Open Source and Standards Must Mesh for Blockchains to Succeed

128px-Blockchain_workflow.pngThere’s a belief in some open source circles that standards can be consigned to the ash heap of history now that OSS development has become so central to information technology. While it’s true that today many use cases can be addressed with OSS where open standards would have been used in the past, that approach can’t solve all problems. Most obviously, while resolving interoperation issues through real-time collaboration among up and downstream projects may meet the need within the same stack, it doesn’t help that stack communicate with other software.

Blockchain technology is an architecture where collaboration on software alone will often not suffice to meet the challenge at hand.

An article at CoinDesk this week provides an excellent example of such a case, describing how collaborative development and agreement on data and other standards will be essential before the securities industry buys into the concept of using blockchains to support trading. As noted in the article:

Blockchains and smart contracts were supposed to fix the inefficiencies and slash the costs of derivatives trading, but two years since such promises came in vogue, a foundational issue has yet to be ironed out…

Simply put, without a common language, there’s not much to be gained from having a common ledger.

Happily, there’s already an industry association, called the International Swaps and Derivatives Association (ISDA), capable of supporting the necessary standards development process, as well as a standards profile called the common domain model (CDM) which is capable of doing the job. Several blockchain startups (e.g., RC and Axoni) have already bought in, and UK financial giant Barclays has become an enthusiastic evangelist for widespread industry adoption. According to the article, the first blockchain-compatible version of CDM will be released in a few months.

While it’s true that messaging standards already exist to permit banks, exchanges and other financial parties to trade data, the internal workings of the same entities use proprietary programs that may talk to each other but aren’t capable of interoperating generally with the outside world. Similarly, in a multi-blockchain world, unless each blockchain and its related ecosystem uses the same data standards it will be difficult and cumbersome to exchange information among them, negating a lot of the value that a blockchain should create. The problem is amplified when smart contracts are added into the equation, and smart contracts present great potential for adding value in the case of securities like derivatives.

So, as a Barclays’ representative puts it:

What we ultimately need in the derivatives space is multiple market infrastructures, including multiple clearing houses, adopting a common standard for data formats, reference data, transactional data, and business processes.

Which, of course, sets up the usual chicken and egg dilemma of any collaborative activity that can provide dramatic network effects – enough players must decide to play before the network benefits click in. In the case of a derivatives trading blockchain, that means that without standards, there may not be enough of a reward ahead to provide the incentives to swap out your existing trading platforms and replace them with new ones.

Or, to torturously extend the original metaphor, if all you have is chickens (a blockchain) and no eggs (data standards), you’re not going to have anywhere near the number of chickens you could have if they could reproduce. Indeed, it may be that none of your blockchain chickens will succeed at all, because no one knows which, if any, will thrive. And if multiple, specialized blockchains are formed to serve horizontal niches (e.g., one for derivatives, one for commodities, one for REITs, and so on), there will be fewer incentives to participate in any of them, due to the inherent inefficiencies.

Here’s an example of why that’s so, taken from the same article (the quote is from Dr. Lee Blaine, the CTO of Barclays):

…[Imagine] a future scenario in which banks are trading with each other on different distributed ledgers. If there are some counterparties on one network and other counterparties on other networks, then does that mean you would need to host a node on every network? Or are they going to be genuinely interoperable?

“A simplistic solution would be to revert to the traditional model of silos with messaging between them, but that risks replicating the fragmentation of the past,” said Braine.

“If you instead transition to the CDM, then at least there is opportunity to standardize on data structures, lifecycle events etc.”

Blaine estimates that over $2.5 billion in annual costs could be saved in the derivates market alone if the CDM standard becomes widely adopted.

So, it sounds like there can be happy ending here. Note, however, that’s only because, in addition to several open source financial blockchain projects, there also happens to be a standards organization and a standard available.

What if that wasn’t the case?

Well, today that very often isn’t the case. And most open source projects aren’t interested in addressing the problem by developing needed standards themselves, although they could. That’s going to hold a lot of blockchains back.

So why is that the case? Mostly, it’s because of the general lack of interest in standards at open source projects, in part because of the belief, mentioned earlier, that standards aren’t really needed. There’s also distrust among many in the open source community of the intellectual property rights (IPR) rules under which standards organizations operate. Many open source developers would be pleasantly surprised to learn that scores of standards setting organizations (SSOs) have developed standards on open-source friendly terms for years, and more are in the process of doing so.

But better yet, we should get past the traditional approach of developing open source over here and open standards over there, and start doing both under the same virtual roof – which, in fact, many SSOs are starting to do. Open source foundations may find themselves at a disadvantage in the future if they don’t adopt a similarly – dare I say it – open attitude towards treating IT challenges holistically, and start employing all the tools available to them to solve problems in the most effective and efficient way possible. The alternative in many cases – as with the blockchain example given above – will to be to end up with all chickens and no eggs. And not many chickens at that.

Updated: As it happens, a new consortium has just been announced in the auto industry that reinforces the same points I made above. The new Mobility Open Blockchain Initiative (MOBI) includes BMW, Ford, GM and Renault among its 30 founding members, as well as a wide range of non-auto companies like Bosch, ZF,  Accenture, IBM, Hyperledger and Consensys. According to CoinDesk, the new group won’t create a blockchain. Instead, it will:

 “…create common standards and APIs to enable payments and data-sharing between cars – all in service of driving forward a new digital mobility ecosystem, from ride-sharing to self-driving vehicles and everything in between.”

The focus once again will be facilitating the exchange of data, in this case for an almost bewilderingly broad range of use cases, including location in space and time, congestion fees, autonomous machine payments, carbon pricing, car and ride sharing, usage-based insurance, usage based taxes and pollution taxes, as well as to monetize that data in multiple ways. Again, echoing the points made above, the article notes:

“Dan Harple, the CEO of Context Labs, who is working closely with Ballinger, said the new consortium’s first step will be to establish a “minimum viable ecosystem” for gaining network effect.”

And this, from Chris Ballinger, the new Chairman and CEO of MOBI:

“[I] if each auto company is trying to develop its own car wallets or its own way of paying tolls, or providing a ride sharing service, it just doesn’t work; it’s the Tower of Babel.”

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And while we’re speaking of blockchains, if you enjoy a good thriller, you can follow along as I post a new chapter every week of the fifth book in my Frank Adversego techno-thriller series. It’s called The Blockchain Affair, and you can do just that by clicking here.