Blockchain looks set to become a disruptive technology in financial services. At least, the potential has been verified now that a clear demarcation has been drawn between Blockchain – a programmable distributed trust infrastructure, and Bitcoin, a tainted virtual currency.
Blockchain isn’t new but there is certainly a fresh buzz about it and it wouldn’t be the first innovation that had to wait in the wings until it found its killer application. Innovations that struggle before finding eventual success often fall into 1 or more of these 3 categories:
1. They were trying to discover something else
Famously, the sticky stuff on Post-It notes was the result of 3M’s failed search for a powerful adhesive which took many years to become an overnight success.
UpJohn Pharmaceuticals were testing Minoxidil as a drug to control blood pressure when it became visibly apparent it encouraged hair growth. The drug eventually made millions under the Rogaine hair restoring brand. Similarly, Viagra’s true potential was discovered when patients in its unsuccessful trial as an angina treatment started experiencing an even more uplifting side-effect than the hairy hands of the UpJohn scientists.
Physicists Penzias and Wilson thought the interference on their radio telescope was down to bird droppings until they were pointed in the direction of the cosmic microwave background radiation left over from the Big Bang. The 1978 Nobel Prize followed when it was confirmed they had found it.
2. We proposed the wrong use for it
The household fridge was never going to be the prime use case for the Internet of Things [IoT]. Smart Fridges hit the market way back in 2000 but nobody bought them because they knew what was in their fridges anyway and they didn’t want a $30 surcharge for internet orders. 16 years later the IoT is big news again and even now, lazy futurologists tout the obsolete Smart Fridge, which is no more part of our near future than the Jetsons’ house or a light saber. Meanwhile, the ubiquity of reliable networks, sensors and mobile GPS technology sees individuals and businesses monitoring the safety, health and movement of themselves and assets of all kinds.
3. The world wasn’t ready yet
Aluminium, aka aluminum, took almost a century to find its niche as the principal material of the aerospace industry. Until that point, like graphene today, it was given all kinds of novelty uses, from Napoleon’s cutlery set to the cap of the Washington Monument.
Some communication technologies only work when a community exists, and that poses a large barrier to entry into corporate marketplaces unless a suitably large internal requirement is met. All new communications technologies require infrastructure so shrewd manufacturers develop hybrid solutions to ease the transition.
Blockchain and the Bitcoin Problem
Numbers 2 and 3 apply to Blockchain and it has struggled with its inclusion in a 4th, more ominous, category that generally sees innovations fail altogether – negative association. With Bitcoin perceived as the logical extension of Blockchain, any damage to its reputation was going to have a knock on effect. This proved to be the case as PR problems with Bitcoin have included:
- Associated with criminal “Dark Web” transactions
- Prone to huge value fluctuations
- Seen as a fad, only adopted in get rich quick schemes
- Lack of acceptance/infrastructure
- Perceived lack of security
- The Japanese MtGox Bitcoin exchange bankruptcy in early 2014 and various start-up crashes since
- Paranoia about unrealizable assets and the seizure of “Dirty Bitcoins”.
The New Dawn for Blockchain
Taken as a separate entity, Blockchain could be huge. It has potential applications way beyond financial transactions into areas such as Electronic Medical Records and even elections with the concept of Liquid Democracy. As Bitcoin’s fortunes bounce around with the latest development being a proposed upgrade to BitcoinXT, more strategic focus has returned to Blockchain in its own right. Essentially it is just a distributed database but it’s immutable, meaning it can’t be overwritten and changes can only be made when everyone in a defined network agrees. Each new block of code is added to the chain providing a full and incorruptible ledger. The agreed terms of a “smart contract” can be input and a transfer between parties can be authorized and transacted when the terms are met, at a later date, with no further human involvement.
The potential for securities trading is quite apparent. The concept of a programmable “smart security” seems entirely plausible and with that kind of technology functioning smoothly the potential for rationalization across some of the less value-adding, contract processing roles will be significant. The future of derivatives clearing could conceivably lie with Blockchain driven smart contracts. Beyond this, Blockchain has the potential to change the entire concept of value with commodities of all types being directly traded without having to be referred to a third party measure, aka Money.
There are issues to overcome around slow transaction speeds and the required coding style is likely to become a sought after specialism if contracts are to be genuinely smart. A cryptocurrency will be required but there are many alternatives to Bitcoin to choose from, mostly using the “coin” suffix – no points for originality. Ethereum is a Blockchain and cryptocurrency platform which aims to facilitate smart contracts for financial services. It is also one of the players investigating the convergence of Blockchain with the IoT where advanced, remote monitoring and high speed, wide area networks are creating fascinating opportunities for a new generation of automated, on-delivery contracts.
I think we will see major advances with this technology over the next few years anywhere that IT networks, trust, compliance, security and efficiency are relevant. On that basis we could see Blockchain cropping up almost anywhere but please keep it out of my fridge!