Purchasing my first Bitcoins back in 2011 was a career-defining moment. Costing me around a hundred euros for three, after a few days of hard maths and complex theories, my hundred euro investment had led me to a new passion: the revolutionary ‘chain of blocks’ connecting those digital assets.
While this interest in Bitcoin did not make me a crypto millionaire, fast-forward seven years and I stand by my original assertion that the underlying blockchain technology actually outvalues the new currency; in fact, it could change the world. So, why do I say that? Let’s look at some applications and examples of blockchain in financial services.
Blockchain is the first technology that offers a way to fully manage digital assets in a trusted, traceable, automated and predictable way. What distinguishes blockchain is that each ‘block’ is linked and secured using cryptography. Trust is distributed along the chain, eliminating the need for a trusted third party to facilitate digital relationships.
Bitcoin was an early and famous application, for managing digital assets. The second application of blockchain are ‘smart contracts’ whereby contracts can be maintained and managed entirely digitally between participants.
This ground-breaking technology does, however, come at a price, because the whole network needs to invest in it to achieve the necessary levels of trust to make it secure. Given Bitcoin’s particular profile and less reputable associations, other blockchain innovations have emerged that have trust built into the network through the power of reputation. The result is a third application of blockchain: the digital ledger. This is a simple distributed database where an undeniable sequence of events can be logged, possibly as a foundation for automated business process handling.
Given that blockchain is a versatile, automated solution that can be applied to a broad range of business processes, value chains and even business models, its value as the final piece of the puzzle towards fully digital transformation seems clear.
Challenges to address
If blockchain is such a great and unique new tool, then why isn’t it a mainstream service yet? There are two key challenges that need to be addressed for blockchain to enter the mainstream.
Firstly, interoperability. There is no one blockchain to serve all purposes and requirements. And, on top of that, if the financial services industry has taught us anything, it’s that there is great value in creating networks of service providers rather than multiple platforms.
The second challenge is sustainability. There is no way that a consensus protocol like the one used for Bitcoin can offer a long-term solution to high-volume transaction processing because of the huge amounts of energy it consumes. This makes it too slow, resource-intensive and difficult to scale up. While some work has been done in developing alternatives, there is not yet one that has gained enough traction.
Blockchain is clearly a promising technology that needs more time in real life business applications and less time in the lab but we are already seeing how this technology is being applied even if the full reveal is still a little way off.
Ivo Luijendijk is Industry Director for Blockchain and Codex at Atos