Why blockchain technology will have a big impact
So blockchain technology is basically a way of distributing the power within a network, instead of assigning this power to a central authority. Why is this actually an improvement over current systems? Doesn’t our current way of organizing society with banks, notaries, social networks, search engines, stock exchanges, and many other central authorities work fine? There are four reasons why our current centralized systems are not optimal.
High costs for users
In developed countries payment fees are around 2 to 3 percent of a transaction. That might not sound like much, but in a world where retailers make around 5 percent margin on a sale, you can imagine they are all eager to cut expensive payment processors out of the equation. Blockchain technology might even have a bigger impact for people in developing countries, where remittance transaction fees are significantly higher: 8% on average. In contrast, payments on most blockchains will be nearly for free. This is because there is no longer a central authority with a monopoly on executing that specific payment. Instead, each node in the network sets its price to confirm a transaction. That leads to competition among millions of nodes and the total price of a normal transaction will approach the cost of the energy used by the node to perform the required computation.
Single point of failure
Currently, most sensitive data is stored locally. Websites store passwords, credit card details and other sensitive personal data in databases that are prone to hacks, or might not be available when a server is down. But not only technical failure is an issue of centralized systems. Human failure is at least as common, whether due to incompetence or malicious intent. There are many countries for instance where, if you own a piece of land, that land might suddenly belong to the son of some high ranking government official without your consent, just because the title record was single handedly changed. Distributed systems, where not one party but the majority of participants must approve a change according to common rules, will become an important tool in battling corruption.
Exclusion of users
Blockchain technology will also have a big impact in developing countries where basic banking infrastructure is non-existent in rural areas, or not available to the majority of people because of low income. Blockchain technology will play the same role here as GSM technology did by bringing telephony services and internet access to areas that don’t have landlines. Most people in rural areas in developing countries now have mobile phones. Even using basic SMS functionality, it is possible to transfer money via blockchain technology. This is a big deal considering the fact that over 80% of the countries in the world don’t have a universally accessible banking system.
Another advantage for consumers is that less need for central authorities means less power to those authorities and thus more privacy and more choice for consumers. While that might not be something that most people in western countries currently see as a necessity (though an increasing number do), it will bring major change to countries with regimes that limit options for their people. The fact that cryptography is used in all communication over a blockchain means that transactions can be performed more anonymously and cannot be interfered by authorities. Neither is it possible for a government to censor information that is stored redundantly among peers in a network all over the world.
The examples above contain some idealistic element. While the opportunity for this technology to change the world for the better is one of the reasons we are very enthusiastic about it from a personal perspective, it is also a reason one might be enthusiastic from an investment perspective: Non-cash payments amounted $390 billion globally in 2014. Over 3 billion people don’t have access to a formal banking system. Around 2,5 billion people live in countries with authoritarian regimes. Those are huge potential markets to be able to tap into.
The abovementioned reasons will cause blockchain technology (and/or derivate systems for decentralized decision making) to fundamentally change the inner workings of several existing markets. Markets that are likely to be transformed are, in no particular order:
- Banking, insurance, mortgages, loans and other financial services
- Currency printing
- Cloud services like storage, web hosting and cloud computing
- Issuing and trading stocks
- Storage and transfer of medical data (and other sensitive data)
- Online advertising
- Intellectual property and other property registers
These are only a handful of examples of huge markets that several well-funded companies are currently entering with blockchain solutions. Apart from disrupting existing markets, blockchain technology will also enable new markets. One of them is particularly interesting to mention, because of its expected size and impact on the world: the Internet of Things.
The Internet of Things (IoT) is currently in its early stages. The first products have found their way to the market. For example intelligent thermostats are becoming more and more common. These thermostats are connected via the internet with its owner’s mobile devices and measure a plethora of things in order to optimize comfort and costs of keeping a house warm. A few years from now, this thermostat will become an independent economic actor on the energy markets, selling your surplus solar power or buying energy for an optimal price based on your needs. Your computers will autonomously buy extra processing power or storage space when needed, and sell surplus capacity when possible. Autonomous shared cars will communicate with each other to match speed, prevent accidents, and even match user demand. These are just a few IoT examples, but they have one thing in common: your devices will store and use a lot of sensitive personal data. Producers of these devices realize there should be a common set of rules based on which all “things” will deal with each other. There are two options: a central authority will own these rules, and thus all data, or this authority will be distributed. Most corporates that are working on IoT devices start to realize that no single company or government should own the Internet of Things, just like nobody owns the current internet. That’s why those companies turn to blockchain technology to create an Internet of Things that is ruled by a commonly accepted set of rules, in which all personal data is ultimately owned by the owner of the devices. All data is then securely stored, encrypted on a distributed ledger in such a way that the owner of the devices decides who can and cannot access his personal data.
We already see many big corporates that are building IoT devices taking action to create this future. Since 2012, Corporates have done 140+ equity investments in blockchain ventures, totaling $1,2 Bn by Q3 2017. These are often no individual endeavors; we see several consortia with high profile companies working together on blockchain technology. To name two of the most important:
Hyperledger: Intel, IBM and Wells Fargo are early members of the Hyperledger consortium, which is run by the Linux Foundation. This consortium has over 150 corporate members and is involved in 300 blockchain projects at the time of writing.
Enterprise Ethereum Alliance (EEA): Microsoft, JP Morgan Chase and several other high profile corporates joined this consortium that is run by the development team behind one of the leading blockchain initiatives: Ethereum. The EEA has over 120 members, spread over North America, Europe and Asia.
The fact that corporates are cooperating in this nascent technology indicates the importance they see in reaching common standards and their dedication towards this.
On the verge of the blockchain revolution
While the potential upside of bitcoin technology seems huge, usage of blockchain technology is currently limited to that of a few insiders. Given the developments described above, our vision is that companies and consumers in developed as well as developing countries will drive adoption and that blockchain technology will become mainstream as a result, like what happened with the Internet.
We are not alone in this vision. A growing number of leaders in the tech industry share this believe. One of the most prominent tech investors, Marc Andreessen, compares the impact of the invention of blockchain technology to that of the invention of personal computers in 1975 and the Internet in 1993. And he is putting his money where his mouth is.
Not only Andreessen does. Approximately 2 billion dollars have been invested by venture capitalists in blockchain related startups until Q3 2017. And this doesn’t even include the 2,5 billion in investments that have been raised via increasingly popular Initial Coin Offerings (ICOs). These figures are significantly higher than the amount of venture capital investment in Internet related businesses in the early Internet days of 1995 and 1996, even when corrected for inflation. These investments will lead to blockchain infrastructure and blockchain-based products, which will drive adoption. Not adoption in the sense that people will say “I’m using a blockchain app” in a few years, but adoption like the Internet: everybody uses its underlying TCP/IP technology, without knowing how it actually works.
So the potential impact of blockchain technology is enormous, and investors are increasingly recognizing this potential. However, if we look at current usage of blockchain technology in our everyday life, it’s comparable to that of Internet usage in 1993: only a few insiders know how to use it, but it’s gaining momentum fast. To us, that looks like the ideal time to be one of those insiders and invest in this technology.
We used the following sources for most of the financial details in this article: