Blockchain is the underlying technology that makes Bitcoin (and other crypto-currencies) possible, but it’s a much broader and potentially transformative technology. It’s a good analogy to consider the blockchain as the internet and Bitcoin a cloud-based application such as email or CRM. The blockchain and the internet in this example are both the broader system that are ideally suited for running applications.
The usage of blockchain as an application platform is already occurring, with global firms such as Maersk (the world’s largest shipping company), conducting tests to track freight on the blockchain. This initiative leveraged blockchain’s unique characteristics to improve efficiency and reduce risk and is just an example of the technology’s promise.
Explaining the Blockchain
The blockchain is a distributed ledger that is continuously updated with records of transactions. It’s a transparent way for everyone involved to keep track of transactions, and eliminates the need for a centralized database. In the cryptocurrency world, this means no government-controlled monetary supply or banking firms are required to process transactions. Blockchain networks can also be built as private structures if for example a company was using them to run applications, but naturally did not want them accessible to the broader public.
Cryptocurrencies operate as peer-to-peer monetary instruments, where the ledger serves as verification of the transaction. The two groups involved in the payment do not need bank or payment processor intermediaries in the processes, because the blockchain is cryptographically protected and immutable. With Bitcoin, the digital currency is not saved to a file, but instead on the blockchain ledger. Transactions are verified and stored on a “block” that is tied to the preceding block, thereby creating the “chain”. Each transaction is permanently time-stamped and stored as an exchange of value. Attempted theft of the underlying transaction is impossible because all the activity on the blockchain is transparently open.
The power of blockchain is its transparency and simplicity that are combined with cryptographic security and anonymity. It moves transactions to a global network, away from powerful intermediaries, to produce an unbreakable ledger of transactions, whether it involves coins, legal contracts, or shipping logs. It’s these capabilities that are driving investment.
Mainstream Attention and ICOs
Blockchain technology is already powering companies that are raising funding through Initial Coin Offerings (ICOs). These events involve a firm presenting their own cryptocurrency tokens in exchange for a certain number of coins of an established cryptocurrency such as Bitcoin or Ethereum. It’s a new funding method that’s completely different from IPOs that feature a stock issuance.
According to data from CoinDesk, there was $40 million of ICO investments in the first quarter of 2017, but that number grew exponentially to $1.7 billion by September. Some companies are raising massive amounts of capital in very short time periods. For example, a company called Filecoin that is proposing to build a blockchain data storage network, raised $200 million in the first hour of its ICO, and is still pulling in funding.
Massive ICOs are prompting financial services companies such as Goldman Sachs to take a closer look at blockchain as a transformative new platform and investment vehicle. The company is promoting blockchain-focused web content and recently completed a six-month test project exploring equity swaps run on the blockchain. When one of the world’s biggest financial services firms takes such interest in the blockchain, companies in all sectors should take notice.
Changing the Industry
Consider the rise of social media from 2008 forward. In that year, data puts the site Blogger as having more users than Facebook, and even has Yahoo! GeoCities ranked at #6. In 2017 we of course know who the market leaders are in social, but could not have predicted the massive global scope of Facebook, Instagram, and other such sites. Companies that saw the promise of the technology and its full capabilities prospered, while others fell off the radar. The cloud and mobile are two other “trends” that have massively shifted how work and play are conducted around the globe.
Blockchain is poised to fundamentally change business because it’s a new way of conducting transactions. The energy sector is one example of an industry that creates many interconnected transactions, from the power generation plant, to a registry provider, then intermediaries of buyers and sellers, before finally arriving at a home or business. The blockchain could greatly reduce the transaction costs of such a dynamic and greatly simplify energy sector management and accounting.
Blockchain is also especially suited to financial services firms, and brings with it several benefits:
- Much faster settlement times (compared to equities)
- Improved performance of contractual terms
- Increased transparency that will build trust and streamline regulatory issues
- Better capital optimization
- Radically reduced costs, making it more feasible to offer services to global markets
Blockchain’s usage in financial services will reduce risk while bringing simplification to an overly antiquated and costly process. Its impacts will be felt throughout the industry, from investment banking and stock markets to personal and commercial lending and insurance. A firm called Celsius is using the blockchain to provide peer-to-peer lending that will threaten the credit card industry. The firm will pay higher interest to lenders and charge lower interest to borrowers because the “bank’s profit” is removed, and instead goes into the pockets of members of the peer-to-peer community.
Another sign of blockchain’s coming prominence is the meteoric price gains for Bitcoin and the use of blockchain for businesses purposes which is prompting regulatory agencies to look deeper at the technology. For example, the SEC is scrutinizing ICOs to determine how they should be categorized, and it and other regulatory bodies will become much more involved once financial services firms move solutions to the blockchain.
If you’re looking to prep your firm for the next era of innovation, then you cannot ignore blockchain technology and its ability to run applications. It’s reasonable to have a fear about missing out on the latest technology, especially one that’s poised to become so disruptive and open up so many opportunities.
To stay ahead of the competition on blockchain, closely watch big global players that are dipping their toes into the blockchain. For example, retail giant Walmart has used this tech since 2016 to track how pigs from China moved from that country to U.S. dining tables. Companies that avoid blockchain are now doing so at their peril.