Blockchains and interoperability — the case for crypto as social innovation

Photo by Louis Hansel on Unsplash

If you’re reading this article, you probably need no explanation into what crypto or blockchain technology is (if so, feel free to skip to the next part). But to recap, a blockchain is an append-only transaction log that guarantees the immutability of transactions in previous blocks. This guarantee is protected by the blockchain network’s protocol, where new blocks are independently validated by participating nodes. This model prevents nodes from overwriting transactions on old blocks or spending other users’ money, as any blocks including such transactions would be detected as invalid by other nodes.

The protocol alone doesn’t solve the “double-spend problem”, where a malicious user broadcasts a money transfer to Alice for one part of the network and a transfer to Bob to the other, with the aim of spending the same money twice. The use of Proof of Work and miner rewards solves the problem by 1) making it expensive to add new blocks to the chain, and 2) giving miners a financial incentive to follow the rules. This allows all participants in the blockchain network to agree on the current state of the ledger without the use of a trusted mediator, allowing the creation of decentralised cryptocurrencies like Bitcoin.

Applications based on smart contracts expand the above model by allowing the contracts to maintain their own internal state and do arbitrary calculations. Users can interact with them by submitting a transaction that calls a method in the smart contract, like a database stored procedure where data is read from, and written to, the blockchain itself. The transactions can modify the internal state of the smart contract (e.g. who owns a given CryptoPunk) or transfer cryptocurrency between accounts (e.g. on a successful bid on an NFT market, the contract transfers the cryptocurrency transferred from the bidder to the account of the seller). Blockchain developers can use smart contracts to build higher levels of abstraction such as decentralised autonomous organisations (DAOs), “crypto-companies” governed and financed through rules “carved into stone” in the form of smart contracts, and non-fungible tokens (NFTs), unique, independently traceable assets on the blockchain often used to represent ownership of digital assets.

This is all interesting from a computer science standpoint, as Byzantine fault tolerance (i.e. ability of a distributed system to function correctly when participants can fail or act maliciously at any time) is a difficult problem to solve. But many software engineers have doubted whether this property is as groundbreaking as crypto-enthusiasts claim: blockchains may be academically interesting, but how often do we really need them in the real world? After all, the entire social and legal system is built upon trust over certain institutions, from banks and stock exchanges to the police and courts: it’s hard to imagine what a fully trustless society would even look like.

In my opinion, crypto and blockchains are not a true technological innovation, because anything possible with a blockchain is also possible with a conventional centralised database in the context of today’s society. It becomes clear when you separate financial incentives from the pure technology. Could the functionality of the Bitcoin network or the Ethereum Virtual Machine (EVM) be performed by a traditional web server? Yes, and it would be far cheaper and more efficient to do so. With this in mind, it would be easy to dismiss blockchains as a fad — many experienced software engineers in forums such as Hacker News are doing just that. And who could blame them?

Yet, here we are in the internet of 2022. State of consumer technology is not looking great: the modus operandi is for startups to offer a new product of service cheaply with the aim of locking their customers in their “walled garden” ecosystem. Those music playlists, recorded workouts, and social media followers you have? You don’t really own any of that: because platforms are not interoperable, changing apps means losing your data and starting over from scratch. It’s no surprise nearly every tech company is pushing a subscription package with some form of data products, from personalised recommendations to insights from past usage — the content and product features are a commodity, it’s your data that keeps you from moving to a cheaper alternative. Amidst all this, blockchain enthusiasts promise a “Web3” world of interoperable applications that merely act as clients to the blockchain. In theory, walled gardens could be impossible in Web3, as changing services would be as simple as changing IDEs (a kind of text editor programmers use that saves files in common format). It’s a promise of a better world, but one decorated with layers upon layers of bullsh*t from charlatans looking to sell you tokens that will moon any time and buy you lambo if you just hodl with diamond hands, as well as venture capitalists promoting their investments on Twitter as the next version of the World Wide Web. With all the FOMO and hype around us, who can we trust?

I believe dismissing blockchains as a solution without a problem is a dangerous thing to do. I believe their utility is not as a technological but a social innovation that can reorient the internet as an open, truly global network built upon interoperable platforms instead of walled gardens. This means blockchains are inherently political; a technology used not because of efficiency but because the social system created by it is seen as favourable over status quo. When designed with care, blockchain-based system can be a governance structure native to the internet, a development that could have consequences well beyond the realms of finance and technology.

Before we discuss blockchains any further, lets explore the current state of consumer technology, and why many people believe change is needed.

The Open Internet

Over the past decade, technology has created the largest single market in human history: the Open Internet. Most people in developed countries, and an increasing number in developing ones, are connected to it: you are reading this very blog post through the Open Internet right now. Software is not limited by borders of the physical world: if a service is provided through the internet, it can be accessed from anywhere. This is unimaginably different from the past, where companies had to expand market by market, leaving a geographic footprint everywhere they go.

Coupled with access to customers, software businesses are also cheaper than ever to start — they require no factories or storefronts, just a server in the cloud. Thanks to open-source libraries, software is also faster to write than ever: talented programmers with a good idea can launch a a basic web app in a weekend. With startups easier to launch than ever, one would expect new alternatives to popular services to emerge every month. But that doesn’t seem to be the case anymore. Dominant companies know competition is a click away on the Open Internet. That has led software companies to build a moat around their business model: mechanisms to retain their customers in an increasingly competitive landscape. Building a better product is the best way, but also the hardest. The walled garden is much easier: make it inconvenient and costly for customers to switch service providers. Take the New York Times (and many other subscription services) for instance: you can sign up for a subscription any time through their website, but cancelling is only possible through calling or chatting with a customer service agent. This reduces churn and boosts profits, at the cost of user satisfaction: there’s no technical reason why cancelling could not be as easy as signing up.

The Open Internet has surpassed even the wildest predictions about it. In 2011, the venture capital firm Andreessen Horowitz declared that Software Is Eating the World. And eat the world it did: nearly every service, from food delivery to banking, shopping, to talking with friends is now accessed through the Open Internet. There is no alternative to it: companies had to choose between moving online and being eaten by a startup that did. This decade of creative destruction is now coming to its conclusion: the winners sit at the top of stock market indexes, users firmly locked in their walled gardens. Opposition to Big Tech is growing, and governments are finally starting to wake up. Is their dominance fair?

The Open Internet transcends country lines. Bill Clinton was right twenty years ago in saying that controlling the internet is “trying to nail Jell-o to the wall”, as servers can be offshored at a moment’s notice. In that quote, President Clinton was referring to the liberating power of the Internet over autocratic states. Today, his quote feels more fitting to describe Western governments’ attempts to curb the power of Big Tech. No matter what you try, the corporations always seem to bounce back stronger.

How (not) to regulate

Imagine a mayor of a small town regulating garbage collecting: the allowed collection times and routes, shape and colour of the bins, and how the waste should be sorted. It’s not that this isn’t important: everyone wants less traffic, noise, and pollution. However, you’d be unhappy if the mayor made no effort to actually collect the rubbish, just regulate how it’s allowed to be collected, and live the dirty work for someone else.

It is not enough for governments to regulate: Big Tech will fight every change that hurts their bottom line tooth and nail. Every year we hear about another fine imposed on Google and co: have those cookie banners really made the internet any fairer? Instead of regulating, governments should roll up their sleeves and start building. If you’re worried about personal data collection, don’t just regulate it and assume companies will bend to your will: build a common protocol for user-controlled storage of personal data and simply force companies to use it. The protocol should come with open-source implementations, hosted solutions for startups to plug into their product, and technical documentation with examples. Such protocols are called interoperable, and it is the interoperable “plumbing” of low-level protocols we don’t often think of that enables billions of people around the world to connect to the internet using vastly different devices and local networks.

Heavy regulation benefits incumbents: Big Tech can afford the legal fees of complying, startups can not. Forcing companies to build upon interoperable protocols does the opposite, reducing the cost of changing services while making it easier to build new applications on top of open-source implementations. I believe restoring interoperability is crucial for the future of the internet, as well as for the society as a whole.

An interoperable internet

Democratic societies based on free-market principles are fundamentally interoperable: anyone can set up a business, and build their business on the products of others. A microbrewer needs not grow their own barley or blow their own glass bottles, they can buy these services from other companies and focus on what they do best, which is brewing amazing beer!

This hasn’t always been the case: in medieval times, buying and selling goods was often restricted to chartered cities where a guild or a trade association had a monopoly on providing a particular product or services. The City of London’s age-old livery companies are an example of this model that has survived to our day. Company towns, owned and operated by a single dominant employer such as a mine or a factory had similar issues. There, workers had no option but to buy goods from the company store, both because it might be the only store in town, and because the employees might be (partly) paid with credit that’s only valid in company-owned stores. Since all real estate was owned by a single company, you couldn’t just set up a competing business either. Such forms of rent-seeking are deemed illiberal and harmful to the economy by most people, although professional associations and charters do serve a purpose for professions where the cost of mistakes is high, such as doctors and accountants.

An interoperable internet would increase competition between service providers, thus leading to better products and lower prices to customers. It would also increase the speed of innovation by allowing startups to build upon existing technology rather than having to rebuild everything from scratch: the iPhone was a hit because of its rich ecosystem of apps, whose developers could utilise the device’s display and input with a simple API. By making app development (relatively) easy, Apple allowed people to customise their iPhones to their liking, making the technology fairer in the process. While the App Store started as a net positive to both developers and consumers, it has since taken on the role of rent-seeker by forbidding competition on app installs, forcing developers to pay the 30% Apple Taxon all revenue. Such “taxes” also exist for advertising, cloud hosting, and payments. Economic rents like these are a drag on innovation and productivity, as every dollar spent by startups on such rents is a dollar not spent in product development.

Who gets to govern the internet?

Interoperability leads us back to the elephant in the room: if blockchain is not a superior technology, why should anyone care about it at all? Why build applications on the blockchain, instead of a centralised server? I believe blockchains could be the solution to curbing the power of big technology companies and building an interoperable internet. As the impact of the web grows ever larger in our daily lives, the question “Who governs and sets the rules?” becomes ever more important. I see three options, and three paths forward.

Option 1 is the nation-state. To avoid nailing Jell-O into walls, nation-states must take full sovereignty of their cyber-space as regulators and builders. Governments do this all the time with infrastructure projects in the physical world, yet a Western government building a successful digital platform seems so unlikely it might as well defy the laws of physics! Regulating is easy, building is hard! Out of major powers, China seems to be the only one actually capable of governing the internet, perhaps out of necessity. Whether you like them or not, systems like the Great Firewall and Digital Yuan require deep technical expertise to build and operate.

It’s a shame if nation-state controlled internet only happens in authoritarian states: the government is meant to represent each and every one of us, and a democratic, interoperable internet could form an important check against the power of large corporations. For the EU’s credit, they are building an interoperable authentication system (eIDAS) for government services, modelled after existing systems in Finland, Estonia, and Singapore. It’s a good start. But until projects like these become commonplace, all we can expect is more regulation and legal battles against Big Tech which do nothing to undermine the stickiness of their ecosystems. Finally, it’s not clear to me whether strong government control can coexist with an international Open Internet. I hope so. In the worst case, it could restore the arbitrary borders of the physical world on the internet, protecting slow and uninventive national champions from competition, restricting people’s access to information, and fracturing the online communities that exist today.

The second option is the status quo, Big Tech and payment providers deciding what’s allowed and what is not. While the system sounds like textbook dystopia, it has worked surprisingly well so far. Illegal content is mostly confined to the dark corners of the internet, dissent and criticism of the powerful is generally allowed, and competition on goods and services still exists. But the rule-makers are unaccountable: if Facebook bans someone, by mistake or on purpose, there is no due process or right to appeal. While Big Tech seems to care more about making profit than censorship, I don’t think anyone should feel comfortable on a handful of unaccountable executives in California deciding which ideas are allowed on the (global) Open Internet. Even if the bosses agree with you today, they might not do so tomorrow. The extraction of economic rents from their ecosystems is another issue: they make the internet as a whole less productive, acting as a de-facto tax on anyone wanting to build a business on the internet!

All of this brings us back to why people are excited about crypto. Crypto promises an internet owned by the people. With crypto, the Open Internet is ruled by governance structures untied to physical places, rent-seekers, or special interests entrenced in status quo. The blockchain protocols make crypto interoperable by design, promising an internet of open protocols over walled garderns. In a sense, internet build upon crypto protocols, often called Web3, would resemble the original internet, Web1, as an internet of protocols anyone can build upon. Blockchain-powered internet itself would not need government regulation, as blockchains can have their own governance structures in the form of DAOs. This is not to say governments would have no role to play in Web3, as the link between blockchains and the real would (such as transferring cryptocurrencies to Fiat currency) would need regulation. If you view crypto from this angle, it starts to make sense why so many engineers are excited about it. Crypto builds: every week there are new projects to explore.

Crypto and equitability

We have one more point to address: even if decentralised internet-governments are desirable, do we really need Ponzi-esque currencies and financial speculation to build them? After all, open source and peer-to-peer software existed long before Bitcoin, and lives on in Matrix, an open source social media protocol and other federated protocols in the “fediverse”. I believe the use of valuable crypto-tokens brings an economic incentive into the system: users can transfer value between each other directly on the blockchain, and in the case of non-fungible tokens (NFTs) a monetary value can be given to an arbitrary asset. Without the cryptocurrencies themselves, open-source internet relies on goodwill of its maintainers, or making profit through other means (consulting, cloud hosting, CV padding), rather than shared incentives to improve the ecosystem for the common good. Most walled gardens of today were started by founders wanting to build something people want to use — the problem is not with greedy businessmen but the incentive structure of the web. Protocols such as email and HTTP were created decades ago, when the technologists using them could fit in the same room. Today, they would be locked into a walled garden by the fastest-moving founders.

While I see tremendous value in the economic incentives created by a well-designed cryptocurrency, we also have to mention the dirty side of the system: crypto of today has few real applications besides enabling financial speculation. Almost every crypto-asset in circulation has been designed with one goal in mind: to enrich the insiders and early adopters by capping supply and minting most of it for insiders in the first few years of the project. The practice is so widespread we can scarcely imagine crypto could be any different! But that’s not how a fair economy will be built — if we want a cryptocurrency to be around a hundred years from now, we must consider the interests of future adopters, most of whom haven’t even been born yet! This problem is quite fundamental to today’s society (climate change, land ownership) but I believe a blockchain protocol, along with associated cryptocurrencies, can and should be designed in a way that benefits everyone, from early to late adopters. I believe this is a much bigger problem than most people in crypto realise, and only by making the allocation of cryptoassets more equitable can blockchains become mainstream.

I’m planning to write about the governance mechanisms in crypto in detail in the future, from what exists today to what I think could be possible in the future. If you’re interested, feel free to follow my blog here on Medium.

The author is a software engineer working in a crypto startup. All opinions expressed in this blog post are solely my own, and do not express the views or opinions of my employer.

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Ville Kuosmanen

Ville Kuosmanen

I care about making digital products to improve the lives of real people.