With a market cap surpassing $200 billion, Bitcoin and other crypto-assets can no longer be ignored. Heralded by technologists and financiers alike as a major disruptive force, these new technologies are shaking up one of the few industries that hasn’t been significantly disrupted by software. So will this new technology be a sustaining evolution or radical revolution for finance? And how will other industries be changed by this new paradigm?
This year alone, early-stage venture has been eclipsed by crypto as over $2 billion has been invested in new blockchain companies via Initial Coin Offerings (ICOs), a public capital-raise process similar to an IPO. Every major commercial and central bank around the world now has an internal working group investigating how blockchain technology can be adapted to increase efficiency and transparency for existing enterprises. Given that clearing and settlement, payments, trade finance, identity (KYC/AML), and syndicated loans, along with numerous other processes, will all be improved by blockchain technology, it’s clear that the impact financial services — both in improving existing processes, and enabling entirely new ones — will be massive. It’s evolution and revolution at the same time.
While the world begins to grapple with the implications of cryptos for finance, some people are starting to dream even bigger. The blockchain technology that underpins Bitcoin can also be applied to other uses. Blockchains are, in fact, a fundamental breakthrough in computer science that will change everything — not just finance. Blockchains are the first tools to ever provide the ability for people to come to agreement about shared data with no central authority. It may simply sound like a database innovation, but the process of “decentralized consensus” offers possibilities that until now have been unthinkable.
Take the internet for example. As information is digitized, amazing new opportunities have opened up. Books and libraries gave way to websites and Google. The “internet of information” provides paradigm-shifting advantages like the democratization of knowledge and the ability to program information in ways (e.g. the hyperlink) that were impossible when content was stored in analog form. When these implications were first envisioned by early internet pioneers, they were fantastical and hard to believe. Today they’re simply our reality.
Information abundance is here to stay, but we still haven’t figured out how to digitally represent value or scarcity. “Value” is the ethereal term we use to describe something that begets utility, but value is also directly related to how scarce something is: if an item or idea is easy to gain or access, it is typically seen as less valuable; if it’s highly sought after and scarce (i.e. difficult to obtain or access), the value will be greater. But when the cost of copying something is free, that thing is no longer scarce, and its price (or market value) approaches zero. This creates a tension between the “real world”, where the cost of creating something is non-zero, and the “digital world”, where the cost to copy something is free. While movies or music can be extremely expensive to create, the cost of copying them is nothing.
Until recently, the only way to digitally represent value or scarcity was to depend on a central coordinating party. Information about money at banks, financial derivatives at exchanges, or real estate in communities, are all recorded by large institutions that provide security and trust that information will be appropriately recorded and kept secure — that they will faithfully represent scarce assets in the real world. This process of coming to agreement about the state of something, for instance, how much money people have or what assets they own, can be called consensus. Until recently, consensus was only possible through trust in central entities of authority. Now, blockchains have made decentralized consensus possible, and that’s the key element that opens a grand landscape of new possibilities.
It’s also important to remember that while finance is the first sector to be transformed by blockchain technology, it will be the first of many. Blockchains solve core coordination problems for people in the same way the internet has. For the first time, developers have an “API to scarcity”, enabling a permissionless and programmable “internet of value.” All kinds of applications of this technology are now possible — a universal identity system, self-organizing supply chains, data marketplaces…. This revolutionary new infrastructure will enable profound new possibilities that cannot be imagined today, just as today’s large internet-native companies were impossible to imagine in 1990. The ballgame is just getting started, and finance is simply the first half of the first inning.