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Mountain West Extends Blockchain's Digital Frontier

The technology is taking root in the region, with states like Wyoming and Colorado opening doors to developers and agencies. But potential technical and regulatory barriers need to be addressed.

(Robert Crum/Shutterstock)
Colorado Gov. Jared Polis is no stranger to cold weather. But during a virtual conference of blockchain developers and investors this spring, his mittens still got plenty of attention.

Holding up his hands to show mittens featuring a furry creature with a unicorn-like horn — a meme-ready cartoon character representing the state’s active blockchain community — Polis made a confession.

“They’re actually bufficorn socks, but they also work as mittens,” Polis joked during the Consensus event.

Growing numbers of governors, legislatures and municipalities across the country aren’t kidding about their desire to embrace “blockchain for the win,” as Polis put it while campaigning for governor. Even as federal regulations around cryptocurrencies remain murky, at least 31 states introduced legislation involving them and their underlying blockchain technology in 2021 in hopes of attracting investors and technology companies, according to the National Conference of State Legislatures. Earlier this year, Miami Mayor Francis X. Suarez proposed paying municipal workers and collecting property taxes in bitcoin, and then kicked off a highly publicized crypto gathering this summer by announcing to the “haters and doubters that this is not a moment, this is a movement.”

It’s also becoming a movement within government, as state and local agencies explore use cases for tools building off blockchain’s core concept — the so-called “distributed ledger” in which ownership of data is decentralized in ways that can at once promote privacy and transparency because it isn’t maintained or stored by any one entity, but is accessed and cultivated by a number of users. Everyone’s changes appear instantly on each user’s copy of the ledger and are encrypted in a way so that they can’t be changed or deleted. Thus, each new block is permanently linked onto an unbreakable chain.

When you listen to blockchain developers and their supporters inside and outside of government, it quickly becomes clear that they’re not just focused on specific use cases like user-owned academic credentials or greater transparency around voting. They’re looking ahead to the potential to transform the entire structure of how governments work — and governance itself.

“Blockchain solves human coordination at scale in ways we’ve never been able to do,” says John Paller, founder and executive steward of ETHDenver, a blockchain-based development community which has collaborated with Colorado state officials. “Think about the social and economic implications of that. It’s a game-changer.”

From Co-ops to Coins

With its long-cultivated frontier image of independent thinking and self-determination, the Mountain West is promoting itself as a blockchain-friendly region well-removed from technology hubs on each coast. New legislation and initiatives in several of the region’s states are building on concepts initially advanced decades before in other areas of governance. For example, Wyoming, which was the first state to recognize limited liability corporations (LLCs) in the 1970s, has now become the first to legally recognize decentralized autonomous organizations (DAOs), which oversee many blockchain collectives, earlier this year and has passed two dozen laws involving the space.

And Colorado, which has its own long history of cooperatives and existing legal frameworks supporting them, passed the Digital Token Act in 2019 to exempt some digital assets from state securities regulations. It appointed its first blockchain architect in 2019, and through hackathons and initiatives ranging from digital identity to legislation requiring agencies to consider emerging technologies to protect sensitive data, the state is attempting to find ways to accelerate blockchain development within government and beyond it.

“The vision is to make Colorado a destination of choice for people who are interested in building these kinds of tools,” says Paller. “We have an opportunity through cooperatives to create the next-generation business paradigm and new organizational frameworks.”

Ironically, one of the reasons the state is attractive to builders of decentralized blockchain technology is its centralized Colorado Digital ID — the first in the nation that can be used as legal identification when stopped by police.

“Digital identity is the cornerstone of everything else. If you don’t have that, you can’t do credentialing, you can’t do decentralized voting,” Paller says.

Another is the active role the state’s Office of Information Technology (OIT) plays in the ecosystem. For the last two years, OIT has sponsored Colorado Jam, which has crowdsourced challenges from state agencies and solutions, and provided a platform for blockchain developers to address them during ETHDenver, which is billed as the “world’s largest Web 3.0 hackathon.” Earlier this year, the virtual event attracted more than 3,000 developers who worked in three-day sprints to prototype new tools using blockchain and other emerging technologies.

“Some states put out RFPs and RFIs and ask what are good ideas for blockchain — Colorado doesn’t do that,” says Russell Castagnaro, the state’s director of digital transformation. “We’re not committing to using solutions, but committing to confirming that a solution is viable — which is often the hardest part.”

The Key to Making Blockchain Work

Colorado state agencies suggested using blockchain to make lottery results more transparent, authenticate business reviews and provide higher education credentials. (There were no takers for a request to develop a way to validate the results of eye exams for DMV use.) A common thread involved building bridges between the state’s digital ID and decentralized blockchain services, which will be critical for any government-based blockchain service.

“The key to making any of these blockchain and Web 3.0 things work is to make their usage transparent,” Castagnaro says. “It’s just too difficult and too easy to make a mistake. We have to help hide all the technology that’s behind it.”

Many states and localities have explored potential use cases along similar lines, says Dustin Haisler, chief innovation officer for e.Republic (Governing's parent company). Given the recent spate of ransomware attacks, the idea of creating resilience through decentralized storage of data on a blockchain’s distributed ledger is becoming particularly appealing, he says.

To that end, the Illinois Blockchain Initiative, a consortium of state agencies and local governments experimenting with the technology, posted its final report at the end of 2018 on a blockchain-based storage network as a proof of concept of the technology’s immutable storage capabilities — but in a reminder of its early stage of development, one that remains far slower than traditional means to access.

Castagnaro argues solutions can “leverage blockchain but not require a huge difference about how you think about your business. What it does change is the cost of verification, prove what you do is real and genuine, and take a lot of the clerical work out of what you do.”

But blockchain supporters are thinking bigger. To understand their mindset, take a look at the so-called “white papers” describing the mechanisms underlying proposed projects. A combination of economics, game theory, incentives and rational outcomes backed by a series of complex mathematical equations that (in theory) unite these divergent disciplines and theories, they describe a world in which blockchain can transform any number of businesses and sectors, including government.

In Colorado, OIT officials realized developers were “thinking about bigger problems,” Castagnaro says. About 50 “greenfield” pitches tackled a wide range of areas, including the Clean Colorado Coin, envisioned as a blockchain-friendly take on carbon credits, providing incentives for behaviors that reduce greenhouse gases in the form of virtual coins which could be sold or exchanged for tax credits, and leveraging Opolis, a “digital employment cooperative” that provides benefits and shared services to its members, as a one-stop shop for government contractors.

And then there’s “quadratic funding.” First proposed by Ethereum founder Vitalik Buterin, it’s described as a “mathematically optimal way to fund public goods in a democratic community” by algorithmically accounting for each contributor’s preferences to address the “tyranny of the majority.” Blending ranked voting with the funding incentives commonly found in blockchain schemes, the esoteric concept has already been spotted in the wild in Colorado — in a downtown business district and the halls of the state Legislature. The concept was used to fund more than $25,000 in philanthropy to support Boulder businesses during the pandemic and will drive a larger statewide community fundraising effort, according to Colorado-based GitCoin CEO Kevin Owocki, and the state Legislature’s Democratic caucus experimented with a similar method to prioritize appropriations bills.

Will Tech and Regs Slow Down the Rise of Blockchain?

Significant hurdles remain, including blockchain maximalists with a decidedly anti-government bent. “Many of my compatriots have no interest in talking to anyone in the political system because they think it’s a waste of time,” Paller says.

There’s also the question of what federal regulations will emerge governing cryptocurrency, which, if not the purpose of blockchain, certainly provides much of the fuel for investment and media attention. While governments around the world have taken different tacks — from China’s recent efforts to discourage cryptocurrency mining to El Salvador’s embrace of bitcoin as legal tender — one expert believes the technology will ultimately be sustained. “At the end of the day, the government is going to want the revenue more than killing the technology,” Kristin Smith, executive director of the Blockchain Association, predicted during Consensus.

And it remains unclear who will ultimately develop the tools governments will use. Government efforts may struggle without a digital identity like Colorado’s to connect services, according to Castagnaro, and Haisler points to the “elephant in the room for government” — the need for a common network infrastructure.

“For states and localities trying to test and develop use cases … the challenge many of them had was that it takes a network,” he says. “They weren’t leveraging the multiplier effect of different agencies.”

Haisler believes that existing government vendors ultimately could be the ones that develop the underlying blockchain technology that will be adopted. “Agencies have little power to change the core infrastructure, but these platform providers do,” Haisler says. “It may be a Lexis-Nexis that creates a permissioned state government blockchain for identity.”

Castagnaro agrees that it’s challenging for governments to purchase technology that uses new models — “we can get it once it’s a product, but we can’t dictate how it gets there,” he says. However, efforts such as hackathons and incubators can help governments refine use cases with developers. “We can provide the expertise on what we need and how we’d like it to work,” he says.

In Colorado, that work continues within the region’s cooperative bent. The ETHDenver cooperative is transitioning to a community-owned ecosystem known as SporkDAO (the name, like the bufficorn, involves another meme). And Polis — from a technology background himself and one of the first U.S. politicians to accept campaign contributions in bitcoin while running for Congress — argues that the state “is and will be the center for blockchain innovation in the United States.”

“We’re creative, we’re innovative," he says, "and we’re the only state with a governor that wears bufficorn mittens."
Mark Toner is a GOVERNING contributor.
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