Why is blockchain so wasteful?

I have a new post up on the Deloitte blog, coauthored with Robert Hillard.

As we point out in the post:

Bitcoin Miners are being paid somewhere between US $7-$9 to process each Bitcoin transaction.

To do this they’re consuming roughly 157% of a US household’s daily electricity usage per transaction. Those numbers don’t suggest a sustainable future for Bitcoin. They suggest an environmental disaster. And this is by design. So why is Bitcoin so wasteful?

The root of the problem is that in a permissionless and anonymous environment — where anyone can mine — you need to pay the miners, otherwise few will mine. We also know that miners will invest up to the margin (which looks to be around 20% for Bitcoin) to obtain this reward.

You can structure the mining algorithm to favour CAPEX or OPEX, though favouring OPEX is preferred, as it reduces the tendency to centralise. You can also play with where the resources are consumed, either direct in the mining process as with Proof of Work, or more indirectly via Proof of Stake. However, you cannot escape the fact that ultimately Bitcoin works because it consumes real world resources.

This leaves you trapped between two conflicting goals:

  • make the mining pool as large as possible to increase the security of the ledger
  • make the mining pool as small as possible to make the ledger more efficient

The only lever you have to pull is the size of the reward: either via seigniorage, or transaction fees.

Again, as we conclude in the post:

Bitcoin is wasteful as it must be wasteful to work. It isn’t actually waste, it’s really just the cost of securing Bitcoin’s ledger. It is, however, a rather high cost when compared to a more conventional, centralised solution.

Image: Mirko Tobias Schäfer

Can blockchain save the music industry?

I have a new post up at the Deloitte Digital blog: Can blockchain save the music industry?

One of the trends we’re seeing across industry is for the market to split in two – low cost, and high value – with the mid-market dying. The mass market, where everyone bought the same thing, is dying, and we’re transitioning to a market where individuals make their own trade-offs between high and low cost.

This makes me wonder if the attempts to modernised the old mass market music model will work. Mycelia and Mediachain are distribution strategies in a world where the mass market is dying.

The future for the music industry might lie elsewhere.

Image: Anefo Nationaal Archief.

The future of retail: The need for a new trust architecture

Deloitte ran a series of breakfasts recently for the retail community, and they kindly asked C4tE to participate. My contribution, which you can find at Scribd or embedded below, sprang out of our recent report The Future of Exchanging Value: Cryptocurrencies and the trust economy(FoEV) when, during a chance conversation, Robbie (the left-brained person who leads the Spatial team) pointed out that that we were arguing for a new trust architecture in retail.

The nutshell explanation of the idea is:

  • The current retail model is a constructed environment and shopping a learnt experience. This model is a response to the creation of mass market products and supply chains.
  • The model is build on there pillars: customers identifying a need, searching for a solution to the need, and then transacting with a merchant that they may not know or trust. Money – cash – facilitates this, as it enables us to transact with someone we don’t know and may never meet again.
  • However, a number of trends we saw in FoEV suggest that this model might be breaking down. The mid-market dies, consumers seized control of the customer-merchant relationship, peers replaced brands, value is now defined by the consumer rather than the producer, payments are moving away from the till, and shopping is becoming increasingly impulse driven.
  • What will retail look like in a world where need is never fully formed, search is irrelevant, and transactions are seen as distasteful? What is the new trust architecture?

See what you think of the presentation and feel free ping us if you have any thoughts.

The two reports mentioned in the presentation are:

Future of Retail – a New Trust Architecture by Peter Evans-Greenwood

Blockchain performance might always suck, but that’s not a problem

I’ve been watching the Bitcoin scaling debate with some amusement, given that my technical background is in distributed AI and operational simulation (with some VR for good measure). Repeatedly explaining blockchain’s limitations to colleagues has worn thin so I’ve posted a survey of the various scaling approaches on the Deloitte blog,1)Peter Evans-Greenwood (5 May 2016), Blockchain performance might always suck, but that’s not a problem, Deloitte Australia blog. Available at <http://blog.deloitte.com.au/greendot/2016/05/05/blockchain-performance-sucks-not-problem/> pointing out why they won’t deliver – either separately or together – the 10,000 time improvement everyone is wishing for, and why this is not a problem. This post is the short version, one not intended for the general audience of the Deloitte blog has.

Continue reading Blockchain performance might always suck, but that’s not a problem

References   [ + ]

1. Peter Evans-Greenwood (5 May 2016), Blockchain performance might always suck, but that’s not a problem, Deloitte Australia blog. Available at <http://blog.deloitte.com.au/greendot/2016/05/05/blockchain-performance-sucks-not-problem/>

Bitcoin, Blockchain, and Distributed Ledgers: What questions should we be asking?

Bitcoin, Blockchain & distributed ledgers: Caught between promise and reality

The latest report from the Centre for the Edge is out, Bitcoin, Blockchain & distributed ledgers: Caught between promise and reality. This report follows on from the one published in February, The Future of Exchanging Value: Cryptocurrencies and the trust economy (FoEV).

In the FoEV we looked at cryptocurrencies and Bitcoin, however we had to set aside a discussion on the technologies that underpin cryptocurrencies and their broader affect on society as the report was already quite long.

With Bitcoin, Blockchain & distributed ledger we pick up where we left off, and take close look at the opportunities and problems created by these technologies, and their regulatory implications.

We didn’t want this report to be yet-another explainer, since there’s already a lot of those out there, with the ensuing arguments over technology that invariably seem to follow them.

So rather than focus on the technology – the solution space – we focus on the potential applications – the problem space, to try and understand not just what is possible, but what is practical. This is resulted in a fail compact and pragmatic report focused on a few key areas, as we point out in the report’s introduction.

In From Bitcoin to Distributed Ledgers, we compare the Bitcoin’s ledger with the more familiar physical ledgers that preceded it, and develop the concept of a distributed ledger7 de ned in terms of the problems solved rather than the technologies used.

In A map of the distributed ledger landscape, we identify questions that should be asked when considering a new distributed ledger, creating a map of the solution landscape.

In Regulation, we explore the potential regulatory implications of these solutions, though we only focus on what is different with distributed ledgers. How does one regulate something no single person or organisation is accountable for?

In Applications, we review the strengths and weaknesses identi ed in the previous two sections to develop an understanding of what a distributed ledger can be and what it can’t be.

Finally, in Conclusions, we look at the technology’s potential and what the future might hold.

You can find the report on the Deloitte Australia web site.

To code or not to code, is that the question?

Centre for the Edge is dipping our toe into the education waters again after last years report, , Redefining EducationWe’re collaborating with Geelong Grammar‘s School of Creative Education to look into “Does everyone need to learn how to code?”

Computers are at the heart of the economy, and coding is at the heart of computers. Australia’s prosperity depends on equipping the next generation with the skills they need to thrive in this environment, but does this mean that we need to teach everyone how to code? Coding has a proud role in digital technology’s past, but is it an essential skill in the future? Our relationship with technology is evolving and coding, while still important, is just one of the many new skills that will be required.

Prime Minister Malcolm Turnbull has called for the country’s schools to introduce IT skills to students much earlier than they do now, suggesting that children as young as five or six should be introduced to coding. President Obama affirmed the need for coding education in his final state of the nation address. Some educators, however, are already pointing out that that teaching coding on its own might not be enough.

We will be holding a series of round table discussions across Geelong, Melbourne,  Sydney, Adelaide and Perth in May 2016 to explore the following questions:

  • What is the intention behind “we need to teach everyone to code”?
  • What educational and social outcomes we should be striving for?
  • Are there key skills from “learning to code” not covered in the current curriculum?
  • Is there a better definition for digital literacy?
  • How does digital literacy relate to coding and the rest of computer science?
  • How do we demystify digital technology and bring the community along?

Please contact me if you are interested in participating.

To code or not to code, is that the question?

Image: Ruiwen Chua.

Bitcoin’s not broken

Cryptocurrency_Mining_Farm

A lot of high profile Bitcoin people are getting their knickers in a knot as they’re starting to realise that they don’t have any real control over Bitcoin and how it evolves.

As Wired points out,1)Cade Metz (2016/02/11), The Schism Over Bitcoin is How Bitcoin is Supposed to Work, TechCrunch. the current schism is more akin to a vote than anything else, and it is working as designed.

Bitcoin’s ledger is protected by an indirect consensus process. Rather than voting on which ledger is correct, with Bitcoin we prefer the ledger (the version of the truth) that has contains the most “embedded work”, as this should be the ledger with the support of the largest proportion of the mining community.

Bitcoin’s definition – its consensus process (protocol in geek, the whole transaction definition, proof-of-work thing) – is protected via a similar mechanism. Miners are free to adopt any version of the consensus process they chose; big blocks, small blocks, etc. We should also remember that there is no restriction on who can offer up a version; they don’t need to be from the “core team” or other blessed group of individuals.

Consequently Bitcoin governance – just like the state of the ledger – is based on the consensus of the miners. This is quite different from the governance models we’re used to in industry or government. It’s also a long way from the traditional open source world.

What we’re seeing is a bunch of high profile individuals getting in knots as they realise that they don’t have any real control over Bitcoin, which is working as designed.

Image source: Marco Krohn.

References   [ + ]

1. Cade Metz (2016/02/11), The Schism Over Bitcoin is How Bitcoin is Supposed to Work, TechCrunch.

The Future of Exchanging Value: Cryptocurrencies and the trust economy

FoEV2_coverOur latest piece at Centre for the Edge is out: The Future of Exchanging Value.

This report started life as a followup to a report we published in 2012. As we say in the current report:

Our findings in that report centred on the realisation that we were reaching the end of the initial build-out
of a digital payments infrastructure. The task of provisioning the infrastructure merchants require to accept real-time digital payments, or for two individuals to settle a debt, was largely complete. Consequently, our focus had shifted to streamlining the buying journey – from the pieces and parts to the whole.

Our key point then was that the future of exchanging value would be shaped by social forces – how payments fit into the end-to-end consumer experience – rather than the technological challenge of deploying yet-another generation of payments solutions.

This new report, which was intended to be a short update, when in an entirely different and much more interesting direction.

Our key insight this time is that we’re all thinking about money the wrong way.

It’s common to assume that we use money (cash, currency…) to build trust relationships. This assumes that our adoption of money stems from the coincidence of wants. I need shoes. You have shoes. You want a fish. I have a chicken. We use money to bridge the gap.

The problem is that this assumption is incorrect. As David Graeber points out in Debt: The First 5,000 Years, debt came before barter and the coincidence of wants. Most folk in antiquity didn’t need money. They knew everyone they interacted with, and could rely on the community to enforce the collection of a debt if need be. Money’s first use was as a measure of value, typically to help calculate damages in a criminal or civil manner. Communities had carefully drawn up lists to capture exactly what you owed, in a convenient currency, someone if you destroyed their house, stole their food. In Somalia, for example, they use camels (commodity money). The other uses of money – as a medium of exchange and store of value – came later.

This is a fascinating fact, is it points out that we have the consumer-merchant relationship backward. We’re focusing on the transaction when we should be focusing on the relationship. The future of payments is not micropayments and tap-and-go. Indeed, the future of payments might be to use a loyalty scheme (a complimentary currency) to anchor the relationship and then move the transactions from the centre of the relationship to the edge. This ties is cultural preferences that we have, and which equate money and transactions as “dirty”. The future of payments might be not to have payments at all.

Bitcoin and the whole cryptocurrency thing is influenced by this too. There’s a huge amount of noise in this area at the moment, and everyone one is waiting for the killer app that will drive Bitcoin (or another cryptocurrency) into mass adoption. If, however, you view Bitcoin adoption as a cultural problem, rather than the search for a killer app, then you end up at the conclusion that no cryptocurrency will become much more than a large niche. The best equivalent in the current environment that we’re all familiar with would be a large frequent flyer scheme. It’s hard to scale trust, even with technology support, and these frequent flyer schemes seem to up near a nature limit.

There is one use case for currencies growing larger, though: when a sovereign nation mandates that you pay taxes in a specific currency. This trick is behind all the major currencies, and was used by the colonial powers to pull conquered land into their monetary system. Acquire currency to pay tax, or we send the bruisers around.

We conclude in the report that the best analogy for cryptocurrencies is rum and cigarettes. Rum was used in Australia’s early days when there wasn’t enough government issued currency to go around. Cigarettes were used by prisoners or war as they had few other options.

We can expect cryptocurrencies to see some adoption in countries where the population doesn’t trust – or can’t access – the national currency. Argentina springs to mind. Cryptocurrencies are mush less useful in other countries with mature and stable economies.

A similar argument can be made against cryptocurrencies as internal reserve currencies. (And that argument is in the report.)

There’s a lot more in the report, and I’ve been told that it’s a bit of a ripping yard. Go grab a copy and read it.

The problem with platforms in the sharing economy

Platform_compressed-750x300

I have a new post up on the Deloitte Strategy blog.It’s the result of a chat I was having the other day with an economist colleague who opined that “platforms are an essential part of the sharing economy”.

As I point out in the post:

These platforms might be sufficient to kick-start the sharing economy, but they’re not necessary for its long term survival. There are alternative approaches to creating sharing economy solutions that do not rely on a centralised platform.

Platforms solve what we might call the discovery problem. When we’re creating a market it needs a mechanism for buyers and sellers to discover each other.

Rendezvous – where buyers and sellers meet at a common location – is probably the most common solution to discover. It’s also the one that firms prefer as it’s the easiest to monetise.

As I point out later in the post:

The recent emergence of blockchain – a distributed ledger solution – from the shadow of Bitcoin might be a sign that something has changed in the environment, something that is tipping the advantage away from centralised solutions and toward distributed ones.

This could be a big deal, as it blows a rather large hole in the business models of the sharing economy firms.

Check out the post and see the whole story.

Our Economic Future: Driving Innovation Through Better Public Policy

The following are the notes I pulled together for the first panel in ADC‘s Future Summit on Monday September 28th.

The major opportunity for Australia is to find and exploit new production systems and consumption models that are cheaper, simpler and more “digital” than the highly entailed product-creating systems that are the legacy of the previous industrial era. We also need to see this as socially driven change, rather than a technologically driven change.

Two quick examples of this in action.

First: cars.

There’s a lot of talk at the moment around self driving and electric cars. Tesla has built an expensive but unprofitable electric car on the back of over USD 4 billion of government grants, while Mercedes, Google et al are out there with prototypes for self-driving cars that look like a technoutopian’s fevered dream.

In the case of Tesla, on the production side, the firm is better thought as the ultimate expression of an industry structure established roughly 100 years ago by Henry Ford; but it might not be an exemplar of how we will build cars in the future. A better example of where car manufacturing might go is iStream by Gordon Murray Design in the UK. iStream is a new production process, one based on established and well understood technology, but which removes 80% of the cost from the factory, slashing the cost of cars in the process. The production process Ford, Toyota et al are using needs 150k cars from a single model to be profitable, which means that Austrlia was lucky to have an old skool car industry for as long as we did. iStream is profitable on 12,000 cars, and would be commercial viable in Australia.

On the consumption side, viewing self-driving cars simply as autonomous versions of manually operated cars ignores changes in consumption patterns where consumers are preferring to consume many products as (value-added) services (think Spotify et al). The car equivalent is Flexicar or GoGet (car-by-the-hour).

If we put the two of these together it’s possible to imagine a new public transport model based on cheap and flexible, locally built and supported, autonomous cars. Some of the cars might be contributed by the government. Some by private operators (Flexicar et al). Some might be from individuals who are contributing their cars to the common pool when they don’t need them (during the week when they work, or when on holidays) via something like Uber.

Second, a local example: the transformation of the  building industry.

Building mid-rise buildings—office blocks, hotels, apartment buildings, &c.—is currently a craft-based process. Design a building, create holding company, buy land, put together consortium, get funding from bank(s), and then go onsite and incrementally add value to the land by hammering in nails, pouring cement, running wires etc. There’s a lot of talk about new technologies “disrupting” building, such as 3D printing. This is unlikely. Buildings are complex structures with many interwoven parts. You might be able to 3D print a wall, but you still need to integrate the services, render it &c. While these new technology might make elements of the process more efficient, they’re incremental improvement at best.

Enter Unitised Building (UB), based in Melbourne. UB have created a new production process that enables them to build a mid-rise building in a fraction of the time at less than half the cost. A good example is 3:East, built in 11 days. UB takes a complete 3D model of the building—including services &c.—and uses digital tools to split the building into a number of units (the model has been “unitised”). A second layer of digital tools takes that unit models and splits out the files required by CNC machines. The units are built in a factory and then transported to the site where they are lifted into place (one every 8 minutes) and snapped together. The only requirement is that you need a crane on-site, which, practically, means that the UB approach is dramatically faster and cheaper once you hit 3 floors (and need a crane regardless).

What UB have done is create a new process that moves the complexity of building from the physical world to the digital world. Indeed, their CNC requirements are quite light and they need few machines, so their factory (in Brooklyn, in Melbourne) has a very small footprint by manufacturing standards. They’re even exporting by finding contract manufacturing facilities overseas and transmitting the digital files to the CNC machines in the remote factory.

Creating these sorts of system changes has a couple of problems.

First, the old industry / sector structures we use to frame regulation and government support make no sense in this new world, as these new solutions span industry sector boundaries and have different requirements. (Supporting manufacturing, for example, has traditionally been a question of ensuring that the manufacturers have lots of land, but the new generation coming through don’t need much land, while they do need access to lots of network bandwidth.) This miss-match between the demands of the new and how government frames public policy makes it difficult for the two to engage.

In the case of UB, two of their challenges have been getting the banks to fund buildings when the current building risk model (based on incremental value creation on-site and quantity surveying) doesn’t match their building process, and the challenge of accessing government support when they don’t fit in any particular sector/industry (Are they a builder? Or a manufacturer?). These new firms span sectors / industries, deliver products as services, and do a bunch of other things that don’t fit with the old industry models. If we’re to frame policy and regulation for the future then we need to set aside the old industry/sector-based view of the world. Fundamentally, we need to stop muddling through as incrementalism won’t fix this problem. There are signs of change though, such as UB winning this year’s “Victorian Large Manufacturer of the Year” award.

Second, we need to acknowledge the these innovations are not the result of light-bulb moments or heroic individuals—they’re the product of trial-and-error and collaboration. By definition, they’re a social process. There’s a tendency—particularly among the technology crowd—to frame the debate in terms of technological determinism. Or, put another way, futurism has a technological blindspot. Just because we invented nuclear reactors doesn’t mean that we’ll have one in every home, or every car. No technology has ever survive contact with society intact.

We need to acknowledge that while the shape of society will change in response to technology (just look at what the modern smart phone is doing to our sense of identity!), society will, in turn, shape the technology it adopts (note that many people now find phone calls rude as they interrupt the recipient, whereas messaging is async).

The current obsession with disruption is a case in point. (And first we must acknowledge that Clayton Christensen’s “disruption theory” is looking less like a theory and more like an interesting idea.) There’s cries that we should let these disruptors usher in the brave new world by allowing them to skirt existing regulation. This assumes that all regulation is bad, or the more nuanced version, that techniques such crowd sourced recommendations are superior to regulation in many instances (why have certification when you can have ratings?) This point of view ignores the fact that regulations are one of the tools we use to encode what we see as the socially acceptable uses of technology. Nuclear power is a really cool technology, but do we want people driving around with small nuclear reactors under their bonnets?

With regard to Uber, and the taxi industry, it’s worthwhile considering the following:

    • allowing taxi licenses to be transferable and limiting their number was probably a mistake, however
    • we provide taxi vouchers to pensioners, partly to to encourage them not to drive, and partly to help them stay mobile and engaged with society: should we compel (i.e. regulate) Uber et al to accept taxi vouchers, or will we allow the death of the taxi industry to disenfranchise these pensioners?
  • Uber separates the payment from the provision of the service, and some parents are using this as an opportunity to give their under 18 (even under 13) kids Uber accounts so that they can get themselves home from school &c. rather than need mum or dad to pick them up: does this mean than we need to compel (i.e. regulate) all Uber drivers to have Working with Children checks?

It’s best to think about three types of policy:

    • Enablers, what do we need to put in place to enable the society we want. One of the biggest boosts to start-ups in Silicon Valley, for example, was Obama Care, as it means that individuals in startups could now access affordable health care. We undervalue policies such as Medicare and HECS as tools to enable as many people in society as possible to engage in the trial-and-error innovation process.
    • Drivers, how can we encourage new developments / ideas that create new value, given that government has a poor record of picking winners? This comes down to how do we use policy support the demand-side to help society to pull in the technology it wants in the way it wants. Admitting that we will regulate driver services, and we will require these services to accept taxi vouchers, and their drivers to have working with children checks, are good examples, as is the policy in Tasmania to provide interest free loans to individuals who want to by bespoke products from makers. Germany’s high feed-in tariffs for solar are another example.
  • Barriers, where do we draw the line? Do we want nuclear reactors in cars? Do we want full-timeAustralian for-hire drivers earning under the minimum wage?

There is a lot of opportunity out there for everyone and Australia, as one of the most voracious adopters or technology in the world, is in a position to capitalise on these opportunities. However, we need to accept that we’re seeing with “digital disruption” is the leading edge of a massive social change, rather than a technological change. The future will not be determined by the disruptors. It will determined by how we, as a society, choose to engage with this change.

Image: Steve Gibson