Posted on

Amazon & Microsoft’s Move to Blockchain: Centralized Companies Into Decentralized Ecosystem

Bitcoin, and the idea of digital cash, has taken hold of the banking sector as banks and financial institutions start to experiment internally with blockchains and cryptocurrencies in order to be at the forefront of these technologies.

This, coupled with the fact that government organisations and even global leadership bodies such as the G20 are looking to regulate cryptocurrencies, again give more legitimacy and longevity to the industry.

The latest wave of adoption is now coming from corporations who, traditionally have come to be successful thanks to their centralized domination over different aspects of the market. Microsoft, in the world of computing, are legendary in driving the world to be digital; then there is Amazon, the pioneers of e-commerce.

These companies are in some manner getting forced towards blockchain technology as it has become apparent that this is the future, and even though it goes against their centralized values, they simply cannot miss out.

Microsoft’s entry

Microsoft has always been one of the biggest companies to give Bitcoin its dues. Back in Dec. 2014, content on the Windows and Xbox stores could be bought in Bitcoin, and this was at a time where Bitcoin’s mainstream adoption and appeal was minimal.

This of course was merely a nod towards alternative payment methods, and Microsoft being flexible to its customers wants and needs. However since then, and since blockchain has grown, Microsoft has been pushing to be in front of the innovative queue.

Microsoft has obviously identified the power of blockchain and its far reaching potential for disruptive applications in the world of enterprise business. The company is now developing blockchain applications – which are not that flashy as some of the solutions put forward by startups, but equally practical.

Microsoft is also looking to build platforms on which businesses can grow their blockchain applications upon, such as the Confidential Consortium (Coco) Framework, an Ethereum-based protocol, which falls under Microsoft Azure, the company’s cloud computing arm.

They have also announced that they are looking into plans to integrate blockchain-based decentralized IDs (DIDs) into its Microsoft Authenticator app.

The latest from the computing giant is that Azure has released its blockchain app creation service, Azure Blockchain Workbench, on May 7. Workbench aims to allow businesses looking to create bespoke blockchain apps to speed up the development process by automating infrastructure setup.

Amazon’s own efforts

Both Microsoft and Amazon have similar origins with their founders – Bill Gates and Jeff Bezos – being driven men with revolutionary ideas. Therefore it is unsurprising to see these two companies pushing to be on the forefront of a new technological wave.

Gates may be spouting some pretty negative things about Bitcoin, and Bezos may be under siege to accept the digital currency on Amazon, but despite what the two founders think of the cryptocurrency space, it is becoming clear that the future is conquering the companies.

Amazon revolutionized the e-commerce space, and is looking to at least be near to top of the pecking order when blockchain technology truly takes a hold. Just like in banking, there is a rush to get blockchain figured out and usable before the rest of the competition gets to market.

Amazon are already in a battle with IBM and Oracle with its own “blockchain-as-a-service” offering. The blockchain framework for Ethereum and Hyperledger Fabric, which is allowing users to build and manage their own Blockchain-powered decentralized applications, is being developed in different forms by all three.

Essentially, users would be able to create their own blockchain applications via the Amazon Web Services (AWS) CloudFormation Templates tool to avoid time-consuming manual setups of their blockchain network.

Oracle and others also entering the space

Oracle, the world’s second-largest software company, also recently unveiled blockchain products, and will be releasing them over the next two months. Again, it was a similar cloud service built on the open-source Hyperledger Fabric project like Microsoft, and equally similar to IBM’s blockchain service, announced a year ago.

Major companies are also jumping on the blockchain bandwagon in different easy, shapes and forms. Huawei is loading its phones with a built-in Bitcoin wallet;  Samsung revealed that it will use blockchain for managing its global supply chain; Spanish banking group BBVA became the first global bank to issue a loan on a blockchain, and use-cases continue to grow around the world.

Oracle and others also entering the space

Why the blockchain drive?

It was not long ago that people were calling Bitcoin a fad, a scam, and something that will not last for long. Those voices have been silenced somewhat as even banks, one of the biggest detractors of cryptocurrencies, are realising that they need to be on the forefront of this emerging technology.

The excitement is spreading, and it is creating an arms race even outside banks and the finance sector. Blockchain technology, while intrinsically attached to cryptocurrencies, also has many applications for other sectors. These applications are being explored, and evaluated.

Companies like Microsoft, Amazon, Samsung, Huawei and others, all realize that with all these possibilities, it would be blind to not dive in, and quick.

AWS vice president Jeff Barr explained in a post:

“Some of the people that I talk to see blockchains as the foundation of a new monetary system and a way to facilitate international payments. Others see blockchains as a distributed ledger and immutable data source that can be applied to logistics, supply chain, land registration, crowdfunding and other use cases,. Either way, it’s clear that there are a lot of intriguing possibilities and we are working to help our customers use this technology more effectively.”

Neil Patel, advisor to Kind Ads, a decentralized ad-network that consults companies such as Amazon and Microsoft, reiterates that these major corporations almost have no choice but to embrace blockchain technology as it is being regarded quite openly as the future of technology. Patel told Cointelegraph:

“Microsoft and Amazon have no choice but to focus on blockchain because it is the future. If they don’t, they know that it will hurt their growth in the cloud computing space. Just look at Facebook, they see the value in blockchain so much that they moved around their executive team to put the ex president of PayPal on blockchain projects.”

Patel’s example above makes mention of how David Marcus, the former president of PayPal and the Facebook executive who has been running the company’s Messenger app, is now assembling a team to explore blockchain technology for the social media platform.

Contradicting ideas

Bitcoin, blockchain and cryptocurrencies in general all continue to split opinions. However, the voices in the detracting camps are becoming quieter, especially if they are just single voices.

Jamie Dimon, the head of JP Morgan, called Bitcoin a fraud and spouted much vitriol about cryptocurrencies – and yet, JP Morgan is building its own blockchain, Quorum. The Head of Microsoft is in a similar situation as he says he would bet on Bitcoin collapsing while his company pushes to be a blockchain leader.

Many of these older viewpoints about how things were done, the centralized control of a sector and the move to monopolize a service, still reside in the likes of Gates and Dimon, but on the company floor, it is a different story.

Blockchain technology is being touted as the future, and it is not just empty words. The amount of money, time and effort being put into blockchain-based research and development by banks and corporations prove there is something more to it than a passing fad.

Posted on

Brazilian Government Plans to Process Petitions and Write Laws on Ethereum

The Brazilian government is seeking to move popular petitions, an inefficient electoral system of the country, onto the Ethereum network, to process hundreds of millions of votes on the immutable Blockchain network.

In Brazil, popular petitions enable over 145 mln voters across the country to come to a consensus on important political decisions. But, for many decades, political experts and analysts have questioned the logistical issue of popular petitions, and political commentators have described the structural problem of the electoral system of Brazil as the basis for most of the country’s political issues.

Gabriel Barbosa, a research associate at the Council on Hemispheric Affairs, wrote, “when people are living paycheck to paycheck, or as the common saying in Brazil goes, ‘selling their lunch to buy their dinner,’ the cost of political participation becomes high enough so that people are excluded from the political process,” emphasizing the lack of proper institutions that handle the cost of political engagement.

Move to Ethereum

As Joon Ian Wong of Quartz reported, Brazilian legislators led by Congress legislative adviser Ricardo Fernandes Paixão and university professor Everton Fraga are planning on ways to utilize the Ethereum Blockchain network to store and process electoral votes, as a part of a larger initiative to improve Brazil’s political system, which The Economist described as “sleazy.”

The key to employing a Blockchain system in processing petitions and electoral votes is to encrypt votes onto the immutable Blockchain network as transactions, to ensure that the specific piece of data remains unalterable and invulnerable to manipulation.

Essentially, processing petition signatures on the Ethereum network would require smart contracts, and the system would operate similarly as other decentralized applications that exist on the network. The electoral system of Brazil would act as a decentralized application of its own with an independent digital token, that is used to process every vote on the Blockchain.

Henrique Costa, a Universidade de Brasilia law professor, told QZ that the lack of an immutable platform to collect signatures of votes had been a real issue for the government in the past.

“In part this is due to the absence of a platform that can securely collect the signatures of one percent of voters. We’ve been through a sort of crisis regarding the legitimacy…of our laws. Although the popular initiative does exist, there is no secure way to collect people’s signatures so people can propose bills themselves.”

Within the Brazilian electoral system, any popular petition with the signatures of one percent of the country’s populations is required to be heard in Congress. But, because of the lack of an institution and a platform that handles petition votes, the group that rallies behind a particular petition also needs to find a legislator to adopt it.

Consequently, the probability of popular petitions being heard in  Congress has significantly decreased, even though many petitions have gathered signatures from the one percent of voters.

Mobile app

Currently, the Brazilian government is exploring the possibility of using a mobile app based on the Ethereum Blockchain network with which residents and citizens can submit petition votes. Since decentralized applications can operate on mobile systems, the Brazilian petition and electoral system can operate in a similar way.

Since broadcasting every single signature as a transaction of its own is highly efficient and costly, the Brazilian government will use a system called hashing to combine all of the daily votes into one transaction and broadcast it to the main Ethereum Blockchain network.

Fraga, one of the two leading advisers of the project, stated that the integration of Ethereum into the Brazilian’s inefficient and impractical electoral system would be a celebration of democracy if it passes Congress and becomes implemented. He said:

“It would be a celebration of democracy. With this project, we are doing what the constitution says, but in practice, it hasn’t [yet] happened.”

Posted on

Building Blockchains  – Ripe Model for Principal-Agent Problem

Management theory, in broad terms, deals with the relationship between managers and business entities. Inherent in this relationship is the principal-agent problem. This problem arises because the interests of a manager (agent) can — and often do — diverge from the interests of the owners of the business (principal) that he or she is managing.

Classic management incentivization: the carrot and the stick

Business organizations mitigate the principal-agent problem by use of incentive games that better align manager and business owner interests.

Example 1 (Reward-Based Game): A manager is incentivized to generate revenues for a business because this is a performance metric that will influence his or her compensation. Revenues also benefit the business and its owners by increasing a company’s equity value (benefiting shareholders), enabling the company to pay down debt (benefiting creditors), allowing employees to be paid on time, etc.

Example 2 (Deterrent-Based Game): A manager is deterred from acting in a manner that incurs excessive risk and liability for the business owners. One way this is achieved is through legal mechanisms such as vicarious liability or ‘piercing the corporate veil.’ The former may allow a manager to be held directly liable for the injury, or illegal conduct, of his or her employee; the latter may allow a manager to be held personally and solely liable in the context of fraud, etc.

I would hazard that the modern ‘business organization stack’ is built upon hundreds of different reward and deterrent incentive games, each playing a part in collectively establishing a Nash equilibrium between the ‘players’ within a business (i.e., managers and owners). These games are prevalent at all layers of the stack — e.g., compensation structures, human resources policies, governance policies, laws and regulations, etc. — and each game provides ‘checks and balances’ to the principal-agent problem that are fundamental to the viability of the organization.

Enter the ‘Cryptoeconomic Business Model’

With the advent of Blockchain-based assets — and the exponential influx of capital into the Blockchain industry over the past few years — we have witnessed the birth of a novel business model. This model enables companies to make money in new ways through the creation of open-source protocols and code (an invaluable service for which we once relied upon the altruism, rather than profit motive, of developers to provide).

I refer to this as the cryptoeconomic business model. This can be defined as any business model predicated on making profit by building a cryptoeconomic system, i.e., a peer-to-peer cryptographic network which functions on providing incentive payments to (assumed) adversarial nodes. Virtually all public/permissionless Blockchains today are ‘cryptoeconomic systems’ by this definition.

The cryptoeconomic business model upsets the classic principal-agent equilibrium that is often achieved by using reward and deterrent incentive games. This is done by introducing an entirely new class of stakeholder into the ecosystem — the Keepers of a Blockchain network (e.g. tokenholders and other participants who provide a form of ‘paid labor’ into the network, such as validators, miners, etc.)

If the traditional business has two classes of players (managers and owners), the cryptoeconomic business has three (managers, owners and Keepers).

These new entrants complicate the game theory model because, now, instead of the acting only on behalf of owners, there are two sets of stakeholders (owners and Keepers) whose interests depend on the efforts of a manager. What happens when the interests of these different sets of stakeholders diverge? In whose interests would (or should) an agent be motivated to act?

Business model

Token offering events & the risk of divergence/dilution

Value creation in a traditional business model is different than value creation in a cryptoeconomic business model.

In a traditional business, the final milestone of success is achieving profitability. Managers are incentivized to achieve profitability, and then to perpetually increase profitability, because the fruits of this labor accrue 100 percent to the business entity benefiting both owners and managers. Simple enough.

This is not exactly the case for a cryptoeconomic business model. Early in the cryptoeconomic business life cycle, each milestone benefits managers and owners collectively — but upon a company’s token offering event milestone (note: because the term ‘ICO’ is a faux pas) there is a fundamental shift.

Value creation no longer accrues to the business entity, but directly to the product/output of that business (i.e., the cryptoeconomic system)

In a cryptoeconomic business model, the final milestone is not profitability per se, but in the value of the Blockchain network/token, which recent scholarship suggests may be measured as a token’s current utility value (“CUV”) and discounted expected utility value (“DEUV”). CUV/DEUV come into play immediately following the token offering event milestone, concurrently with the introduction of Keepers into the stakeholder set.

This point is illustrated below:

Chart

So how does this impact our thinking on managerial incentives?

The immediate observation is that managers and owners will only benefit from working to increase a network’s value to the extent that they retain some amount of that network’s native tokens. In practice this amount might be in the ~20–50 percent range for the business entity, which is sizable, but significantly less than the 100 percent value retention model of a traditional business.

In theory, managers have ‘skin in the game’ by virtue of these token holdings and should be motivated to drive growth in the token’s CUV/DEUV with the expectation of selling those retained tokens for a profit at some later date. This outcome would be ideal as it implies an alignment between manager-owner-Keeper interests.

But the problem is that the dilution from 100% value retention (in a traditional business model) to ~20–50 percent value retention (in a cryptoeconomic business model) may also dilute a manager’s motivation to create long-term value for the network. Without sufficient reward/deterrent games in place, managers are prone to instances of moral hazard and myopic thinking.

It is plausible, for instance, that this may result in some degree of friction between the profit motive of managers, which incentivizes a manager to retain a significant portion of the tokens for the core business and the interests of the other Keepers/tokenholders who would benefit from those tokens being distributed more broadly thus creating network effects that could increase the CUV/DEUV of the token. This would be an example of misalignment between manager-owner-Keeper interests.

Other challenges in managerial motivation post-genesis block

Another challenge is due to the fact that revenue models (i.e. ‘rent-seeking’) may not be viable in cryptoeconomic systems. If a manager were to extract profit/revenue from a network by coding a centralized fee* into a protocol or dApp (i.e. any type of transaction fee that remits value back to the business), a likely outcome is that the protocol or dApp would either: (i) fail to gain adoption, or (ii) be hard forked by users (or duplicated by a competitor) to remove the fee from its code base thus making the network more cost-efficient.

*Note: To clarify my point on centralized fees, certain platforms use sustainable fee models as a feature of the platform’s cryptoeconomic design (e.g,. Factom and Counter-Party, wherein a portion of fees are burned to increase the scarcity of the token). Also, as the use cases for dApps/protocols continue to proliferate, centralized fees may prove to be an accepted business model for certain applications of Blockchain technology.

Here are a few of the other ramifications of this challenge:

  1. Profiting upfront; creating value later: The creators of cryptoeconomic networks (currently) realize value for the business entity primarily via two streams: (i) the proceeds of token offering events, and (ii) the retention of some amount of the offered tokens. Both of these milestones occur relatively early in the life cycle of a business. Given that the majority of a manager’s compensation/profit is front-loaded, experience has shown that some managers will opt to simply complete a token offering event before ‘jumping ship’ to the next project, rather than working to generate value for their current project.

  1. CUV/DEUV is a bad indicator of managerial competence: We may not yet have the best tools to evaluate managerial performance in cryptoeconomic business models. CUV/DEUV are inherently different metrics than earnings per share, EBITDA, return on equity, etc. (the latter are some of the tools used to evaluate CEO performance in a traditional business). CUV/DEUV is driven by supply and demand; more fitting for valuing a commodity than equity. To evaluate a manager’s performance on the CUV/DEUV of a token is akin to evaluating a gold company CEO’s performance on the price of gold.

  1. The lack of legal mechanisms to protect Keepers/token-holders: There exists an elaborate body of corporate, securities and employment law designed to address the principal-agent problem between participants in traditional business structures (e.g., vicarious liability, ‘piercing the corporate veil,’ fiduciary duties owed by directors to shareholders, etc.) These protections do not (yet) exist for the Keepers/token-holders of cryptoeconomic systems. Granted, there is free market mechanism in play by virtue of the Keepers’ ability to hard fork a protocol in retaliation to mismanagement, but this overhaul should only be used as a last resort.

  1. Singular token offering events: For traditional start-ups, the process of raising capital occurs in tranches (i.e. Seed, Series A, Series B, etc.) and each tranche is largely tied to a manager’s ability to demonstrate progress towards profitability since the previous tranche. Token offerings — on the other hand — are mostly structured as singular events. This structure alleviates the much needed external pressure on managers to deliver on building their products on time and on budget. It also fails to backstop losses for investors in the event that a manager fails to deliver.

These are just a few examples of how the principal-agent problem can manifest itself in the context of new, cryptoeconomic business models— each of which will eventually be solved by new incentive games designed for the tripartite (i.e., manager-owner-Keeper) environment.

I suspect that the study of management theory in the context of cryptoeconomic business models will continue to be an evolving field — and a very relevant one at that.

Many thanks to Ryan Zurrer, Lawrence Krimker, Lauren Furman, Marc Pontone and Josh Teichman for their contributions to this article. I welcome any comments or feedback.