BLOCKCHAIN: AN INNOVATION IN TRUST
It’s been referred to as a “revolutionary technology” by IBM[1], and a “once in a generation opportunity” by PricewaterhouseCoopers[2]. But perhaps the most descriptive title came from The Economist when they dubbed it “the trust machine”[3]. It is a breakthrough in computer science that holds the promise of reducing the cost of establishing and maintaining trust for both individuals and organizations. Businesses will be streamlined, inefficiencies will be eliminated, and the significant impact will be the result of one innovation: blockchain technology.
“Blockchain” is a relatively new term that refers to a specific type of computer database. The Oxford English Dictionary defines blockchain as “a digital ledger in which transactions…are recorded chronologically and publicly”[4]. The etymology dates back to 2008 when the creator of the cryptocurrency “bitcoin” called its ledger a “blockchain”, or a chain consisting of blocks of transactions. Since then there have been many competing versions and iterations, but most operate on the same premise: they are open-sourced, run 24x7 and continuously update in real-time.
What makes blockchain technology unique and ground breaking is that it’s not controlled by any single entity; instead the ledgers are distributed among all parties involved (also referred to as a “distributed ledger”). This means that no central party has ownership of the ledger, therefore no one can individually amend the entries already on a blockchain. This makes the blockchain an immutable store of information.
One of the primary values of blockchains in business is the role they assume by disintermediating middlemen. Because blockchains are decentralized and immutable, counterparties can independently transact and verify the data on a ledger without the need to hire costly third parties to perform similar tasks. Often the role of third parties is to add trust and integrity to transactions, especially between unknowns. For example, in real estate transactions escrow companies act as one of the many third parties who sit between the buyer and seller to collect fees for the service of exchanging funds for documents. In contrast, on a blockchain individuals and businesses would be able to transact directly, peer-to-peer.
“Standard practices that normally involve specialists, like title searches, legal, finance, etc. will be less needed or in most cases totally unnecessary. [Using blockchains] the speed to transact will be shortened from days/weeks/months to minutes or seconds”, explains Jason Ray, CTO of the Urban Land Institute, a global real estate body[5]. The application of this technology in real estate will make waves by increasing transparency, expediting lengthy processes and overall reducing the costs of transacting.
Over $1 billion of venture capital money has already been invested in blockchain-related companies around the world. Leading edge businesses and investors across many industries have begun to recognize that this technology holds the key to revolutionizing the way money, assets and securities are transferred, accounted for and reconciled. The goal is to harness blockchain technology to save time and money for businesses and their customers — the product of which will be increased trust and transparency in many currently opaque industries. One beneficiary will be the financial markets, where the pricing of complex derivative instruments (exotic options on securities, equities and commodities), including those on mortgage-backed securities, contributed to the 2008 financial crisis.
Trust is the key element of blockchain technology. When transactions are executed and settled on a distributed ledger, counterparties don’t need to have an established trust relationship. If each participant in the transaction trusts the blockchain itself then they don’t need to directly trust each other. This opens up new avenues of customers for businesses operating on blockchains. Here is a real-world example in the insurance industry:
SafeShare Global is a modern insurance company that has a unique edge: they employ blockchain technology to offer affordable insurance solutions specifically designed for the sharing economy. Companies such as AirBnB and Vrumi allow users to rent out space to interested parties, however, this means the hosts need to be comfortable letting complete strangers into their homes. This is where insurance plays an important role: to protect the hosts from potential liabilities. (It is important to note that typical home insurance policies do not cover individuals or families when using residences as unregistered quasi-hotels, which forces space sharing companies to offer their own insurance.)
Vrumi, a startup launched in 2014, has partnered with SafeShare Global because they cannot afford to self-insure like some of their competitors. Once a Vrumi host and renter are matched, and the host opts-in for insurance through the website, the material information about the policy gets directly uploaded onto a distributed ledger. At this point all logistics are essentially automated as Vrumi, SafeShare, the underwriter and all other parties involved behind the scenes simultaneously receive and can view the time-stamped information about each policy. The use of a distributed ledger eliminates the need for these companies to employ labor-intensive middle and back offices to handle the details and coordination of each policy.
What differentiates this from a typical database is the immutable and distributed aspect of the ledger. No one can amend or duplicate policy information, otherwise fraudulent policies would immediately be visible by all parties running the ledger. The transparency of this distributed ledger virtually eliminates fraud, which further reduces the costs of doing business for all parties involved.
One of the parties running a node on this ledger is a UK governing body called the States of Alderney. While not necessary, they are adding an air of legitimacy to this pilot insurance program. To be fair, the relevant reason for the government’s involvement is to help protect one of their oldest insurance companies who has taken on the responsibility of underwriting SafeShare’s policies: Lloyd’s of London.
Lloyd’s has been vocal about their willingness to embrace new technologies to help streamline the insurance industry. Their Director of Operations, Shirine Khoury-Haq, elaborated that “blockchain has the potential to improve the way insurers record risk, increasing the speed, accuracy and transparency of our processes.[6]” Lloyd’s recognized that once they approved of the way SafeShare’s distributed ledger operated that they were ready to enter into business with the startup. Expressed differently, Lloyd’s just needed to place trust in the blockchain and not directly in SafeShare itself to enter into this business relationship.
Blockchain technology adds transparency because it is essentially an open window into the inner workings of a business. Without the use of blockchain technology, Lloyd’s would have to trust the methodology in which SafeShare goes about its business, without any direct insight into the integrity of their operations. Blockchain technology reduces the barriers to entry for new market participants like SafeShare because the transparent nature of distributed ledgers means it is much harder for businesses to hide any dubious practices.
The blockchain-inspired relationship between all parties involved in this example is a microcosm of the impact that distributed ledgers will have on the overall economy. Successful new innovations generally save users either time or money, or they add convenience. Blockchains do all three, and the applications of this technology have only just scratched the surface of their full potential. Other implementations of the technology are currently found in banking, healthcare, notaries, digital rights, provenance and the Internet of Things. As the reach of blockchain continues to grow, more industries will feel the disruptive impact of this innovation in trust.
[1] http://www.forbes.com/sites/ibm/2016/03/17/how-businesses-and-governments-can-capitalize-on-blockchain/#6830d3e3a2c8
[2] https://www.cryptocoinsnews.com/pwc-blockchain-generational-opportunity-finance/
[3] http://www.economist.com/news/leaders/21677198-technology-behind-bitcoin-could-transform-how-economy-works-trust-machine
[4] http://www.oxforddictionaries.com/us/definition/american_english/blockchain
[5] https://www.linkedin.com/pulse/blockchain-cre-its-all-speed-transact-jason-ray
[6] http://www.coindesk.com/lloyds-sees-blockchains-potential-insurance-markets/
