If you hadn’t spent so much of your time under house arrest bingeing on Netflix and playing Minecraft with your kids, you’d have read up on blockchain. And if you’re in the investment arena, it’s time to catch up. Blockchain technology is reshaping the very fundamentals of trading — replacing something of value for something else of perceived equal value — and finance in ways that we are only beginning to see. In other words, blockchain is the definition of an economic disruptor, touching every imaginable business and industry. In the next few years, blockchain will revolutionize commerce as we know it today.
A Short History of Blockchain
Way back in 2008, about the only good thing to come out of trading and finance that year was the introduction of blockchain.
A person (or group of people, it’s kind of like Anonymous) called Satoshi Nakamoto developed a hack-proof technology designed for the burgeoning cryptocurrency craze, namely Bitcoin. Blockchain serves as the “public ledger” for crypto trades, meaning that it stores digital data related to a given transaction in a series of “blocks” containing the details of the transaction, which are then a “chain” of transactions.
Each individual user ID in a blockchain has a unique signature and a defined spot in the chain. This chain technology makes it difficult, if not impossible, for hackers to break through since they would need to know every block in the chain to break it. When you hear that blockchain is a “Distributed Ledger,” that’s what it means: data is spread through the entire chain. There is no real head to the beast that malware or a hacker could compromise (this is mostly true but not going down this rabbit hole for now).
Here’s an example. As of January 2020, the blockchain for Bitcoin had topped 614,500 blocks. Blocks are stored in a linear and chronological format, so the most recent transaction is always at the end of the chain. If a hacker wants to attack a block, they would have to change the unique signature, or hash, of every one of those half a million blocks. This is what makes blockchain the most secure platform for any financial transactions.
Innovative Blockchain Design for Enterprise Technology
Blockchain tech is the new darling of traders and investors. While cryptocurrency will continue to hog the spotlight; however, the underlying infrastructure that crypto is built upon is the true innovation. There are a number of exciting new enterprise applications using blockchain. These platforms are not only implementing the traditional distributed ledger system, but they have also added smart contract capabilities to the mix and built on existing technologies to create these applications.
Blockchain is a tech geek’s dream come true — it’s the apotheosis of open-source software. It’s collaborative, shared, transparent, and developed for the good of the community rather than for the benefit of one individual or corporate entity. No one owns blockchain. While this business model seems to go against everything you learned in B-school, the immutable security of blockchain makes it the outlier in the proprietary arena. Besides, Fortune 10 companies are implementing these blockchain enterprise applications, so there is clearly an opportunity for profit.
Okay, you’re wondering how a community garden where everything’s free can help your bottom line. Let me introduce you to Ethereum, the only programmable blockchain. Developers use the Ethereum platform to build new enterprise applications — cryptocurrency wallets, financial apps, decentralized markets, and even games: somebody has to develop the nest Minecraft.
How does this work?
A developer uploads their Decentralized Applications (DApps) to the Ethereum platform, where they hum along like clockwork — the app will predictably run as it’s programmed. DApps control digital assets (Ethereum’s cryptocurrency is the ETH) and can create all kinds of new fintech applications. Each Ethereum participant is a “node” and has access to all the data in their blockchain network. To make a transaction happen, the node has to pay “Gas” in the form of ETH.
Ethereum was developed primarily to execute smart contracts. A smart contract is a glorified Coke machine — you drop in your quarter, and a Coke rolls out the door — you don’t have to give a middleman another nickel to facilitate the transaction. When you’re involved with a smart contract, it’s between you and the other party. Once you meet the criteria outlined in the contract, the deal, such as for a new house or a stock sale, is done. Smart contracts allow international transactions to go a lot more smoothly and at speed. Ethereum does the math in calculating the value of various currencies, translating them to ETH, and then sorts it out to the relevant numbers.
The difference between the public-access Ethereum and Hyperledger is that the latter is a permissioned blockchain framework. Hyperledger is also open-source; it was developed and is hosted by the Linux Foundation. Again, don’t confuse this for some sort of socialist approach to blockchain. Global corporate leaders across many industries have signed on with Hyperledger, which allows them to customize their blockchain applications to their individual business needs.
Since the point of Hyperledger is to create a streamlined path for cross-industry applications, there’s a lot more control over who gets access to Hyperledger. Only authorized users can use the platform, something that adds an extra layer of security to the Distributed Ledger Technologies (DLT) it holds. If you’re using Hyperledger blockchain, there’s an easy collaboration and extreme flexibility in customizing the enterprise applications that developers are creating for businesses.
Going a step further, Hyperledger has two permissioned modes: private and semi-private. Private accessibility is generally within an organization; semi-private access is among organizations. The semi-private structure, also known as Federated or Consortium blockchain, has more real-world potential as companies interact with each other. It’s also the default mode for permissioned blockchain.
Real-World Blockchain Enterprise Applications
How does all this crypto techno work in the real world? Profitably.
KomGo SA is a Swiss consortium of international banks, commodities traders, energy companies, and a certification company that have joined to simplify and streamline transactions. It is based on JP Morgan’s Quorum blockchain, an enterprise application on the Ethereum platform. Their mission is to digitize trade finance operations like letters of credit, receivables discounting, and standby letters of credit. Komgo also implements the Know Your Customer (KYC) compliance solution. It is standardizing the KYC process in a seamless transaction without having to use a central database.
KomGo reduces the need for manual processes in trade transactions, so trade operations go faster and with fewer middlemen. The founders — MUFG Bank, Citi, Shell, Credit Agricole Group, and Societe Generale, to name a few — are confident in the immutable security of the blockchain platform to ensure data privacy and security without worrying about fraudulent transactions. Converting all the participating currencies to ETF further simplifies the process.
KomGo has a sort of sister company in VAKT, a commodities blockchain consortium (semi-private) that targets oil post-trade processes. Several of KomGo’s founders — ING, ABN, Koch, Shell, and Mercuria — are also shareholders in VAKT. If you see a trend here, it’s because VAKT processes more than 60% of post-trade transactions for Brent crude.
VAKT also functions on Morgan’s highly permissioned and private Quorum platform. Morgan is turning into a player in the blockchain space. They’ve recently added a privacy component to Ethereum-based blockchains (this is where the open-source aspect of blockchain is so cool; everybody has access) that hides not only the parties involved in a transaction but who is sending the money.
On that note, JP Morgan has also launched their own cryptocurrency, the JPM. Since any blockchain transactions require some form of digital currency, Morgan is using the JPM as their crypto-token in cyberspace.
Blockchain’s Disruptor Potential
So I talked earlier about how blockchain is positioned to be THE disruptor in the economy. How does such an esoteric digital instrument do that? Santander Innoventures says that blockchain has the potential to lower bank’s infrastructure costs by $15 to $20 billion in just a couple of years. Santander’s study found that DLT would also lower costs by eliminating central authorities and third-party payment platforms.
There is also some thought that DLT could eventually support smart contracts via computer protocols to implement or verify contracts.
Supply Chain Management
Managing the global supply chain is a challenge at best, but blockchain technology makes the process more efficient and secure. The Port of Antwerp is using blockchain to handle containers as they come in to port. Once the container logs in, the port authorities digitize the transactions among the various entities that touch the container. It can connect carriers, terminals, and shippers without any intermediaries. This reduces the chances of theft or fraud, eliminates that much-maligned middleman, and paperwork becomes practically an afterthought.
Blockchain And Retail: That Too-Good-to-Be-True Louis Bag Probably Is a Fake
Blockchain also has potential in the retail space, as a way to improve the supply chain and to prevent fraud. Walmart is running a blockchain trial to track the origins and movement of pork in China. Also, Alibaba, the Chinese retail giant, has developed an in-house blockchain network to root out counterfeit products. Hong Kong retailer Luxify is already using blockchain to authenticate the provenance of luxury goods.
What are your thoughts about blockchain? Since it’s separating from Bitcoin, its use has grown into nearly every industry. If you think it has a future in the energy sector — or venture capitalism — let me know about it.