Even if you’ve never heard of blockchain, you probably would have heard of bitcoin, the world’s first decentralised digital currency (there’s no central bank involved). While bitcoin is exciting, the underlying technology that makes bitcoin possible is even more revolutionary in terms of how it can transform the way business is done. Called “blockchain”, this technology is a big deal, especially in the financial sector.
Blockchain, in a nutshell, is a distributed ledger or database that can record transactions between two (or more) parties efficiently in a verifiable, permanent and transparent way. In the case of bitcoin, the blockchain is a huge ledger that keeps track of who owns how much bitcoin. The coins themselves are not physical objects or digital files but entries in the blockchain ledger. Units of the currency are transferred from one party to another as part of a new “block” of transactions added to the existing chain (hence its name).
Each encrypted block of code contains the history of every block that came before it, together with timestamped transaction information. These encrypted blocks can never be modified and because the whole thing is decentralised, there’s no single point of failure from which records can be hacked or corrupted.
Bitcoin was just the first application that leverages on blockchain but it’s important to understand that bitcoin and blockchain are not the same thing. When it comes to digital assets, you can put literally anything on a blockchain and create a “trustless” system for transactions.
When I say “trustless” system I don’t mean one that can’t be trusted. Actually, it’s quite the opposite. Because the blockchain verifies each transaction there’s no need for a trusted middleman like a lawyer or brokers or financial institution to be involved. Trustless transactions enable two parties who do not know or trust each to do transactions with confidence.
Eliminating the middleman has profound implications on how business is currently done globally. Here are some examples of industries that will be affected by blockchain.
Thanks to the Internet, stock transactions can be done online and executed very quickly. However, the actual transfer of ownership of the stock will take much longer because the parties involved have no access to each other’s ledgers and thus cannot automatically verify the transactions. Intermediaries act as guarantors of the stocks as the transactions are individually updated on the ledgers. This is a slow and cumbersome process. With blockchain, where there’s no need for any middleman to verify the transfer of ownership, any transaction could be securely settled within seconds.
“Smart contracts” could very well be the most transformative application of the blockchain. They basically automate payments and the transfer of assets as certain agreed-upon conditions are met. For example, a smart contract could send a payment to a seller as soon as a shipment is delivered to the customer, without any third-party intervention. Another example is a derivative could be set to be automatically paid out when a financial instrument meets a certain benchmark. Smart contracts will result in a massive reduction in the cost of enforcing contracts and making payments as the software will self-execute the instructions based on the terms of the contracts.
When it comes to artistic content, the middleman always get a huge cut of the revenues. This certainly is true of the music industry. If only the artistes could cut out the middleman effectively and get their music direct to their customers, they’d make a lot more for the music that they sell. Mycelia, a company founded by British Grammy-winning artiste Imogen Heap, has developed a blockchain-based system where songs would have smart contracts built into them. Royalties and other licensing agreements would then be executed automatically once the sale is done. There’s no music label, lawyers or financial institutions to pay. Blockchain can also be used for artwork and in fact, a new start-up called Ascribe provides a digital registry for artwork which contains information to verify authenticity, condition and ownership. Artists can basically upload digital art, watermark it and transfer it as they wish.
SUPPLY CHAIN AUDITING
Consumers are increasingly wanting to know more about the items they buy, whether for ethical grounds or health reasons. For example, someone might want to be certain that the jewellery they buy contain diamonds that are not from conflict zones. Purchasers of meat may want to know whether the livestock involved was raised in a free-range environment. Sushi restaurant chains may want to know if the seafood they purchase was harvested in a sustainable way. Blockchain allows for that as its distributed ledgers are timestamped with dates and locations and these cannot be altered and falsified.
The sharing economy as exemplified by AirBnB and Uber has really upended traditional business. But these new economy companies are actually intermediaries who help aggregate suppliers who are willing to sell their excess capacity (in the form of rooms and driven cars, respectively) and take a percentage of the sale. Blockchain provides the potential for service providers to sell directly to clients without a third-party involved. Essentially, it would be a peer-to-peer sharing economy that’s decentralized.
If a sharing economy as described above were to happen, identity management is crucial. Customers need to know you are who you say you are. Currently, AirBnB and Uber provide that service. When third parties are taken out of the equation, there needs to be a way to verify identities. This is also crucial for financial transactions conducted on blockchain as there’s no intermediary like a bank involved. You need to know that the other party you’re dealing with is genuine.
There’s no doubting blockchain’s revolutionary and transformative impact on the way business will be conducted in the future. However, this isn’t something that’s going to happen overnight. It may literally be decades before blockchain become very commonplace.
An experiment done at MIT a few years ago highlights a key challenge that blockchain-based systems face: people don’t understand it. In 2014, the MIT Bitcoin Club provided each of MIT’s 4494 undergraduates with US$100 in bitcoin and gave them the freedom to do as they wish with it. Some 30 per cent of the students didn’t even bother to sign up for it, while 20 per cent of those who did sign up ended up converting the bitcoin to regular cash within a few weeks. Of course those who held on to it eventually made a lot of money as the value of bitcoin subsequently skyrocketed. But what that experiment showed is that even amongst a tech-savvy, intelligent crowd there’s still apprehension about using bitcoin.
But beyond that, blockchain technology itself is still at an infancy stage. There’s still a lot more technological development that needs to be done before we can see widespread adoption. There’s also a host of regulatory and legal issues to overcome. Blockchain might be a decentralised system but buy-in from the government is still necessary if it’s to be used for legal, financial or identity management purposes.
It’s hard to say which industries or government sectors would be most impacted by blockchain. We can make educated guesses but when it comes to disruptive technologies, it’s always very hard to make accurate predictions. Take social media for instance. If you had told someone about Twitter or Facebook around the time they launched, would anyone have believed they’d become such a regular part of our daily lives? One thing’s for sure though, blockchain is no fad. It’s here to stay and will only become more relevant in time to come.