A value proposition for the application of blockchain in financial transactions

What do you know about the blockchain?

Published in

Wake Fintech Club

6 min readNov 13, 2015

When asking friends around campus for their thoughts on cryptocurrencies like Bitcoin, I am returned with either a blank stare or a negative quip regarding Silk Road affiliations and the Dark Web.

A few months ago, if someone had asked my thoughts on the currency, I would have responded in the same way.

At the moment, cryptocurrency isn’t on most Americans’ radar. For the tech-media, the most exciting “next big thing” seems to lie either within the realm of virtual reality, driverless cars, or the Internet of Things.

After the crash of 2013, we were told that blockchain tech is just a niche technology. Bitcoin was virtual currency used only by hackers, thieves, and peddlers. The reality is that this ‘binary data’ has no real-world value, and will fall off the map in five years. Right?

Wrong.

The truth is that the application of blockchain technology — the network of decentralized nodes which record and store information, and constitute the backbone of Bitcoin — may just be the most disruptive force to hit the world since Web 2.0.

Here’s Why:

To further understand why this is the case, lets take a look at the technology adoption lifecycle [1]:

According to this model, product life cycle timeline follows a normally distributed curve with each segment representing successive standard deviations (σ) from the mean (μ). Innovators make up the first notable segment of the curve, at -3σ and are said to total to 2.5% of a given total population.

Using bitcoin as a case study, we will assume that the primary growth of this segment (innovators) occurred during the time period between 2009 (when Satoshi Nakamoto released his whitepaper detailing the currency and its underpinnings) and May 2013 (when the currency held its first high profile conference, featuring endorsements from notable VC’s like Marc Andreessen, Peter Thiel, and the Winklevoss twins [2]. During this month, the currency rested at a peak of 132.96 : 1 (USD:BTC) on the 26th [3].

At the end of the end of this month (and the innovator’s segment), the amount of BTC mined totaled to 11,222,850, approximately three quarters (75.86%) of today’s total of 14,793,650 [4].

As a result of the explosion of BTC transactions through Dark Web services like ‘Silk Road’ in conjunction with continual viral media coverage, BTC rose in value and reached its ‘Early Adopter’ segment (-2σ) .

In his book Crossing the Chasm [5] Geoffrey Moore adds a wrinkle to the graph. He proffers the idea that a chasm exists — after the early adopter segment — which “separates the early market and early adopter visionaries from the early pragmatists”. A visual representation of this idea is expressed below:

Understanding this chasm is crucial to products reaching critical mass. This is the exact spot on the timeline where the “Next Big Things” of generations past failed (look into products like the Betamax, Newton, Dreamcast, and more recently, the Google Glass). These technologies were groundbreaking and technologically superior to their competitors, but failed due to their lack of mainstream adoption. If we follow along Geoffrey Moore’s model, these innovations failed because their value proposition lacked “real-world pragmatism for consumers” [6].

Thus, in order for blockchain-backed tech to avoid this chasmic pitfall and make moves towards widespread adoption, consumers must recognize an easy to use, practical incentive for BTC transactions.

This is where the rising trend of mobile payments through NFC and RFID plays an important factor. Below is a figure published by Deloitte University, which highlights the near exponential growth that mobile payment transactions have witnessed since 2009 (right around the time bitcoin was launched)

If the trend here is any indication of the future, mobile payments are here to stay (check out the academic research), and will become a driving force for enterprise-consumer transactions in the near future.

Here’s where things get exciting.

At the moment, when a consumer utilizes mobile payment methods while making a physical purchase with a credit card — using Apple Pay at a store, for example — five parties are involved in what should be a two party transaction.

Let’s flesh out a familiar scenario:

A consumer decides to make a purchase.

He or she initiates a purchase by hovering an iPhone over a Visa PayWave Machine or equivalent (which a store had to buy for a significant investment). [7]
The phone’s near field communication chip sends the buyer’s credit card information to the PayWave machine. — Visa takes a percentage, called an interchange fee. [8]
The buyer has purchased goods on credit. Visa pays closes out balance with cash, charging vendors a fee, called a base processing fee.
The enterprise finally receives the money, after a delayed period, and is exposed to further chargeback fees.
Finally, enterprise must pay markup fees. These fees are cast under a wide net of titles, including statement fees, network fees, PCI fees, and gateway fees.

In this scenario, there are costly and unneeded intermediary steps (see bold). If the standard transactional process is already digitized and automated, then why are we unnecessarily giving away our money to firms which may be less trustful than the blockchain. [9]

Banks own the computers which handle the data storage and record transactions. As a decentralized processing network the blockchain would permit participants to collectively and securely record this data, completely cutting out the middlemen. Efficient business practices would tell us to always cut out middlemen (See disintermediation).

Now lets go through an alternative scenario:

A consumer decides to make a purchase

He initiates a purchase by hovering an iPhone near a store’s NFC capable device (this can be another smartphone, tablet, or any ordinary NFC-enabled device)
The store’s tablet sends a Bitcoin address and a requested amount, which is displayed on both devices’ screen. No percentage charge necessary.
Confirming the payment causes the phone to create, sign and broadcast the Bitcoin transaction as normal. The store’s Bitcoin node will receive the transaction a few seconds later (rather than waiting a few days for the transaction to be processed by a card vendor).

And that’s it. If the enterprise is worried about the volatility of the currency, they can instantly convert to USD, saving them all the costs of transaction and chargeback fees — leading to a more desirable price equilibrium spread for both consumers and enterprise.

We should also note that this process requires no sunk costs for hardware — users and vendors already have NFC enabled smartphones.

Once a company successfully creates an automated software model that treats the currency as a vehicle, using secure identity verification system for the private key and creating API’s which work seamlessly with the checkout for existing digital e-commerce sites, we will see a jump from the early majority into widespread adoption.

By combining the foundational principles of the internet (decentralization with blockchain technology), the Internet of Currency (coined IoC) is born. The value proposition is lies at the feet of enterprise (1–3% increase on profit margin per transaction), the question is, who will build the software infrastructure?

For more information on all things related to blockchain technology check out Wake Forest’s premier cryptocurrency/blockchain research group at wakefintech.club.

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Works Cited