Fat Tailed Thoughts: Blockchains in the real world
Hey friends -
In this week's letter:
What is being built on blockchain
Facts, figures, and links to keep you thinking over a drink
A drink to think it over
Total read time: 10 minutes, 45 seconds.
Building with blockchain
Following my earlier letter, I received several follow-ups asking what blockchains are actually being used for today. Some of the feedback was dismissive of blockchain technology generally, an understandable reaction given the extraordinary hype and lack of high-profile use cases with millions of users. In response to the comments and as a fun exploration into the early days of a still-emerging technology, we're going to dive into the space.
Despite my best attempts otherwise, this will be a two-part letter. This week’s letter sets up the framework for how we'll think about blockchain networks and explores a curated subset of business consortiums using blockchains. In next week's letter, we'll dive into the truly wild world of cryptocurrencies.
The blockchain applications we'll discuss are all live and, for most of the consumer-focused ones, are services you can sign up for and use. For many of the networks, it's unlikely you would even be aware that a blockchain is being used unless you endeavored to dig into the technology itself. These applications are not meant to be a comprehensive list and, more so than any other specific rationale, inclusion reflects my personal interest in what is being built.
Standard disclosure as some of this will meander in and around regulated financial instruments: none of my writing should be taken as investment advice, many of these examples are likely to fail, some may be frauds, and be prepared to lose your shirt (or pants or what is formally called your entire principal) if you choose to put money into them.
A framework for blockchain
Hundreds of businesses are being built on and with blockchains. Before we jump in, let's establish a mental model for the enormous diversity of projects underway.
Private & Permissioned vs Public & Permissionless
The major breakdown is private & permissioned blockchain networks versus public & permissionless ones. While the terminology may not be immediately familiar, the difference between them is closely analogous to how we experience the internet today.
At your work, you probably have access to an internal network that's not accessible outside the office. Maybe there's a server in your office building or even a couple of servers spread across multiple offices. The stuff available on the internal network, like project drawings, financial documents, and maybe an internal message board is can only be accessed by the company and its employees. To access the network, your company gives you credentials like an email address and password that you use to log in. Once logged in, you can access all of the resources on the network. We'll call this a private network.
Not all of the users on the network likely have the same permissions. There are probably administrators on the network who have super-permissions where they can do things like add and delete users. We'll call this aspect of your company's internal network permissioned.
Some blockchains are quite similar to your company's internal network - only approved users can join and certain permissioned users have rights that others don't. As we'll see, most of these private & permissioned blockchain networks have been launched among businesses looking to collaborate with one another.
Much like the difference between your company's internal network and the much bigger public internet, there are also public & permissionless blockchain networks. As the name implies, anyone can join a public blockchain and the network itself is permissionless - everyone can do everything. As we discussed in the prior letter and we’ll discuss at length next week, these blockchains use cryptocurrencies to keep them secure.
Let's dive in.
Private & Permissioned
Businesses often face the challenge of figuring out how to collaborate with one another without sharing too much proprietary information. The collaborating businesses can even be direct competitors, a strategy known as co-opetition. We're going to focus on three industries with live private & permissioned blockchains, all of which are solving a version of this collaboration challenge:
Supply chains - how do 20+ different types of businesses collaborate to ship and track physical goods across countries and oceans?
Money movement - how do competing financial services firms partner to move money across companies, countries, and currencies?
Identity - how do we give someone control of their identity and still enable them to prove their university degree, vaccine status, and other credentials?
Supply chains: getting from A to B
Moving and tracking physical goods across the world is an enormously complex endeavor. We often take for granted that today we can order a widget online, receive an email with a tracking number, and then follow along all the way until the package lands on our doorstep. That tracking works because the whole process is typically managed by one company - UPS, USPS, FedEx, or Amazon if you're in the US - and within one country which means we don’t have to deal with customs. As soon as multiple different parties have to coordinate, the process gets way more complicated.
Take shipping for example. The 11 different companies in the diagram above are just a subset of the involved parties. It doesn't even consider the banks who finance the shipment, the insurers who insure the shipment, or that the port operator and port terminal are typically different companies! Each one of these companies needs information and paperwork that the other ones have, including:
purchase orders - official statements that an order has been received, including details about the transaction and who is involved,
commercial invoices - receipts of purchase including full details of the transaction and shipping terms,
bills of lading - contracts between the shipper and the freight carrier including details about what is being shipped to where,
export packing lists - packing lists that itemizes all the cargo being carried,
... and a whole lot more.
When I say paperwork here, I really do mean paperwork. The many trillions of dollars of goods that are shipped annually are managed on physical paper that's shuffled about between companies in manilla envelopes. Because everything is paper, much of the information we'd like to know about the goods as they travel simply can't be captured effectively. Especially in the case of food, we want to know information like where it came from, the temperatures at which it was stored while it traveled, and how long it was exposed to those temperatures. Today's supply chains are not equipped for the many companies involved in moving food from origin to destination to share this information with one another.
With blockchain, companies are starting to digitize, capture, and share this information. These networks are set up to only allow approved companies to join. Each company retains control over its own data and with whom it is shared, often through a "share-to-get" model where each participant only gets access to other companies' data if they share their own. These access and control guarantees can only be achieved with a blockchain and are unlocking huge value for participating companies.
In global shipping, TradeLens coordinates document sharing and workflow among over 175 companies and government organizations to facilitate the movement of shipping containers around the world. The network has already processed over 44 million shipping containers, enough to cover all of Manhattan in a shipping container blanket 81 feet deep.
Carrefour and others are deepening the connection between grocery customers and their food by using IBM Food Trust to power QR codes on chicken, eggs, milk, oranges, and more. The QR codes connect the customers to an immutable audit trail tracking the food all the way from the farmer through the grocery store. Customers can today see the date of harvest, location of cultivation, when it was packed, safety tests, and certifications, with more data being added regularly.
To finance all this movement of goods, 13 banks in 25 countries are using Contour to digitize the letter of credit. Letters of credit guarantee the seller that they will get paid and underpin more than 15% of global trade transactions. By reducing the friction and cost to use letters of credit, more small sellers around the world can engage buyers they may not know and still be guaranteed payment.
Money movement
Physical goods aren't the only things that travel around the world. As goods are shipped from the seller to the buyer, money moves from the buyer to the seller. Money also moves globally in a variety of other contexts including remittances, a $500B a year transfer of wealth as families abroad send monies to their families back home.
If you've ever sent a wire domestically, you're already familiar with some of the challenges of money movement - it's not instant, it's expensive, and you don't know when the money will arrive. I'm sorry if you're ever had to send money cross-border because the same problems are even worse. If you're feeling particularly sadistic, try sending money cross-border and cross-currency to experience the full monty of slow, expensive, and no visibility as to when or even if the money will arrive.
Just like with shipping physical goods, there's rarely a single company that can move your money from your account to the receiver's account. Instead, the money goes through multiple intermediaries each of whom updates their own records, collects a fee, and then sends the money along.
You can think of this as a bunch of sticky notes getting moved around. Imagine you have an account at Bank A. When you ask Bank A to send money, they take a sticky note off the you-at-Bank-A account and move it to the Bank-B-at-Bank-A account. Bank A then contacts Bank B through Swift and lets them know about the sticky note. Bank B then takes a sticky note off the Bank-A-at-Bank-B account and moves it to the Bank-C-at-Bank-B account. This process of moving sticky notes, taking a fee, and then contacting the next intermediary continues through as many steps as necessary to reach the ultimate receiver. Not particularly elegant.
A blockchain can act as a single ledger that records all of the accounts and dramatically reduces the number of hops needed to get to the destination. JP Morgan's Onyx blockchain is already facilitating business-to-business money movement for over 400 financial institutions in 25 countries. The same network not only facilitates moving money but also messages about the payments such as demonstrating that the senders are not terrorists.
Spunta is another payments-messaging blockchain network, in this case used by 91% of Italy's banks to reconcile the over 8.4 million annual interbank transactions in Italy. For us individuals, Ripple enables blockchain-based cross-border money movement among over 300 financial institutions.
These consumer networks like Ripple are extraordinarily powerful because they support programmable payments. Let's say you live in Mexico and want to send money home to your family in Thailand. You probably won't be able to find a money changer who will sell you Thai baht for your Mexican pesos. With Ripple, you can string together two transactions - pesos —> dollars then dollars —> baht - and the blockchain guarantees that both transactions will go through at the negotiated prices or the entire transaction will cancel without any fee. These instant and programmable money movements among individuals and financial institutions are only possible with a blockchain.
Identity: who owns your identity?
Identity today is a mess. You might not think about it as "identity," but you certainly live these problems almost every day.
If you're here in the US, think about your medical records. There's probably not just one medical record but rather multiple separate records each stored at a different doctor's office. Not only are each of those records incomplete, but you also don't own any of them - the doctor's office owns your identity!
The same thing applies if we talk about credit scores, university degrees, or employment verification. If a bank wants to verify your employment before making you a loan they don't ask you for proof of employment, they ask for proof from your employer - your employer owns that part of your identity!
An alternative model is that you own your identity and can choose to do with it what you want. Rather than creating a copy of identity and handing it over each time you need to share it, you can authorize access for a specific purpose and then rescind the authorization when access is no longer needed.
As part of your identity, you can also own your credentials including credit score and university degree. The credentials can be verified as real and provably traced back to the issuer, but you own them to do with what you may.
This model for owning your own identity is known as self-sovereign identity. The first self-sovereign identity networks are already live among credentialing organizations that have shared interests in giving back identity control to their customers so that the customers may engage all of the organizations in the network.
Customers of the six major Canadian banks can use Verified.Me to verify their identity when applying for a Costco membership or employment insurance benefits with the Canadian Government, as well as accessing many other services provided by the rapidly growing network. Travelers with Air France, Hong Kong Airlines, and the 43 other members of IATA can use IATA Travel Pass to share their vaccination and testing certificates with the appropriate authorities while traveling.
While still early days, these initial forays into self-sovereign identity are putting individuals back in control of their own identities.
Next week: the land of crypto
We're going to have fun next week with crypto. We’ll explore a huge range of industries from payments to video games and decentralized finance. We'll even discuss how the cryptokitties craze in late 2017 laid much of the groundwork for many of the uses we're seeing today.
Cocktail Talk
Still don't control your own identity? Be careful next time you're in France - you might have trouble proving to the French government that you're not dead.
The always-in-the-news Elon Musk and XPRIZE announced a $100M prize purse for anyone who can build a solution in the next 4 years that removes 1,000 tonnes of CO2 from the atmosphere per year.
The White House issued a massive executive order, clocking in at 72 separate initiatives on "promoting competition." I’d highly recommend reading or at least perusing the order as it covers everything from non-compete agreements (no more of those) to net neutrality (bringing it back) and drug prices for generics (import cheaper ones from Canada).
Remember Juul, those e-cigarette vapes that were going to ruin everything in 2019? They recently furthered an unblemished track record of disreputable choices by purchasing an entire medical journal issue and filling it with articles written by their employees to convince regulators that Juul is good for public health.
Your Weekly Cocktail
Another hot week here in the city. A tall glass of lemonade always cools things down.
Fernet Lemonade
2.0 oz Bourbon
0.75 oz Lemon Juice
0.5 oz Fernet Branca
0.5 oz Heavy Simple Syrup
2.0 oz Seltzer
Pour everything, except the seltzer, into a collins glass. Fill partway with ice and stir. Pour in the seltzer and fill to the brim with ice. Highly recommend sippin' through a straw if you've got one.
This drink was inspired by Sother Teague's far more sophisticated Bentwood currently on the menu at Amor Y Amargo. The Bentwood prominently features Vittone Menta, a Fernet. Fernet, for those unacquainted, is about as intense a drink as you'll find anywhere. It's an amaro that's at once wildly bitter, sweet, and herbaceous. The most prominent flavor and the nose are distinctly minty, but that description does not begin to do it justice. It is very much an acquired taste that one bartender described as "Why would anyone do this to themselves on purpose?"
As part of a lemonade, Fernet is a far more tame beast. In small parts and made long (bubbles), Fernet brings a minty spiciness to a classic bourbon lemonade that makes this a perfect way to beat the heat.
Cheers,
Jared