Blockchain technology and cryptocurrencies like Bitcoin generated a lot of news this past year. It seems like every week there's another headline touting an upcoming revolution or downplaying this new technology as a fad with few long term prospects. If you are unfamiliar with blockchain tech, or are still building a point of view, let me make the case for revolution.
Recipe for Disruption
Let's start with why we trust doing business with a company. We trust our largest retailers to fulfill our purchases to deliver goods and services. We trust our banks will ensure our account balance is correct and transfers are verified and free of fraud. The systems these companies have in place build our trust. For example, regulations, anti-fraud systems and services that verify transactions all play a role in ensuring business is conducted above board. Credit card companies are a specific example of a 3rd party that charges a fee on each purchase to verify and settle consumer credit. Overall, each of these parties act as middlemen and provide their services for a fee on each transaction.
The number of transactions in our global economy is mindblowing. World wide retail sales are more than $ 20 trillion USD each year, and gross world product (GWP) is over $ 100 trillion. So enormous numbers of deals and transactions use middlemen and their verification services to run trusted businesses. As the cost of doing business, we accept that these intermediaries extract fees on many trillions of transactions to curb fraud and maintain consumer faith. Those costs creep into the economy, driving up living expenses and the prices for goods and services.
But what would happen if there were cheaper or faster ways to verify deals in our economy? If substitutes existed, the savings would be in the trillions of dollars. For example, online payment gateways earn many billions by adding more than 2.9% on each transaction. There's also the cost of lost time. Middlemen all add days and weeks of delays in real estate, loan approvals or license renewals. Cutting the costs placed on every deal and order in the economy would return incredible profits to businesses and disrupt the way we engage in commerce. Injecting savings in the trillions would kick start growth in the global economy larger than what any one government or company could do on their own.
In comes the blockchain
Blockchain technology is basically a decentralized system for recording trustworthy transactions with no middlemen. Using the power of cryptography, each transaction is irrefutably linked to each other and shared throughout a network of computers. Computers on the network automatically verify the terms of transactions, acting as instant accountants "verifying the books" without any fees. So automatic verification of transactions is the basic feature of blockchain technology.
This is how cryptocurrencies like Bitcoin work too. There are a finite number of coins earned through solving computational puzzles or purchasing them from someone else. Someone with the solution to a puzzle can prove their ownership of a coin because their proof is recorded in the underlying blockchain network. Participants in the network cryptographically verify the identity and the integrity of each other's proofs to guarantee who owns which coins.
The impact of the blockchain concept is clear. Using blockchain technology, businesses could save trillions and deliver services faster. Specifically, they could:
- Eliminate the costs of proving transactions are legitimate from 3rd party services, saving trillions per year.
- Enable faster service by instantly verifying the terms of transactions, removing middlemen services like banks, governments and marketplaces.
- Deliver more securely, using the security built into the blockchain without further investment.
- Automate more complicated businesses, like insurance services, using programmed " Smart Contracts ".
Adoption of blockchain technology could add trillions of dollars in savings to the global economy. In these early days, some platforms resemble replacements for middleman services, while others are truly decentralized. In any case, with moderate adoption, it will heavily disrupt the way global businesses settle deals each day by giving them a path to remove bloated costs and overhead.