Blockchain: the emperor’s new clothes or a knight in shining amour?

By October 16, 2016Uncategorised

Imagine a world where an anonymous, Banksy-like character going by the pseudonym of Satoshi Nakamoto, remote Chinese ‘mining’ installations and the Russian founder of an entity called Ethereum operate side by side and the scene is set for a Bond spy movie. This world exists. The world of blockchain… so we’d better arm ourselves to deal with it!

According to the WEF, 10% of GDP will be stored on blockchain technology by 2025. Last year alone, almost half a billion dollars was invested in VC-backed blockchain companies (RSA, 2016).

So what is blockchain and will it transform the world as we know it?

Firstly, to be clear, blockchain and Bitcoin, often used synonymously, are not the same thing. Bitcoin is just one application of blockchain technology… but more of that later. Blockchain is, a ‘database that takes a number of records and puts them in a block. Each block is then ‘chained’ to the next block using a cryptographic signature’ (Government Office for Science, 2016)?!? Clear now? In essence, it’s a cloud-based, digital transaction ‘ledger’ of any form of information, which is transparent (public) but somehow protects the identity of those involved, distributed (shared across a network of users) and immutable.

So is blockchain a knight in shining armour?

Some of blockchain’s main advantages- cost saving, empowered users, disintermediation and trustless exchange- stem from its transparency and immutability. We know with certainty what belongs to whom, which allows A to transfer money to B without having to pay a transaction fee for 3rd party validation. This is great news for consumers and innovators in all industries, less great for the middlemen. But it may not be all bad news for banks either, provided that they’re prepared to data share. According to Santander InnoVentures, blockchain technologies could reduce banks’ back office costs by $15-20bn a year by 2022.

Other advantages are:

  • Speed- as banks’ monopoly is disrupted and incentivises rapid transaction settlements
  • Value innovation- as blockchain is open source, it can be applied in all industries, reduces barriers to entry and encourages innovation
  • Ecosystem simplification- with all transactions being added to a single public ledger, it reduces the complications of multiple ledgers
  • Reliability- as the network is decentralised, it doesn’t have a central point of attack or failure

 

These advantages have led to a host of applications and that’s where our Bond world re-emerges

  1. Bitcoin- blockchain’s most famous application, is a peer-to-peer digital asset, an alternative ‘currency’. It is global and no government or bank owns it, which is why it appeared attractive when founded by the mysterious “Satoshi Nakamoto” (a.k.a. possibly Australian Craig Wright?) following the 2008 financial crisis. Bitcoins are issued to the market based on ‘miners’ (computer wizards) racing against other ‘miners’ to solve mathematical algorithms and bundle transactions into blocks to earn bitcoins!! Bond’s Q would be in his element! Intriguingly again, 80% of Bitcoin is ‘mined’ in remote Chinese locations with cheap software and electricity and by only 4 organisations, making these ‘miners’ pretty influential over the future of Bitcoin software and Bitcoin itself. Check out this 7 mins video! Despite Bitcoin’s small market cap at c.$10.2 bn and a series of hacking attacks which have called the security of the system into question, several leading brands, including Microsoft, Expedia and Home Depot, now accept Bitcoin payments. It must be said though that in the western world, Bitcoin might be considered a solution seeking a problem as we are well served currency-wise. The developing world is where Bitcoin makes most sense, for example in Indonesia where only 4m of 280m people have credit cards, or for hedging purposes in countries with unstable economies

Map of Bitcoin accepting venues (CoinDesk, 2016):

map3

  1. Finance- All traditional banks fear the blockchain effect and are investing in it at breakneck speed so they are not left out of the party and the potential cost savings. R3 consortium is raising $200m from over 60 of the world’s largest financial institutions to fund collaboration for the adoption of blockchain and 15 banks are collaborating with Ripple to revolutionise settlements. Nasdaq has launched Linq, a private trading platform based on blockchain technology, allowing private companies to trade shares together. They believe that blockchain has the potential to reduce settlement times from 3 days to 10 minutes, reducing both risks and costs

 

  1. Government- Dubai’s government has committed to 100% blockchain by 2020 and the UK government has been testing the technology to make benefit payments. In July 2016, the Bank of England said replacing 30% of the currency in circulation with a central bank digital currency would ‘permanently raise GDP by as much as 3%’

 

  1. Music- Start-ups such as Ujo Music are building Ethereum-based blockchain smart contracts to solve the industry’s monetisation and licensing problems. Storing a song on the blockchain, with its own unique ID, allows artists to be paid directly for their music, aiming to cut out online services. Singer Imogen Heap has launched her first song on the blockchain

 

  1. Energy- smart meters enabling digital payments could revolutionise the sector, particularly for unbanked customers. A pilot project by start-up Bankymoon brought electricity funded by foreign donors to a South African school. This also has applications for charities, ensuring that donations reach their intended destination

 

  1. Healthcare- blockchain technology has the potential to deal with healthcare’s major problems- lack of interoperability, security and costs

 

  1. Sharing economy- blockchain has the potential to disrupt even the most innovative business models. lmagine if Airbnb and Uber were replaced by blockchain clones. This world, envisaged by Don and Alex Tapscott in ‘The Blockchain Revolution’ (2016), would verify financial transactions and codify reputations, diminishing the power of middlemen and the 20% cut that Uber takes from its drivers. The two companies could share customer information but would have to endure margin squeeze. No surprise then that Airbnb has pre-empted the situation by employing blockchain experts themselves

 

So this new world is full of possibilities. While I do believe that blockchain, although very much in its infancy, has the potential to be the knight in shining armour which brings the consumer to the centre of every business transaction and saves costs throughout the economy, Bitcoin, at least for the developed world, might be considered a case of the emperor’s new clothes. And blockchain ex Bitcoin is not without its problems, among them scalability (maximum 7 transactions/sec), speed (minimum 10 min delay for transaction confirmation), security as all transactions are transparent and perhaps most importantly, that it contradicts existing legal, accounting and taxation rules- whoops!