Like Shipping Containers, Verifiable Credentials Will Economically Transform the World
This is part 2 of a 3-part series:
Part 2: Like Shipping Containers, Verifiable Credentials Will Economically Transform the World
- Verifiable Credentials (VCs) aren’t just functionally similar to shipping containers, they are economically similar as well, and will bring an explosion in global digital trade like shipping containers brought for global physical trade. The right container at the right time can change the world, dramatically.
- Shipping containers caused a precipitous drop in shipping costs (over 95%) by bridging the physical contexts between ships, trains, and trucks; VCs can deliver a similar cost reduction in the digital realm, by bridging the contexts between organizations.
- The transitive trust enabled by VCs enables cooperative network effects, which are even bigger than regular network effects.
If VCs Are Economically Similar to Shipping Containers, It’s a Big Deal
The comparison of VCs to shipping containers is much more than a passing one. This analogy, which I’ve been using in presentations and conversations for the last couple of months, has been a big improvement when teaching the basic concept of VCs from a functional standpoint. It is simple, clear, and everyone seems to quickly understand it, a rare breath of messaging fresh air in a world of confusing SSI lingo.
But more important than messaging clarity, if VCs are economically similar to shipping containers, the ramifications to the digital economy are hard to overstate; everyone in SSI will be in for one heckuva ride.
In fact, I believe this possibility — that Verifiable Credentials are economically similar to shipping containers — could be the most impactful business realization of my lifetime.
The Right Container = Economic Explosion
From a humble beginning in 1956, “containerization” brought an explosion in global trade and became “more of a driver of globalisation than all trade agreements in the past 50 years taken together,” according to The Economist.
Before 1956, when shipping containers were invented by trucking entrepreneur Malcolm McLean, the world already had containers of many kinds — barrels, bags, boxes and crates — that needed to be painstakingly emptied when a ship arrived at port, and contents moved into other containers on trucks and trains. This manual “break-bulk” process, unchanged for millennia, was slow, complicated, dangerous, and costly.
Instead, Mr. McLean envisioned a container that was sturdy, stackable, secure, and most important: moved intact from a truck onto a train or a ship, and then back again when a ship reached its destination, without being re-packed along the way. It took a few years to really take off, but when shipping containers proved their immense usefulness in the Vietnam war it became clear they were the future, and the ISO then developed the first shipping container standards that the industries of ships, trains, and trucks would begin to adhere to.
The rest, as they say, is history.
The efficiency gains were so dramatic that producers of raw materials and small manufacturers in every corner of the world could now market their products to every other corner of the world, changing global trade forever. “Made in China” wouldn’t be a thing today without “containerization.”
From $5.86 to $.16
There were many other containers in existence prior to 1956; why did this particular container make such a disproportionate difference?
“Trans-contextual value transfer,” is the answer, in economic terms, my colleague Dr. Sam Smith would use, the ability to efficiently move value between the very different contexts of ships, trucks, and trains. By moving the entire container, and not emptying it until it has reached its final destination, the break-bulk process was eliminated entirely, causing a precipitous drop in shipping times and overall transaction costs. Stunningly, the price to unload one ton of goods fell from $5.86 in 1956 to only $.16 today.
Whenever transaction costs are reduced there is an increase in transactions proportional to the reduction¹, and that is exactly what happened.
Bridging contexts in any arena is hard, and expensive, but the gains from discovering how to do it efficiently can be enormous. Standardized shipping containers bridged physical contexts between ships, trains, and trucks and changed the world forever; VCs will do a similar thing for data, lowering transaction costs by efficiently bridging contexts between trust domains.
VCs Do for Data What Shipping Containers Did for Physical Goods
Trust domains and how VCs bridge them, mechanically, is the subject of Part 3 of this series, “How VCs Bridge Trust Domains,” and so will not be treated fully here, but a quick summary seems appropriate.
The current process of moving trusted data between unconnected organizations is uncannily similar to the break-bulk shipping process prior to 1956: data must be carefully removed from the data containers of the sending organization and re-packaged into the data containers of the receiving organization. As an example, just ask anyone in the know how academic transcripts in the U.S. are really exchanged between schools today: it is manual, slow, complicated, expensive, and often requires the paid help of 3rd-party intermediaries. Again, this is strikingly similar to break-bulk.
VCs address this chasm how shipping containers did. Data senders (“issuers”) and data receivers (“verifiers”) first agree on a standardized container². Issuers pack VCs with a desired payload and then issue it, either to the wallet of an individual “holder” or into storage in a database or blockchain. When verified, the verifier can rely on the fidelity of the data payload because they can verify the provenance and fidelity of the container it came in, and critically, perform that verification cryptographically without contacting the issuer.
We don’t yet know to what degree VCs will reduce costs. Earlier I cited the more than 95% drop in costs shipping containers delivered; that level of efficiency wasn’t fully realized until most ships, trains, and trucks had made modifications to adhere to the standards and were in full production. The same thing will happen with VCs. While it will take some time, with the complete elimination of “break-bulk”-style data exchange, and of the then-obsolete data middlemen and their associated time, cost, and manual processes, the cost reduction will be massive.
When comparing VCs and shipping containers, you discover the nature of the problem they address is similar, the way they address it is similar, and the size of the markets — global physical trade and global e-commerce — is arguably similar. It follows that the reduction in transactions costs, proportional increase in transactions, and overall economic impact would be similar, too.
VCs Unlock Global Network Effects
Another, related dimension of the economic impact VCs will have on the digital economy, and one that’s more familiar than shipping containers but potentially just as impactful, is network effects.
VCs enable a powerful kind of network effect, a cooperative network-of-networks effect. Deeper research into how SSI and VCs enable cooperative network effects has been done by Dr. Samuel Smith, my partner at Digital Trust Ventures, in his seminal paper, Meta-Platforms and Cooperative Network-of-Networks Effects, so I will only summarize Sam’s findings here.
When networks “cooperate,” some value from one network is transferable to another. Cooperative network effects are inter-network and exponentially greater than intra-network effects, like comparing the internet to AOL. To understand cooperative network effects it’s helpful to first understand its cousin: competitive network effects³.
The ride sharing industry offers an excellent example of competitive network effects. When Uber acquires a new driver, that driver becomes more likely to also drive for Lyft, Uber’s direct competitor. Though Uber and Lyft may wish it were not so, every driver and rider gained by one network is just clicks away from being gained by the other, which is unfortunate for whoever spent large sums to first gain them. This effect accelerates competition, adds price pressure, and sows the seeds of mass defection if it ever becomes advisable. Of course there is a selfishly beneficial tradeoff too, when your network gains from another’s expansion.
In contrast, cooperative network-of-network effects occur when growth in one network benefits other, non-competitive networks. Literally, customers gained in one network or industry are accretive to other, non-competitive and even completely unrelated networks or industries.
For example, several credit unions (CUs) in the U.S. are now issuing VCs to members to enable a secure, streamlined experience when they call in, walk in, or log in; they call it MemberPass. While the first use cases are limited to within the issuing CU, any entity in any industry could also choose to accept MemberPass and offer a sleek onboarding and login experience that eliminates forms and passwords for anyone presenting one. What website wouldn’t prefer instant onboarding and authentication of new customers presenting cryptographically verifiable credentials issued by regulated U.S. financial institutions, instead of the friction of forms, usernames, and breachable passwords they’re forced to offer today?
Every new MemberPass issued becomes a new, easily onboardable prospective customer for any entity anywhere that accepts VCs, online or off. And value flows both ways, as CUs benefit from increased satisfaction whenever members successfully use MemberPass, from increased value provided to members and the loyalty that engenders, and from increased demand for MemberPass from both existing and prospective CU members.
These are cooperative network effects indeed, as they foster cross-industry collaboration. The only obstacle is awareness.
This kind of cooperation between unrelated networks, both intentional and unintentional, has rarely been observed or achievable, but with VCs becomes predictable. The resulting ‘meta’ network effects — Smith’s Law — are exponential compared to intra-network effects, and also beyond Metcalfe’s Law. If you’re a student of the science of network effects, be sure to check out Sam’s paper. You’re in for a treat; the math for this is incredible.
Shipping containers were a once-in-a-lifetime improvement in global trade, forever bridging the physical barriers between ships, trains, and trucks. VCs are the shipping containers of the digital realm, bridging trust domain barriers between organizations, departments, and even internal silos.
Shipping containers brought an unprecedented multi-decade, multi-trillion-dollar global economic expansion by dramatically reducing transaction costs for physical goods; VCs will do the same for digital goods, and economically change the world to a similar magnitude.
If that were VCs only economic value, it would be more than enough. VCs also enable cooperative network-of-network effects, where issuances in one industry can benefit other, non-competitive industries, potentially many of them.
Excited yet? It’s time.
This article is part 2 of a 3-part series:
¹ M. C. Munger, “Tomorrow 3.0: Transaction costs and the sharing economy,” Cambridge University Press, 2018.
² This underscores the importance of the work those involved in VC standards have been working on globally for years, and the exciting progress that has been and continues to be made at W3C and the Trust Over IP Foundation.
³ Network effects between competitive networks are technically also considered cooperative, but for the purpose of explanation I’m treating them here as separate and distinct.