Much has been said about Blockchain and how it will, literally, change the entire world. Blockchain is the hip and relatively new technology that has been described as the second coming of the internet. Most people are familiar with it based on the cryptocurrency, bitcoin, a pseduo-anonymous, distributed, public distributed ledger of currency. Depending on how you use the vocabulary, bitcoin/blockchain could refer to a variety of things ranging from the algorithm, the protocol or the currency. It’s been claimed that the blockchain can be applied to “all human endeavors”–as has been foretold since bitcoin came into the public view. It’s important to remember that blockchain technology is part of a cryptocurrency but a cryptocurrency is focused on payments while blockchain technology can be used for more than payments.
Regardless of the risk, legal or moral issues surrounding blockchain as a currency, bitcoin technology allows parties with various trust levels to transact together. Blockchain 1.0 really viewed the world through a currency and financial lens–financial transactions between two or more parties. Blockchain 2.0 is based on the idea that “all human endeavors” can be coded (you pick your programming language) into little programs that are baked into the blockchain and “run” based on triggers or other criteria i.e. smart contracts. These little blockchain programs allow you to execute conditional logic e.g. if it rains on Tuesday, pay party “A” 2 bitcoins. Obviously, as soon as a “program” is executing, you run into a large variety of issues such as the ability of that program to run a “trusted” fashion or who gets access to what and whether access can be limited (talk about risk mangement!). Blockchain 2.0 technology also has additional features to serve diverse needs of their users e.g. blockchain tokens/coins for use in representing physical (or even non-physical) assets.
Newer projects such as Ethereum, Hyperledger and others have been created to deliver the Blockchain 2.0 vision. They add the ability to run these programs, control access, create trusted execution environments, etc. I will state for the record that all of these things are needed to create a Blockchain that is useful to business interests e.g. B2B type activities where additional privacy, control and capabilities are needed–governance in general. You could easily imagine taking Blockchain 1.0 and using it carefully to create Blockchain 2.0 capabilities, but Blockchain 2.0 is a bit more a rewrite than a tweak.
This is all very good, but the questions you should start asking yourself is “who gets to cash the check–who really benefits?” The person “cashing the check” really determine how fast things will move and whether they will share the benefits with others.
Blockchain promises to reduce the cost of transactions and make it easier for parties that do not trust each other, to conduct transactions. Does that mean that banks are not needed and the cost of a transaction becomes minuscule unlike today? I’ll mention that the concept of “transaction” related to banks may or may not mean exchanging payments, it could also mean “asset management.”
If so, the consumer benefits, the banks do not. Or does it mean that banks are still needed, maybe they are not called banks anymore, but a middleman is still needed. If so, then the “new middleman” benefits at the loss of the old middleman (ala Platform Scale). Consumers may lose for awhile due to an increase in choices/confusion.
The technology can deliver benefits. However, it is interesting to consider:
- You will still need alot of computer servers and people to feed and care them.
- The actual blockchain can be viewed as a database that talks to other databases to sync up and update itself. Sometimes the algorithms require alot of computational power.
- You’ll still need to administer the process e.g. in Blockchain 2.0, someone has to give “permission” to transact.
- There are legacy assets that need to be retired over time and sometimes this takes a really long time–as in decades.
- There will probably be multiple, maybe thousands, smaller transaction networks setup for specialized interests and uses. This means that all the above issues are multiplied by “n.”
- It is hard to get people to agree to use the same standards across the entire stack of an application unless it gives them an advantage.
- New technology and its applications that enable new scenarios can create challenges to managing risk—not transaction risk but overall risk of the activities the transactions support.
- Perhaps most importantly, if you transact with Bitcoin 2.0, you have to trust the platform to execute, which means you have to trust the people running the platform, which is exactly the issue we have today, “who do you trust?”
Bitcoin 2.0 thinking is designed to be more business friendly e.g. less computational power needed and more access controls. As Bitcoin 1.0 becomes Bitcoin 2.0, the types of issues present in today’s systems crept in and imposed an overhead and burden similar to the way the same requirements burden today’s environments. The key issue though is that IF companies can agree to use these new technologies together, then their total cost of ownership CAN go down. In other words, if companies collaborate smartly to transact, then yes, costs can go down and benefits can increase. This was true 30 years ago as well–standardization can benefit the entire ecosystem.
So its clear there can be a benefit. Most likely companies will benefit first as they will incur the initial investments and most companies will not fully transfer everything over to the new platform. Eventually, consumers will benefit as existing goods and services can operate under cheaper transactions. Cryptocurrencies are where people can obtain a benefit fairly quickly if you can become comfortable with the use of non-fiat currency. Government regulations will eventually catch up.
So back to the title, Blockchain can definitely change everything. Companies could benefit the most first, incrementally. There can clearly be a shift in the players and there are opportunities for startups to disrupt if they can get out far enough ahead using Christensen‘s definition of disruption.
But I am not convinced that it is a tidal wave about to hit me this year or next (2019 looks like a strong blockchain year with 2018 being a ramp) especially since large corporations most likely hold the keys to deployment speed and deployment functionality. For example, today, there are only a few firms that really hold the “ledgers” (custodians) for financial accounts. These players are enormously powerful and “trusted” for good reason. That’s not going to change. They are the only ones that will really lead the charge in the financial sector because they own the “transactions.”
They are not going to go away quietly or at all. They will probably create a bitcoin-based system that benefits them–the new market makers. Whether good or bad, they will deploy blockchain first and reap the benefits of the investments and they are the ones who will create a system beneficial to them. It is doubtful if they will ever pass along the benefits since they must still maintain legacy systems, they’ll have two systems to maintain. More importantly, why should they pass along the benefits to others? A smart person, with morals not strictly aligned with public benefit, will seek to make money and enhance their position. It is known that this is exactly what they are doing, right now.
Sure, there are other types of “custodians” who hold the ledger today. But due to a variety of factors, once you back away from a “single, transparent system that untrusted parties can transaction with” which is what bitcoin 1.0 is today with its “proof-of-work”, the collaboration and standards benefits start bouncing up against creeping costs to “use.”
Today, there are over 100 cryptocurrencies. Beyond payments, will the future hold tens of thousands of “bitcoin 2.0” ledgers? Fragmentation, even using the same technology, also seems like the bogeyman of the benefits story. In order to try and gain control from current owners, disruptors will try to “own” the bitcoin 2.0 ledger platforms to run smart “contracts.” In the in process the “ledgers” will fragment.
Also, since its doubtful that there will really be any disruption quickly (but it is coming), the limited set of players who deploy these capabilities will reap the reward in the short and near-term. There will be benefits from Bitcoin 2.0 but maybe we (the public) will need to wait…until Bitcoin 3.0, wait, until Bitcoin 4.0, wait, …
Disclaimer: I own a few bitcoins.