What you need to know about Blockchain
As an undergraduate business student with little technical background, trying to understand the mathematical principles and algorithms powering blockchain technology was almost impossible. After hours of my own research, I realized that I did not have the technical competence to understand what blockchain technology really was doing, or what it’s applications could be.
That was until the latest HBR article on blockchain called “The Truth About Blockchain” was published by Marco Iansiti and Karim Lakhani of HBS in early 2017. The article aimed to provide a conceptual model to understand different blockchain applications and the overall impact of the revolutionary technology. This piece has been by far the most clear and comprehensive overview of blockchain and its underlying use cases that I have stumbled upon so far. The reason why this article was so clear is because it compares blockchain technology to the rise of the internet and draws on simple comparisons of the two.
So what is blockchain, then?
First, we need to understand that our entire economic and legal systems are built on contracts, transactions, and their records of existence. For example, in a B2B setting, Company A pays Company B when Company B physically delivers goods or completes a service. The parameters for payment are detailed in a contract, which captivates the laws that the signing parties must follow. When the services or goods are provided, Company B receives payment, and a bank records the transaction for proof that it actually occurred. In this case, the record identifies who is involved in the transaction and when the transaction took place, while the contract governed the actions of the parties involved. Identity, time, and governance are at the backbone of our economic engine.
This very foundation of our economic system is old, and ripe for innovation. In a digital world, the way we regulate the control of transactions has to change — and it certainly will with Blockchain.
Blockchain is an open, distributed ledger that can record transactions between two parties efficiently, and in a verifiable and permanent way. Even more importantly, transactions can be programmed to execute automatically with a given set of parameters. Think of blockchain as a complex email that allows you to not only transmit data, but value. Everyone involved in the blockchain network has an identical copy of the records, and certain people in the network are incentivized to validate them. With blockchain, we can identify parties with certainty, time-stamp transactions, and program governance all on a public or private platform. Instead of banks, brokers, or other intermediaries, we have access to a secure platform that transmits data and value, for a fraction of the cost.
The internet followed a specific pattern of adoption: single-use cases, localized use cases, substitution, and transformation. It was first used for a single-use case communication between two computers that had been physically connected through private lines. Localized use cases emerged when companies started using the internet for internal email communications. In the mid-1990s, the internet had burst into the World Wide Web that we know today. Companies emerged that provided missing pieces to the internet ecosystem - hardware, software, and services to connect to the public network. Once the basic infrastructure gained a critical mass, companies began providing substitutes for existing lines of business. Finally, transformative applications arose that fundamentally changed the way value was created. For example, eBay changed online retail, and Google changed web search.
This pattern of adoption can be paralleled to the adoption of blockchain technology. Bitcoin was the first example of a single-use case for blockchain technology. People using bitcoin can send an underlying fiat currency to anyone on the public bitcoin blockchain. Now, we are seeing dozens of localized use cases of blockchain by financial institutions from around the world. RBC, Citibank, UBS, Nasdaq, Deutsche Bank, and Bank of America, are just a tiny sample of the financial institutions working on localized proof of concept blockchain applications — and they are already seeing significant cost reductions amongst the network participants.
Just how significant are cost reductions?
Ray Sharma is the founder of Extreme Venture Partners and was once titled as the world’s greatest mobile analyst at a time when 99% of mobile communications were still texting (aka the blackberry era). He argues that 18–20% of any financial institutions costs are for solving “nuances” such as “are you really who you say you are” or “did that person really own these assets”? Although there is no way to really tell, he estimates that with blockchain, these costs may end up at 2% of total costs or less. When considering the overall size of financial institutions globally, we are talking in the ballpark of hundreds of billions of dollars in cost savings — and this is only considering the implications blockchain has on the financial services industry.
How far along is blockchain today?
As of today, blockchain is in the second stage of adoption when compared to the internet — localization. The next logical step will be for businesses to start substituting offerings using blockchain. This will be one of the longest and most difficult stages of adoption for consumers and businesses. In this case, financial services innovations are just at the tip of the iceberg. There are an infinite set of potential substitution use cases that we could see in the future. Vehicle ownership, patient records, digital ID’s, online voting, loyalty programs, and property ownership are all examples of substitution use cases we may see with blockchain.
Finally, the transformation stage of blockchain that could begin to tear away at the backbone of our economy comes from “smart contracts”. Imagine a world where contracts were coded into money so that the money acted in a certain way, with mathematically defined properties. A company could theoretically set their entire budget for the year by programming their money to only be allowed to buy certain things. Employment contracts and employee pay systems could be fully integrated. Essentially, any commercial agreement could be automatically executed given the service was completed. The governance of money will be automated and frictionless.
Although blockchain has certainly been overhyped in the short-term, its long-term implications are not. It’s important to know that this adoption will take time and will follow an adoption process. Knowing that blockchain is currently in the localization phase, substitution and then transformation are still to come. Like the internet’s adoption that took over three decades, these phases will certainly take a long-time.
The companies providing the infrastructure moving towards the substitution phase are already emerging. Companies such as Nuco and Chain.com will provide the blockchain architecture and code to allow companies to begin providing alternative solutions. This means that the next generation of entrepreneurs that will lead the blockchain revolution will likely be millennials — the young students today that don’t really know what blockchain is — yet.
The future is bright for blockchain, but there is a long-way to go before it reaches its full-scale potential. So, to all my millennial friends — I urge you to try to begin to understand the importance of this breakthrough technology and be aware of how it may impact you in your career. It will be young leaders like you and I who will drive the innovative substitution and transformation blockchain use cases for the businesses we operate or work for in the future.
