Blockchain Middle layer services will be as valuable and free as air.

Layer 2.001

Try living for more than a few minutes without air – it is clearly super valuable. Try charging people for the air they breath – it has to be free. Blockchain Middle layer services will be like that – super valuable and totally free. If you operate at this layer you have to convince developers that there is no risk of lock-in (which enables you to charge a lot); most developers can smell a lock-in threat from a distance.  However, investors love lock-in. If your proposition to your investors has any hint of lock-in, you have a fundamental disconnect between your customers and your investors. The strange sounding discipline of tokenomics, where a Utility Token can be more valuable than Equity or Security Tokens, may be the key at this layer of the stack.

This is Part 1/Chapter 4 of The Blockchain Economy. This serialised book is a practical guidebook for investors, entrepreneurs and employees who want to learn how to prosper during the transition to an economy where value exchange is permissionless and disintermediated. For the index please go here.

The 3 layers of Blockchain Economy Infrastructure, seen from top to bottom are:

  • Layer 3: Blockchain Finance Market Infrastructure. This was covered in Chapter 2. This level is familiar to those coming from Legacy Finance. Above this level are the end user services (read Part 2 of this book for how Blockchain is changing existing markets).
  • Layer 2: Middle Layer Services. This was covered in this Chapter 3. These services are used by Layer 3 and use Layer 1.
  • Layer 1: Protocol.  This is covered in Chapter 4. This is the base layer. We have made this chapter accessible to non-technical people (no code samples!)

The boundaries between Layers 1 & 2 are fairly fluid. In both cases, it is about developers building for developers. However there is some debate about what functions should go into the two layers and some of the work that is happening at Layer 2 will impact how we use Layer 1 and vice versa.

If you operate at Layer 3 you need to understand how Layers 1 & 2 work.

This Chapter covers:

  • Developer Services making DApps as easy to develop as Apps.
  • Blockchain Data Feeds aka Oracles
  • New payment rails operating Offchain.
  • Identity & Privacy services
  • Cross Chain integration in a world of niche Blockchain platforms.
  • Funding the free middle layer through tokenomics.

Developer Services making DApps as easy to develop as Apps.

DApp is a decentralized application. DApp frontend code makes calls to a backend code running on a decentralized peer-to-peer network. In contrast, a traditional App calls backend code running on centralized servers.

Whether the backend code is running on centralized servers or a decentralized peer-to-peer network must be totally invisible to the end user. The end user may get some benefit from the fact that it runs on a decentralized peer-to-peer network, but the end user normally does not care how that benefit is delivered.

The same is true for the DApp developer. Loading a DApp onto a decentralized peer-to-peer network should be as easy as loading a traditional App onto AWS or any other type of cloud based centralised server. That is easy to say, but harder to achieve in reality. This is where Blockchain Developer Services do their magic. One could write a book just on this subject but as this is only one section in one chapter in a book that is designed for a non-technical reader, here are the key issues and takeaways:

  • These Developer Services are usually accessed by developers at the layer above through an API (Application Programming Interface). In general terms think of abstraction layers, with each layer making it easy to consume the services in the layer below without thinking about the details of how that service is built and delivered.
  • These Developer Services are designed to make it easy for the developer to use a Virtual Machine (VM). VM is like a server farm for a decentralized peer-to-peer network. The most famous VM is the Ethereum Virtual Machine (EVM).
  • There are two ways to use these Developer Services – onchain and offchain. For on-chain applications, they compile code so that it can be understood by the virtual machines managed by the Blockchain platform. For off-chain applications, the developer uses an API or some other abstraction layer interface. For example Ethereum uses the JSON RPC protocol and Web3.js. Bitcoin services at this level include OMNI Layer and Counterparty (both of whichwhich are Turing-incomplete and can serve multiple platforms).
  • Programming Languages are at two levels – UI and business logic. One is the User Interface (UI) level, where the default option is Javascript. The other is the business logic layer,  called Smart Contracts in a Blockchain context.
  • Programming Languages move from specialised to whatever you want. For example, on the Ethereum Virtual Machine, you used to write in Serpent,  now you use Solidity and in future you may be using Viper (a Serpent offspring). There are some bleeding edge languages such as Bamboo and Babbage. Developers prefer choice including mainstream languages such as C/C++, Java, Swift, Python, Ruby, Rust and many, many others. There is a lot of innovation happening in this space and which languages are supported on which VM is changing very fast, but the direction of travel from specialised to whatever you want is very clear. Specialised languages for smart contract development will coexist with more mainstream languages. What matters is choice.

Blockchain Data Feeds aka Oracles

Financial traders have long relied on market data feeds. In the Blockchain Economy, these data feeds are called “oracles” and they serve a critical role and cover a lot more than simply market prices. An oracle is a software agent that finds and verifies data about real-world occurrences and submits this information to a blockchain to be used by smart contracts.

A smart contracts typically follows a business logic along the lines of “if this is true, then do this”. It is therefore critical that the “this” really is true.

A Blockchain Data Feed Oracle could include data such as weather temperature, successful payment, product price fluctuations and much much more. To think about how hard this is, consider the difficult of fact checking in the era of fake news. Solving this problem requires three different types of Oracles:

  • Software Oracles work when there is reliable data online, such as temperature, commodity prices, flight or train delays, market price data. 
  • Hardware Oracles use Internet Of Things (IOT) sensors to get data from the physical world. For example, a sensor in a car crossing a barrier or a smart lock opening a house. This obviously raises privacy issues.
  • Consensus Based Oracles. This came from Blockchain prediction markets such as Augur and Gnosis that rely heavily on oracles to confirm future outcomes. To avoid market manipulation prediction markets implement a rating system for oracles. For further security, a combination of different oracles may be used, where for example 3 out of 5 oracles could determine the outcome of an event.

Some of the companies and projects in this space include Oracalize, Town Crier, Shelling Coin, Factom.

New payment rails operating Offchain.

Examples include Lightning Network operating today on top of Bitcoin and Litecoin and Raiden operating on top of Ethereum.

For more about Offchain networks, please read this Chapter.

For more about how Blockchain is disrupting Payments, please read this Chapter.

The reason we put this into the Middle Layer, is that these off chain payment channels enable totally new forms of payment that are hard to do using current payment rails such as:

  • Micropayments. Current rails make payment for something less than about $10 uneconomic. Mobile wallets work for small value payments but only within one currency. The idea of  Micropayments has been around a long time. The need is clear. Off chain payment channels could finally make this happen.

 

  • Streaming real time payments. The idea that salary, for example, should be paid monthly or biweekly is based on legacy batch processes in core banking systems. In the Gig Economy you could get paid instantly (which is bad news for businesses using float, good news for everybody else).

Cross Chain integration in a world of niche Blockchain platforms.

In a world dominated by network effects, there is still room for niche players. Blockchain Platforms optimised for markets such as Enterprise or Internet Of Things (IOT) or the Dark Web could coexist with big platforms such as Bitcoin in the same way that Twitter, LinkedIn and WordPress coexist with Facebook.

If we have multiple niche Blockchain platforms, we will need middle layer cross-chain integration services such as:

  • Blockchain browser. So you can browse across platforms as easily as we browse across websites today. One example is Blockstack.
  • Atomic Swaps. So you can easily exchange one coin for another.
  • New Virtual Machines. One example is WebAssembly (WASM) which has credibility because it comes from W3C and is licensed using Apache. WASM was not built for Blockchain but is a decentralised virtual machine management system. Some other contenders in this category include RChain, TrueBit and EILE
  • Inter Ledger Communications. This is like the Internode Communications with in a single Platform but working across platforms. The leading example today is the Inter Ledger Protocol (ILP) from Stellar.

Identity & Privacy services

Identity & Privacy are two sides of the same coin. An individual should be able to choose:

  • in some situations you may want to be yourself, to prove who you are. You may a) trust the institution b) really need what that  institution is offering. One example is when you want to renew your passport or open a new bank account.
  • in other situations you may want to remain totally private and anonymous. Usually this is when you do not trust the institution. It may also be if you are doing something illegal. Or you simply enjoy putting on a mask and a different persona.

One myth is that as individuals we are either one or the other. It all about the circumstance and we should be able to choose.

Blockchain Identity & Privacy services is driven by three concepts

  • 1. Your Digital Identity is an asset that you control through a private key. You control Identity on Blockchain just like you control cryptocurrencies on Blockchain.
  • 2. Nobody can change that data. Not you, not your government, not some corporation. Data can be appended, but never deleted or changed. Think of this like a private key that allows you to view your crypto stash but not to magically make the stash bigger. Your biggest asset is safely under your control, but you cannot simply write your own history of yourself.
  • 3. Granular control. You can reveal one part to one company and only that one part. The only person who sees the whole picture is you. For example, only you can see your health records, friends, financial records, political opinions and all the intelligence you gather by combining those data sets, but you may reveal your health records to a doctor, your financial records to a bank and so on.

This subject is so critical that there is separate chapter on why Digital Identity Is The Key To The Blockchain Economy.

There are 4 Mirages (hopes & dreams that will NOT happen) related to Blockchain Identity & Privacy services from any of the following:

  • A big tech that grew to dominance in the centralised Internet era. The reason: Blockchain decentralisation works on a fundamentally different business model. Companies like Facebook, Google, Amazon, Microsoft may dream about controlling the toll booth for Blockchain Identity & Privacy, but trust will be a major hurdle.
  • VC equity funded startup. The reason: VC equity works through an exit, which means we would have to trust an unknown future acquirer.
  • Any single government. The reason: in a digitally borderless world this is useless
  • A global government standard. This is theoretically possible, but the politics of getting this through something like the UN makes this practically unlikely.

This is where the Sherlock Holmes quote – “Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth” – brings us to the subject of Tokenomics.

Funding the free middle layer through tokenomics.

There are two types of ICO:

  • conventional business with a revenue model and a plan to get to profitability. This type uses both equity and utility token financing (just like a more mature company uses both equity and debt). For more on utility tokens in this context, see this chapter on Investing in Utility Tokens.
  • non-profit without any revenue model. This is useful for funding a philanthropic venture (see this chapter for more). It is also useful for funding Middle layer services that are as valuable and free as air, which is the subject of this chapter.

Tokenomics means issuing tokens at different prices similar to how Legacy VC rounds work (Series A, B, C, etc) as the product matures. The key point is that those tokens have no claim on how the company is managed or any claim on future profits or exit value.

When you fund entirely through tokenomics, there does not need to be any revenue model, any exit or any plan for profitability. Nobody will get rich from a venture funded in this way but the team building it will get paid and get the satisfaction of creating something for the commons.

Bernard Lunn is the CEO of Daily Fintech and provides advisory services to companies involved with Fintech (reach out to julia at daily fintech dot com to discuss his services).

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For the index to Bernard’s serialised book, The Blockchain Economy, please go here.

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