Distributed ledgers and the future of value
Trust is a foundational element of business. Yet maintaining it – particularly throughout a global economy that is becoming increasingly digital – is expensive, time-consuming, and, in many cases, inefficient. Some organisations are exploring how blockchain, the backbone behind bitcoin, might provide a viable alternative to the current procedural, organisational, and technological infrastructure required to create institutionalised trust. Though these exploratory efforts are still nascent, the payoff could be profound. Like the Internet reinvented communication, blockchain may similarly disrupt transactions, contracts, and trust – the underpinnings of business, government, and society.
Discussions of blockchain often begin with bitcoin, the cryptocurrency that gained notoriety as much for its novelty as for the volatility of its valuation. In a fog of media reports driven by bitcoin's associations with dubious use cases,1 the far-reaching potential of blockchain – the technology underpinning bitcoin – remained largely obscured. Yet, that is changing. Organisations throughout the public and private sectors have begun exploring ways that blockchain might profoundly transform some of their most basic operations, from the way they execute contracts and carry out transactions to the ways they engage customers and more.
What is blockchain? Simply put, it is a distributed ledger that provides a way for information to be recorded and shared by a community. In this community, each member maintains his or her own copy of the information and all members must validate any updates collectively. The information could represent transactions, contracts, assets, identities, or practically anything else that can be described in digital form. Entries are permanent, transparent, and searchable, which makes it possible for community members to view transaction histories in their entirety. Each update is a new "block" added to the end of the "chain." A protocol manages how new edits or entries are initiated, validated, recorded, and distributed. With blockchain, cryptology replaces third-party intermediaries as the keeper of trust, with all blockchain participants running complex algorithms to certify the integrity of the whole.
It seems ironic that as digital transforms the world, one of its more promising building blocks is a throwback to our decidedly analog past. Blockchain is the tech-charged equivalent of the public ledgers that were once used in towns to record everything of importance: the buying and selling of goods; the transfer of property deeds; births, marriages, and deaths; loans; election results; legal rulings; and anything else of note. Instead of a bearded master wielding a long-stemmed stylus to record minuscule entries into an oversized book, blockchain uses advanced cryptography and distributed programming to achieve similar results: a secure, transparent, immutable repository of truth, one designed to be highly resistant to outages, manipulation, and unnecessary complexity.
Figure 1. Blockchain: How it works
Blockchain's ability to replace middlemen with mathematics is precisely why this technology matters. It can reduce overhead costs when parties trade assets directly with each other, or quickly prove ownership or authorship of information – a task that is currently next to impossible without either a central authority or impartial mediator. Moreover, blockchain's ability to guarantee authenticity across institutional boundaries will likely help parties think about the authenticity of records, content, and transactions in new ways. Consider, for example, the efficiencies that shared ledger technology might bring to the labyrinthine global payments market. Or how a secure, transparent, transactional environment might help developing countries reduce the estimated $1.26 trillion they lose each year to corruption, bribery, theft, and tax evasion.2
The financial services industry (FSI) plays an important role as today's institutional authority of record for payments and remittances, the issuing and trading of securities and trading, and ownership of financial instruments. It comes as no surprise, then, that FSI organisations are aggressively pursuing blockchain investment and experimentation. Outside of the financial sector, organisations across industries are also ramping up their own blockchain programmes and exploring opportunities, with next-generation payments, loyalty and rewards platforms, smart contracts, asset management, and exchange scenarios leading the charge.
Meanwhile, venture capitalists have invested roughly $1 billion in 120 blockchain-related start-ups – half of that investment taking place within the last calendar year.3 Investors recognise that the blockchain ecosystem lends itself to different use cases and technology enablers, from payment processors and digital wallets to cryptocurrency exchanges and blockchain-based platforms. Analysts at one investment bank commented on this trend recently, saying, "We expect venture capital flows to accelerate in 2016 and lead to further development of the foundational and infrastructure services necessary to create a fertile 'plug and play' ecosystem for entrepreneurs and innovation that may ultimately escalate enterprise adoption from a trickle in 2016 to a multi-year boom starting in 2017."4
Blockchain consortiums are forming as well. For example, R3 CEV, representing more than 42 of the world's largest banks, is creating a distributed ledger platform to power FSI's foray into blockchain.5 The Digital Currency Group, sponsored by MasterCard, New York Life, and others, manages and operates a portfolio of blockchain and cryptocurrency investments.6 Enabling technology players are also getting involved. The Open Ledger Project, backed by IBM, Cisco, Intel, the Linux Foundation, and others, has created a standards-based, open-sourced blockchain platform to accelerate adoption and the development of surrounding services.7
Patterns of value
And we're only getting started. With new use cases emerging weekly, it's worth examining both the underlying benefits of blockchain8 as well as the operational areas in which blockchain may add little value. Blockchain often works best when the following conditions are met:
- Transparency: Ease of sharing and visibility are essential features of a blockchain; lack of one or the other of these is often a central driver of blockchain adoption. They become particularly critical in transactions in which more than one organisation is making blockchain entries.
- Trust: The immutability of blockchain makes it nearly impossible for changes to be made once established, which increases confidence in data integrity and reduces opportunities for fraud.
- Disintermediation: With blockchain, peer-to-peer consensus algorithms transparently record and verify transactions without a third party – potentially eliminating cost, delays, and general complexity.
- Collaboration: Blockchain can be programmed to instigate specific transactions when other transactions are completed. This could help parties collaborate without increasing risk on transactions with multiple dependences, or those authored by different parties.
- Security: With private and public key cryptography part of blockchain's underlying protocol, transactional security and confidentiality become virtually unassailable. Trust zones can also be established, including open public ledgers and permission-based shared or private blockchains in which participation is limited to select entities.
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1 Bitcoin as a vehicle for funding terrorism: Stan Higgins, "ISIS-linked blog: Bitcoin can fund terrorist movement worldwide," CoinDesk, July 7, 2014, http://www.coindesk.com/isis-bitcoin-donations-fund-jihadist-movements, accessed January 4, 2016; Bitcoin as the currency fueling criminal black markets: Joshua Bearman, "The rise and fall of the silk road," Wired, May, 2015, http://www.wired.com/2015/04/silk-road-1/, accessed January 4, 2016.
2 Mark Prosser, "Today corrupt officials spend your money – tomorrow blockchain will stop them," SingularityHUB, October 20, 2015, http://singularityhub.com/2015/10/20/today-corrupt-officials-spend-your-money-tomorrow-blockchain-will-stop-them/, accessed January 4, 2016.
3 Deloitte analysis and CoinDesk, "Bitcoin venture capital," http://www.coindesk.com/bitcoin-venture-capital/, accessed January 4, 2016.
4 Spencer Bogart and Kerry Rice, "The blockchain report: Welcome to the Internet of value," Needham and Company LLC, October 21, 2015, http://storj.io/TheBlockchainReport.pdf, accessed January 4, 2016.
5 R3 CEV, http://r3cev.com, accessed January 4, 2016.
6 Fitz Tepper, "Barry Silbert launches digital currency group with funding from MasterCard, others," TechCrunch, October 27, 2015, http://techcrunch.com/2015/10/27/barry-silbert-launches-digital-currency-group-with-funding-from-mastercard-others/, accessed January 4, 2016.
7 Prableen Pajbai, "IBM spearheads open ledger project, which uses blockchain technology," NASDAQ, December 17, 2015, http://www.nasdaq.com/article/ibm-spearheads-open-ledger-project-which-uses-blockchain-technology-cm555865, accessed January 4, 2016.
8 David Schatsky and Craig Muraskin, Beyond bitcoin, Deloitte University Press, December 7, 2015, http://dupress.com/articles/trends-blockchain-bitcoin-security-transparency/, accessed January 4, 2016.
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