United States: Blockchain Technology: Inevitable Disruption Or Inflated Hype?

Last Updated: August 29 2017
Article by Aaron S. Weiss and Matthew E. Kohen

The virtual currency Bitcoin has gained notoriety and intrigued entrepreneurs, finance magnates and governments. Lauded and criticized for its ability to offer relatively fast, inexpensive and nearly anonymous transactions, Bitcoin ushered in a new era of Fintech innovation. For example, it paved the way for the development of other virtual currencies such as Ethereum, Monero and Dash.

Although various virtual currencies offer different features and purport to serve different purposes, most share one key attribute: the blockchain. This article offers a high-level overview of blockchain technology and how it might impact industries such as finance, insurance, smart contracts, real estate and logistics.

Expanding Interest in Blockchain Technology

Today's virtual currency ecosystem is estimated to have a market capitalization of over $90 billion. Virtual currency and its underlying technology have interested entrepreneurs, speculators, and those who wish to transact anonymously; and captured the attention of venture capital firms worldwide.

Large sums of capital are being invested, and incumbents in various industries have begun to explore blockchain technology. Consortia such as R3, Hyperledger, and most recently, the Enterprise Ethereum Alliance, have been established to research blockchain technology and its potential effects on various industries. In the past year, industry consortia have grown in size and popularity, and count Fortune 100 companies, startups and governments among their ranks.

These vast sums of time and money are being primarily directed toward a single goal: determining whether and how the blockchain might reduce market friction, decrease transactions costs or otherwise improve the manner in which business is conducted.

A Blockchain Technology Primer

Generally, the term blockchain refers to a cryptographically secured, distributed ledger. Before the advent of the blockchain, parties to a transaction had to trust a third party, often a bank or other fiduciary, to maintain an accurate ledger and settle the transaction. For example, if Alice pays Bob $10 with her debit card, Bob trusts that Alice's bank maintains accurate records of her account, and that she has sufficient funds to pay him. In exchange for relying on this trust, Bob or Alice may pay a fee to Alice's bank.

The blockchain enables trustless transactions by eliminating the middleman. The blockchain eliminates the need to trust third parties by distributing the ledger to all (or substantially all) market participants. Using complex cryptography and mathematics, the blockchain requires a majority of market participants to agree on a transaction's validity before the ledger can be changed. Absent the consensus of market participants, past transactions cannot be modified. Without a similar consensus and verification, new transactions cannot be added to the ledger.

The immutability and security of the blockchain eliminates the need to rely on intermediaries to verify and settle transactions. If Alice had $5 in her account, the network would not consider her payment of $10 to Bob a valid transaction. If Alice attempted to modify her copy of the ledger to make it appear that she had $10 when she only had $5, the network would reject her copy of the ledger because it contains data that conflicts with the ledger that a majority of the network considers accurate.

Smart Contracts 101

The properties of security and immutability gave rise to smart contracts, which are self-executing computer programs that exist on the blockchain. Smart contracts monitor and validate a condition, and based on that condition, automatically determine whether the asset involved in that contract should be sent to one or more parties. Since they exist on a blockchain, smart contracts, once deployed, cannot generally be stopped, interrupted or otherwise modified. This results in an environment where parties who do not trust each other can verify that their previously agreed-upon terms will be executed automatically and without risk of misconduct or manipulation. Because of these properties, many believe smart contracts may disrupt the way numerous industries operate.

Finance

The above example describes the blockchain's potential effect on the current financial system. Cryptocurrencies use the blockchain to provide secure, decentralized transaction ledgers at a fraction of the cost typically provided by today's financial institutions. As such, individuals may no longer need to trust banks and other intermediaries to administrate their accounts. For these same reasons, blockchain technology could disrupt escrow agents, clearinghouses and other trusted intermediaries that are ubiquitous in today's market.

Insurance

Using blockchain-based smart contracts, insurers may be able to change the way they operate. For example, smart contracts that trigger based on the happening of some external event could lead to the development of increasingly automated claims processes. Blockchain can also enhance companies' ability to share and obtain data from a plethora of unrelated sources, which could offer advantages with respect to risk assessment and pricing. Additionally, the blockchain may allow for more decentralized solutions to current systems, which are expected to increase back-office efficiency and reduce fraud.

Real Estate

Given blockchain technology's immutable, tamper-proof properties, it is expected to be advantageous in areas where access to accurate land and title records is unavailable. Similarly, using a multi-signature transaction, parties buying or selling real estate may be able to reduce transaction costs associated with escrow arrangements.

Logistics

Using the blockchain, parties to complex supply chains may enjoy greater transparency and efficiency, and be better able to combat fraud. This technology is expected to allow participants to track their product at every stage of its journey through the supply chain. Further, existing projects are leveraging blockchain technology to enable previously incompatible systems to share data with one another, as well as third parties such as executives and auditors.

Conclusion

Blockchain technology is still in its formative years. While many theorize it will have the same disruptive potential as the internet, to date, widely adopted uses are few. Although blockchain technology use comes with financial, legal and technological uncertainties, companies should be mindful of its disruptive potential.

Reprinted with permission from the Daily Business Review.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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