Markets are decentralized and the software that runs them should be too » Brave New Coin


In today’s world, each firm in a market has an insanely complex IT estate with hundreds or thousands of corporate applications, many of which do the same thing as their competitors. But it’s worse than that. Not only do firms have massively duplicated systems, none of them are ever in sync. However, the advent of Bitcoin taught us there is another possibility.

There’s a funny little contradiction at the heart of the economy: Most businesses are centralized but the markets that most businesses operate in are decentralized.

Here’s what I mean: Pretty much any company you can think of has a chief executive and a head office and a board of directors and a finance department and a head of sales and a marketing team and countless other departments.

It’s a bit weird when you first think about it: The beating heart of the capitalist system consists of institutions that are inherently centralized, top-down, and run along command-and-control principles.

But if you look at the markets in which these firms operate, it is very rarely the case that there is anybody in charge. Who is the “chief executive” of the reinsurance market? Where is the “head office” of the syndicated lending market? Who sits on the board of directors for the financing of world trade? Outside trade bodies, regulators and some specific organisations in the financial markets, the answer invariably is, nobody.

Any competitive industry you can think of is typified by a large number of producers  –  companies  – striving to earn income by providing things that consumers  – individuals or other companies  – are willing to pay for. And there’s nobody in the middle who is “in charge.”

When the IT revolution began many decades ago, it was natural that it was companies and other centralized organizations that were the adopters of the technology; there was a competitive advantage to be gained by optimizing one’s operations, and a command-and-control mechanism to get the technology adopted and working practices changed was the way to make it happen.

So it’s no surprise that if we now look back on the achievements of the IT industry over recent decades we see that IT has mostly been deployed within firms and has mostly been used to optimize those firms.

However, when you raise your attention to the level of industries and markets, you see something different. It’s really quite remarkable, when you think about it, how little has changed in many markets. The way international trade looks today would be easily understandable by a merchant from 300 years ago. The mechanics of how a complex reinsurance contract is negotiated would look little different from a century ago. And so on.

In fact, it’s only when markets have introduced centralization, such as with the creation of highly regulated centralized infrastructure firms in the financial markets, that we’ve seen transformational change at the level of an entire industry. The results have often been spectacular. But they have come at the cost of new intermediaries, greater risk concentration and a resulting regulatory need to ensure these new institutions do not become rent-seekers or stifle innovation once established.

Until now, we simply haven’t had the technology that would allow us to make such changes without introducing new points of centralisation and control. The deepest assumptions of most of the software that exists today is that it will be deployed within a firm, that it will be controlled by that firm, and that, because it is run by or for that firm, its outputs can be trusted by people in that firm.

And so we find ourselves in today’s world, where each firm in a market has an insanely complex IT estate with hundreds or thousands of corporate applications, many of which do the same thing as their competitors.

Except it’s worse than that: Not only do they have all these massively duplicated systems, none of them are ever in sync. They constantly have to be reconciled and checked to make sure that every party to a deal or contract is in sync with each other.

However, the advent of Bitcoin taught us something very interesting: It is possible to build systems that are deployed between multiple entities, whom don’t fully trust each other but desire to transact with each other – and to do so without introducing a new centralized party they must all trust.

It could be a massively powerful breakthrough to apply the same logic to other things, such as legal contracts and healthcare records, or reinsurance policies and complex loans. It could be the holy grail to optimizing entire markets without forcing these markets to reshape themselves to conform to the badly fitting centralized models that today’s software would demand. It would be the best of both worlds and could unleash a productivity revolution.

This is what R3 believes is the potential of blockchain technology for business. It’s the vision upon which the design of R3’s Corda is founded: the ability for anybody to transact directly with anybody else on an open network, with total assurance that “what I see is what you see,” with assured privacy, and scalability.

And it’s the vision that projects and initiatives such as Finastra Fusion LenderComm, B3i, GuildOne, Tradewind Markets, the RiskBlock Alliance and many others are bringing to reality across industries as diverse as insurance, healthcare, gold, oil and gas, finance and more.

Entire markets are in the process of being transformed, and it’s being done without forcing new intermediaries into the mix or driving these riotously decentralized markets into inappropriate centralized models.

Over the next decade, decentralized software will become the new normal across markets. And it’s about time.