The blog post Discovering the potential of blockchain for your business, introduced the key concepts of the business blockchain, as explained by leading blockchain expert William Mougayar at Pythian’s 2017 Love Your Data conference. But what are the business implications of blockchain, which Mougayar describes as a “catalysts for change”?
Even if you’ve never heard of blockchain, it’s a safe bet you have heard of Bitcoin, the first successful cryptocurrency. Bitcoin is based on blockchain technology, making cryptocurrency the most obvious area of disruption for blockchain technology.
Since Bitcoin was introduced in 2009, it has been joined by numerous other cryptocurrencies, including Ethereum, Dash and Golem. The current value of the 800 or so cryptocurrencies is .83 billion dollars—and growing. Mougayar estimates that another 200 to 300 cryptocurrencies will be created in the next year. For the most up-to-date information about cryptocurrency market capitalizations, visit the CryptoCurrency Market Capitalizations website.
What are the implications of cryptocurrency? Financial assets based on traditional currencies include futures, options, and gold-related commodities that are transacted on, for example, the New York Stock Exchange and NASDAQ. Cryptocurrencies have new exchanges, such as Coinbase, Kraken and Poloniex—which Mougayar describes as “the banks of the future”.
What makes the cryptocurrency exchanges different from traditional exchanges? You don’t need an intermediary, so the process is faster. And you don’t pay any transaction fees. Simply open an account and begin to transact. For example, send money to someone, and they receive it within ten minutes. The process is quick, efficient and saves you money. What’s not to like?! Well, unless you’re a financial institution. For exactly all these reasons, plus issues of governance, most banks don’t like cryptocurrency at all.
Distributed ledger technology
The second blockchain area of disruption that Mougayar discusses is Distributed Ledger Technology (DLT). When a user writes something to a blockchain, it’s recorded and can’t be changed. It’s also shared with everyone else in the blockchain immediately, with no wait time or need for updates and synchronization, as with centralized databases. These characteristics make a blockchain an excellent record-keeping tool.
Financial institutions are very interested in blockchain DLT. A recently released report by Accenture claims that DLT could reduce infrastructure costs for most of the largest investment banks by an average of 30 percent, “translating to $8 billion to $12 billion in annual cost savings”. As an example, the Bank of England is investigating DLT to improve the speed and efficiency of the UK settlements system—and also saves tens of billions.
But although central banks worldwide are exploring DLT, it’s large enterprises in the private sector that will lead in development. To quote Bank of Japan deputy director general Yuko Kawai, in a conversation with CoinDesk: “We believe technologies should be developed in the private sector.”
Another area of disruption created by blockchain is centralized protocols. Mougayar explains: “Think of the blockchain as a new layer of technologies above the internet. We now have new protocols that are emerging, and new applications on these protocols.”
The applications include:
- Decentralized peer-to-peer commerce, such as OpenBazaar, which is like Ebay without listing fees or credit card fees
- Decentralized exchange trading, such as Ox for Ethereum trading
- Decentralized cloud computing using DFINITY
Proof of X
Mougayar describes blockchain as “the next Google”, explaining that today we Google for information, but in future we’ll use blockchain to verify that something happened or that someone owned something or did something. This concept is what Mougayar calls “Proof of X”. As shown in Table 1, the business applications of the “X” are many and varied, from land registry to accounting audits and proof of ownership.
The government of Dubai wants to put all land registry information on blockchain in the next three years, and many African countries are also interested because the secure and trustworthy nature of blockchain will help with fraud management.
Smart contracts, also called self-executing contracts, have been described as “the blockchain technology that will replace lawyers”. The idea is to convert contracts to computer code, then use blockchain’s DLT to record exchange of money, property or anything of value, including receipt of a product or service. You use cryptocurrency to pay for the contract. A contract is “smart” because blockchain automatically enforces the obligations in the contract: the rules and penalties.
There are multiple benefits, including autonomy, security, speed, and savings. There are also multiple applications, including financial services, healthcare and insurance. (I’ll discuss applications in detail in a future blog post.)
The term “token-based models” may sound like a buzzword but it’s just a new application of a very old idea. We use subway tokens to represent money and secure something: a subway ride. Blockchain tokens are even better because we not only spend them, we can earn them.
Both start-ups and established companies are using token-based models. One example of an established company is the mobile chat app Kik, which has 300 million users. The company recently announced that it’s going to raise tokens and give them to users so they can earn and spend based on their actions, such as watching a video.
Mougayar explains that this business model will offer serious competition to Facebook, which he says “takes our attention, tracks where we’ve been and what we’ve done, then monetizes this information by selling advertising—and we don’t earn a penny.” In addition to Kik, another half-dozen companies are challenging centralized business models with decentralized, token-based apps.
Initial Cryptocurrency Offerings
The final blockchain area of disruption that Mougayar discusses is Initial Crytocurrency Offerings (ICOs). The term is analogous to an Initial Price Offering (IPO), and it’s a way to raise money to fund either a protocol or an app. ICO coins can easily be traded, although as pointed out by The Economist “unlike shares they do not confer ownership rights. Instead, they often serve as the currency for the project they finance.”
As a catalyst of change, blockchain offers a wide range of areas of disruption, from cryptocurrency, with its token-based models and ICOs, to the DLT that blockchain is so well known for. Decentralized protocols are spawning new apps. Smart contracts provide autonomy and security. And Proof of X provides verification of ownership and events.
But what does this all mean for business? We’ll discuss the many and varied applications of these disruptions in an upcoming blog post.