology for a while. After hearing from several leaders in the space, executive director Jim Zemlin decided that the time had come for Linux to start a blockchain project.

In December 2015, the foundation announced Hyperledger, positioned as a collaborative project to “develop an enterprise grade, open source distributed ledger framework” so that developers could “focus on building robust, industry-specific applications, platforms, and hardware systems [that] support business transactions.”32 The project had “technical and organizational governance structure and 30 founding corporate members,” notably IBM, Fujitsu, DTCC, and Accenture.33 The Linux Foundation is a good home for open, transparent governance of the software development process and the management of intellectual property provenance and safeguards.

Our book covers public blockchains such as bitcoin and Ethereum, which remain two of the most important platforms today. They are open, meaning

that anyone reading this book can conduct transactions, verify transaction data, race to create blocks, and develop distributed applications without anyone else’s permission. Upgrades to the codebase are reached by consensus. Users who don’t agree with particular upgrades (such as the increase of a bitcoin block size) can choose not to adopt it, and the blockchain forks in two. Both bitcoin and Ethereum have forked since we first wrote about them. Hyperledger pioneered the notion of the “consortium” model, which formalizes the governance of such upgrades and consolidates industry expertise around the formulation of standards.

Unlike bitcoin and Ethereum, Hyperledger’s focus is on permissioned blockchains, networks in which verified, nonanonymous nodes can post transactions to the ledger and confirm other transactions. Such networks are typically also read-limited to that same network of verified nodes, but the network could allow a larger audience to read the data. A subset of that network could allow further control over read and write access so that it could use a much simpler form of consensus, one based loosely on a “supermajority vote” of the nodes, rather than on the more CPU-intensive proof of work (PoW) that bitcoin, ether, and most other coins have used. Such a network could also accommodate a much higher transaction volume than typically provided by PoW blockchains. Many of those building distributed ledger applications for the financial industry and the industrial Internet of Things, for example, prefer this model. It may also prove more valuable for those building certain public-facing applications, such as educational credentialing, carbon emissions monitoring, or fiat currency administration.