Can blockchain come back from the doldrums? Yes, writes Chris Skinner, if the right technologies for the systems required can be identified.

There has been a huge amount written about and invested in blockchain developments but, for all the hype, there is still a lot of confusion, misunderstanding and lack of delivery surrounding this technology. In fact, it is sitting firmly in the trough of disillusionment today. Will it recover?

For about five years, I have been talking about blockchain technologies. Initially, everyone thought I was talking about the Bitcoin blockchain technology. I wasn’t, and had to clarify that I was talking about any currency based upon blockchains, which includes the likes of Ripple and Erethreum. These are two of the most discussed in banking sectors, along with Digital Asset and R3.

Key differences

However, in that discussion there is also misunderstanding, as people talk about blockchain as the solution when, in most cases, they mean distributed ledgers. The two are linked but distinctly different, as a blockchain is part of a distributed ledger along with a digital currency, digital signature and consensus system, whereas a blockchain on its own is just a method of recording a transaction.

Even when these terms are clarified, there is still an argument over which ledger system is the best. Obviously, the first question has to be: the best for what? For example, some have more transparency than others. So does the transaction being recorded need to be public, private or semi-private? That question determines which system you might choose to use.

There is then the point to be made that this technology is not yet developed. This is why most of these companies developing blockchain and distributed ledger systems talk about an experiment, a proof of concept or a proof of work. A good example of this is when the Erethreum blockchain was hacked and $60m of its ether currency stolen. The founders of that system then rebooted the blockchain – something called a hard fork – and said that they were starting all over again because this is an experiment. A test.

These points underline that the required technologies for the distributed ledger systems have not yet been identified. That is why we are in a trough of disillusionment, and it raises the question of why people are so excited about this technology. Richard Branson, Reid Hoffman, Dee Hock and even Ashton Kutcher and Mike Tyson are talking about it. So what is going on?

Cheaper and more reliable

The real answer is that everyone who has looked under the hood can see that the development of an internet-based database, where transactions are authenticated in real time by the network, will be a revolution in how value exchange is recorded. The distributed ledger structures, using blockchains to record transactions, create immutable records of proof for all time that can be authenticated and notarised for low cost with complete trust.

That is the fundamental reason why this is of interest, as it means anything that needs a legal record of proof can now be recorded for almost no cost. Land deeds, digital identities, monetary exchanges, the purchase of rare items, even births, deaths and marriages can be recorded on such systems. In other words, all the areas where transactions are recorded today on paper can be replaced with a much cheaper but far more reliable system of record. That is why there is so much interest and excitement in distributed ledgers and blockchains. However, there is one fundamental challenge to the implementation of these technologies, and that is how to use them.

The how rather than the what is the key question. This is because the use of a distributed ledger blockchain service is for shared databases between counterparties who have no trust and need a trusted record to co-operate. A shared database is the way in which many experts talk about the distributed ledgers and blockchains, and that generates the greatest challenge: who is sharing what with whom? In many of the use cases cited above, the issue is how to create a shared system rather than developing the software or technology.

Take clearing and settlement, which is one of the earliest areas of blockchain development in banking. Clearing and settlement involves cross-border structures between different trade bodies at the moment. Those bodies include central banks, central securities depositories, central counterparty clearing systems, banks, brokers and institutional investors. Applying a blockchain to create nearer real-time clearing and settlement at far lower cost makes sense – industry estimates are that it would save more than $20bn a year in processing costs – but creating an agreement between all of those counterparties is the challenge. How to move from an existing industry infrastructure to a new one that is, as yet, unproven, is the challenge. How to agree the new industry structure is the challenge. The how, not the what, is the challenge.

For these reasons, I am one of those who is hugely excited about the possibilities of distributed ledger blockchain technologies but, for the moment, I am reserved about when it will deliver and still believe it will be five or more years before we truly see the benefits. In other words, for blockchain technologies to cross the chasm, it needs industry and government agreements to be made first and that is why it is going to take time. 

Do not underestimate this though as, when it does deliver, it is going to fundamentally transform everything. As with other technologies such as the internet, the PC and cloud, there is a lot of over-estimating the speed of change and under-estimating the impact of blockchain technologies. This technological change may take far longer to deliver than was expected but it will deliver far greater benefits and change than anyone can imagine today. That is why I’m betting on blockchain big time. 

Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.

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