The corporate world’s gone blockchain mad.
If companies aren’t exploring its possibilities, they’re being talked about as potential victims of the disruption it will cause.
Whether it’s reducing the time and cost of settling financial transactions or eradicating corruption in the Honduras land registration process, it seems there’s hardly any problem that the distributed ledger technology that underpins Bitcoin can’t solve.
There’s now a lucrative market for blockchain consultants, with tiny start-ups getting paid millions in fees or receiving large equity investments from some of the world’s corporate giants and biggest financial institutions.
What is a blockchain?
What is a blockchain? It’s simply a ledger of transactions outlining who sent what to whom. The difference is that this ledger is distributed and managed by numerous unrelated individuals who are linked to a computer network rather than controlled by one single authority.
When a new transaction takes place, everyone updates their own version of the ledger. If more than half of the ledgers on the network match than the transaction is considered authentic.
Along with the use of algorithms designed by the National Security Agency that link each transaction to the transaction that preceded it, this is believed to make blockchain settlement systems much more secure than those used currently.
In order to manipulate the system, a person would need to control over half of the network and/or successfully alter multiple ledger entries at the same time, which requires an enormously expensive amount of computing power. A blockchain also theoretically can't be destroyed or lost.
Blockchain is also considered a cheaper and faster way of settling: with fewer intermediaries required to get the money from point A to point B, fees would be saved. For example, the ASX (ASX:ASX) believes that switching to blockchain would allow for near real-time settlement of transactions.
It sounds like a no-brainer doesn’t it? A cheaper, faster and more secure way to perform the many transactions that underpin the economy every single day.
With the ASX already suggesting that blockchain could replace the CHESS settlement system and Commonwealth Bank (ASX:CBA) already trialling one in a practice environment, it’s easy to think that blockchains will be in place sooner rather than later.
But before we get too excited and short the life out of settlement companies and intermediaries, it's necessary to consider the design challenge involved.
Currently, the size of the Bitcoin blockchain is around 55 gigabytes and contains approximately 110m transactions, which took Bitcoin seven years to reach. By contrast, the NYSE performs more than 110m transactions every month.
The processing power of the blockchain members' servers must keep up with that needed to run the blockchain or the system could slow or even seize up. This isn't far-fetched given questions have already risen about how much more volume the Bitcoin system can handle.
Any mainstream blockchain will also need to include the same regulators and intermediaries that Bitcoin aims to avoid.
It's unlikely that central banks are going to be happy watching from the sidelines. Nor would regulatory bodies like ASIC, which still need to identify who is behind trades, monitor short selling and be on the look out for illegal activity such as insider trading.
Further, as the integrity of the world’s financial systems would be reliant on blockchain, I hope those designing it take their time and don't give in to the hype that’s infected everyone else.
For instance, 3D printing was another new technology meant to change everything but, so far at least, its impact has been much less than what its most fervent supporters predicted.
Blockchains will no doubt be used in one form or another but whether that is in one, five or even 10 years’ time is anyone's guess.
Moreover, the winners and losers from its use are also unclear (blockchain entrepreneurs aside). Whilst the banks look like being amongst the winners, its impact on a company like Computershare (ASX:CPU) is unclear.
I'm sure of one thing, though: it will be an interesting space to watch.
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