Blockchain in Seattle: Meet the Local Players Getting Involved in the Disruptive Emerging Technology

Seattle investors are flocking to blockchain platforms, some for a quick payday, but others to have an impact on the future.
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This article appears in the June 2018 issue. Click here for a free subscription.

No one will accuse John Wantz of lacking ambition. The former Target executive and now CEO of the newly formed SHOP global commerce cooperative aims to disrupt the growing dominance of Amazon and loosen its iron grip on brands, shoppers and their behavior data.

Such centralized concentration, Wantz contends, “leads to loss of selection, loss of control and [Amazon’s] ability to influence and have unified buying power.” In his view, shoppers should keep ownership of their own data in a kind of digital lockbox, and negotiate directly with brands, perhaps charging for access to that information.

The technologies fueling this approach, not to mention the disruptive ideas of many other companies, was first developed for cryptocurrencies — the best known being bitcoin. Known as blockchain, these emerging technology platforms distribute a digital ledger containing that critical information on many computers across the internet rather than with a single, central authority. Each digital entry records a transaction. Each transaction is grouped into a data batch called a “block,” building a consensus state of affairs transparent and public, with private data secured by powerful encryption.

In a distributed ledger, no one other than the owner can restrict access to the information, so no one can profit as a middleman. At the same time, powerful encryption enables the owner of information to limit who sees it. You can always get to the ledger, or lockbox, but you can’t read it without the owner’s permission.

Blockchain could one day be to assets what the internet is to content, enabling strangers to trade and track value easily without using a trusted intermediary such as a bank.

With its concentration of cloud experts, programmers and entrepreneurs, Seattle is attracting many blockchain-related companies. Both Microsoft and Amazon offer cloud-service clients ways to deploy blockchain networks.

Already, the technology’s disruptive frontier has gotten investors’ attention. IBM shares spiked in January when the company announced a venture with Maersk to explore using blockchain technology to track global shipments. That same month, Kodak announced a blockchain initiative to track, secure and license digital photo rights, boosting the 130-year-old company’s share price more than 200 percent. Sweden wants to use blockchain technology to record real estate transactions, an approach that could eliminate the need for title insurance.

The lure of blockchain technology is so strong, a mere name change can move markets. The sagging stock price of beverage maker Long Island Iced Tea quadrupled in December after the company changed its name to Long Blockchain Corporation.

Blockchain efforts in the Seattle area have received less publicity, but could ultimately prove fundamental to the further development of the technology.  

“What’s cool with cryptocurrencies,” explains Wantz, “is you get to architect your own economy.” With SHOP, he foresees shoppers keeping their identities, shopping patterns, preferences and demographic information safely encrypted in the blockchain register. Paying for a purchase using SHOP “tokens” or cryptocurrency grants a brand access to that information, rewarding the customer with more tokens to be used, perhaps, to buy something else at a discount.

The features of blockchain companies like SHOP can also upend early-stage investment models by selling the cyptocurrency the platform runs on. The advance sale of these tokens in an initial coin offering (ICO) can help raise capital for the business without any release of equity in the company. Even before a platform fully exists for the digital coins to function within, investors can speculatively trade them on cryptocurrency exchanges like Seattle-based Bittrex.

For Wantz and his partners, whose earlier failed effort at creating online marketplaces was fueled with venture capital funds, SHOP’s planned ICO provides an opportunity to succeed. “The goal is to raise a significant amount of money,” Wantz says. “This could give us a real shot at bringing together a band of brands and shoppers that could change retail.”

Blockchain constitutes a swelling tech wave many other businesses are seeking to catch. Several Seattle groups aid fledgling blockchain ventures with technology and expertise, such as the Rchain Cooperative, an open blockchain technology platform, and the Disney-incubated Dragonchain.

Pithia, a Redmond-based venture capital company, has raised $170 million to invest in companies committed to Rchain, which CEO Lawrence Lerner describes as blockchain 3.0. Unlike first-generation technology like bitcoin, which can’t be easily used in transactions, and second-generation technology like ethereum that has limitations on speed and scalability, Rchain’s technology “will scale to 40,000 transactions a second, like Visa,” says Lerner.

“Rchain is a unique blockchain, it’s foundational and it’s in Washington state,” says Lerner. The Rchain Cooperative, established to build and promote the technology, has created consortiums to develop industry standards in areas such as digital identity, in which Lerner believes blockchain will play a crucial role  transforming such industries as insurance, health care, financial services and retail.

While Pithia would like to see the emergence of a new platform, New Alchemy helps companies build on existing technology.

As CTO Ted Leung explains, nearly all New Alchemy clients seek to create new businesses whose customers engage with a product or service through a digital currency. This may mean a specialized market for an intangible good, such as advertising contracts or digital rights, represented by tradable tokens. Most will launch their own ICOs of that currency.

“We help them get organized to do that,” Leung says. New Alchemy develops the necessary code and helps administer the sale of coin tokens. Just as important, Leung says, it advises “how to explain that currency to people who might be interested in buying it.”

On its website, New Alchemy tracks the total current value of coins launched with its assistance. In January, that figure exceeded $8 billion. In a sign of how volatile digital currency can be, however, the figure plummeted to $2.1 billion by April 3.

For New Alchemy, it takes much more than tech skills to make a blockchain business model work, and its staff brings expertise in economics, game theory and management to the table.

“Many of us are here,” Leung notes, “because we feel this will be a game changer” whereby allowing computers to manipulate money in their own economic system “has the potential for a large impact to the world.”

Leung has seen how ICO hype “becomes about the money, not building things that are going to make things work better.” But he is encouraged by projects he has seen that try to change the landscape, as with a client who has applied the technology to trading renewable energy contracts. “We’ve been pleasantly surprised how many of our clients are doing some social good while making a lot of money,” he says.

Raising capital wasn’t a central concern for Seattle-based e-sports wagering company Unikrn, even though a September sale brought in $31.4 million for its cryptocurrency, UnikoinGold. For the Mark Cuban-backed company, CEO Rahul Sood observes, “Our ICO was about selling a product we already have and creating more opportunities for our customers to use their tokens.”

More important to the company was enabling its ability to expand in high-growth markets, such as China and Korea, where online betting is tightly restricted. The record creation inherent in the technology helps the online gambling company comply with a global array of anti-money-laundering regulations. “For transparency,” Sood says, “there’s no better way to do it.”

The company’s video gaming community was firmly established and Sood was delighted to learn that most were already using digital currencies. Unikrn’s introduction of a currency for its own platform helps those customers who are handling transactions across the globe, perhaps buying and selling credits used in an online game, for example, to do so without concern for multiple exchange rates or fees. Of the first coins sold in the public offering, more than half went to existing subscribers on the Unikrn platform. This suggests to Sood that most buyers were purchasing tokens to use them with Unikrn rather than for speculation.

That development strengthens his conviction that a blockchain works when it functions as an integral part of the business. “If you’re doing it for no purpose other than an ICO, that’s not a good purpose,” he asserts. “That’s the best advice I can give anyone.”

When the thing being secured is your identity — assuring that you are indeed who you say you are — cryptography presents both an enabling feature and a challenge, explains Drummond Reed, chief trust officer at Evernym. The company’s blockchain technology implementation allows individuals and organizations to create digital identities containing encrypted information, which they alone control and which can only be accessed with the user’s verification key (its public identity) and a signing key known only to the user. This setup allows individuals and organizations to complete transactions securely with others without the use of a centralized database that could be hacked.

“We can solve some serious trust problems on the internet,” declares Reed, whose Salt Lake City company is expanding in Seattle, where Reed and COO Steve Havas already operate.

Managing the growing number of public keys that grant access to encrypted information has become its own problem.

“These keys aren’t just as valuable as money,” says Reed. “They are the money.”

Evernym has developed a ledger named Sovrin that acts as a global system for protecting those keys “using a bank vault to store keys to other vaults.” Several other companies, including Trusted Key — incubated at the University of Washington — are trying to meet this need via blockchain. Trusted Key’s digital identity wallets may be used across the internet to grant and enforce limited permission to access personal information for commerce or finance.

Common activities like applying for a mortgage loan, Reed suggests, can be greatly streamlined in this way. A process that now requires several parties, multiple fees and weeks to verify creditworthiness might be enabled through a master identity credential. Through token exchanges in the Sovrin ledger, Reed explains, “Banks can cut that [process] down to pennies and seconds. Everybody wins.”

Built upon the Linux Foundation’s open-source Hyper Ledger blockchain, Sovrin is available through a nonprofit foundation. It embraces a public utility strategy that Evernym hopes will encourage global adoption. Trusted Key seeks to entice its customers through easy-to-use mobile apps.

The growing Internet of Things (IoT) poses its own security challenges, which Atonomi, a sister company to IoT security company Centri, hopes to help solve. More than 5.5 million new smart devices come online each day, with more than 20 billion expected to be interoperating by 2020, according to the technology research firm Gartner. Vaughan Emery, founder and CEO of both Seattle-based Centri and the fledgling Atonomi, believes order can be brought to those systems through a secure ledger of devices built through Atonomi’s platform.

“As we started to research application of blockchain,” Emery says, “it became immediately obvious it was uniquely suited to helping cybersecurity get a handle on identity and trust.”

Such certainty is needed for devices that can both direct and pay for energy, or for factory equipment that can order its own supplies. But as more join the network from many different makers, reliability among devices can vary widely.

Also, while you can’t always count on every manufacturer’s device to conform equally to a standard, you can log its behavior to see if it follows the rules. Each registered device has a distinct identity and builds a reputation over time through its transactions, transparently available to all in the shared ledger. A device that misbehaves, either from malice or error, can be identified, then isolated.

“Just as we have credit scores,” explains Emery, “a device will have those metrics as well.”

Atonomi’s tokens register and activate devices on the system, and also validate transactions, linking to a device owner’s cryptocurrency wallets as needed.

So, could the Internet of Things develop its own economy without human intervention?

“I absolutely believe that is something we could see in our lifetime,” says Emery, noting that Atonomi would be able to keep rampant devices in line. “It’s an inherent way to ensure that artificial intelligence doesn’t run amok.”

THE BLOCKCHAIN BASICS

How the emerging technology of blockchain works remains perplexing to most, starting with who even came up with the idea. Its mechanisms were first proposed by a person or group of people writing under the pseudonym Satoshi Nakamoto in 2008. These principles were soon applied to bitcoin, the first digital cryptocurrency. Since then, other blockchain systems, such as ethereum and hyperledger, offer alternatives to some of the bitcoin platform’s shortcomings. For technologists, bitcoin is inefficient for processing transactions at speed and scale. The key features, however, are:

A DISTRIBUTED LEDGER
The blockchain is a commonly held database duplicated across thousands of computers on a network. They work together to keep the information valid and current, forming a consensus that reconciles entries as they are made. Since no single computer has control over the system, the collective agreement the system requires makes the information practically impossible to corrupt.

COMPUTATION AND CRYPTOGRAPHY
The validity of each block in the chain is ensured by having its information conform to patterns produced by heavy computation, difficult to make but easy to check (known as “proof of work”). Other, less mathematically intensive methods (such as “proof of stake”) are increasingly used for speed. Powerful encryption also separates the information everyone should see from sensitive information.

INCENTIVIZED EFFORT
In this network of equal participants, the intense computation is shared and duplicated by all. The system works because every computer in the system contributes to maintain a consensus. Bitcoin rewards participation with more currency (“mining” for coins) and other blockchain systems may similarly compensate work through tokens.

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