Blockchain (distributed ledger technology) is a network software protocol that enables the secure transfer of money, assets, and information via the Internet, without the need for a third-party intermediary such as a bank. Transactions are validated, executed, and recorded chronologically in an append-only tamper-resistant database, where they remain available on the Internet for on-demand lookup and verification.
A digital money system such as Bitcoin is the first and perhaps the most obvious application of blockchain technology. Money can be transferred immediately in real-time from one continent to another, at very low costs, and in a matter of seconds or minutes, instead of waiting days or weeks, and paying high commissions, as is the case with current international money transfer and remittance solutions.
Just as the simple mail transfer protocol (SMTP) constitutes the underlying protocol by which Internet users can send an email to each other in a seamless and interoperable way, regardless of their email provider, likewise, the Bitcoin protocol allows people to seamlessly transfer money to one another, regardless of their bank. However, digital currency is but one application enabled by blockchain technology. The four main kinds of applications in development are real-time money transfer and payments, property registries, contractual agreements, and identity confirmation. An increasing amount of everyday operations involving money, assets, and documents could start to be conducted via blockchain-based distributed network ledgers with cryptographic security, and at more granular levels of detail.
The terms blockchain and distributed ledger technology are often used interchangeably. Distributed ledger is the general form of the technology, and blockchain is a specific form with an additional technical detail. Both refer to the concept of a ledger– a file that keeps track of who owns what.
A distributed ledger has four salient features: i) a transaction database shared among network members that is ii) updated by consensus, with iii) records timestamped with a unique cryptographic signature, maintained in a iv) tamper-proof auditable history of all transactions.
Blockchain adds the additional feature of sequential updating of database records per chained cryptographic hash-linked blocks (each block calls a hash of the previous block, effectively linking transaction blocks into an immutable chain, hence the term “blockchain”). There are two kinds of blockchains: public and private. Anyone may use public blockchains such as Bitcoin and Ethereum, and identity is not known. Private blockchains are analogous to a corporate intranet, used by industry consortia and governments, where users are known and credentialled.
Four specific applications that highlight the potential economic benefits of digital ledgers are:
Application 1. Digital Asset Registries
One of the biggest blockchain applications in development is digital asset registries. The same distributed ledger technology provides the means to record and transmit digital goods over the Internet, while ensuring that these goods cannot be copied or multiplied (thereby addressing the double-spending problem that has been an issue with digital currencies previously). A digital asset registry is a listing of smart assets – an asset that is registered to a blockchain and thus can be easily verified and transferred because of this digital registration. Digital asset registries might use blockchains extensively as a system to record, transfer, and verify asset ownership. This could include titles for automobiles, homes, and land.
Land titling systems are a “low hanging fruit” application to demonstrate blockchains in practical use. Some countries have pilot programs underway, notably Georgia, Ukraine, Sweden, and Ghana. A blockchain can be used as a digital registry to record, transfer, and verify asset ownership (home, auto, stocks, bonds, mortgages, and insurance), and to preserve the integrity and authenticity of sensitive documents or records (e.g., passports, visas, driver’s licenses, birth and death certificates, voter registration, contracts, wills, patents, and medical records). An exemplar implementation of digital asset registries for identity services is the State of Illinois’s blockchain-based birth registry project.
Application 2. Leapfrog Technology
One of the highest-impact applications of blockchains could be as a leapfrog technology for global financial inclusion. It does not make sense to build out brick-and-mortar bank branches to every last mile in a world of digital services. Instead, eWallet banking apps might be an effective means of reaching the two billion “unbanked” people in the world. Even without phone-based banking, low-cost debit cards might effectively service the unbanked. These kinds of “FinTech “solutions (i.e., financial technology: financial services delivered by technology) could have the benefit of opening up new markets to service providers who did not have a cost-effective method of addressing these customers previously. The leapfrog impact could be significant as banking services are bundled together with identity services and land registries.
Application 3. Long-Tail Personalized Economic Services
For the blockchain economy, the key point is that not only are long-tail markets economically viable, but also that there is demand for personalized products and services that cater to individual needs. In the digital marketplace, the 80/20 rule – the classic logic that 80% of sales come from the top-selling 20% of items – does not hold. Researchers confirm long-tail economics in digital marketplaces, finding that niche books account for 36.7% of Amazon’s sales. They argue that power laws as opposed to Pareto distributions are a better model for digital marketplace sales for books, music, and software downloads. Amazon, eBay, and Craigslist are digital marketplaces that allow the long tail of economics to meet in the sense of the buyer of a particular rare item being able to find a seller of that item in a way that would not be possible in a mass-market retail store. The point is that, in digital marketplaces, buyers and sellers can transact more granular personalized business than is economically feasible in the brick-and-mortar format.
Application 4. Payment Channels and Peer Banking Services
One of the most intriguing ideas being developed in the blockchain industry is payment channels. A payment channel is a financial contract executed over time in three steps: i) one party opens up a payment channel with one or more parties and posts a pre-payment escrow balance on file, ii) the party consumes against this credit over time, until iii) the closing transaction in which aggregate activity is booked in one net transaction to close the contract. The idea arose for micropayments, such as video bandwidth consumption, where piecemeal transactions do not make sense and an automated contractual arrangement can support aggregate consumption. Payment channels are similarly conceived for regular consumption such as opening up a Starbucks payment channel for $50 each month. The daily coffee consumed is tracked and booked against the $50 channel and netted at the end of the month. Contracts close and roll over at regular intervals. Either party may elect to close the payment channel early, in which case the net settlement would be booked, and the contract would end. Another benefit of payment channels is easing blockchain scalability by only booking the opening contract and the final amount as opposed to interim transactions, while being contractually obligated and protected all along the way.
Payment channels are a speculative concept that is under discussion, but the conceptual implications are provocative. First, the radical implication of peer-to-peer networks is that any node can deliver services to other nodes, for a small transaction fee. This is already how the Bitcoin network operates, with 9,352 worldwide peer nodes hosting the transaction ledger. The mining operation to confirm and log transactions is another network peer-based activity. Storage and news hosting are newer network services, and the implication is that payment channels have the requisite functionality to allow peer nodes to offer banking services.
A further implication of digitized money and payments is that the standard amounts at which we do business could be much more granular. This granularity could possibly allow progress in reconceiving the debt juggernaut impacting individuals and institutions alike. Streaming money could be disgorged in much smaller chunks that are more closely tied to costs and repayment possibilities.
Melanie Swan is the author of the best-selling book Blockchain: Blueprint for a New Economy (2015), which has been translated into six languages.
Swan, M. 2017. Anticipating the Economic Benefits of Blockchain. Technology Innovation Management Review, 7(10): 6-13. http://doi.org/10.22215/timreview/1109