DLT Development and Tokenized Funding Must Solve Significant Challenges to Succeed in 2019
By Matthew Hine
The DLT Revolution
Blockchain technology – or more generally, distributed ledger technology (DLT) development – has the potential to transform the world of business even more broadly and deeply than the first generation of internet technologies of the ‘90s and 2000s. But what sort of transformation will it bring and who will profit most from this transformation?
The internet protocols that created the foundations for Amazon, Facebook, Netflix, and Google were open, digital communication protocols – methods of democratizing the sharing of information. DLTs are the world’s first digital commerce protocols – methods of democratizing the exchange of real-world assets, value, and records. Companies using DLT successfully will create vibrant, competitive markets where there were previously rent-seeking monopolies at the hubs of commerce.
DLT development will bring unprecedented efficiency, security, and reach to digital commerce and lower the bar of entry for high-trust business operations that were traditionally only within reach of large enterprises with access to significant resources. DLT will drastically streamline how companies manage their own internal assets, accounts, customers, and records. And DLT will transform the way that these new businesses gather investment funding, putting the business in control of a much more flexible and accessible process for both issuer and investor. Overall, Gartner estimates that “The business value-add of blockchain will grow to slightly more than $176 billion by 2025, and then it will exceed $3.1 trillion by 2030.”
The DLT Revolution on Hold
Agile and disruptive businesses already wish to embrace DLT’s revolutionary advantages, but the path is unclear. Just as the last generation’s internet success stories required layers of mature software built on top of bare communication protocols, direct development on new, complex, and rapidly evolving bare DLT protocols is practically inaccessible for most businesses.
Add to that the economic, financial, and legal uncertainties created by a highly disruptive protocol of commerce, and a viable DLT-based solution verges on impossible today.
In short, businesses need the enormous benefits that DLT promises, without having to be DLT technology experts – or DLT law, economics, or fundraising experts. They should be able to stay focused on their business and their market while leveraging the drastic competitive advantages conferred by DLT and its benefits for customers. Without practical solutions for businesses, the true DLT revolution will remain on hold.
The Problem of DLT Development
DLT platforms are “bare metal” technologies – complex trust engines that must be carefully chosen, understood, and harnessed in order to be practically useful. Businesses diving into a DLT-based system development run into significant barriers:
Changing Technology: DLT technology itself is changing incredibly quickly. Who knows what DLT platform to use, how to use it, and if it will keep up with particular business needs in the future?
Scarce Resources: DLT development requires highly specialized developer resources, with expertise that is often specific to a single DLT platform. These resources are expensive, hard to find, and inflexible.
Immature Development Stack: The prevailing DLT development wisdom focuses on a smart contract “dapp” development model that is a poor match for how businesses need to operate. Privacy, scalability, interoperability, and supportability are difficult or impossible to achieve, and the risks of business-threatening mistakes are high.
He3Labs’ experience working with businesses is that they are desperate for customized DLT solutions, but developing everything from scratch is often wildly unrealistic.
Enterprise software is often considered to be tedious, complex and dull. It is also the most valuable and important infrastructure that the world relies on. It is where the majority of the world's trade is conducted, and it represents the majority of the value expected to be gained from using DLT. Today, integrating DLT (or blockchain) into a new or existing enterprise system is extremely difficult. Neither system natively understands the other. The learning curve for non-DLT developers is steep. The risks and costs of failure are high.
In short, ”bare metal” DLT platforms are as incomplete for real-world enterprise systems development as raw internet protocols were in 1992. The result is that everybody is testing and exploring DLT, but companies aren’t deploying and scaling real solutions.
The Problem of Tokenized Funding (ICOs and STOs)
One specific DLT application of note is tokenized fundraising, popularly understood as an ICO (initial coin offering). The appeal is obvious: innovative startup companies drawn to DLT technology also need funding to get their ideas off the ground and ICOs seem to promise access to that funding. The rise of ICOs has demonstrated that traditional funding mechanisms fail to meet the desires of both companies and investors; companies want fundraising on their own terms, not those dictated by a narrow set of gatekeeper banks or VCs, and investors want to get in on the action through accessible, liquid markets.
And in order to address the regulatory concerns of ICOs, the next anticipated advance in DLT-based funding, particularly in the US, is tokenized securities, or STOs (“security token offerings”).
However, businesses seeking tokenized funding quickly realize that conducting an ICO or STO isn’t so simple today. The process of designing, creating, and issuing a token is technically confusing and risky and conducting the token sale, particularly in a regulatory compliant manner, is complex and poorly understood. Once again, companies want the benefits but are halted by the lack of a clear solution that lets them focus on their business, the relationship they want with their investors, and the funding they need.
Fulfilling the Promise of DLT in 2019
We believe that a new approach to DLT development – including both enterprise systems and the issuance and management of tokens for STOs and ICOs – is needed to overcome these challenges, and that the big winners of the DLT transformation are going to be those that embrace this approach rather than crypto and smart contract hype. Specifically, we must close the significant gap between DLT and traditional enterprise systems and developers to bring the potential of the technology to businesses – both large and small.
Rather than focusing on smart contracts and tokens, enterprise systems need a robust software stack that provides a simple but powerful API, that abstracts complex DLT platform mechanics, and that encapsulates best practices of DLT usage. These solutions may use hybrid public/private DLT approaches or even invisibly interface to multiple DLT platforms. Those that build and use these complete software stacks will finally enjoy the true, practical, and significant competitive advantages made possible by DLT’s inherent benefits.
He3Labs demonstrated its own new DLT development approach with an e-Government proof-of-concept system, shown at the 100th Annual Crow Fair in August 2018. Crow Tribe government officials and Native American citizens were given a hands-on look at integrated and streamlined e-government systems accessed via smartphone app. This system was developed from scratch in a matter of weeks – not months – using an early alpha version of our forthcoming enterprise-grade Threshold SaaS DLT middleware.
He3Labs’ application of Threshold, in early form, to an e-government system also applies to an immense breadth of trust-critical enterprise business systems – from real estate fractionalization, to supply chain management, to accounting, to provenance tracking, to verifiable logging and authorizations and much more. We believe Threshold will be a model for a new and more practical approach that will break through the barriers of DLT development in 2019. We will have much more to say about Threshold in the near future.