In yesterday’s blog, I discussed that while the Bitcoin currency system may not see widespread adoption, it gave us a unique piece of technology that would – Blockchain. At its heart, the Blockchain technology eliminates the need of a third party for verifying transactions. This is accomplished through using the cryptography to encrypt transactions and an open ledger on which these are stored.
In simple terms, if we keep an open book of transactions, shared instantly with everyone, and write with an ink that cannot be removed, we do not need a third party. Blockchain is that open ledger and cryptography is that indelible ink. I noted in the last blog the amount of computing power that is needed to verify/write a block. Imagine the amount of computing power needed if you were to forge an existing block and rewrite all subsequent blocks. Close to impossible.
If there is no third party needed to verify transactions, imagine the labour/operational savings that can be delivered in many high value transactions that don’t require real time processing.
This cost saving angle is already being explored within banks – and between networks of banks – to re-engineer and simplify processes in this profit-starved low interest rate world. Such ‘automation’ can be applied to a great many transactions that are processed between banks overnight, long before they visibly arrive at a bank account near you. Moreover, with more sophisticated Blockchains including if/then coding elements, smart contracts could be created and implemented that can auto execute when certain conditions are met, again leading to efficiency related savings.
One could have many different Blockchains for various different use cases, supervised by a governing body formed by the users. Such an implementation would ensure benefits of network effects from broader adoption of users, keep it relevant and specific to certain use cases and ensure continued innovation and efficiency savings without disrupting the current financial system.
We are not talking too far into the future; significant effort is already being directed towards Blockchain ecosystem development by both public and private organisations. In France, the government is developing a legal framework that would allow funds to be distributed using Blockchain technology, while in the UK, a range of Blockchain-based services are being tested in a regulatory sandbox (a ‘safe space’ in which businesses are able to test innovative products, services, business models and delivery mechanisms away from the normal regulatory infrastructure). Elsewhere, in December 2015, a collaborative effort to advance Blockchain technology was initiated by the Linux Foundation with more than 60 global member organisations to develop global standards for open-source Blockchain-based ledger systems. The project focuses on enabling organisations to build and run industry-specific applications, platforms and hardware systems to support individual business transactions.
Blockchain technology as a decentralised database is attracting growing interest and can provide significant value for certain use cases. Broader adoption however, will require significant regulatory change and industry collaboration.
That said, unlike bitcoin, we believe that Blockchain technology will become mainstream and that it will disrupt accepted processes across many industries. It is the social, legal and financial challenges that these changes raise that may prove a much harder problem to solve.