Trust is required to execute transactions, from trading shares to sending money abroad. Intermediaries can profit from this dynamic, in terms of transaction fees and time delays, often at the expense of users. It is all too easy for accounting records of large companies to become convoluted, error prone and subject to fraud and data leaks. Tracking an asset through its supply chain to ensure authenticity and ethicality is nigh on impossible to guarantee. Increasingly, organisations are becoming aware of the importance of relationships within their ecosystems beyond their own internal operations.
Since the Bitcoin white paper, that was written a decade ago, we have and are continuing to see an explosion of initiatives and consortia attempting to apply the underlying concepts and technology of blockchain to such ecosystem interactions, with the goal of making them more automated, reliable and cost effective.
If blockchain can fulfil the promises it makes, at the extreme, it has the potential for enabling society-wide change. If that happens – and what form it will take – is still to be determined. In this article we explore the visionary side of this potential, illustrating why there is so much interest in this technology.
The core value proposition of blockchain technology is to provide a decentralised, shared record or “ledger” of transactions. To understand this proposition further take a look at Shodhan Sheth’s recent post “Building on Blockchain”. The combination of decentralised control, being practically impossible to modify and the ability to encode rules and logic in smart contracts, gives a blockchain system itself the potential to act as a trusted intermediary between transacting parties, or at least provide a more solid foundation for establishing trust. We should be wary of imparting too much significance to the role of technology in trust. Trust is an inherently human concern and even the most tamper resistant technology cannot prevent someone from lying.
It is possible to imagine many applications for such a system. For organisations, blockchain technology (or more broadly, Distributed Ledger Technology) could provide a transactional environment that no single organisation can control and thus provide a foundation for ecosystem wide services that have traditionally been thwarted by lack of trust for individuals, blockchain technology could provide the foundation for systems that allow them to take ownership of their digital identity and data. For example, the Personal Black box company, allows users to only share the data they need, such as anonymised health data that allows healthcare providers to have a better understanding of disease. They can even share additional data in exchange for money or other benefits.
It is unclear in the current environment if individuals actually care about this. Outwith of the tech community, it is common for people to choose convenience over data privacy and security. By logging into applications using our Facebook accounts we give away all the information from our Facebook pages to third party apps. Yet major events change opinions on the importance of data privacy: we’ve seen this with a reduction in Facebook’s growth following the Cambridge Analytica scandal which impacted over 50 million Facebook users. New legislation can also change what is acceptable in society. GDPR has raised awareness on the use of data. The Information Commissioner’s Office (ICO) shows a rise in data complaints to the ICO since it took effect, growing from 21,019 in 2017/18 to 41,661 in 2018/19. Moreover, while previous generations may have handed over their data in exchange for internet services, those who have always had access to the internet are less likely to assume they need to give something in exchange. While blockchain may form some part of solutions in this space, we should be careful not to see it as an immediate solution. The very nature of it being a public, shared, tamper resistant and immutable record is in direct tension to most of the principles of GDPR.
The Trust Problem
Another core proposition of blockchain is providing a mechanism to help people trust each other at a greater scale and with a reduced overhead in terms of intermediaries. When normal payments between domestic bank accounts are instant and free, people are baffled when an international payment takes 3-5 working days and fees are charged. Eyebrows are raised at payments clearing instantly but taking days to settle. With scandal after scandal, the idea of using physical ledgers to keep track of all transactions, requiring auditors and regulators to keep them honest, appears ripe for reform.
At a first glance, institutions making money from fees charged for acting as an intermediary, or harvesting user data, would have no incentive to adopt this technology. This is not the case. Established players are taking note. Banks have come together to form R3, a consortium responsible for building the Corda blockchain platform and the Corda network, with banks then working together to build applications on top of the platform. While initially focused on financial services, Corda is also being applied in other sectors. JP Morgan have built their own platform, Quorum to facilitate secure transactions. And, as of March 2019, 220 banks had signed up as members of the INN, their Quorum peer-to-peer network. Tech giants are involved as well; a subsidiary of facebook, Calibra, has been instrumental in forming Libra. They and other established players in payments, tech, non-profit, and telecommunications, have each put up $10million to be part of the association. This is no small investment!
It’s important to take note of why established industry players are doing this, and how. The majority of bank-based blockchain innovations keep the established players as central to business processes. For example, permissioned blockchains in which only those approved are able to join, centralised nodes that issue tokens for which the banks conveniently hold the physical assets, and faster transactions that reduce cash flow issues with existing settlement times. This allows banks to profit from the efficiency gains of blockchain without actually undermining their centrality in transactions. They can skim off the profits by still setting interest rates on issuing “stable coins”. Additionally, Facebook maintains its business model of data harvesting by being suitably vague about what financial data they have access to as part of the Libra association. To quote the white paper, they “will continue to evaluate new techniques that enhance privacy”…
This is not to say these are bad solutions – they actually show a lot of promise for facilitating international payments and reducing the dependencies on physical banking infrastructure in the developing world. However, they do not live up to the decentralised and permissionless world promised by blockchain visionaries. Some compare this situation to the early days of the internet where organisations built private networks (intranets) to transact in the initial phases but as the technology and infrastructure matured and became more trusted more and more business moved to the public internet.
Established Industry vs Innovators
If established institutions can use these first-stage innovations to appease an increasingly demanding user base then they are at less risk from more innovative start-ups that challenge them. Circle, for example, is a start-up that removes the need for banks to be involved in international payments at all, with instant and free peer-to-peer payments across 29 countries. As brilliant as this is, people are less likely to feel the need, especially for large transactions, when the bank can do it quickly for lower fees than before, even if they still take a cut, it’s worth it for the feeling of security, and transparent dispute mechanisms an established institution provides.
Feeling secure as a customer will be a short term advantage of established institutions until blockchain applications become more normalised. However, disputes are less likely to arise as smart contracts’ underlying transaction logic only act when codified conditions are met. For example, the funds won’t be paid for an asset until the blockchain can verify that the counterparty owns that asset. The funds aren’t held by a third party, and the transaction itself never took place. When disputes do occur you can rely on the underlying ledger for immutable evidence to resolve them.
Disputes will still occur; how they are resolved will differ across applications while common procedures are being developed. Fortunately, they can still include human intervention, because if it has reached this stage the dispute cannot be resolved by the underlying technology alone. One potential solution could be the random selection of jurors to arbiter a case, with incentive to act well e.g. reputation tokens or a stake in the success of the platform. Jurors can view the evidence without removing confidentiality, and can make a decision free of existing biases on gender, class, race, etc. Arguably a fairer and less taxing dispute process than currently exists.
Having explained how blockchain can overcome current hurdles, it is important to remember that major innovations do not historically come from established institutions. Taxi firms did not create Uber, Blockbuster did not create Netflix, and Hilton did not create AirBnB. The market is full of blockchain start-ups. Augur has shown how to reinvent the prediction market, with a decentralised approach to allow users to create markets, buy and sell shares, and crowdsource the correct outcome for quantifiable events – no middlemen required. Everex has undercut Western Union, facilitating remittances on the blockchain via their app. Payments are instant, cheap, and convenient and can be withdrawn in a currency of your choice. They are addressing the lack of digital payments infrastructure in developing countries, such as Myanmar and Thailand, with withdrawal via ATM and tellers. Other companies, like ETHA are planning to go even further, covering 190 countries with a similar solution.
These are only a few examples from 1000s of startups; one of them is bound to succeed. Once they do, it is essential that established institutions are prepared. Building their blockchain capability as they are currently doing is a good first step. However, if all they do is shoehorn their current business models into a blockchain platform, they will find themselves quickly undercut by true innovators. If Western Union send remittances via the blockchain to reduce their own costs but still require users at either end to reach a Western Union branch and pay up to 20% in transaction fees, they won’t keep their user base. To future proof their businesses, enterprises need to reinvent their business models so they can still generate business value even if they were disintermediated. This means using their size and influence to reimagine the ecosystem as a whole, removing unnecessary steps in processes and finding means of generating revenue elsewhere.