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How Blockchain Tech is Helping to Tap $3.1 Trillion in Value

Jun 13, 2020 | Blockchain Technology

In October 2017, the largest bank in the  United States, JPMorgan Chase, quietly revealed that a small network of  competitors had been secretly testing a way to send payments to each  other using blockchain, the technology first popularized by bitcoin.  Emma Loftus, the bank’s head of global payments, said the blockchain  platform, which promises to simplify the process of complying with  global regulations by moving the transactions to a shared ledger, could  reduce the time required using the current payment rails from “weeks to  hours.”

Eleven months later, that small group of banks, dubbed the  Interbank Information Network (IIN), had swelled to 76 members,  including its founding partners, the Royal Bank of Canada and the  Australia and New Zealand Banking Group, and international banking  giants such as Banco Santander, Société Générale, Mizuho Bank, and the  Commercial Bank of Africa.

The consortium was just the latest in a  litany of blockchain groups looking to leverage the network effects of  moving a wide range of their workflows to a shared, distributed ledger.  JPMorgan and Santander had previously been members of another  distributed ledger consortium, called R3, which has raised $107 million  to build a series of interconnected networks across industries. Still  other IIN members are working with Ripple, a venture-backed startup with  $16 billion worth of the XRP cryptocurrency at its disposal;  Hyperledger, a nonprofit that supports a number of blockchains, and the  Enterprise Ethereum Alliance, which is working to ensure that businesses  building on both the public ethereum blockchain and permissioned  alternatives can work together.

While  the explosion of members joining these consortia has become a cliché  among many in the industry, seen as an easy way to get media coverage,  it turns out there is a little-known economic principle powering the  phenomenon, according to a research paper published today by blockchain  startup Prysm. Called “hold-up,” the principle dictates that when an  individual invests in a group project, that investment is worth more as  part of the group than outside it, giving others bargaining power equal  to the investment. 

Like an old-fashioned bank robbery, the  unlucky investor can essentially be “held up” for the value of the funds  and other resources invested in the group and forced into undesirable  situations, discouraging participation in the consortium at all and  undermining even the greatest potential benefits. 

 

But blockchain lets consortia organizers move both the governance  processes behind the way these groups make decisions and the data each  member provides to a shared, distributed database, without requiring  that they hand over control of the actual data itself, where it could be  easily copied and drained of its value, argues Stephanie Hurder, a  Prysm cofounder and one of the report’s authors. As a result,  competitors linked together via a blockchain are free to invest in  common goals, and if they choose to leave the group in the future they  can take their data with them as easily as one moves a bitcoin.

“Each  business has sort of its secret sauce which it doesn’t want to share,”  says Hurder, who has a Ph.D. in economics from Harvard University and is  a visiting scholar at USC’s Center for Physical Systems and the  Internet of Things. “But then there’s a lot of benefits for sharing data  that’s non-trade secrets, and if people can successfully not only get  over the hold-up problem, but also successfully implement these  consortia, we’ll see a lot of value created.” The research company  Gartner estimates that the business value locked up in these blockchain consortia and elsewhere in the industry will reach $3.1 trillion by 2030.

While economists at Prysm Group, the University of Chicago  and elsewhere have only recently begun studying the potential impact of  blockchain on hold-up, those with experience building blockchain  consortia are already seeing it play out in the real world. 

Today at Consensus, a conference hosted by industry news site CoinDesk,  a number of consortium builders from JPMorgan, Johnson & Johnson  and the World Economic Forum will speak about the impact of hold-up on  their own work and how they are working to overcome it.

“The  solution we have resolved is helpful for the whole network,” says Oliver  Harris, JPMorgan’s blockchain boss and head of crypto-asset strategy.  In conversation with Forbes, Harris started by focusing on the limits of  blockchain to help competitors reach consensus. Even before looking at  the technology itself, Harris says, competitors in any industry need to  identify a common problem to solve. In the case of JPMorgan’s IIN, that  problem was the weeks it can take foreign correspondent banks to send  each other money.  

But even after competitors identify a common  problem, that doesn’t stop the blockchain and distributed networks  themselves from competing, according to, Thomas Pizzuto, the global  director of medical giant Johnson & Johnson’s emerging technology  and supply chain. This competition too can result in a form of hold-up,  he says.

As others in the medical industry, from insurance  providers to medical records managers, are rapidly joining blockchain  consortia being gathered by IBM, venture-backed Chronicled and  others, Johnson & Johnson has been noticeably absent. While the  company, currently valued at $371 billion, is a member of a blockchain  working group with the GS1 standards body, Pizzuto says it has had  difficulty aligning the short-term benefits of joining larger groups  with the potential long-term risks of being locked into a single  network. “We’ve encountered the hold-up problem,” says Pizzuto. “Not so  much who are the partners, but who is bringing everyone together.”

Beyond  questions of finding a problem common to all competitors and concerns  about being locked up in the blockchain networks themselves, beating  hold-up relies on overcoming what Ashley Lannquist, World Economic Forum  blockchain project co-lead, calls the free-rider problem. 

In  addition to working at the WEF’s Center for the Fourth Industrial  Revolution, helping central banks research crypto, and exploring the  public ethereum blockchain, Lannquist is a cofounder of the Mobility  Open Blockchain Initiative (MOBI), which brings the auto industry  together to explore how sharing data about driver habits could create  safer driving conditions and lead to better fuel economy.

With  members including BMW, GM, Ford, Honda, and others all in various stages  of collecting driver data, Lannquist says one of the most important  hold-up concerns going forward will be about the amount and quality of  data provided. Companies with a lot of high quality data to share might  be less inclined to do so if companies with less data gain equally. “The  governance design for the consortium is what will address hold-up and  other collective action problems,” says Lannquist. “You need to design  in governance elements to ensure there’s fair use.”

To help tap  into blockchain’s potential value, the report’s author, Stephanie Hurder  co-founded Prysm Group in 2018, with fellow Harvard economist, Cathy  Barerra. The New York company is not disclosing its financials, but says  it does not expect to raise a round of venture capital. Instead, the  company is supporting itself with revenue charged for consulting  services provided by Nobel Prize winning economist, Oliver Hart, who  originally defined the hold-up concept, former Microsoft chief economist  Preston McAfee, and others. The startup is just the latest of a new  breed of consulting firms, including SmartContract.com, Datarella, and  Fae, working with enterprises,  governments and startups to develop  smart contracts that are both more complete than traditional agreements  and overcome long-term concerns of hold-up.

The paper, “Can  Blockchain Solve the Hold Up Problem for Shared Databases?”  identifies  three main causes of hold up: assets that are collectively owned and  therefore difficult to account for, contracts that fail to account for  every eventuality of these complicated business relationships, and most  importantly, consortia-specific investments that are worth less if a  member leaves. To overcome these concerns, the paper’s authors advocate  that consortia creators identify past causes of hold-up in their  industry and code smart contracts that account for them. The paper  concludes with several recommendations for overcoming hold-up, most  importantly, that data be structured in a way that is readable both on or off a blockchain, making it easier to not only integrate with other consortia, but leave them.

“If  I leave the consortium, and I technically own the data that I  contributed,” says Hurder. “But I can’t read it anymore because it’s  been converted to some strange format, that’s really terrible for me.”  Hurder and Barerra will be presenting the paper on stage today at  Consensus, along with a framework for helping competitors more  effectively work together.

 

 

 

Original Article by FORBES / Michael del Castillo / 2019  

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