Say what you will about Cryptokitties, but the app does something today that nearly all enterprise blockchains still cannot: exchange one item of value, a cryptokitty, for another item of value, ether.
That item of value may be silly (a digital kitten), but to those who care about them, it’s really enough.
More importantly, the entire contract and transaction, including the exchange of product, takes place on the ethereum blockchain. At EY, our hypothesis is that this kind of low-friction, closed-loop economic transaction is, in fact, the ultimate end game for most enterprise blockchain aspirations.
We’re still very far from that destination, however.
Right now, many enterprise blockchains are still operating like distributed databases and notary services, often with very specialized objectives, such as tracking product provenance. This is a useful start, but if we are not careful, it could be a dead end — a fancy, hacker-proof database, where the software company has replaced the central bank as the intermediary of choice.
To deliver on the full promise of blockchain technology, we believe that enterprises must embrace the full power of tokenization, and ultimately, the allure of the public network. And, 2018 is the year that this will come into view as the future of this technology.
The foundation of this high-value future is the concept of tokenization: representing a company’s products and services as digital tokens on a blockchain, not merely as items of information, but as carriers of value.
Such digital tokens can stand for anything from pharmaceuticals to phones to music. Whatever they are, they should have assigned ownership and value. If you have a pallet of 1,000 mobile phones, each worth $1,000, that’s on a ship in transit, the blockchain should represent that with 1,000 small tokens with a collective value of $1 million.
When products are made, delivered or sold, value in the blockchain can change hands: 1,000 phone tokens for $1 million in U.S. dollar tokens. Not just bitcoin or ether, but U.S. dollar. Or euros or yen for that matter.
Set aside the debate about the value of traditional fiat vs. cryptocurrencies for the long run. The simple fact is that enterprise CFOs want to be paid the same currencies in which they have expenses and long-term liabilities.
That means tokenizing traditional fiat currency and doing so in the same blockchain as the products and services are tokenized.
Having both types of tokens in the same blockchain is critical — it is what enables the seamless, low-friction and low-risk exchange of items of value. Cross-chain connections are a nice idea, but they can’t beat the power and simplicity of direct exchange.
Central banks are already experimenting with the tokenization of their own currencies, but doing so in private, permissioned or proprietary blockchains that are managed by the central banks. It is a good start, but the next logical step is to create the legal and regulatory framework that enables the tokenization of fiat currency on any industrial or public blockchain.
Once a closed-loop tokenized industrial blockchain exists, many of the key foundations of specialized blockchains would become add-on features in the true economic blockchain. Trade finance is easy if you trust that the representation of 1,000 phones, each worth $1,000 is accurate — you can loan money against those tokens in the blockchain.
Similarly, customs declarations, tax calculations, and product history and provenance are all easily derived from looking at the history of the tokens in that blockchain. No separate blockchain is required for trade finance, payments or product traceability.
This vision of the future will start arriving in 2018, and it will have two clear stages.
The first will be the development of what we are call full cycle economic blockchains, where products and services are tokenized and exchanged through digital smart contracts for digital currency tokens. This foundation will likely start with sales, procurement and logistics, and will then go on to see the addition of related services, such as trade finance.
The second phase of this will be the gradual emergence of public blockchains as the preferred ecosystems for these transactions.
We believe that decentralized public blockchains are the only way by which enterprises will truly and deeply commit to digitizing their products and services in a fully interoperable manner. No company will want a centralized intermediary to become the main point of exchange for trillions of dollars in products and services: that entity will have far too much power as a natural monopoly, protected by powerful network effects.
This second phase will depend on how quickly transaction privacy tools such as zero-knowledge proofs (and related zk-snarks and zk-starks) mature.
Right now, transaction scalability and data privacy are not yet ready for multiple competing enterprises to put their strategic transactions into a public blockchain and feel confident they are secure, but that those risks will start to fade in 2018.
Beyond privacy, there are still many challenges to making public blockchains usable for enterprises, including how to implement the rule of law and related know-your-customer and anti-money-laundering regulations.
We believe these are solvable problems and that they can be addressed without the need for centralization. We’re already testing our ideas of how to audit decentralized fiat currency tokens on public networks in ways that will company with AML and KYC rules, for example.
In the end, the lure of the public blockchain network is overwhelming. It’s the only place where companies can be sure they are being treated fairly on a transparent, inspectable and open playing field.
In 2018, the foundations for this future will emerge and the first pilots of these concepts will be visible on the world’s public blockchain networks.
Magnet image via Shutterstock
Written by Paul Brody from www.coindesk.com