Bitcoins and the popularity of other cryptocurrencies have overshadowed the underlying technology which makes cryptocurrencies possible. Following the topic “Simplifying block chain” in a previous post, in this post-Shubham Patel explores the application of blockchain to diverse fields. Towards the end, some major challenges to the technology are also outlined.
A simple definition of the blockchain would be that it is a system of information. This system of information in effect is aiding to a reduction in transaction costs involved in a business. The technology can be used to further reduce costs of international trade, micro payments, trade execution etc. The following industries can benefit the most out of this technology.
The potential application of blockchain in the banking industry is huge. Blockchain has the ability to bring in greater efficiencies across micropayments, international transactions, investment, wealth management etc. According to a Fintech study by Santander, the banks, by using blockchain will be able to cut down their infrastructure costs by around $15-20 billion a year by 2022.1 The benefits, however are not limited to banks, the greater efficiency would result in cost savings for the customers as well.
Consider an illustration where two parties from different countries with no common bank want to transact with each other. In such a scenario, a third-party intermediary hired by these parties would increase the transaction cost. There would also be a delay due to different settlement processes and time zones. Meanwhile, the intermediary would earn interest on the float.
In an alternative scenario, if the banks agree to maintain a central blockchain system for their clients, then there could be a significant reduction in costs. When there is a central ledger system that both company A and company B are part of, they can directly interact and transact on such a platform.
International Trade: –
With respect to international trade, blockchain technology can also enable the transfer of documents in a secure manner. Currently, in an international trade transaction, the seller prepares the shipping documents and then sends them via post to the purchaser. The purchaser then must show these documents to the port authorities, and the shipping company to release the shipment. This prolonged process is followed to ensure a safe and secure transaction” sounds better. The problem gets worse when the shipping company makes multiple stops across the world.
The international traders can be brought to a secure blockchain network where they can transfer these documents. Such a blockchain network will not allow a double spending. Further, the time consumed for such transactions would reduce from several weeks to just a matter of hours. This would reduce the time for settlement from days to instantaneous.
Barclays and an Israel-based start-up company have carried out what they say is the world’s first trade transaction using blockchain technology, cutting a process that normally takes between seven and ten days to less than four hours. The transaction guaranteed the export of almost $100,000 worth of cheese and butter from Irish agricultural food co-operative Ornua – formerly the Irish Dairy Board – to the Seychelles Trading Company. The deal was executed via a blockchain platform set up by Wave, a firm that came through a Barclays development program.2
Smart Contracts: –
Blockchain networks can aide contract based transactions in a much efficient manner than the current practice. This can be done using smart contracts on the blockchain. The introduction of smart contracts is the next development in the blockchain technology which is poised to act as the new building block for the practical application of blockchain.3
A smart contract is essentially a form of the protocol on a blockchain which can facilitate the execution of more complex transactions. Such complex transactions will involve many parties and variables to each transaction. The variables could further be affected by the different clauses of the contract which further dictate the terms of the relationship between the parties.
An application could benefit the entertainment industry.
Royalties are generally received days or months after the revenue is generated. Further, the producers generally retain complete control over the finances and the artist must trust the producer. The execution of a smart contract can prevent the abuse of authority between the producers and the artists. This smart contract would divide the money instantly between the two, and neither of them would have a complete control over money. The various variables for the proportion of revenues to be distributed can also be entered into the smart contract and put in a blockchain.
Blockchain to track Assets: –
Apart from keeping track of a transaction between parties, blockchain technology can also be used to keep track of assets. Currently, the ownership of many distinctive assets such as diamonds are recorded on paper. This paves way for fraud, misrepresentation, and tampering with the documents. The blockchain technology can significantly ease the process of asset identification and transfer. The blockchain can be used to digitize the ownership documents of the asset. Since the ownership can never be with more than one person on the blockchain, forgery or fraud of the ownership of the assets cannot be done.
In the example of the diamonds, a single diamond stone can be traced to the origin of its mine. This would further help in regulation of blood diamonds as authorities can verify the source before the diamond is put on the blockchain. A London start-up, Everledger is using the technology to tackle the industry’s expensive fraud and theft problem or as CEO Leanne Kemp describes it, “putting bling on the blockchain”. Currently, there are more than a million diamonds uploaded onto the platform by Everledger’s team, and Kemp expects this to rise significantly.4
“Blockchain the new digital ledger of economic transactions can be programmed to record virtually everything of value and importance to humankind: birth and death certificates, marriage licenses, deeds and titles of ownership, educational degrees, financial accounts, medical procedures, insurance claims, votes, provenance of food, and anything else that can be expressed in code.5
The applications of blockchain technology are wide covering many different industries. However, these applications face some practical challenges such as:
- Nascent technology
Resolving challenges such as transaction speed, the verification process and data limits will be crucial in making blockchain widely applicable. However, these technologies have been growing by leaps and bounds and the costs are falling significantly. 6
- Uncertain regulatory status
Due to a added feature of semi-anonymity the most popular blockchain based crypto currency (bitcoin) received a notorious reputation for illegal transactions. It has led to development of the dark web market for drugs and weapons. However, recently governments seem to have realized the potential of the blockchain technology which is beyond bitcoin. China is looking for blockchain solutions to help eliminate cash completely.7 Further Japan has legalized bitcoin.8
- Large energy consumption This is a misconception and not a challenge. The blockchain system can work on very low power consumption. It all depends on the form of protocol in the system, the Bitcoin blockchain network’s miners are attempting 450 thousand trillion solutions per second in efforts to validate transactions, using substantial amounts of computer power. However, private blockchains can operate on separate protocols not requiring such high computational power.9
- Control, security, and privacy
While strong encryption, and private or permission blockchains exist, there are cyber security concerns that need to be addressed to the public in order to entrust their personal data. These security concerns can be resolved as more experimentation is done with technology.
- Integration Concerns
Blockchain applications offer solutions that require significant changes or replacement of existing systems. To make the switch, companies must strategize the transition. However, considering the kind of benefits blockchain systems provide there is very less scope of resistance from industries. Moreover, the incumbent players will be wiped out by the blockchain technology.
Blockchain technology provides a prospect for greater efficiency across industries. This prospect comes with its own sets of challenges which cannot be overlooked. The way forward not only requires effort from those within these industries but also from those outside in terms of regulation. The government will have to play a key role especially when blockchain technology comes in direct contact to important sectors such as healthcare, finance, education etc. With such support, blockchain could very well do what the internet did in the 1990s.
List of citations and references.
- Mariano Belinky, Emmet Rennick & Andrew Veitch, The Fintech 2.0 Paper: Rebooting financial services http://www.finextra.com (2017), https://www.finextra.com/finextra-downloads/newsdocs/the%20fintech%202%200%20paper.pdf (last visited Apr 1, 2017).
- Jemima Kelly, Barclays says conducts first blockchain-based trade-finance deal Reuters (2017), http://www.reuters.com/article/us-banks-barclays-blockchain-idUSKCN11D23B (last visited Apr 1, 2017).
- Gareth William Peters & Efstathios Panayi, Understanding Modern Banking Ledgers Through Blockchain Technologies: Future of Transaction Processing and Smart Contracts on the Internet of Money https://www.ssrn.com/en/ (2017).
- Grace Caffyn et al., Everledger Brings Blockchain to Fight Against Diamond Theft CoinDesk (2017), http://www.coindesk.com/everledger-blockchain-tech-fight-diamond-theft/ (last visited Apr 1, 2017).
- Don Tapscott & Alex Tapscott, Blockchain revolution 7 (1 ed. 2016).
- Cocco, L., Pinna, A. & Marchesi, M., 2017. Banking on Blockchain: Costs Savings Thanks to the Blockchain Technology. Future Internet, 9(3), p.1. Available at: http://dx.doi.org/10.3390/fi9030025.
- Joon Wong, China’s central bank is hiring blockchain experts to help it kill off cash Quartz (2017), https://qz.com/838589/chinas-central-bank-is-hiring-blockchain-experts-to-help-it-kill-off-cash/?utm_source=qzfb (last visited Apr 1, 2017).
- Kharpal, A. (2017). Bitcoin value rises over $1 billion as Japan, Russia move to legitimize cryptocurrency. [online] CNBC. Available at: http://www.cnbc.com/2017/04/12/bitcoin-price-rises-japan-russia-regulation.html [Accessed 13 Jul. 2017].
- Iansiti, M. and R. Lakhani, K. (2017). The Truth About Blockchain. [online] Harvard Business Review. Available at: https://hbr.org/2017/01/the-truth-about-blockchain [Accessed 25 Aug. 2017].