CRYPTO INSIGHTS

The internet provides the precedent for how Distributed Ledger Technology will scale

As a fundamental component of the digital assets ecosystem, Distributed Ledger Technology is here to stay and will become a bigger part of how we transfer value in banking and capital markets.
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January 17, 2022

Too often, we forget the past offers us a glimpse into the future.

With the internet deeply embedded into every aspect of our existence, it’s easy to lose sight of the improvements that gradually made this happen. These enhancements – now invisible to most people – are the ones that enabled the internet to reach the scale and widespread adoption it has today. They also hold important indications that help us understand how Distributed Ledger Technology (DLT) might evolve.

With DLT, we can see the signs of a fast-maturing technology layer with the ability to become a fundamental component of our society. So when we look at the key elements that developed our ability to interact with the internet, we can also distinguish how they can play a similar role to the evolution and pervasiveness of Distributed Ledger Technology.

Transition to widespread infrastructure – how Distributed Ledger Technology will scale

If you’ve been following conversations around Distributed Ledger Technology, you’ve most likely come across opinions that recognize its merits for establishing trust without intermediaries.

“So far, experiments with DLT point to the potential for financial infrastructures to move toward real-time settlement, flatter structures, continuous operations, and global reach.”

IMF – Distributed Ledger Technology Experiments in Payments and Settlements

However, many still hold the view that DLT-based solutions are only suitable for low-volume use cases, such as settlements. When it comes to infrastructure supporting the large-value payment system and others, they are deemed not mature enough or lacking in interoperability.

This brings up a familiar pattern for those who have been involved in and closely monitored the evolution of the internet and its layers of technology since its inception.

For the moment, Distributed Ledger Technology is admittedly slower, less efficient, and more expensive when compared to a centralized solution – but so was the internet in 1996! Back then, using the internet for email was ok but ecommerce or video? Completely out of the question.

There were only 100,000 websites in January 1996 and dial-up connection “speeds” reached a meager 33.6Kbps. But despite its nascent state, the internet was already inspiring industry-changing transformation. In 1996, “for the first time, more e-mail was sent than postal mail in the USA.”

This flashback is a powerful reminder that, as technology develops our ability to engage with Distributed Ledger Technology, it will inherently become more integrated into our systems, phones, TVs, and cars. As a result, just as the internet did, digital assets – and the DLT-based solutions they spur – will change our landscape dramatically.

 

How we’ll get from here to there (and who leads the way)

In a nutshell, we will get there through the work of motivated and skilled engineers who found a way to scale the tech that enables the internet to expand to unthinkable proportions.

As Chris Dixon famously said:

“What the smartest people do on the weekend is what everyone else will do during the week in ten years.”

Far from the limelight, the smartest people have been working on blockchain technologies for several years. This is one more reason the evolution of the internet provides a precedent for how scaling Distributed Ledger Technology may happen.

Let’s unpack some of the key similarities.

When the internet protocol (IP) was introduced in the ‘70s, the networks that made up the internet were nascent. This made it slow, insecure, and costly, so engineers developed techniques for caching, compression, translation, and security to improve its utility and user experience.

At first, functions sat at the edge of the network. As network operators started to adopt them, they became part of the network fabric, rendered “invisible” to end-users. Today, we can see constant improvements like these being applied to Distributed Ledger Technology (e.g. the Lightning Network is caching for Bitcoin).

Besides improving speed, performance, and security, these enhancements also expanded the utility of the internet, creating new uses for the network, such as the Web, Voice-over-IP (VoIP), and streaming audio and video.

For example, in the early days of the Web, you needed a great deal of patience to use VoIP and streaming services. Once again, the techniques of caching, compression, translation, and security played a crucial role in improving how the internet works.

The people behind them contributed their technical proficiency and vision of the future and turned them into a global system that caused a deep paradigm shift in our society.

“It was conceived in the era of time-sharing, but has survived into the era of personal computers, client-server and peer-to-peer computing, and the network computer.

It was designed before LANs existed, but has accommodated that new network technology, as well as the more recent ATM and frame switched services.

It was envisioned as supporting a range of functions from file sharing and remote login to resource sharing and collaboration, and has spawned electronic mail and more recently the World Wide Web.

But most importantly, it started as the creation of a small band of dedicated researchers, and has grown to be a commercial success with billions of dollars of annual investment.”

Internet SocietyBrief History of the Internet

So it stands to reason that the people most likely to make Distributed Ledger Technology fundamental to mainstream tech infrastructure are those who shaped and improved how the internet works. Their critical thinking and exceptional skills (cryptography, for example) combine to create technologies that support transformation across sectors. 

In finance, the next wave in the evolution of digital assets these engineers create will also expand the applicability and performance of DLT in the same way as internet protocol (IP) optimizations made it dramatically faster, more secure, and cheaper.

In a June 2020 study by the IMF, industry experts concluded that systems specialized in large-value payments, securities settlement, and cross-border payments can all benefit from it, suggesting already that the skeptics are being proven wrong.

With increasing proof that the tech is maturing, industrial grade scalability is just a matter of time. But the question still remains how long before we get mass-scale adoption – and in the end, it is likely to be economics, as much as tech, that fuels this.

The economics are here to make DLT go mainstream

The largest institutions in the world recognize the certainty of the fact that DLT-based solutions will become an essential part of the financial system. And they’re making definitive steps towards them.

But, before that happens, network effects will take hold, as owners of digital assets multiply exponentially.

The first VoIP phone holders couldn’t make full use of their technology because there were too few of them. What Bitcoin is experiencing now is a similar moment. However, with digital assets coming of age, this shortcoming is dissolving much faster because technology evolves at exponential speeds.

So the key for any financial institution will be to keep its options open which – to a great extent – will be synonymous with not creating legacy technology. At the same time, leapfrogging instead of being the boiling frog will mean choosing orchestration for their digital assets.

While starting afresh and rebuilding the future of their businesses using Distributed Ledger Technology, financial organizations will also introduce the flexibility that enables them to navigate this fast-changing space more successfully.

We are all contributors to change

Network effects that support mainstream adoption will get created when our ability to interact with digital assets increases – through constant improvements, just like the internet did.

“The Internet is as much a collection of communities as a collection of technologies, and its success is largely attributable to both satisfying basic community needs as well as utilizing the community in an effective way to push the infrastructure forward.”

Internet SocietyBrief History of the Internet

As a fundamental component of the digital assets ecosystem, Distributed Ledger Technology is here to stay and will become a bigger part of how we transfer value in banking and capital markets.

Just how the Internet has not finished changing, so will digital assets and the DLT applications that support them continue to evolve. If you want to join the discussion about, and more importantly the action around the future of Distributed Ledger technology, reach out to our team at METACO. Or even better, come work with us!

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