Douglas Heintzman, a technology industry veteran with over 30 years of experience, sits down with banklesstimes.com to discuss his involvement with the Blockchain Research Institute (BRI) and its mission. The BRI is a global think tank focused on accelerating the adoption of Web3 and blockchain technology in enterprise deployments. Heintzman highlights the opportunities and challenges facing the blockchain industry, emphasizing the importance of aligning stakeholder interests and addressing governance issues. He also discusses the potential of blockchain technology to address pressing social and environmental issues by incentivizing sustainable behaviors and enabling transparent marketplaces.
Bankless Times: What motivated you to get involved in the Blockchain Research Institute (BRI), and what do you see as its primary mission?
Douglas Heintzman: I had been in the technology industry for over 30 years. I was previously a strategy executive at IBM software group, a COO, a founder, a management consultant, and a VP of strategy for a blockchain platform company. I had also been involved in the emergence of the internet, mobile computing, cloud computing, and enterprise social computing. I’ve always been attracted to the question of what the implications of a foundational technology disruption are.
I had known Don Tapscott, Executive Chairman of the BRI, for about 20 years dating back to when he was doing briefings for IBM’s strategy community. We crossed paths again when I moved back to Toronto from New York. I had read Blockchain Revolution and done work on Blockchain for consulting clients around the world and a blockchain platform company. Don simply asked me if I would come and help him change the world for the better.
The BRI is a global think tank. We do research, develop education, facilitate roundtables, nurture an ecosystem, and generally help our members on their Web3 and blockchain journeys. We see ourselves as an accelerator and catalyst in bridging the potential of Web3 and blockchain technology to the actuality of enterprise deployments.
BT: In your view, what are the biggest opportunities and challenges facing the blockchain industry today, and how do you see these evolving over the next few years?
DH: In its simplest form, blockchain is a solution to the multiparty trust problem. It solves supply chain coordination and provenance challenges. It integrates distributed IoT sensor readings into automated processes. It provided confidence in registries of assets. It has a mechanism to enforce digital scarcity and exchange value. It will even provide us with a new digital identity primitive that will help us build a new civil society. It is the foundation of the next iteration of the internet… so opportunities abound.
There are technical challenges, but there are a lot of very smart people working on these problems and we are making rapid progress. So, I’m not so worried about the technology. For me the biggest challenge is the human factor. Because blockchain solves multi-party problems, you need to align stakeholder interests and onboard different business entities. You must make sure that everyone is comfortable with the governance and the equitable distribution of both costs and value created. For a supply chain to be automated you need many different parties and types of parties engaged. This is very hard to do. Of course, at a point of critical mass, compelling value, ease of use, and low cost, people will scramble to join an ecosystem. But before we get to that point, it will be hard going.
I think the most important thing to watch for in the short term is the enterprise-to-public inflection point. All foundational network technologies need scalability, throughput, security, and transactional privacy to be adopted by enterprises. At the beginning of the internet era, enterprises deployed internet protocols behind corporate security walls as “intranets” but at some point, public intranet technologies incorporated enterprise features and the economics and exposure to open innovation made it compelling to deploy enterprise workloads on public internet. I think a similar thing is happening with blockchain. Improvements in scalability throughput, transaction costs, security, and transaction privacy mean that we are near the inflection point where capabilities, economics and exposure to innovation make it compelling to deploy enterprise workloads on public blockchain infrastructure. I also see quite a bit of progress being made in distributed governance, which will give rise to new kinds of business entities.
BT: How do you think blockchain technology can help to address some of the world's most pressing social and environmental issues?
DH: Dealing with climate change and environmental and social sustainability is at the top of the list of pressing global imperatives. The challenge is that so much of the environmental damage that is being done is the result of economic externalities. The real cost of carbon and other forms of pollution, as well as resource depletion and biosphere degradation, are not factored into the price of the goods and services that are the cause of the social and environmental challenges.
Blockchain gives us tokens and the means to ledger IoT transactions. With these tools we can count things and transact tokens and credits in a way in which people can have confidence. This is the basis of a functioning marketplace. With tokens we can build efficient mechanisms that incentivize healthy behaviours and disincentivize environmentally destructive behaviours. We can move capital resources from polluters to sustainability innovators and consumers can get access to data that allows them to make more informed decisions.
BT: How can companies leverage blockchain technology to create new products and services or to transform their existing operations?
DH: When confronted by a new technology, business leaders usually have one of two reactions. They either say “That’s interesting… how could I use that to improve my operations to make them 10% faster, 10% better and 10% cheaper?” or they say, “That’s interesting… what could I build with this that doesn’t currently exist?”
There certainly are many use cases examples in many industries of the first case, where blockchain is a better solution for an existing problem. Banking is using it to process foreign letters of credit, oil and gas is using it to do post trade settlement, retailers are using it to track the provenance of produce… etc.
All of these are existing processes that were made more efficient and less costly because of blockchain’s capabilities. The BRI has an opportunity-analysis methodology that is designed to systematically identify opportunities for which blockchain is a compelling option.
Because of blockchain’s ability to de-siloize data and provide process coordination logic between companies, there are many more interesting emerging examples of the second case. The “What can we do new?” question.
BT: Can you share any examples of successful blockchain projects that you've been involved with, and what lessons did you learn from these experiences?
DH: Most of the BRIs members are working on fascinating projects from which we are learning many lessons. We study them and write case study analysis on many of them. Some notable examples I’ve been engaged with recently, some of which I’ve profiled on our Podcast, include regional infrastructure initiatives such as LacChain in Latin America which is designed to reduce the cost and friction of adoption, so that companies can easily deploy solutions such as next generation property registries to improve the efficiency of land transfer. Dimetra which is helping farmers in developing companies increase yield, reduce cost and mitigate risk through information transparency is another good example. So is Solve.care which is building networks to coordinate healthcare delivery and GuildeOne which is tokenizing natural resources and carbon with an aim to improve the planet’s sustainability. There are also many examples in the Cardano and Hedera ecosystems of companies working towards environmental and ESG solutions.
There are many common “lessons being learned” including those from having to deal with: the challenges of navigating a diverse and immature regulatory landscape, the challenges of multi-party recruitment and stakeholder alignment, and the problem of the still existing, but rapidly declining, conflation of blockchain and crypto currencies.
Among the lessons would be to focus on bite size pieces of big problems, don’t forget about good governance, and make sure that the parties have confidence in the transparency and equitable distribution of influence and benefits. These systems are extremely hard to implement when there is a concern that one company, or a small number of companies, are capturing the lion’s share of the benefits.
Other lessons would include making sure that you have reasonable code portability and that you have good advice about the regulatory landscape…. Oh, and also, that you consult with the Blockchain Research Institute.
BT: How do you think blockchain will impact the financial industry, and what challenges will need to be addressed to ensure its adoption and success in this space?
DH: I think that blockchain will impact the banking and financial services industry in very profound ways. First, the advent of digital currencies in various forms, including Central Bank Digital Currencies (CBDCs), Stable coins, and digital bearer assets, will change both the payment rails and the economic basis for retail financing.
But more than that, the business composability (the ability to easily combine various business processes) attributes of Blockchain will mean that banking and finance will be fundamentally restructured. We are already seeing early signs of this in jurisdictions where open-banking legislation is in place. Open banking has been largely responsible for the massive growth in Fintech. As the banks are forced to provide access to banking data through APIs, many companies have flooded into the market to innovate and improve cost effectiveness. The inventiveness and composing in the DeFi space are other pieces of the puzzle.
I think what happens is that core banking services will be commoditized as much as is possible in a heavily regulated environment. Core banking services will deal with complex, regulated, and expensive procedures such as KYC and AML. Core service banks will differentiate themselves based on compliance excellence, security, transaction costs, and ease and functionality of interface.
The customers of these core banking services will be Fintech, DeFi and service aggregator companies. This group of companies will service consumers and businesses and deliver composite, adaptive, innovative solutions to their customers. These companies will be able to address smaller niches in the marketplace and provide us with a more comprehensive and integrated view of many financial and related services we interact with.
BT: What are some of the potential use cases of Web3 technologies that you're most excited about and why? How do you see businesses and organizations successfully integrating this technology?
DH: I’m excited by the emergence of the Web3 infrastructure platform. It combines the data state and runtime features of blockchain; the decision support, prediction, and generative capabilities of AI; the measurement and actuation of IoT and the spatial UX of AR/VR. It will be the interplay and force-multiplying effects of the convergence of these technologies that will define the next era. I’m especially excited about the possibilities in supply chain optimization and ESG systems. The role of Web3 in additive manufacturing (3-D printing) and as a commercial platform for the metaverse are also exciting areas to watch.
I think that most businesses and organizations will integrate the technology incrementally. Web 3 technologies don’t exist in a vacuum. They are built on top of, and work beside, many other technologies. Most companies will also integrate the technology unconsciously as they consume services that happen to make use of the technology.
BT: Do you think the popularity of cryptocurrencies and DeFi has been driven by the state of the traditional financial system and its limitations? In your opinion, how do these things overcome said limitations and what do they offer that makes them an attractive alternative for consumers?
DH: I think the DeFi phenomenon has been driven by three major factors. Yes, I think that the many limitations of the traditional banking system and the fact that many people and use cases that have been excluded from that system has been a driver. I also think that it is pretty obvious that the speculative excitement about the possibility of rapid wealth accumulation has been a part of it. But I think that the most important driver has been innovators and financiers having ideas about the potential opportunities that this new technology presents and daring to experiment. This is of course related to their assesment that the current banking system has significant limitations.
I think that the systems that will emerge in the Web3 era will be more inclusive and more fit for purpose. I think that consumers will have more of a dashboard view of the many services they interact with including, financial, banking, remittances, insurance, utilities, and spending. I think that many asset classes and investment vehicles will become more accessible because of token enabled fractional ownership, especially in real estate, debt, and the protocols that support the new economy.
BT: With the rise of both DeFi and centralized crypto services, do you see the two as competitors? How do you think DeFi and CeFi might evolve and complement each other in the future?
DH: Like most things in the world, I think that the most stable and sustainable systems are those that balance fit for purpose and interoperability. They tend to be more adaptive and reconfigurable. There are going to be many use cases for which CeFi is a more cost effective, secure, or durable solution. The same is true of DeFi. I see both prospering and being applied to the things they are good at. While there will certainly be tension between various parties arguing for the merits of one over the other in any given situation, I hope and believe that they will end up complimenting each other. I also think that the distinction between the two will only be relevant to a relatively small portion of the population. Most people will focus on what service provides value at a good price, and in many situations that will be a composite of the two models.
BT: With so many cryptocurrency platforms making headlines in recent years for being sanctioned by regulators or going bankrupt, what do you think these companies need to do to future-proof their services and build better trust with their users?
DH: There is certainly good reason for there to be a trust deficit problem between crypto currency platforms and exchanges, and people who trusted them and lost a lot of money. This is also true for investors in and depositors of the many banks that have been failing. In both these cases the root problems and solutions are similar. There obviously needs to be better regulation and enforcement to make sure that governance standards are being met, that self-dealing and fraud are stamped out, and that deposits are properly collateralized to avoid runs and contagion risk. The trick will be to find the right balance between enough regulation and enforcement to ensure public confidence, and too much that it stifles innovation in an emerging industry.
The new financial system will have vastly improved cost effectiveness, functionality, and speed. But speed is also and risk. Digitization, high speed networks, and computerized trading systems, means that friction is removed, and assets can be move very quickly. We saw how fast people pulled funds out of FTX and out of Silicon Valley Bank on their cell phones once rumours of a problem started to circulate. The risk of runs and contagion are magnified in a digital era. It’s entirely possible that we will develop AI systems that can see patterns and warn us of the consequences of certain actions and the associated risks.
As far as futureproofing goes, beyond the obvious hiring of good people, paying attention to governance, and making sure you pick deployment platforms with a high likelihood of longevity, the most obvious systemic thing I can think of is preparing for post-quantum cryptography.
BT: Do you think the way blockchain networks achieve consensus on transactions makes them more secure than other methods of transferring value? Do you think Proof-of-Stake networks are a good foundation for inclusive and environmentally-friendly ecosystems?
DH: In general, yes, I believe that the way blockchain achieve consensus makes them more secure than other systems. The various security lapses on crypto exchanges were not on the blockchain itself but at the exchange level that uses more traditional database technologies. I also think that Proof-of-Stake consensus is a good foundation for inclusive and environmentally friendly ecosystems. When Ethereum switched from proof-of-work to proof-of-stake its electricity consumption fell by 99.95%. That being said, there are actually many ways that blockchains achieve consensus and some methods are better or poorly suited for different use cases. My personal believe is that much of the workload will eventually move to algorithmic randomization and probabilistic systems. These systems should be more efficient and allow for variable consensus. It seems absurd to me that we should consider all transactions to be equal. They aren’t in the physical world. Buying a $3 cup of coffee should not incur the same transactional costs as buying a $300M company. We should be able to ask the network to deploy a variable amount of consensus based on the nature and value of the transaction and the reputation of the counterparties.
BT: What role do you think governments and regulators should play in shaping the future of blockchain, and how can we balance innovation with the need for appropriate oversight and regulation?
DH: The question of finding the right balance of restrictive regulation and freedom of action has always been a challenge for government and business. This question isn’t only about financial services and crypto it is also about privacy, identity, and AI.
I think the obvious answer is strong consultation and cooperation. Government needs to resist the temptation of making grand political and populist driven gestures. We are talking about crafting the framework for a new ecosystem economy and a new social contract, so we must be careful and meticulous.
As a rule, I tend to lean towards being on the permissive experimentation side of the scale as it will be through experimentation that we will more likely define a stable and enduring system. I don’t think that business and government are in as much conflict as most people believe. Government wants to promote innovation and business activity and business wants counterparties and the public at large to have confidence in the stability of the system. The other new dynamic in many of these systems is that public ledgers can be transparent, so the activity of oversight can be automated to a greater extent.
BT: As blockchain technology continues to evolve, what do you see as its most promising potential applications or use cases, and why?
DH: As is always the case at the outset of a new era, predicting the most interesting use cases is largely pure guesswork. It is highly likely that the most impactful applications of the Web3 era haven’t been dreamed of yet.
More automated and resilient supply chains is very likely. Transportation and traffic systems will become highly automated. The impact of AI will be pervasive, varied, awe inspiring and in many ways, scary. Everything, including us, will become instrumented.
One truly transformative likelihood is that Web3 will allow us to develop a new sense of digital self. The idea of a self-sovereign digital identity and extended identity will redefine the way we all interact with businesses and governments.
Perhaps the most important application will be more systemic. The rationale for the existence of companies is that they have the advantage of lower levels of internal information and trust friction relative to the market at large. The question that arises is: “what happens if that isn’t true anymore?” What happens when confidence in, and availability of, data, and trust in transactional integrity and counterparty, become inherent characteristics of an underlying network? In a world supported by that kind of network infrastructure, many smaller economic actors, even freelancers, can compose their resources and capabilities and deliver composite goods and services to the market with an efficiency and variety that many large companies will have trouble competing with. There will still be structural and network effect reasons that give advantage to large companies, but the norm will likely be that the “ecosystem economy” becomes the dominant business structure.
