Contracts, transactions, and the records of them are among the defining structures of our economic, legal, and political systems. They establish and verify identities and chronicle events. Yet the bureaucracies formed to manage these have not kept up with the economy’s digital transformation. Blockchain is a proposed solution to this problem.
The Blockchain is a revolution that builds on another technical revolution that was created by IBM in 1970: the database. Nearly every aspect of our civilization is now dependent upon databases for storing and retrieving data. The Blockchain revolutionized databases about 10 years ago by positing a simple question: what if a database worked like a network – a network that is shared by everyone in the world such that anyone and anything can connect to it? Blockchain experts call this “decentralization”, which offers the promise of nearly frictionless cooperation between members of complex networks that can add value to each other by enabling collaboration without the need for central authorities or middlemen.
Blockchain is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. 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 for transactions. Individuals and organizations would freely transact and interact with one another with little friction. While this all sounds interesting on the surface, it would be foolhardy to believe that a Blockchain-led transformation of business and government will occur in the near term. There are many barriers to be overcome: technological, governance, organizational and societal before Blockchain could make its intended impact. Hence it is likely years away.
Let’s examine an industry that Blockchain could revolutionize: banking. The banking industry is replete with shared resources. Consider the ATM machine: each machine is owned by one institution but accepts cards from a huge network. This sharing requires a complicated management apparatus, primarily provided by VISA, which acts as a middleman. VISA owns the database and transaction processing layer, which makes everything possible. If the ATM process were invented today with Blockchain’s database technology as an option, there would likely not be the need for a VISA-type entity to manage the process. Rather, the technology itself would unite the interests and the business processes of the member banks, and significantly lower costs in the process.
Consider also the start-up market. New business ventures access growth capital by targeting angel investors in the early stages, later they seek venture capitalists, and finally culminate in an initial public offering (IPO) on a stock exchange. The start-up industry supports a number of intermediaries (middlemen) such as investment bankers, exchange operators, auditors, lawyers, and sometimes crowd-funding platforms. Blockchain revolutionizes this industry by making it possible for start-up companies of virtually any size to raise capital in a peer-to-peer way, through global distributed share offerings. Existing players in the start-up market have taken notice and are adjusting for this new normal.
The benefits of Blockchain are cataclysmic to music industry where currently, intermediaries capture nearly all the value and the artist gets paid last. Companies like Mycelia, found by Grammy-winning artist Imogen Heap have developed intelligent songs with smart contracts built in. This enables the artist to sell directly to customers without going through a record label, financial intermediary, or technology company. Royalty and licensing agreements execute automatically and instantly such that the artist gets paid first and digital piracy is significantly reduced.
The applications of Blockchain are virtually endless. Blockchain will be of significant benefit to the healthcare industry, where electronic health records regarding medications, allergies, health history, etc. could be detailed on an open-source, community-wide trusted ledger with guaranteed integrity to all providers and yet preserving the confidentiality for the patient.
Consider also travel loyalty programs (flight, car rental, hotel, dining, etc.), where Blockchain could totally disrupt an industry where billions of dollars of commissions are paid to intermediaries such as Priceline, Expedia, etc. A robust, frictionless partner network would create less hassle, greater options for redemption and increased customer satisfaction.
While Blockchain’s asserted benefits certainly appear promising, societal changes are necessary before this type of system can become a reality. Today, the only impediment appears to be the passage of time.
