“The blockchain’s the rails, bitcoin’s just one of the train cars,” says the sign in a fintech lab I visited recently. Cybercurrency disruption is becoming the new normal for commerce by turning the rails of blockchain into a new way of securely transferring both representations of fiat money payments and non-monetary things of value.
In many ways, the latter is the most revolutionary.
A first step of understanding blockchain is to think of it not as a technology but a process. In the same way a spreadsheet helps us comprehend the connection between a set of numbers and a company’s finances—a process that uses computer technology—blockchain also transfers value between parties with digital tech, including cyber networking. In both examples, it helps to grasp not how technology automates the process, but how the process itself works.
Until blockchain, the trustworthiness of a monetary or other transfer of value was guaranteed by the most ancient of all methods: the King says so. Today that translates to: a financial institution or central bank says so. But this authoritarian approach is dogged by an ever-present problem. That is, we never all agree on who actually has the authority to say, “This transaction is valid.”
So you might think my King, or my central bank, is not to be trusted. Then you’re stuck having to make a judgement call to accept my payment to you as valid or not.
But blockchain removes the need for an agreed-upon authority to trust—replacing it with the activity of the participants, all of whom can inspect the transaction and vote on its validity. If a blockchain record says you are paying me $2, I can believe it’s true because the last group of people who checked the record before I did have confirmed this—as did everyone who participated before them, starting with the sender. Thus, the “chain.”
Now, if every step (each processing of a “block”) is voted by the participants who validate it as processed accurately, then the transaction is reliably recorded as untampered with and considered valid. In one way of looking at it, blockchain transactions sub in the wisdom of the crowd for the authority of another entity. Since its participants aren’t identifiable prior to their participating, it is extremely difficult for a would-be thief or political actor to divert or corrupt the process. He or she literally wouldn’t know whom to target.
To pare down of the number of computations that can occur in the pure bitcoin-type model of a blockchain—where anyone can jump in and add a block to the chain—the number of actors with permission to participate can be limited by moving the transaction onto what’s called a permissioned blockchain. This limitation keeps the number of computational cycles from building into an avalanche and racking up a cost in computations performed—as well as taming the staggering amount of electrical power that can be required in the original, open-ended, bitcoin type of blockchain transaction.
But the transferred thing using the blockchain method need not be a cybercoin. It could just as easily be a credit or debit to a regular bank account. In fact, it doesn’t have to be money at all.
Where is this all headed? As frequently happens with radically new inventions, the originally intended use doesn’t always turn out to be the most frequent or valuable. Blockchain right now transmits not just payments but also information whose value does not lie in its being a monetary unit. This includes smart contracts: essentially computer programs built directly into a block that can serve as a financial instrument, such as a loan or bond.
Other proposed uses of blockchain include:
The only thing coin-like in these transactions involves an object of value transmitted from one party to another; these are “coins” only etymologically.
What these new uses of blockchain have in common are:
- a process already exists, accepted in law and in practice
- the transferred object can be represented in computer code
- there is substantial value associated with the transferred document, designation or consent
- there is a need to guard against a motive to steal or falsify the change of status (e.g. who owns the house or who is a doctor)
In terms of value transfer, it’s a new way of doing things—and in many ways better, as were the Letter of Credit, the check and the credit card when each first appeared. As these earlier inventions had to slowly gain acceptance, blockchain must also live through a period of the inherent human distrust. That, of course, is deeply built into the self-preservation-focused human genome.
In the view of an anthropologist I work with, evolution itself is a natural blockchain, with reproductive lifespans as the chain’s blocks and genetic inheritance.
My bet is that it won’t take too long for the banking and financial communities become comfortable processing payments, loans and bonds via permissioned blockchains. As with the adoption of almost all new inventions, getting there first is almost assuredly risky.
But arriving last can just as assuredly mean missing out on a chance for growth and profit. It’s probably now time for financial institutions to start looking seriously at blockchain as a safe, effective new way to move value between parties. To be sure, there is no need to block its way.
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George Warfel has worked in banking and payments for more than 30 years at SRI International, IBM and PwC. He can be reached at email@example.com.
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