The Digital Platform Revolution: IoT & Bitcoin Are Just The Start

One of the main bridges between the physical and digital applications enabled by the fourth industrial revolution is the internet of things (IoT) – sometimes called the “internet of all things”. In its simplest form, it can be described as a relationship between things (products, services, places, etc.) and people that is made possible by connected technologies and various platforms.

 Sensors and numerous other means of connecting things in the physical world to virtual networks are proliferating at an astounding pace. Smaller, cheaper and smarter sensors are being installed in homes, clothes and accessories, cities, transport and energy networks, as well as manufacturing processes. Today, there are billions of devices around the world such as smart phones, tablets and computers that are connected to the internet. Their numbers are expected to increase dramatically over the next few years, with estimates ranging from several billions to more than a trillion. This will radically alter the way in which we manage supply chains by enabling us to monitor and optimize assets and activities to a very granular level. In the process, it will have transformative impact across all industries, from manufacturing to infrastructure to healthcare.

 Consider remote monitoring – a widespread application of the IoT. Any package, pallet or container can now be equipped with a sensor, transmitter or radio frequency identification (RFID) tag that allows a company to track where it is as it moves through the supply chain – how it is performing, how it is being used, and so on. Similarly, customers can continuously track (practically in real time) the progress of the package or document they are expecting. For companies that are in the business of operating long and complex supply chains, this is transformative. In the near future, similar monitoring systems will also be applied to the movement and tracking of people.

 The digital revolution is creating radically new approaches that revolutionize the way in which individuals and institutions engage and collaborate. For example, the blockchain, often described as a “distributed ledger”, is a secure protocol where a network of computers collectively verifies a transaction before it can be recorded and approved. The technology that underpins the blockchain creates trust by enabling people who do not know each other (and thus have no underlying basis for trust) to collaborate without having to go through a neutral central authority – i.e. a custodian or central ledger. In essence, the blockchain is a shared, programmable, cryptographically secure and therefore trusted ledger which no single user controls and which can be inspected by everyone.

 Bitcoin is so far the best known blockchain application but the technology will soon give rise to countless others. If, at the moment, blockchain technology records financial transactions made with digital currencies such as Bitcoin, it will in the future serve as a registrar for things as different as birth and death certificates, titles of ownership, marriage licenses, educational degrees, insurance claims, medical procedures and votes – essentially any kind of transaction that can be expressed in code. Some countries or institutions are already investigating the blockchain’s potential.

 The government of Honduras, for example, is using the technology to handle land titles while the Isle of Man is testing its use in company registration.

 On a broader scale, technology-enabled platforms make possible what is now called the on-demand economy (referred to by some as the sharing economy). These platforms, which are easy to use on a smart phone, convene people, assets and data, creating entirely new ways of consuming goods and services. They lower barriers for businesses and individuals to create wealth, altering personal and professional environments.

 The Uber model epitomizes the disruptive power of these technology platforms. These platform businesses are rapidly multiplying to offer new services ranging from laundry to shopping, from chores to parking, from home-stays to sharing long-distance rides. They have one thing in common: by matching supply and demand in a very accessible (low cost) way, by providing consumers with diverse goods, and by allowing both parties to interact and give feedback, these platforms therefore seed trust. This enables the effective use of under-utilized assets – namely those belonging to people who had previously never thought of themselves as suppliers (i.e. of a seat in their car, a spare bedroom in their home, a commercial link between a retailer and manufacturer, or the time and skill to provide a service like delivery, home repair or administrative tasks).

 The on-demand economy raises the fundamental question: What is worth owning – the platform or the underlying asset?

 As media strategist Tom Goodwin wrote in a TechCrunch article in March 2015: “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate.”

 Digital platforms have dramatically reduced the transaction and friction costs incurred when individuals or organizations share the use of an asset or provide a service. Each transaction can now be divided into very fine increments, with economic gains for all parties involved. In addition, when using digital platforms, the marginal cost of producing each additional product, good or service tends towards zero.

We’ll discuss this more tomorrow, but I’d like to bring up some of the Layer 2 solutions being built on and for Bitcoin.

In particular: Liquid and the Lightning Network.

You might have heard of the latter, but not the former.

At a very high level, Liquid is pretty much a blockchain, but a very centralized one, certainly when compared to bitcoin.

It’s a permissioned blockchain with “corporate” validators like exchanges and without any GUI for now, but Green Wallet plans to incorporate Liquid.

This federated sidechain allows bitcoins to be locked on one side and then transported to Liquid where its higher level of centralization and trust requirements can then provide things like sort of free and pretty much instant transactions.

As uninteresting as all that might be, what could be interesting is that Liquid can be seen as sort of bitcoin’s playground.

While there are clear benefits to the Lightning Network, there are other Layer 2 solutions that can be useful in the area of international money transfers. While the Lightning Network may not have the necessary liquidity or capacity to handle larger transfers, it’s possible that exchanges will open rather massive Lightning Network channels with each other.

That said, the Liquid sidechain, which is mainly focused at traders who wish to move money between exchanges, may be more useful for larger transfers. It will be interesting to watch these separate layers being built on top of the base Bitcoin blockchain develop over the coming years, as each protocol may be better for different, specific use cases.

The Lightning Network and the Liquid sidechain both come with their own sets of tradeoffs. The Lightning Network is instant, but it could have issues with liquidity. Liquid is a bit slower with its one-minute block times, but it could be better for larger transfers, albeit in a more centralized fashion.

In the future, Drivechains and Statechains could offer additional options in terms of sending bitcoin across the world as efficiently as possible.

We’ll dive into these possibilities more in the next newsletter.