Bitcoin was created as a digital currency, with blockchain being the underlying technology. Blockchain removes the need for a centralized intermediary, and establishes a different way to make transactions trustworthy – by using a decentralized ledger. In a traditional bank prior to the digital age, a physical ledger would have been used to record transactions, giving way to digital ledgers that are fully under the bank’s control. A public ledger on the other hand is not owned by any one bank or third party – instead the network as a whole verifies each transaction via a consensus mechanism. Thus, blockchain technology is valuable for a number of different applications.
The term “blockchain” originated from the way individual transactions are grouped into blocks. The public network has a number of nodes that seek to verify each new “block” and each of these verifiers retains a copy of the ledger. The blocks are stacked on previous blocks, forming a chain. Using bitcoin as an example, each “coin” is a string of data that can be used to identify all the prior transactions that this coin was involved in. It is computationally prohibitive to break the blocks and thus the blockchain technology is robust to hacking.
Blockchains can operate either on public networks or on private networks. Public blockchain networks allow anyone to participate in the consensus mechanism – Bitcoin being the prominent example. The blockchain network can also be private, where the transactions are restricted to pre-selected nodes (individuals or institutions). Ripple is a good example of this. While Bitcoin itself may or may not be eventually successful, blockchain technology is a powerful way for distributed storage of transactional information of almost anything that is sold or exchanged, impacting a variety of industries:
• Banking – payments, foreign exchange, loans
• Utilities – power trading
• Insurance – asset history
• Real estate – titles, land deeds
• Peer to peer sharing – reputation and reviews of users
Blockchain technology is today at the stage where the internet was in the early 80s. There is realization that the technology is powerful and can be leveraged for a number of industries. A number of startups are actively working on applications of blockchain, and a select few VC firms have put their full weight behind it.
• Reducing the cost of transactions such as forex, payments and loans.
• Speedier transactions enabled by digital records and elimination of multiple intermediaries
• Wider geographical footprint – international transactions can be processed as quickly and cheaply as local ones
• Increased privacy – individuals are identified only by their alphanumeric ID rather than name and address information
• Greater inclusion – by making records digital it enables seamless data access for billions of people
• Technology barriers – needs a higher than average computer literacy to use blockchain, and there is no centralized customer service for help
• Security – as the recent bitcoin incidents have shown, service providers are vulnerable to attacks but the blockchain technology itself has shown to be robust against hackers.
• Anonymity – the increased privacy in blockchain also imposes a risk that it could promote illegal activities
• Regulatory changes – it is unclear how local and federal governments will regulate blockchain , leaving open the possibility that stringent restrictions could impose additional cost and other barriers
While the applications of blockchain are many, here we highlight a few specific areas of high relevance to current and potential future business of firms
Reimagining Payments and Banking
The oligopoly of Visa / Mastercard / American Express can potentially be broken by a more cost-effective system to process payments based on blockchain. In addition, steep forex fees can be avoided by using blockchain.
Traditionally, if two parties wanted to participate in a monetary transaction, the money must go through a trusted third party (e.g. a bank). This results in fees just to move money from one party to another. An even greater drag on using a third party the associated delays; it can take days for a transaction to go through. There is also a need for identity authentication for parties every session they to participate in a monetary transaction (e.g. pin numbers, passwords, and other forms of I.D.); this creates holes in security and the possibility of breaches. Blockchain allows us to bypass these fees and time delays.
Blockchain will be able to let people around the world that don’t have easy access to financial institutions partake in monetary transactions. There will also be efficient financial structure around the world, since transactions will be quicker and have significantly less turnaround time. Also users have to establish digital credentials only once, streamlining operations. For example, to open a bank account, banks won’t need to carry out the expensive business of checking up on each user, saving time and money. Similarly, loans can be given out more readily if users have a digital identity and reputation that can be readily verified
Transforming the Electricity Industry
Blockchain can be used to facilitate power trading between major utilities and individuals, enabling smarter grids and potentially resulting in a lower carbon footprint.
In many countries, electricity production is centralized to achieve economy of scale. But this also increases chances of a major blackout. In addition, there are often power line losses (5-10%). Load balancing is often a problem – there are fluctuations in power, which is dependent on demand. With the increasing use of rooftop solar and energy storage, individuals can potentially act as energy providers and even-out some of the load; this can reduce future Capex needs for transmission / distribution. This also necessitates a market for electric energy comprising of many parties (utilities, small generation facilities, consumers with rooftop panels, etc) with the need for real-time pricing that takes into account supply and demand.
An example of this already in action is from a startup called TransActive Grid which has enabled a P2P energy sales network based on blockchain technology – essentially creating a small marketplace for decentralized energy. Homes with rooftop solar in a neighborhood can sell energy to their neighbors that don’t have solar implemented into their homes. Blockchain’s open ledger technology allows the end users to negotiate the price of power amongst themselves.
When rolled out nationally, such a model can make electricity cheaper. Decentralized energy grids will help promote the market for renewables – because consumers now have the ability to sell energy. This concept also creates a self-sustaining marketplace where the community decides how much to charge each other for electricity – eliminating the load balancing problem from monopolized utilities.
With the rise of the sharing economy, there is an opportunity to increase asset utilization by letting people share their underutilized assets (e.g. cars, home, rooms, tools). The decision making process is complex for parties transacting since they are doing business with individuals with unknown reputation rather than a traditional company (such as a brand name hotel or car rental). The higher the trust level between the parties, the greater the volume and size of the transactions. By securely credentializing individuals’ information and ensuring the accuracy of reputation information, blockchain can be used to streamline user experience and increase safety and trust in these transactions. There is significant potential for a “social blockchain” database that aggregates social credentials and authenticates previous transactions, effectively helping users carry their “social and trust credentials” across merchant platforms.
Platforms like Airbnb and Uber have largely taken off because of a robust supply and demand they are able to create, which in turn is dependent on the trust built into these systems – reviews, payment processing, ease of contracting, and booking. Each of these is made easier by blockchain for a variety of asset classes. Blockchain could help enhance P2P sharing in the following ways:
By layering in a real-time view of the asset availability and condition, blockchain enables transacting parties to get a fair idea about the asset before they make a decision – this is especially critical for areas like lodging where individual properties from even a reputed owner can differ widely in condition.
Ease of Contracting
Traditionally, contracting between individual parties for peer-to-peer transactions has been a challenge because there was no efficient way to take care of things like no-shows, damage to property, etc. It would be too expensive to draw up a unique contract for each such transaction but having no contract is not an option either. Platforms like Airbnb offer a mix of features to lower this barrier – from providing insurance to hosts to imposing cleaning fees / other charges on guests and taking care of guests’ needs in case of last minute cancellations by the host, Airbnb acts as a medium to increase trust between the parties. Blockchain has significant potential to offer contractual templates for each asset class and a public blockchain platform can be used by multiple platforms interchangeably to manage contracts.
Blockchain can securely store a user’s reputation information such as reviews. Also Blockchain enables integration of a history of transactions securely, ensuring that all reviews are authenticated by counterparties with their unique digital signatures. Thus, Blockchain would allow for a tamper-free review ecosystem.
Securing payment credentials and automating the release of funds upon contract satisfaction can be enabled by Blockchain.
Home-buying and financing are currently subject to significant transaction and insurance costs along with time delays for deeds. Blockchain could reduce title insurance premiums and generate cost savings by reducing errors and manual effort. Land registration systems could help reduce transaction and financing costs. Title insurance is issued to protect a property owner and/or mortgage lender’s financial interest in a real estate transaction (residential or commercial) against loss from title defects.
The problem with the real estate title insurance industry is the premiums themselves are largely determined by the insurer’s underwriting cost factors as opposed to actuarial risk of expected losses; this is because these insurers conduct searches of public records prior to insuring the title, spending a lot of time and money in the process. Blockchain could lower transactional risk, introducing cost efficiencies. If property records were stored on Blockchain (where information was accessible to all parties), the transferring of property title would become more efficient and secure. Through the open ledger system, property records can be validated by consensus and helps eliminate paper based errors. The effects can shake up the real estate industry.
How Can Companies Leverage Blockchain
We have highlighted the above opportunities in payments, energy trading, peer-to-peer sharing and real estate. Apart from these, there is additional opportunity from specific functions and processes within companies:
• Procurement: if procurement switched to a private blockchain, tracking spending financials will be easier. In addition, each supplier can have a private profile with their own quality score that will enable cross-BU visibility on both supplier performance and transactions.
• Identity management: If each employee has their own elaborate profile in a private blockchain, it can enable functional efficiencies. Processes that require identification (e.g. stock issuance, smart contracts, reimbursements, payroll) have the potential to be a lot more efficient.
In addition, business opportunities exist that can act as platforms for novel business models:
• Energy marketplace: There is potential to create a block-chain enabled energy marketplace and accelerate the adoption of distributed renewable energy generation.
• Open platform for reputation management: companies have an opportunity to create the first reputation management platform – this would be well timed given we are on the cusp of ecommerce penetration and increased consumer spend.