Decentralization. The Future?

People use the term ‘blockchain technology’ to mean different things, and it can be confusing. Sometimes they are talking about The Bitcoin Blockchain, sometimes it’s The Ethereum Blockchain, sometimes its other virtual currencies or digital tokens, or sometimes it’s smart contracts.Most of the time though, they are talking about disrupted ledgers, i.e. a list of transactions that is replicated across a number of computers, rather than being stored on a central server.

I see “blockchain technology” as a collection of technologies, a bit like a bag of Lego. From the bag, you can out different bricks and put them together in different ways to create different results.

Whats the difference between a blockchain and a normal database? Very loosely, a blockchain system is a package which contains normal database plus some software that adds new rows, validates that new rows confirms to pre-agreed rules, and listens and broadcasts new rows to its peers across a network, ensuring that all peers have the same data in their databases.

Seeing Beyond the Blockchain Hype

After eluding close inspection by most business leaders outside of the tech and financial sectors, blockchain technology has recently taken center stage in the conversation about management’s digital makeover. Indeed, some believe that the long-term business impact of blockchains — which are distributed ledgers that enable and record secure online transactions — may be greater than that of the technologies that have grabbed most of our recent attention, such as data and analytics and the cloud.

So, can blockchain reduce costs in a significant way? Where will we see an impact first?
Yes, we concluded that at least two key costs will be affected: the cost of verifying the attributes of a transaction (for example, when did it take place, who was involved, etc.) and the cost of exchanging value within a network without relying on a costly intermediary.

The ability to securely record and time-stamp information on a blockchain is extremely valuable when issues arise with a transaction. Whereas today we often have to invest resources to audit the transaction and assess the truth, in the future, these tasks could be automated thanks to a distributed ledger. This makes settlement and reconciliation across organizations simpler and more efficient, which explains why many early use cases for blockchain are in the financial sector.

Here the compelling reason to adopt is the ability to lower operational costs while keeping the rest of the ecosystem the same. It also explains why banks and financial institutions like distributed ledgers but are worried about cryptocurrencies. Distributed ledgers, on their own, do not challenge existing revenue models and regulatory frameworks. In fact, they may even allow incumbents to achieve greater economies of scale. Cryptocurrencies, in contrast, present an existential threat to how value is generated and appropriated in the economy.

This is where the second cost — the cost of networking — plays a key role: Before cryptocurrencies such as Bitcoin existed, we needed intermediaries to transfer value across the globe. Creating and maintaining a secure network was both capital-intensive and labor-intensive. Bitcoin solves this problem by throwing cheap hardware at it: While often criticized for the energy-consuming computations needed to secure it, the bitcoin network has been extremely successful at automating value transfer.

Where secure financial messaging platforms such as SWIFT and ACH have to invest in maintaining “trusted nodes” to validate transactions, Bitcoin uses a clever mix of cryptography and game theory to deliver the same results. Gone are the accounting, reconciliation, and security costs associated with ensuring that a rogue employee or financial institution did not tamper with the transaction. The integrity of the underlying data is not guaranteed by an intermediary but by the design of the system itself. This is the architectural innovation associated with cryptocurrencies, and it constitutes both an opportunity and a threat to existing business models.

How Blockchain Applications Will Move Beyond Finance

As the cryptocurrency has matured, it’s often been criticized for its inability to match the performance of existing payment networks and meet the requirements of financial systems and governments. But Bitcoin has been extremely successful at solving the problem it was designed for: allowing a global network to securely transact and exchange value without the need for a costly intermediary. Through a clever mix of game theory and cryptography, Bitcoin replicates financial systems’ ability to transfer value, but without any of the labor typically involved in running and securing transactions. Furthermore, it does so while minimizing the degree of trust parties have to place in each other when transacting; it essentially digitally mimics many of the features of cash — including privacy.

As cryptocurrencies like bitcoin and distributed ledgers continue to mature, where might they be applied next?

It’s not surprising that some of the closer-to-market applications of the technology are in the financial sector. While trading and speculation were early use cases of Bitcoin, new technologies, such as Ethereum and Zcash, have emerged, with Zcash providing a higher degree of privacy than Bitcoin, and Ethereum offering a powerful development platform for smart contracts and decentralized applications, with the power to transform everything from predictive applications to job and energy markets to hedge funds and decentralized cloud services. As the entire cryptocurrency ecosystem matures, digital wallet providers and exchanges are becoming more professional and secure.

On the consumer side, companies such as Circle and Abra are taking advantage of the lower costs offered by blockchain technology for cross-border payments, encroaching on the territory of players like Venmo, TransferWise, and traditional remittances providers. Visa and MasterCard are both exploring uses for similar technology to improve the way they process payments, while Ripple is lowering the cost of transactions between banks and other financial institutions through its global settlement network. In all of these cases, blockchain technology is adopted “under the hood,” and consumers and businesses can reap the benefits without ever knowing that a distributed ledger was ever involved.

Central banks are also actively exploring the opportunities and challenge a fiat-backed, digital currency would entail for monetary policy, taxation, and lending.

A challenge for many of these applications is to securely and reliably record the properties of physical assets, individuals (credentials), resource use (energy and bandwidth through an internet-of-things device), and other relevant events taking place through a supply chain on a blockchain. The immutability offered by a blockchain is only useful if the original information entered on it is accurate.

Whereas a blockchain can allow for the costless verification of the attributes it carries, recording those attributes in the first place may require labor-intensive tasks and intermediaries (including the government) to prevent fraud. In this area, internet-of-things devices and sensors can drastically expand what can be built on top of a blockchain.
In the long run, cryptocurrencies have the potential to change how internet services are delivered; how open-source communities fund their development; how we crowdsource micro-tasks and expertise; how we pay for content and media; and how we harness talent to improve predictions. On the other hand, private or internal distributed ledgers and blockchains can be deployed to solve another set of problems. As ever, there are trade-offs and pros and cons to each solution, and you need to consider these individually for each individual use case.