CHAPTER 5

EMBRACING CONSENSUS THROUGH DECENTRALIZATION

Decentralization is, in many ways, the beating heart of blockchain. When combined with tokens, the metaphorical blood coursing through the commercial ecosystem, decentralization determines whether you and other network participants operate as true peers with equal ability to derive value or whether some actors reap benefits out of proportion to their contribution. If you hope to participate in blockchain-driven digital markets and derive the maximum benefit from blockchain, decentralization is not optional.

Although the blockchain-complete phase of the spectrum won’t begin until about 2023, experiments in decentralization are already under way. If your customers are frustrated about something, we guarantee that some blockchain startup is working on a decentralized solution to relieve their frustration.

For example, Golem is developing a solution for computer users who need a lot of processing power for specific purposes, but whose needs are irregular, and therefore are ill served by cloud service providers like Amazon or Google, which require long-term contracts because of the sunk costs of running a distributed, centralized computing network. Golem’s solution allows participants in a peer-to-peer network to rent out the unused processing power on their servers and computers to users who need large amounts of processing capacity. Think of its model as a decentralized version of Airbnb for excess computing power. And like Airbnb, Golem is building a platform with the potential to broker today’s illiquid supply. Unused computing supply is a huge market: global server use is just 70 percent of total capacity, which translates into $30 billion in idle servers in data centers.¹ Golem’s approach also offers new relationship possibilities. Instead of requiring long-term contracts, Golem can access resources as they are needed and can reward asset owners using tokens.

The company is marketing its first use case, Brass Golem, to computer graphics designers, who need significant power in the short term to render two-dimensional designs so that they appear three-dimensional on screen. Golem has raised more than $17 million since it was formed in 2016.² It joined blockchain peers Sonm, Ethernity Networks, Conduit, and others in offering decentralized computing power, as well as Filecoin and Storj—two blockchain startups focused on decentralized storage—to reimagine cloud computing in a decentralized model.

As blockchain startups like Golem gain traction, and as blockchain-inspired solutions of the evolutionary or native archetype expand their user base, legacy organizations will need to explore decentralized solutions more actively. Yet even with these clear competitive nudges, business leaders we’ve talked to have voiced concerns about decentralization and everything it entails. These challenges span the domains of technological, economic, and social systems and commercial governance.

In this chapter, we tackle a wide range of topics on decentralization. We define the components of decentralization in blockchain, outline the business value of decentralization in an increasingly digital environment, and show how legacy organizations are evolving and embracing decentralization along the spectrum. We also walk you through the major challenges that decentralization poses. We start with the basics of decentralization.

THE EIGHT COMPONENTS OF DECENTRALIZATION

On the surface, the technological aspects of decentralization are straightforward. Instead of a central authority, the design of blockchain gives each participant in the network one equal vote on whether other participants are authentic and transactions are valid, according to the business rules that dictate interactions on the blockchain. Participants, can operate as nodes, which are the machines owned or used by participants to run a blockchain consensus algorithm each time a block of transactions passes through.^a If at least 51 percent of the full network nodes conclude that a transaction is good, it gets cleared and then appended independently by each node to its copy of the ledger.³ Duplications, double-counted assets, and fraudulent transactions that one node might miss or intentionally overlook are unlikely to be missed by the consensus. The one node, one vote, policy is the way that blockchain gets around the challenge of authentication and validation in the absence of a centralized authority.

But decentralization is not just about technology. It is also about how the blockchain defines and executes on the business rules for a solution. It is about who gets to participate as a full node in the network. Decentralization is also about allocating participants’ rewards according to their contribution. Overall we see eight primary ways that decentralization operates in blockchain across the categories of governance, economics, and technology.

Though each of the eight components can be more or less decentralized, there are clear dependencies between them. For example, a blockchain that has a single owner or group of owners (e.g., centralized commercial governance) is likely to reinforce this centrality with a centrally coordinated technology architecture. Such a design means that the blockchain doesn’t rely on decentralized consensus and is thus a blockchain-inspired archetype. Open participation, in contrast, probably relies on a consensus-driven technology architecture to establish trust, since the participants don’t know each other.

A CLOSER LOOK AT GOVERNANCE

Despite the current technological limitations of blockchain, these shortcomings aren’t, in our experience, the reason why companies hesitate to move toward decentralization. Organizational resistance is.

Leaders like you have told us that they’re grappling with how blockchain asks them to hand decision-making control to an algorithm. You and other leaders no doubt have concerns about participating in a network in which you don’t know and can’t know who is on the other side of your transaction. You are exploring what it means to extract value from a resource (the blockchain) that you don’t own or control. The complexity of those governance issues deserves greater attention.

DECENTRALIZED DECISION MAKING

In a blockchain, algorithms execute the business rules and decisions contained in their code. To arrive at that point, leaders have to agree to relinquish control over a respective decision and define the decision with enough detail so that it can be converted into code.

This relinquishing of control may sound like a big jump. However, the journey has already started with some business leaders. Experience gained through the use of AI and the outsourcing of core systems and processes provide stepping-stones into decentralized environments.⁴

Smart contracts hold the code needed to execute decisions in blockchains. Those contracts vary in complexity. Simple smart contracts handle individual decisions or processes; complex smart contracts hold a complete set of rules defining the decisions of an entire operational function, say, all the financial tasks (from purchasing to billing) involved in supply-chain management. These complex contracts are known in the blockchain world as DAOs, or decentralized autonomous organizations. Think of them as avatars for the line of business. In some situations, DAOs will contain all the business rules needed to operate a business, and the interactions, transactions, and value created by the DAO won’t have a physical-world equivalent. As an independent business, a DAO will make all the decisions and execute all the processes wired into its programming. Incorporating advanced AI agents will allow these business decisions to be made autonomously by the intelligent systems running over the ledger.

If the idea of handing over decision-making control in this way seems radical, remember that none of this will happen as a first step. Instead, you will begin by decentralizing well-understood decisions such as hiring or staff annual reviews to a blockchain solution before progressing to decentralizing processes like project management or financing and, then, whole corporate functions. The transition to DAOs will likewise evolve first with a focus on processes or parts of a market that are already highly standardized, codified, or automated and that can fit within existing contexts.

DECENTRALIZED PARTICIPATION

As an element of blockchain governance, participation refers to who or what is allowed to act as a node in the network, given the requisite infrastructure. In a fully decentralized blockchain, anyone or anything that wants to can be a full node. A common synonym for decentralized participation is a public, or permissionless, network. A permissionless network stands in contrast to one with centralized participation, which is called private or permissioned or even enterprise blockchain.

The logic behind centralized participation is that it allows all participants to know who they are dealing with and conform to organizational and operating norms. Many of you have told us you are frankly uncomfortable with the idea of transacting or interacting with an unknown counterparty. Yet maintaining a centralized system with all known participants undermines the foundational benefit of blockchain. In that sense, a permissioned blockchain is like a motorboat with built-in paddles: you’re not supposed to need them, so why are they there?

DECENTRALIZED COMMERCIAL GOVERNANCE

Who owns a blockchain? Who oversees its governance? Who takes responsibility if someone is harmed or if other problems arise? In a decentralized blockchain, the answer to the question of ownership is both no one and everyone: no single participant owns the whole, and every participant takes responsibility for its maintenance and operations by operating a full node, running the consensus, and maybe contributing to the open-source protocol and solution development.

On the surface, collective ownership allows for the dispersal of network costs, though decentralization itself carries certain costs. For example, running a consensus algorithm costs the nodes that operate it some computing power and energy (e.g., the bitcoin mining process). Network and system security also carry an associated cost.

Another issue that affects governance is community unity or, as it happens, nonunity. The consensus that enables decentralization at the technical level usually relies on majority rule. If a network introduces a new rule that represents a shift in its vision and goals and some nodes disagree about adopting the rule, then the network can split, or fork. Forks are created when network members disagree on goals and decide to divide into two separate networks (e.g., Bitcoin and Bitcoin Cash). Forks may also happen as a response to an emergency, such as when the Ethereum community chose to fork because of the failure of the DAO project in 2016.⁵ In either context, forking has technical, commercial, and legal implications that trouble business leaders who need guarantees about the sustainability of mission-critical systems.

THE EVER-CHANGING STATE OF DECENTRALIZATION

The eight components of decentralization operate both independently and in combination to construct a consensus-driven environment for creating value and distributing it equitably. Importantly, these eight components are dynamic; their degree of decentralization shifts over time. Let’s examine that dynamism more closely.

Decentralization in the Bitcoin blockchain—the largest distributed blockchain coordinated through a decentralized architecture—offers a useful view of how a network evolves its decentralized architecture over time. Because of the open, peer-to-peer nature of blockchain, nodes enter and exit as they choose and the technology architecture and the network governance change with those entrances and exits. The reward mechanism of Bitcoin, whereby full nodes are compensated with bitcoin for the work they do maintaining the network and running the consensus, contributes to this trend. Nodes are said to mine bitcoin, and the people who run nodes are referred to as miners. As the ledger grows, miners need more power executing at greater speed to run the consensus. With bitcoin, miners with the most scalable and cost-efficient operations can mine faster than others. This difference results in market consolidation. The decline in the value of bitcoin compounds the issue by making the rewards no longer worth the work for less efficient miners. They drop out of the mining pool. All this results in the centralization of mining; today, four mining pools run more than 50 percent of the Bitcoin network.⁶

Protocol development is another dimension of centralization in the Bitcoin blockchain. The purported promise of open-source solutions is that because no individual company owns them, they benefit from the diverse contributions of numerous independent programmers. More people catch more bugs and make more improvements in less time than would happen if a central organization were in change. In practice, people have to eat. Developers are more likely to invest in solving a technology problem if they are compensated to do it.

Open-source models also face continuity challenges. When GitHub was acquired by Microsoft in June 2018, for example, the acquisition raised questions about the sustainability of existing open-source solutions in the GitHub library.⁷ Some developers will strive to preserve openness such as with the forking of MySQL into MariaDB and Open-Office into LibreOffice after Oracle’s acquisition of Sun Microsystems.

Pieter Franken, a senior adviser to Japanese financial services company Monex Group, pointed out, “A lot of contributions to maintaining a blockchain are made on a volunteer basis. How sustainable is this? Who’s going to maintain the source code? Who is accountable for a coding bug? What happens if developers have a different view of the world than the company using the related blockchain? How does this impact your business? At Monex Group, we believe that allocating resources to get connected to developers’ community is essential.”⁸

As a blockchain evolves and its development challenges grow more complex, the skills needed to fix them also become more specialized and thus centralized to a smaller number of developers. The same centralizing tendency applies to Bitcoin. The ongoing development of the platform is being done by fewer people, making it more likely that one developer introduces a vulnerability.⁹

To be clear, there is no evidence that the Bitcoin blockchain has been compromised by the increased centralization of the mining pool or the protocol development. We highlight the example more because it represents a natural experiment in the evolution of decentralized blockchain technology. The lessons offer useful fodder as you attempt to quantify the relative risk and reward of blockchain solutions built with consensus. Keep in mind the comparative small scale of Bitcoin or any of the cryptocurrencies relative to global transaction volumes and business scope. Also recognize the green field in which blockchain began, with no legacy data to transfer, no existing processes to translate, and no established players with vested interests to coordinate and manage.

With this understanding of what decentralization is in blockchain and the multiple ways in which it functions, let’s turn to the issues of control and value creation, using the lens of the most pressing question we get from business leaders: what does decentralization allow your organization to accomplish with blockchain?

THE VALUE OF DECENTRALIZATION

Any discussion about decentralization in blockchain must confront an uncomfortable truth: those of you working in legacy businesses face enormous resistance to decentralization. It is the rare legacy business building a blockchain solution today with all five elements. You often hear elaborate justifications for why decentralization won’t work. Some of the most common we hear are these:

• A centralized system clears transactions faster than can be achieved with a decentralized system.
• A known actor has to be in control for security or regulatory reasons.
• Your partners won’t support it.
• Centralized systems are less energy intensive.
• The volume of data involved in each transaction, or the complexity of the business process, precludes decentralization.
• You need to be centralized (and in control) because your participants lack the technology capability to run a node.
• Participants in a blockchain don’t want to expose their transaction data, or perhaps their identity.

None of these arguments are inaccurate or ill informed at face value. Given today’s technological capabilities, centralized systems do often operate faster. They are also often less energy intensive (depending on the operational architecture) and better able to handle transactions involving huge volumes of descriptive data. Centralization can give regulators single throats to choke, and it does allow powerful actors to manage and control standardized processes and value chains. Finally, centralized systems can be easier for the average information systems team to manage.

The preceding points aren’t arguments for centralized design in blockchain, however. They are simply arguments for using traditional data management when you need or want centralized coordination and oversight with trusted counterparts. More to the point, these arguments are self-imposed constraints. Instead of imagining what could be possible in a business environment defined by decentralization, you are shoehorning blockchain into your organization’s existing centralized structure, with its top-down hierarchy. This fixed mindset is creating a kind of strategic tautology, whereby legacy organizations are focusing on blockchain as a tool for solving high-cost internal or ecosystem challenges and then rationalizing that the solution they designed does not need decentralization, because the problem it solves applies to a closed network of known participants. To break out of this circular thinking, you can shift perspective. Instead of focusing on why you don’t need decentralization, consider what it could do for you.

WHY DECENTRALIZE?

As we described earlier, decentralized systems redefine the terms of engagement away from winner-take-all economics toward a more equitable system in which rewards are distributed according to the participants’ contribution and accountability is transparent. Consider what this equitable distribution looks like for the business currencies introduced in chapter 1: data, access, contracts, and technology. As we’ve noted, data is the primary currency driving the digital economy, so data access and control (as enabled by contracts) are the primary enablers of digital capabilities. Access and control are not the same thing, of course, but they merge in centralized transactional environments. On a digital platform like Amazon or Alibaba or a Trojan horse or opportunistic blockchain-inspired solution, for instance, participants implicitly pay for access by exposing their proprietary data, which the platform owner captures in addition to a percentage of each sale or fee for a service. The fee revenue is a onetime input for the platform, but the value of the data repeats multifold as the platform owner exploits it down-market to inform advertising, product placement, product design, supply-chain partnerships, and so forth. In sum, centralized environments operate according to an informal contract that requires participants give up control over their data in exchange for access to customers or technology, or both.

Decentralized environments like blockchain offer an alternative that allows for a separate negotiation of access and control over data in digital contexts. As we demonstrated in chapter 4, tokenization allows participants—whether they are people, organizations, or things—to capture data in a tradable form and then share it in whole or in part with counterparties to generate new sources of revenue. Combining tokenization with decentralization gives participants control over how they share that information and allows the value from that exchange to accrue to them. There is no third party to negotiate a data exchange without the knowledge of the data owner. In a decentralized environment, complementary technologies such as identity and access management tools and confidentiality systems like zero-knowledge proofs give participants even tighter reins on the information they share, who they share it with and how they share it.^b For example, enterprises can guarantee that confidential data has been delivered to another party without sharing the details of the underlying information. This capability would have wide-ranging implications for every industry sector. In the corporate banking segment of the financial services industry, trade finance is one domain using such methods to improve the process of issuing purchase orders. Through the use of platforms such as eTradeConnect, financial institutions can avoid overfinancing by cross-referencing financing information between banks without sharing customer data.¹⁰

Figure 5-1 reprises the image we introduced in chapter 1 to model the potential combinations depending on the degree of decentralization and the degree of programmability in today’s business environment. Companies that have achieved an average level of digitalization for their industry and operate with centralized governance—hierarchical decision making; centrally managed people, processes, and resources; and a centralized business model—operate in the southwest “structure” quadrant. For them, becoming more digital without becoming more decentralized sends them north into the “maximize” quadrant, as in this quadrant, organizations maximize their control over and use of the business currencies. This northerly movement is what blockchain-inspired solutions of the Trojan horse archetype do for you, as described in chapter 2.

Some legacy businesses have managed to claim territory in the northwest quadrant, but the last two decades have made very clear how tough it is to compete head-to-head with digital platforms. Doing so requires exclusive access to a wide variety of data, analysis capabilities, and the ability to convert what you learn into new product development and business models. Those pursuing that path will become less decentralized over time as a way to exert more control over the data they amass and over what their audience sees and buys.

Blockchain-inspired solutions of the evolutionary and native archetypes invite some decentralization of the business decisions executed on the blockchain, driving a partial move into or just above the “negotiate” quadrant, so named because in this quadrant, actors have more control over the business currencies and create a new environment for negotiating access to and use of these resources. Participation in a collaborative consortium could help organizations drive further along the decentralization continuum, but without decentralization of the technology architecture, there are limits. Organizations interested in new operational methods, new business opportunities, or new sources of value will therefore aim to move northeast to the “liberate” quadrant. These decentralized blockchains with full programmability facilitate the creation of new forms of value and its exchange with anyone at any volume and price point.

As we’ve said, it may seem that organizations can choose to either go north or go northeast, but these two directions are not equivalent in terms of opportunity. IoT, coupled with AI and edge computing, is already pushing commercial activity in opposite directions along the centralization-decentralization continuum.¹¹ On the one hand, the expansion of IoT and edge computing is pushing decentralization by locating computing and decision-making power with widely distributed things. On the other, digital platform providers are reinforcing their hold on power by enhancing their capabilities with AI algorithms that leverage the vast quantities of data they collect from customers, things, their data centers, and other sources.

The competitive gap is ever widening. For the vast majority of companies, the ability to compete at all will depend on their ability to profit from their processes and data using decentralized business models.

THE IMPORTANCE OF STARTING SOONER THAN LATER

Decentralization will offer greater competitive opportunities for the vast majority of companies. That does not mean, however, that an embrace of decentralized governance, technology, and economics will be easy for all organizations.

On the contrary, legacy organizations carry significant metaphorical weight that drags them down and makes it very difficult to change. Rigid organizational processes, out-of-date products and services, old technology, fixed mindsets, and inflexible cultural and hierarchical structures all act as sources of resistance. These sources are why John Childress, an expert on organizational change, focuses on the need for sustained and dedicated effort to change organizational cultures.¹²

Applying this effort to decentralization, figure 5-2 illustrates how an organization must use force to move against the various sources of resistance to achieve business benefits. Organization 1 has more operational and technical sources of friction dragging it down than does Organization 2. For those reasons, Organization 1 takes longer to begin decentralizing its decision making, its other processes, and its business models. The result is a decentralization lag. The longer the lag, the further an organization falls behind those with less internal resistance. Furthermore, the learning cost is strongly correlated with a company’s culture and cannot be easily replicated by another company. This difference can prevent the laggard from catching up, thanks to the technical experimentation of the leading organization in a given industry. Likewise, time imposes higher costs, since with time, processes and technology grow older and mindsets ossify. As a result, an organization must impose even more force over time to achieve progress.

These factors collectively keep Organization 1 from reaching its decentralization inflection point until long after Organization 2 has reached its respective point. The decentralization inflection point is the time when the forces of resistance weaken in your organization and the benefits of decentralization begin to accrue. On the other side of this inflection point is improved competitiveness, efficiency, value creation, and profitability, collectively termed the decentralization benefit. Maintaining the benefits of decentralization requires ongoing and dynamic effort, as with any set of competitive activities. In summary, the transition to decentralization will bring challenges, but the challenges only get worse with time if other organizations and competitors start their decentralization journey sooner.

More experimentation is needed to ascertain exactly the best practices for achieving greater decentralization. Incentives and rewards structures will play an important role in decentralization. Tokens can be used to distribute rewards to the people and things that act in ways consistent with the goals of change.

The collaborative software developer Loomio offers an example of using tokens inside an organization to reward group-oriented behavior. For some background, Loomio grew out of an Occupy movement in New Zealand. Benjamin Knight, an Occupy camp manager in Wellington, was inspired by the collaborative decision making process in the movement and hoped to apply it in a distributed environment.¹³ From that seed, Loomio was born. Early on, the organization—which operates as a cooperative—created Loomio points and gave them out to reward its first members. The cooperative’s founders describe these points: “We have a separate system to acknowledge the work people did for free to get the project off the ground, and the opportunity cost staff wear by accepting pay below market rates while we get the business going. We acknowledge the risk workers took giving their time to an early stage startup with no guarantees by putting a multiplier on points earned during the early days.”¹⁴ Interestingly, Loomio points have no concrete value. Only when the board decides that Loomio is in a strong financial position will the points be exchanged for cash bonuses.

In other circumstances, tokens could be used to encourage information sharing across organizational functions. Siloed information is one of the known disadvantages of hierarchies. The equating of knowledge with power in organizations and the resulting hoarding of information greatly lengthens the decentralization lag. But if information sharing is encouraged and rewarded through token distribution, could siloed information sources become more open? The answer is unknown, but we encourage you to conduct experiments to find out how knowledge can be priced and shared inside your organization. Blockchain enables this kind of transparent measuring of behavior in real time so that leaders can better understand the incentives necessary to move the organization toward a new way of operating.

CENTRALIZED BUSINESSES EMBRACING DECENTRALIZATION

Despite the advantages of decentralization, blockchain-inspired solutions are the dominant model in development by legacy organizations. Similarly, the startup community is launching solutions that are more evolutionary than fully decentralized because of the current state of the market. Apart from this common intransigence, some highly centralized organizations are now experimenting with some degree of decentralization.

BANQUE DE FRANCE: DECENTRALIZED ISSUANCE OF CREDENTIALS

Payments in the European Union used to be handled by each member state in its own way, but in 2008, EU payment processes were consolidated under the rules for the Single Euro Payment Area (SEPA) initiative, which requires that payment beneficiaries (i.e., creditors) have ID credentials. Banque de France is in charge of issuing SEPA creditor IDs in France. The manual process is cumbersome and error-prone and requires the transfer of information from hard-copy documents into a database. The procedure causes delays and overlaps with bank KYC processes.

Wanting to modernize the ID issuance procedure with blockchain, Banque de France saw an opportunity to experiment with a new technology, address a known problem, and engage with its commercial bank stakeholders. The blockchain it developed was inspired in design, and the solution the new technology offered was basic; a secure digital portal could have achieved the same end. But the bank sees broader benefits for collaboration and the eventual decentralization of interbank processes. Officers we spoke to at Banque de France said the project created a new level of engagement between the Banque de France and the commercial banking community it serves. The project also allowed everyone to understand how decentralization affects decision making, accountability, and data privacy and permissions.¹⁵

Banque de France currently owns the software, governs the security infrastructure and the private keys, and co-owns the data. Yet its leaders would like to see the governance model shift over time. One of the Banque de France interviewees told Christophe, “Our role is as software provider and gatekeeper. This is not sustainable governance. It is not a priority for commercial banks, but we need collective governance or this will not work.”

That is a remarkable comment for a central bank officer to make. As he articulated it, the vision is to have an open community model that enables more decentralized development, shared costs, and the ability to build new complementary solutions. He compared it to open-source projects like those hosted on GitHub; in the case of Banque de France and its customers, the application’s code could be open-sourced and accessible by participating banks. Although the original blockchain was built for France, SEPA credential IDs apply to creditors across the eurozone. Likewise, KYC credentialing uses some of the same information, enabling complementary use cases that would exploit the same platform. Together, these factors point to opportunities for European central banks to collaborate on a more progressively decentralized blockchain credentialing model.

UNION OF EUROPEAN FOOTBALL ASSOCIATIONS: SAFE DECENTRALIZATION OF TICKETING

Another example of a highly centralized organization experimenting with controlled decentralization through blockchain is the Union of European Football Associations (UEFA), the European governing body for the Federacíon Internationale de Fútbol Associación (FIFA).¹⁶ UEFA organizes some of the most prestigious pan-European football competitions, including the annual Champions League tournament. Tickets for UEFA events are in high demand, and there is a robust, decentralized secondary market for reselling them—scalping, basically. UEFA estimates that only 37 percent of tickets go to primary buyers; the rest go to resellers and sponsors.

Secondary sales create several problems for UEFA. One is security. The union loses the record of who enters its event facilities when the person who uses the ticket is not the person who bought it. The ongoing problem of sports-related hooliganism and rising concerns about terrorism have made the identification of ticket users a pressing issue.¹⁷ Price gouging is another concern. Tickets sell out quickly to bots (or brokers) that swamp official channels. Those tickets then appear on secondary markets at precipitously higher prices. UEFA takes the brand hit when the average family can’t afford tickets to a football match, but none of the money goes to UEFA or the teams. Instead, it goes to the ticket brokers, some of which are associated with organized crime. Two more issues are counterfeiting, when a scalper sells a fake ticket, and double-counting, when a scalper sells the same ticket to multiple buyers.

In spite of these problems, UEFA sees secondary sales as a reality of its business and a good way of enabling social viewing and word of mouth. Alternative channels have a role in reaching parts of the market that UEFA can’t, so the goal is not to stop secondary sales altogether but to limit their negative aspects by using a decentralized economic market. To this end, UEFA is turning to blockchain.

UEFA is working with SecuTix and TIXnGO, Swiss technology companies that are part of the Swiss IT company ELCA Group. The SecuTix and TIXnGO platform saw its first UEFA pilot in Lyon, France, in May 2018. The platform was used in that city to issue and manage twenty thousand tickets to the final game of the UEFA Europa League. A second pilot was conducted with ten thousand tickets for the UEFA Super Cup match in Tallinn, Estonia, in August of the same year. All eyes are now on the main prize for the solution: the Euro 2020, the European soccer world’s equivalent to the World Cup.¹⁸

The platform works by prompting a ticket buyer to download the SecuTix and TIXnGO app. The app is connected to a blockchain, and tickets are tokenized to allow the platform to record the ticket purchase and link its ownership details. If an owner wants to give a ticket away to a friend or family member, he or she can do that through the app, which sends the record of the transfer to the blockchain. When a ticket holder wants to put the ticket on the open market, things get interesting. SecuTix and TIXnGO have developed the capability for a secondary market to operate inside the blockchain app. The SecuTix platform defines the markup resellers are allowed to charge. This practice prevents price gouging and limits the incentives illegal brokers have to participate but maintains the decentralized environment that allows ticket holders of all kinds—whether they are individuals or ticket brokers—to sell to willing buyers.

Since every ticket transfer is recorded on the blockchain, SecuTix and TIXnGO can track tickets and know the identity of the person entering a venue. In theory, this information could go to the security team and allow security people to prevent entry if they believe a ticket holder poses a security risk. In practice, it’s unclear how UEFA can or would use this feature. As Frédéric Longatte, CEO of SecuTix explained, “We have an architectural work around to ensure that the ticket holder’s privacy is protected, with no personal data resident on the blockchain, a feature which allows our clients to stay compliant with GDPR rules while still maintaining the ability to associate a ticket to a purchaser.”¹⁹

UEFA’s effort with ELCA Group demonstrates how blockchain enables the decentralization of business decision making, specifically as it relates to the sales model. The technology solution is blockchain-inspired, but the combined governance and economic capabilities involving the use of tokens, the inclusion of secondary market actors, and the flexibility of ticket holders to freely sell or exchange tickets (within price limits) nudge the solution eastward along the continuum of decentralization (figure 5-3). Over time, the direction could point further east, as the solution aims to integrate secondary ticket marketplaces and thus more participants and market actors with the goal of enabling safer decentralization of the economic system surrounding ticket sales.

Together, Banque de France and UEFA show a few ways that centralized organizations will experiment with decentralization to unlock new opportunities. Yet we opened this chapter with Golem—a native blockchain company—to highlight a market reality: startup companies are already developing decentralized alternatives to existing business models.

One example is rLoop, a token-enabled DAO focused on connecting decentralized talent in the engineering and design world from all over the globe to create engineering innovations. This model has already won the company a SpaceX Innovation Award for its prototype of the Hyperloop, a high-speed transportation system.²⁰ The SpaceX competition may pigeonhole rLoop as a futuristic entity, but the group is solving a current problem of talent access in science, technology, engineering, and mathematics (STEM) fields.²¹

Decentralization can happen two ways. Centralized organizations embracing the need for institutional change can make incremental changes. Or new entrants offering alternative ways to create value make a stronger push toward decentralization.

YOUR REAL BUSINESS LENS

WHAT DID YOU LEARN?

The blockchain-inspired phase extends through to about 2025, when technological maturity and business experience enable organizations to make the transition to blockchain-complete solutions. How fast that transition occurs and how fully you benefit from it depend on how quickly you embrace some degree of decentralization.

Decentralization is not just about technology. It has eight components, which fall in three main categories: governance (decision making, participation, and commercial ownership and oversight); economics (financing and rewards allocation); and technology (technology architecture, protocol development, and network governance). These components determine how the blockchain defines and executes on the business rules for a solution; who gets to participate and their roles in the network; and how to allocate rewards to participants according to their contributions.

WHAT SHOULD YOU DO ABOUT IT?

To take advantage of blockchain solutions, you’ll need to experiment with decentralization. Begin with simple, administrative decision making, and then progress to more-complex managerial and leadership decisions. Move on to organizational operations and then to organizational business models. Because your organization’s capacity for change and its culture will be the biggest sources of resistance, you should consider early on the role of incentives and reward structures using tokens. Even very centralized organizations can adopt some principles of decentralization and create a foundation for new economic systems. Resist the temptation to wait and see what happens in your market. Twenty years of experience with digital disruption reveals a pattern in the way former industry leaders collapse. They fail not just because a new competitor enters the market but also because that competitor taps into a vein of customer disillusionment that the incumbent had been ignoring. Survival and growth will come from participating in your own creative destruction.

WHAT’S NEXT?

The debate over centralization or decentralization is not binary. The blockchain spectrum highlights an evolutionary path. Some aspects of markets, industries, enterprises, and operations may still benefit from aspects of centralization. However, as blockchain capabilities mature, you will encounter more opportunities that encourage you to attack the decentralization inflection point and advance along the decentralization continuum.

In the next chapter, we travel further along the spectrum to examine blockchain-complete solutions and their role in propelling this evolution.