The world of blockchain is very fragmented. The abundance of opportunities for implementation, the technical complexity of the topic, as well as media hype around the industry make it very difficult to separate the grain from the chaff.
First, let’s talk about crypto-currencies, as this is the most “noisy” direction, but at the same time the least interesting for real innovations. There are more than 150 crypto-currencies, 30 of which are basic, and 10 of them account for the bulk of transactions.
The main “production” or mining of crypto-currency accounts for China — 60% control four Chinese pools (outside of China, the largest is the Georgian-American BitFury).
After about 50 players have left the market, there are still about 50 active exchange boxes, 9 of which are the main (the three largest — in China).
On all of them, the most popular currency pair is not bitcoin-dollar, but bitcoin-yuan. China demonstrates the constant ability to create bubbles — take at least a sweep of the online lending market, which the local central bank is forced to deal with after a series of bankruptcies and frauds. The speculative topic requires the development of speculative instruments to maintain interest in oneself: such functions as high-frequency and margin trading (“with a shoulder”) are rapidly developing, derivatives are being actively produced, as well as index investment funds. As in the case with any pyramid: you can earn, that’s just not for everyone, but only for those who jump out in time.
However, the largest international banks have been studying and implementing for a number of years the technology of constructing a chain of transaction blocks. According to a study by the World Economic Forum, the total investment in this area was $1.4 billion over the past three years.
A year ago, Mizuho Financial Group, Japan’s largest financial holding, announced the start of a project that uses Microsoft Azure and provides services like Blockchain-as-a-Service. Holding applies it to handle syndicated loans of the company.
In August 2016, four major international banks UBS, Deutsche Bank, Santander and the Bank of New York Mellon announced the creation of a new digital currency based on blockchain technology. Banks will be reconciling and auditing among themselves by these conventional units, so that they don’t have to wait until transfer of traditional money is completed. It is important to note that the pilot program has already been successfully tested. Cryptocurrency was called utility settlement coin. Its commercial use will begin in 2018.
People and Land, Contracts and Countries
At the same time, the most interesting (and promising) areas in the blockchain are all those that are outside the crypto-currencies: health care and medicine, logistics, land cadastre, state and corporate document circulation.
Estonia, which is the leader in the implementation of electronic public services, together with the blockchain startup Guardtime is working to create a single database of medical books for the public, which will be available for information exchange for clinics, as well as for insurance companies.
The same is done by Prescrypt (jointly with SNS Bank and Deloitte) in the Netherlands and BitHealth in the USA. Swedish officials, together with ChromaWay and the partner bank, are creating a single register of land plots on the blockchain in order to ease the process for sellers and buyers, as well as banks that want to use them as collateral.
The state of Delaware, in which many companies from other states and states are registered, introduces a system for registering companies, issuing shares, fixing decisions of the boards of directors, redistributing shares as a result of buying and selling on the blockchain (the same functionality is realized in several states by the Singapore company Otonomos).
It is also important to note the grandiose plan of the UAE in an attempt to transfer the entire state document flow to the blockchain by 2020. Blockchain startup LBRY recently saved from deleting more than 20,000 online lectures and podcasts made by the University of Berkeley due to it's the legal constraints with the State.
The Rise of Smart Contracts
If we return to the financial sector, then everything that is beyond payments and transfers is interesting: trade finance, fixing of pledges, issuance and trade in shares, document circulation between banks and their corporate clients. To be more specific, we are talking about the segment of smart contracts.
The first real transaction in the world with the use of blockchain was in September 2016. It was held by British bank Barclays, Israeli technological start-up Wave and Irish dairy producer Ornua, which concluded an agreement on the supply of cheese and oil for $100,000 to Seychelles Trading Company.
The process, which usually takes from seven to ten days, took about four hours. The use of cryptographic protection and verification mechanisms allowed the transfer of information in an encrypted form, which eliminated the need for its third-party verification, then explained in Barclays.
Another commercial success comes from Russia: the S7 airline carried out through Alfa Bank settlements with one of the counterparties using a covering letter of credit, in which the customer deposits the agreed amount with the executor and requests to transfer it to the bank servicing the performer. The latter receives money after providing evidence of the delivery of services.
The Future vs Regulation
However, the introduction of new technology does not go smoothly. Due to the rigid regulation of the financial market, fintech organizations face an ugly reality. The current paradigm of developer, regulator and the market, the speed of real innovation is severely limited.
For example, fintech organizations in the US have to receive up to 54 separate licenses from various regulators in order to be able to operate on the financial market. Although some countries are more loyal and even form special committees to improve and simplify the procedure for introducing innovations in the financial sphere.
What greatly complicates the task is the set of misunderstandings and bias media coverage of cryptocurrencies. Many countries not only do not recognize cryptocurrencies as settlement currencies but also prohibit their issuing and use at the legislative level. The lack of awareness and wrong associations of bitcoin with the blockchain protocol influences public opinion. Which is also facilitated by various incidents connected with the theft of hackers of bitcoins from trading exchanges.
Naturally, with a fairly strong coverage of news in the media, the population is skeptical about this form of innovation.
The good news is that a negative or defensive position is bypassed by some countries. So, for example, Japan at the legislative level equates the cryptocurrencies to money. The situation is very productive in Africa. Where, due to the absence of a heavily regulated public sector, there is a huge opportunity to introduce progressive technologies. Blockchain is planned to be applied not only to state structures but also in financial and medical sectors. This is reflected in the increased interest in this market among all participants in the fintech industry.
Speaking about the participants, this is a long-established market for opportunities. Like any new technology, blockchain created new specialties. On the market there are already specific occupations that have emerged only due to blockchain:
· Blockchain engineer — core-developer with serious experience in system programming in C / C ++, Go or Java. An analog of the professional who writes the Kernel for Linux.
· Blockchain developer — an analog of a professional who writes a desktop application. Not to forget how Electron’s approach is changing that approach, but that is a separate topic for discussion.
Speaking of programming languages, it should be noted that C / C ++ is important for blockchain developers because most projects are written on it. A smaller part of the blockchain projects is written in Java, although theoretically, you can build chains of transaction blocks in any language.
And the language of the client has long been unaffected. The chances to find work in the blockchain project are much greater among developers who write in a native language without using frameworks. And, of course, you can’t get far without mathematics and knowledge of algorithms. It has become a necessary base. In this regard, it may be useful to work with distributed databases in general, knowledge in the field of modern cryptography, especially asymmetric, encryption and hashing.
Universities are already actively conducting training courses on blockchain. Actively growing sphere of blockchain gradually changes the list of skills that are in demand on the labor market: for example, earlier applied cryptography has not been so popular, and now many specialists are trying to fill knowledge gaps.
In connection with the universality of the blockchain protocol, it is modified and adapted to the requirements of the market or organization. Speaking of the financial sphere, the main stopping factor of the original — the bitcoin core protocol is the bandwidth or TPS (transactions per second). Bitcoin has 7 TPS, while Visa’s infrastructure at peak times is capable of withstanding 60,000 TPS. At the same time, solutions have already been created that allow not only to reach the same values, but also to surpass. For example, the protocol on which the cryptocurrency DASH is built theoretically has no bandwidth limits because it can always scale. By the end of 2016, the throughput was already at 275,000 TPS mark, which means that 20% of the infrastructure has the same capability as the entire VISA system.
The market is gradually filled with small private teams, which are developing the blockchain system and creating cryptocurrencies to order. And since the field of application of decentralization concept is unlimited, we will see more and more applications in the most unusual spheres. For example, more recently Telegram announced audio calls architecture, which is built on the principle of decentralization.
Finance Tech vs Blockchain Tech
However, not everything is so smooth. 2016 (especially its second half) was unexpected for the industry: Fintech doubled every year for four years, but here it increased by only 16% per year. And if we discard the bargain-stricken deal at the end of the year for a round of $ 4.5 billion in AliPay, then it completely sank 6%. If in 2014, more than 230 Blockchain startups were opened, in 2016 this figure was already 160. And although the number of investment rounds increased from 54 for 2014 to 119 for 2016, the average raised amount per round decreased.
Two US companies are fighting for the right to become a “new Swift” for banks around the world — the R3 consortium and Digital Asset Holdings. The first unite 70 partner banks, while the three eminent players left the consortium — Goldman Sachs, Morgan Stanley, and Santander, who among other things own 60% of the shares.
Large banks felt that such platforms and Fintech startups with well-written open APIs are a strategic threat for them, commoditizing their business and leveling out the benefits (in the form of having a license, processing center, issuing cards, compliance service), and began to promote the idea of BaaP Banking-as-a-Platform) — when the bank is not only a technical platform for landing startups but also their final seller to their customers (ABN Amro, Sberbank, and others).
The main motivation for this kind of large banks is the opportunity to retain the “last mile” — the final relationship with its accumulated customer base. In China, the BaaP ideology is practiced by fintech-giants like AliPay and WeChat Pay.
As a result, in the next few years, we will continue to observe the development of the blockchain sector, since the best solution is yet to come. We will also observe the increasing activation of large players in the startup market, new accelerators and more partner solutions to be opened. We will also see more attempts at absorption and what is more important progress in the regulatory sphere, which will only increase the rate of change.