What is the Truth About Blockchain

Jan 29, 2018 | William Vastis


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Like most of us financial professionals over the past year, i have been constantly asked about Blockchain, Bitcoin, Ethereum, Ripple, IOTA and even Crypto Kittys.  That is just a fraction of what is out there and the list will continue to grow in the years to come as what I have learned.   Over the years, the Blockchain is here and will be growing into the market place with the convergence of globalization and the exponential advancements of technology; especially through digital transformation.

 

 

Contracts, transactions, and the records of them are among the defining structures in our economic, legal, and political systems. They protect assets and set organizational boundaries. They establish and verify identities and chronicle events. They govern interactions among nations, organizations, communities, and individuals. They guide managerial and social action. And yet these critical tools and the bureaucracies formed to manage them have not kept up with the economy’s digital transformation. They’re like a rush-hour gridlock trapping a Formula 1 race car. In a digital world, the way we regulate and maintain administrative control has to change.

 

 

Blockchain promises to solve this problem. The technology at the heart of bitcoin and other virtual currencies, blockchain is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed to trigger transactions automatically. Think of when you make a Skype Call to someone,  you are directly connect to that person through your own devices.

 

How Blockchain Works

With blockchain, we can imagine a world in which contracts are embedded in digital code and stored in transparent, shared databases, where they are protected from deletion, tampering, and revision. In this world every agreement, every process, every task, and every payment would have a digital record and signature that could be identified, validated, stored, and shared. Intermediaries like lawyers, brokers, and bankers might no longer be necessary. Individuals, organizations, machines, and algorithms would freely transact and interact with one another with little friction. This is the immense potential of blockchain.

 

Indeed, virtually everyone has heard the claim that blockchain will revolutionize business and redefine companies and economies. Although we share the enthusiasm for its potential, we worry about the hype. It’s not just security issues (such as the 2014 collapse of one bitcoin exchange and the more recent hacks of others) that concern us. Our experience studying technological innovation tells us that if there’s to be a blockchain revolution, many barriers—technological, governance, organizational, and even societal—will have to fall. It would be a mistake to rush headlong into blockchain innovation without understanding how it is likely to take hold.

 

True blockchain-led transformation of business and government, we believe, is still many years away. That’s because blockchain is not a “disruptive” technology, which can attack a traditional business model with a lower-cost solution and overtake incumbent firms quickly. Blockchain is a foundational technology: It has the potential to create new foundations for our economic and social systems. But while the impact will be enormous, it will take decades for blockchain to seep into our economic and social infrastructure. The process of adoption will be gradual and steady, not sudden, as waves of technological and institutional change gain momentum. That insight and its strategic implications are what we’ll explore in this article.

 

Patterns of Technology Adoption

Before jumping into blockchain strategy and investment, let’s reflect on what we know about technology adoption and, in particular, the transformation process typical of other foundational technologies. One of the most relevant examples is distributed computer networking technology, seen in the adoption of TCP/IP (transmission control protocol/internet protocol), which laid the groundwork for the development of the internet.

 

TCP/IP burst into broad public use with the advent of the World Wide Web in the mid-1990s. New technology companies quickly emerged to provide the “plumbing”—the hardware, software, and services needed to connect to the now-public network and exchange information. Netscape commercialized browsers, web servers, and other tools and components that aided the development and adoption of internet services and applications. Sun drove the development of Java, the application-programming language. As information on the web grew exponentially, Infoseek, Excite, AltaVista, and Yahoo were born to guide users around it.

 

Once this basic infrastructure gained critical mass, a new generation of companies took advantage of low-cost connectivity by creating internet services that were compelling substitutes for existing businesses. CNET moved news online. Amazon offered more books for sale than any bookshop. Priceline and Expedia made it easier to buy airline tickets and brought unprecedented transparency to the process. The ability of these newcomers to get extensive reach at relatively low cost put significant pressure on traditional businesses like newspapers and brick-and-mortar retailers.

 

Ultimately, it took more than 30 years for TCP/IP to move through all the phases—single use, localized use, substitution, and transformation—and reshape the economy. Today more than half the world’s most valuable public companies have internet-driven, platform-based business models. The very foundations of our economy have changed. Physical scale and unique intellectual property no longer confer unbeatable advantages; increasingly, the economic leaders are enterprises that act as “keystones,” proactively organizing, influencing, and coordinating widespread networks of communities, users, and organizations.

 

The New Architecture

Blockchain—a peer-to-peer network that sits on top of the internet—was introduced in October 2008 as part of a proposal for bitcoin, a virtual currency system that eschewed a central authority for issuing currency, transferring ownership, and confirming transactions. Bitcoin is the first application of blockchain technology.

 

The parallels between blockchain and TCP/IP are clear. Just as e-mail enabled bilateral messaging, bitcoin enables bilateral financial transactions. The development and maintenance of blockchain is open, distributed, and shared—just like TCP/IP’s. A team of volunteers around the world maintains the core software. And just like e-mail, bitcoin first caught on with an enthusiastic but relatively small community.

 

TCP/IP unlocked new economic value by dramatically lowering the cost of connections. Similarly, blockchain could dramatically reduce the cost of transactions. It has the potential to become the system of record for all transactions. If that happens, the economy will once again undergo a radical shift, as new, blockchain-based sources of influence and control emerge.

 

In a blockchain system, the ledger is replicated in a large number of identical databases, each hosted and maintained by an interested party. When changes are entered in one copy, all the other copies are simultaneously updated. So as transactions occur, records of the value and assets exchanged are permanently entered in all ledgers. There is no need for third-party intermediaries to verify or transfer ownership. If a stock transaction took place on a blockchain-based system, it would be settled within seconds, securely and verifiably.

 

In addition to providing a good template for blockchain’s adoption, TCP/IP has most likely smoothed the way for it. TCP/IP has become ubiquitous, and blockchain applications are being built on top of the digital data, communication, and computation infrastructure, which lowers the cost of experimentation and will allow new use cases to emerge rapidly.

 

With our framework, executives can figure out where to start building their organizational capabilities for blockchain today. They need to ensure that their staffs learn about blockchain, to develop company-specific applications across the quadrants we’ve identified, and to invest in blockchain infrastructure.

 

But given the time horizons, barriers to adoption, and sheer complexity involved in getting to TCP/IP levels of acceptance, executives should think carefully about the risks involved in experimenting with blockchain. Clearly, starting small is a good way to develop the know-how to think bigger. But the level of investment should depend on the context of the company and the industry. Financial services companies are already well down the road to blockchain adoption. Manufacturing is not.

 

No matter what the context, there’s a strong possibility that blockchain will affect your business. The very big question is when.

Source RBC, Nathana Sharman; Singularity University