To use blockchain or not to use blockchain?
This content aims to enable readers to explore and identify practical uses of blockchain and DLTs (Distributed Ledger Technology). Though I’m a hardcore deep-tech evangelist, I’ll have to agree with some things that people are saying about blockchain technology.
In the simplest terms, there are not many truly useful applications of this technology yet. In my opinion, one part of the reason may be that the focus was heavily confined to pump-and-dump schemes through ICOs.
I almost hear all the haters saying Ethereum, Civic and IOTA are not really useless ICOs. And I may agree with you to some extent, but again, it’s too early to say.
Financial Express wrote a piece titled “No, Blockchain is NOT revolutionary; here’s what startup founders say about overhyped tech” (link). They say that less than 1% of founders in the US and outside have found blockchain to be revolutionary for their businesses. They however, also mention that over 65% and 51% of startup founders believed VR/AR and bots, respectively, to be overhyped.
In order to give perspective to this, I want to bring up another interesting metric. Which is that 9 out of 10 businesses fail. The data that tries to ‘prove’ that blockchain is not worth investing in has multiple holes. Also, can blockchain be applied to absolutely any business? Probably not. It hasn’t reached that kind of scalability nor that kind of generalization. I predict that may happen only 3-6 years down the line. So, to question random founders about their ability (or inability) to fit blockchain into their business and then conclude (through such a limited survey) that blockchain is overhyped is a very skewed perspective.
I know for a fact that different sizes of enterprises (like Accenture, Axis Bank, Boeing, Target, to name a few) are unable to innovate within their organisation due to the corporate mindset, excessive red tape and other reasons. Sure, some may have partially solved this by drilling the “entrepreneurial spirit” into their culture. But they’re all opening up innovation cells and funding external companies. Why? Why would they need this if they could really innovate within?
In short, if some of the biggest businesses in the world are unable to innovate and are looking for outside help, I’d expect smaller businesses to have a similar problem. And that means they don’t have the capability to judge the merits of blockchain and other unexplored technologies bereft various biases. Innovation, however easy it may seem, isn’t. It is often misrepresented. In its depth, innovation really refers to the change of processes to create more effective processes, products and ideas. Can blockchain do that? Absolutely.
Now let’s break down what ‘blockchain’ really is. In its essence, blockchain and distributed ledger technology are nothing but systems that can ensure the integrity of some data in a truly trust-less manner without the need for centralization or a dependency on third-parties. They also allow for smart-contract execution on transactions without the need for any human intervention, and thus remove human error (and corruption) from the equation. Blockchain technology answers one of my favourite questions “Quis custodiet ipsos custodes?” or “Who will guard the guards?” (Juvenal, Satire VI, 347). In the sense that data-integrity cannot be compromised by malicious actors, including malicious owners of said data.
Some people may argue that applying “strong” encryption to data on some data-store is more efficient than blockchain. But this is a sad oversimplification of the challenges involved to build a blockchain-like system through traditional data-stores, not to mention how computationally intensive decryption of data per transaction is.
A lot of people are still under the misconception that blockchain and cryptocurrencies go hand-in-hand. This is not true at all. Cryptocurrencies use blockchain technology to support trustless decentralized value-transfer. They can be thought of as a (successful) use-case for blockchain. Obviously, you may argue that cryptocurrencies have some demerits such as their volatility. This is not really a blockchain problem. It is more so related to the lack of regulation around the trade of cryptocurrencies which causes their value to be determined purely by market forces. This unfortunately also allows sharks to manipulate the market. Hype and stigma also affect prices in a big way.
What are some real merits of blockchain technology? Let’s list a few:
1. Reduction of transaction costs
Blockchain technology enables peer-to-peer and business-to-business transactions to occur without the necessity of a third party. Removing the middleman has seen a significant improvement in process efficiency. Interestingly, one of the biggest contributors to farmer suicide in India is middlemen. Bank transaction costs are so high due to the number of middlemen involved in the process. “In a world without middle men, things get more efficient in unexpected ways”(Harvard Business Review). Imagine a 15-step supply chain where even a 1% transaction fee adds up. A lot of sacrifices are being made to shorten supply-chains today. Complex value-networks may be created wherein profits may be made, even for quite small transactions.
With blockchain, we can enable a world wherein contracts are embedded in code and stored in transparent, shared data-stores, in a truly trustless manner. In such a system, every single process, task and payment would have a digital record and signature that could be identified, validated, stored, and shared. Individuals, organizations, machines, and algorithms would be able to interact with one another with very little friction. This would allow a lot of the work that is done by lawyers, brokers, and bankers to be automated. Interestingly, I think this is where a lot of the stigma around blockchain comes from. Parties that are incentivized to demerit blockchain since they would benefit less from the advancement of it. True advancements as well as adoption of blockchain would allow newcomers to get extensive reach at a relatively low cost – which would put significant pressure on traditional businesses.
3. Faster settlements
Today, transaction settlements are dependent on a huge variety of factors. Let us be clear that ‘transaction’ is not limited to the financial domain. Sure, there are obvious financial transaction settlement use-cases. Such as in the areas of trade finance, foreign exchange, cross-border settlement, and also securities settlement. As a simple example, local time-zones of financial institutions that take part in transactions affect settlement time. In a day and age of high technology adoption, should this be the case? Customs agents suffer manual paperwork-dependent processes wherein there are a lot of international law nuances that need to be addressed. Cannot this be move to a smart-legal-contract executed system? All of these challenges delay transaction settlement and can go away.
4. User-controlled networks
Nowadays, interactions between various actors, whether they are organizations or individuals, usually occur through externally controlled networks. The rules of the network are defined by someone else, and not always the participants of the network. This needs to change. There is motive and conflict involved when external actors design networks that other actors are forced to use. ATMs are a simple example of this fact. Each machine is owned by a single institution, but accepts cards from a huge network. This type of sharing and coordination involves complicated management apparatus, mostly provided by VISA. VISA here, is the central entity that owns the database and transaction processing layer that makes everything else possible. Blockchain can remove the need for VISA, wherein the technology will perform the heavy-lifting of uniting interests and business process of member banks. Imagine a single global blockchain network for enabling interoperability of bank cards. This will replace the need for the hub-and-spoke model that exists today and open up various opportunities for new ideas.