In 1999 I was busy trying to start up a business that would exploit an exciting new technology that allowed people and companies to access the internet on handheld devices. (Hands up if you remember WAP?). During that period I went to many networking events such as First Tuesday, which were full of internet entrepreneurs all with great ideas for changing the world. It was truly an exciting time, and none of us then imagined how comprehensively, and how quickly, the internet would take over our lives.
I felt some of that feverishness again recently when I attended a conference in London’s Docklands that was all about the blockchain. The difference this time is that I also smelt fear. The fear came from the financial institutions, whose skyscrapers loomed over us across the river in Canary Wharf. The representatives of these global businesses were in attendance to learn, but also to present reassuring stories about how they were actually embracing blockchain, a technology that had the potential to completely undermine their whole business model.
Blockchain is a relatively new technology that has come to everyone’s attention through the popularising of Bitcoin, the crypto-currency. Bitcoin relies on the blockchain to validate all of its transactions so that the Bitcoins cannot be spent twice: it is like a traditional ledger, but, crucially, it is not in the control of a centralised organisation (such as a bank). It is distributed amongst thousands of nodes, each of which validate the veracity of the blockchain by majority agreement (as well as cryptography and a burden of ‘proof of work’).
Blockchain without Bitcoin
So, if you take that concept of a distributed, non-repudiable database (the blockchain) that permanently records the transactions of tokens that have some sort of value (e.g. Bitcoins) then you should, without too much head scratching, be able to extend that to other uses. What if the tokens were records of ownership of financial assets, such as shares? Then the shares could be traded between individuals without any need for a stock market to act as a middle-man. Same goes for bonds and futures markets. The clearing houses, that guarantee the financial transactions between two parties, would become redundant as well. Any central bank would lose its core purpose. And what if the tokens were deeds to houses? No need for a land registry. Car registration documents? There goes the DVLA.
It’s no wonder that the big financial institutions are starting to look seriously into blockchain. But can they do anything about it? I honestly believe that no-one knows the answer to that yet – it is just too early in the cycle. What I do know is that a number of the global firms have teams investigating blockchain and running proof-of-concepts. There are few examples of real live applications coming out of them (Nasdaq OMX’s experiment to oversee stock trades on a separate, blockchain-enabled market solely for private companies is probably the best example out there). The most promising efforts though are where a few finance and technology organisations have teamed up with each other, such as in the Open Ledger Project, which brings IBM, Intel, Cisco, the London Stock Exchange, the Depository Trust & Clearing Corporation, JP Morgan, Wells Fargo and State Street together under the banner of the Linux Foundation. The interesting, and worrying, thing about this project is that it will create a new blockchain – an open-source one, but one that has been driven and shaped by some big companies that will have their own agendas. It’s a lot like Google’s strangle-hold on the ‘open-source’ Android mobile operating system.
Which is where the public blockchain initiatives come in, and where the entrepreneurs can really make a difference. Just as Cloud Computing has ‘public cloud’ (accessible by anyone) and ‘private cloud’ (accessible only within an organisation), blockchain is going the same way. At one end of the spectrum, the financial institutions will look to create private (controllable) blockchains and at the other there will be public blockchains, such as Ethereum, which will be accessible to anyone that wants to create applications for it. In between the two, there will be the likes of the Open Ledger Project, and other ‘hyper-blockchains’ that will try to connect the disparate blockchains together.
At the conference I talked with a number of start-up blockchain businesses that are building applications on the Ethereum platform. They included one that verifies the provenance of diamonds, one which validates the veracity of CVs, and another which allows gamers to buy and sell digital assets without them getting ripped off or robbed. These are still relatively small-scale, but they prove the technology is viable. Some of these new businesses use the concept of ‘smart contracts’ – essentially clever versions of the tokens that I talked about earlier. A smart contract can have value, but it can also contain the conditions that define that value, such as termination dates, interest levels, penalties, etc. These conditions are encoded into the smart contract and executed automatically, thus doing away with a lot of the legal burden and cost normally associated with drafting, disputing or executing contracts. Lawyers are another profession that needs to fear the blockchain.
The future impact of Blockchain
It’s clear to me that blockchain technology will have a far-reaching impact on many of the fundamental businesses models that lie at the heart of our established Capitalist system. Blockchain could actually bolster Capitalism by doing away with the centralised institutions, power brokers and inequality that many people perceive to be its inherent weaknesses. Or, together with the inexorable rise of automation in the workplace, it could lead to Capitalism’s demise and transformation into a more equitable, decentralised system based on inherent trust.
All of this may seem a long way off right now, but remember it was only 17 years ago that being able to transfer data wirelessly between devices was just an idea in some entrepreneurs’ heads. The big unknown is whether the timing for blockchain’s coming-of-age will be driven by hungry entrepreneurs or be tempered by the financial institutions. Right now, both are at the start of that journey, and it’s going to fascinating to see it develop.