A little while ago, R3 was like Mel Gibson’s Nick Marshall in What Women Want. It was the alpha male of the blockchain world, Wall Street’s gift to distributed ledger technology. The company exuded confidence, capable of seducing techies and finance types in equal measure. The sky was the limit and the world its oyster. Then came an unexpected wake-up call and the reality that it wasn’t quite pushing all the buttons it thought it was.
The decision by several major banks to leave R3 is by no means the death knell for the consortium, but it does raise that age-old mystery: what do businesses really want from their blockchain providers?
R3, which consists of around 70 major players from the banking world, is a big deal. There is a huge amount of talent and influence embodied in the organization. Blockchain has a lot to offer the financial world, and R3’s mission was to deliver on the promises.
At the end of November four major banks – Goldman Sachs, Morgan Stanley, the National Australian Bank and Banco Santander – took their leave in a move that prompted experts to suggest that the company was struggling to deliver anything of value. A total of seven banks are rumored to be leaving R3.
R3’s flagship projects — Corda, ‘a distributed ledger platform designed from the ground up to record, manage and synchronize financial agreements between regulated financial institutions,’ and a proof-of-concept KYC registry — have apparently failed to wave their partners’ flags. BTCManager’s Christoph Bergmann concludes, “Both Corda and the KYC-blockchain can be solutions to problems of the banking industry. But as the recent bank drain indicates, neither of R3’s projects seems to be the big thing everybody has waited for. Maybe the three banks just realized, that real innovation rarely blossoms in the gated community of a consortium of established institutions.”
Whilst we don’t know what went on behind closed doors, there’s a war brewing for the soul of blockchain, and if R3 isn’t at its epicenter then it,s symptomatic of its values.
The consortium was a magnet for funding and talent, attracting the likes of bitcoin royalty Ian Grigg, and former bitcoin developer Mike Hearn, who vocally bailed on bitcoin early this year, pronouncing it a failure before starting his new job.
Now it seems a rethink may be on the cards. The banks that have walked out on R3 are all pursuing their own blockchain projects, demonstrating that blockchain isn’t going out of fashion. It’s just that R3 wasn’t able to deliver quite what they wanted — whether in technical or business terms — or it may merely be banks seeing that they may become irrelevant and the banks are trying to keep their piece of the blockchain pie.
Complexity and efficiency
Bitcoin, the first application for blockchain technology, has been around for eight years now. It was something totally new, quite remarkable: a form of money that operated outside of the existing structures of financial power, namely the banks and governments. Or rather, it was almost new: there’s a case for saying that bitcoin is more like very early forms of pre-coinage money than it is like what we now consider money — bank-created debt-based electronic cash.
It seems new to us, at any rate, because money has been controlled by banks and governments for 2,500 years.
Make no mistake about it, blockchains are complicated. But in terms of what it can do, bitcoin is a simple, open platform: anyone could use the network to transfer value, directly from one address to another.
Bitcoin offers cash transfer — just like handing over money in person, only on the web. No one else is involved. You aren’t beholden to anyone, you don’t have to work with anyone else. There is no trust required. You just downloaded the bitcoin client (or used a web wallet like blockchain.info) and make the transfer.
It’s a fast, low cost and borderless way to move money. There are huge efficiencies to be won over the legacy banking system, which runs on outdated infrastructure and imposes unnecessary costs and complexities at almost every point.
In an age of zero or sub-zero interest rates, economic stagnation and increasing regulation, efficiency savings are very, very attractive. Banks have quickly seen the benefits of blockchain and are jumping on the idea as quickly as possible — which is how the R3 issues came about in the first place.
As R3 grew so rapidly the bank could hardly stand it, and caught on rather quickly, from an initial nine members in September 2015 to over seventy banks currently. That is not bank branches — thats whole companies. And, as it turns out — may well be the only problem R3 had — their quick and dynamic success.
Banks do not want to recreate bitcoin, exactly. Banks want their own version of a Bitcoin.
Bitcoin works on the principle that when everyone is in charge of how you are handling your money and this scares many agencies. So, no one is in charge, and you no longer have to rely a middleman or base your trust on a “trusted” bank or third party to make your personal transaction.
Unsurprisingly, banks don’t like this idea. They want to keep the efficiencies of the blockchain, whilst introducing other features to bypass these deal-breakers.
Bitcoin is an open or un-permissioned blockchain; critical to much banking interest in the blockchain is the development of control layers that allow them (the bank) to intervene.
These permissioned blockchains may look similar to their un-permissioned forerunners, but they are a very different beast, both in terms of values and technology.
Introduce a gatekeeper (bank) and you unnecessarily introduce a gate, for a start: permissioned chains (think bank) inevitably mean greater security risks.
The tech aside, seventy major banking industries, jumping all at once, is an awful lot of alpha dogs trying to chase the same bone.
It is a beautiful irony that in seeking to domesticate blockchain technology for its efficiencies, the result may have been the introduction of unnecessary complexity and inefficiencies, both on the technical or organizational level.
In an interview with The Register, Garrick Hileman from Cambridge University’s Centre for Alternative Finance suggested that “while the assembly of so many major banks by R3 was impressive, such a large number of members inevitably leads to organizational challenges. It has not gone unnoticed that the proofs-of-concept that R3 has produced have had a very limited number of participants.”
So some of the earlier members have jumped ship with the ballooning size of the consortium. The departure of Goldman Sachs is of particular interest, as one of the world’s largest and most successful investment banks. ‘There is an obvious conflict with such fiercely competitive companies, all seeking to drive forward their own advantage, working together in harmony on democratizing and transparency enhancing technology.’
Linux vs Windows
In some ways, these developments reflect the problems faced by bitcoin-based services over the last couple of years.
What, exactly, is the revenue model for a bitcoin wallet company? When sending ecash money using bitcoin is so fast and low-cost by design, adding commission fees isn’t going to do you any favors. Bitcoin companies have evolved rapidly in the light of this realization. The new technology requires a new approach to revenue generation.
Where does this leave the “mainstream” blockchain sector? Well, in one sense, not much has changed. All of the organizations that left R3 are pursuing their own (bank style) blockchain research — they are just doing so independently. R3, with the might of dozens of the world’s financial giants standing behind it, will do just fine, even if it has to scale back its fundraising a little. R3 seems to have some of the brightest minds from the blockchain world within its walls.
But, for businesses, there’s a lesson — and for the Old School open blockchain platforms, an opportunity.
Bitcoin probably won’t be a big part of the coming wave of blockchain adoption, for various reasons (reputation and glacial pace of development being two commonly-cited issues). But there are plenty of other blockchain platforms and organizations that are pushing ahead with open protocols that offer all the functionality most businesses need.
The best of these platforms understand the needs of business but also the nature of the technology they are dealing with — specifically the fact that introducing unnecessary complexity is a very bad idea, technically and organizationally.
Many companies have substantial funds at their disposal. R3 is seeking to raise $150 million from its members; blockchain platforms like Ethereum (smart contracts) and Waves (custom blockchain token functions) have crowdfunded $15+ million, which is no mean feat, with many others raising seven-figure sums.
These are grassroots organizations that do not answer to corporate shareholders and know how to operate on a shoestring (Waves’ current burn rate, for example, is less than $100,000 a month).
What these platforms offer is efficiency at every level — in what they offer their users, in how they approach development and in how they are organized. In this, they embody the original values of the blockchain. However, this does not always mesh well with conventional business approaches.
To understand the challenges facing traditional financial businesses, a comparison with Linux may be helpful. Linux is an open source operating system, developed for free by users and enthusiasts around the world. Linux is emphatically not a hobby project. You will only find it on around 2 percent of home computers, but it underpins a huge range of commercial applications, including point-of-sale software and the Android operating system.
For servers and for embedded systems such as routers, smartphones, DVRs and similar devices, as well as industrial systems, it is king. Linux adds tremendous value to the world of business, but it is not sold in the same way that Windows is sold or licensed.
Linux is a lot like an open blockchain project in that businesses can take it and build on it however they want to create their own applications — that is the nature of open source software. Generating returns directly from Linux is another matter. (It is not impossible, but it is certainly a tougher proposition.)
Indeed, one of Linux’s great strengths is precisely its open nature, which has enabled the creation of a low-cost and secure platform for anyone to use. It’s well known that Linux is more secure by design and by culture. Anyone can see the codebase, flaws tend to be found and fixed by thousands of user-developers around the world, rather than by a small group of developers working on a closed-source codebase to their own timetable — Windows, “security by obscurity” approach. So it goes with the blockchain. Open platforms including bitcoin are rigorously tested by users before a new release; sometimes sunlight really is the best disinfectant.
As major financial corporations develop their own blockchain solutions and their approaches evolve, there are certainly opportunities for Open Blockchain Platforms that anyone can use and audit. Businesses — ordinary businesses — in the real economy, rather than the same financial giants we’ve always had running the show.
The financial giants are just starting to grapple with blockchain and realizing the benefits it can bring (to their pockets — if they control it). Will these “biggies” want to use Windows, or Linux?