As I immerse myself in the blockchain ecosystem I often feel like I’ve been drawn into a science fiction movie, Tron Legacy for instance:
“I tried to picture clusters of information as they moved through the computer. What did they look like? Were the circuits like freeways?”
As you dip a toe into this world, you’re assaulted with foreign concepts like Bitcoin,cryptocurrency, consensus, distributed ledgers, smart contacts and trustless interactions. The amount of misinformation, subterfuge and conspiracy theories means it’s hard to separate fact from fiction. Real from unreal.
The real question you want to answer is: what is the promise of blockchain beyond that digital frontier? Or put differently:
“How can blockchain transform the finance industry, my career, my company and the future?”
To think beyond that frontier, is to understand a set of principles at the heart of blockchain with the potential to revolutionise the way we interact with companies, machines and each other: trust is inbuilt and doesn’t need to be verified. In time, we may look back at this as a great leap on the scale of the wheel, the steam engine and the internet.
If all this seems hyperbolic, read on and judge for yourself. At the very least, in this two part article, you will get an understanding of blockchain technology and its potential to transform the Australian wealth management industry.
In essence, the blockchain is a shared database that enables trustless interactions via consensus. Lets break down the key parts of this sentence:
- shared: a network of computers provides the processing power for a blockchain. In this way, the network infrastructure is distributed amongst the participants in the network.
- database: the database is a ledger of all transactions that have occurred on the blockchain. The accuracy of the database is verified by the participants of the network who contribute processing power to confirm that transactions have been validly executed.
- trustless: participants in the blockchain are assigned a unique identifier (a private key) that they use to sign encrypted transactions. The private key protects the identity of the participant but enables the blockchain network to record the counterparties to any transaction. This is where things get really interesting.
- consensus: in order to prevent fraudulent transactions and malicious behaviour by network participants, the blockchain provides incentives for network participants to verify transactions. If a majority of network participants agree that a transaction has been validly executed then the database record is updated irrevocably and cannot be altered or manipulated. Read about the Byzantine Generals Problem in the Deloitte article at the bottom to understand in more detail why this is so important.
Just as we trust the internet to connect us to information, blockchain technology has the potential to deliver trust within the information itself. These principles are the foundation for the blockchain ecosystem and are illustrated rather elegantly in the below:
To understand blockchain and its potential better, compare the formative stages of blockchain technology to the development of the internet. The internet now connects billions of people around the world who intuitively understand how to use it but have very little concept of the technology layers underpinning it (DNS, TCP/IP, HTTP etc).
This is because for most people, the technology doesn’t really matter. What matters is what the technology enables people to do. Think of blockchain as a building block that can enable:
- computers and devices to exchange data regardless of the hardware provider (i.e. no more locked in ecosystems such as Apple vs Android);
- individuals to interact with companies without exposing their identity or personal information (i.e. your credit card details don’t need to be transmitted to every vendor that you buy from);
- alternative forms of value-exchange and market economies including reputation-based systems and funding of social initiatives by a community and its beneficiaries;
- companies that will operate autonomously without human employees and contracts that execute automatically once the coded pre-conditions have been fulfilled; and, most famously
- the issuance and use of digital currencies (e.g. Bitcoin) which represent the democratisation of what was once only the purview of nation states’ central banks.
These aren’t just theoretical applications, the blockchain is enabling new and different ways to exchange value right now, and not just in finance. A report by GrowthPraxis has identified 20 non-financial use cases for blockchain technology where start-up companies are already in operation:
If you’re still struggling to grasp how the blockchain enables new ways of transacting and interacting with one other, watch the video linked at the bottom from Into Bitcoin.
The use cases for blockchain in the Australian wealth management industry are manifest and developing right now. Technology leaders and finance companies are seeing blockchain as a key part of the infrastructure that will deliver:
- peer-to-cash transfers
- distributed share and unit registers
- frictionless settlements and asset transfers
- virtual custody without custodians
- pre-programmed financial instruments and corporate actions.
In part 2 of this article, I’ll be delving into these use cases in more detail whilst surveying the blockchain leaders and making some predictions about the future of blockchain in the Australian wealth management industry.
Read the other articles in this series:
Watch (5 minute primer on the blockchain):
Further reading (the Byzantine Generals Problem):