FINTECH | Blockchain and the "Internet of Value"

By Udit Bhatnagar

By Udit Bhatnagar

Blockchain has managed to grab a lot of attention for some time now and it continues to be a "trend" in 2017. Still, it is rather a complex technology to understand and explain. Don & Alex Tapscott, authors Blockchain Revolution (2016) define it as: 

“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”

This is a crisp and a simplified definition which just scratches the surface of what Blockchain means. Personally, I like to think of Blockchain as another database technology with certain superpowers which make it revolutionary.

The most important superpower quality of a blockchain is its ability to share a database directly across the boundaries of trust, without even requiring a central administrator. A regular database needs a human administrator and you trust the sanctity of your data with the human organization where it resides. Now, imagine replacing this human with a smart piece of code. This is exactly what Blockchain does through cryptography and distributed databases.

Another superpower quality of Blockchain is its robustness and built-in redundancy. While the governments, institutions, and companies which use regular databases spend significant dollars on disaster recovery and back ups, with blockchain redundancy comes as an inherent feature. Every transaction which is executed on a blockchain is available on every node. These nodes automatically keep in sync with each other without the need of complex configuration.

There could be other ways to understand the blockchain from a technological and implementational point of view but if you are already familiar with a database then an understanding of these distinctive features will provide you a good platform to dive deeper. Now, with a fair bit of understanding of Blockchain let's shift gears and move to the next piece of this puzzle.

What is "Internet of Value" (IoV)?

During a speech at the Stanford Graduate School of Business the co-founder and ex-CEO of Ripple Labs - Chris Larsen very well puts forward the idea of "Internet of Value" - a network of networks for moving value. Larsen says, “Just as you can’t have fire without fuel, oxygen, and heat, you can’t have effective globalization without interoperability in goods, data, and money. They all have to work together.” As we have the internet to move data, or the global logistics network to move goods, IoV will be a dedicated global network to move value (money and other digital assets) in a safe, efficient and inexpensive manner. To understand this more closely let us take the example of payments.

The existing process of international wire transfer requires co-ordination and series of resource-intensive steps between participating banks, clearing houses, and the central banks. To process an international wire, many banks need to get involved in establishing a connection with the transactions together through each ledger in the connecting banks which are being affected. While it seems like a bank to bank transaction would just involve one bank, like, in the world of international logistics, many third parties have to get involved to fulfill the transaction. Each party involved slows down the process. Further adding to the problem, these steps are not executed instantly, but rather as a "batch process" several times during a day. As a result, a payment can end up in a queue to be credited one or more days after the initiation and further delays can be caused due to a public holiday or a weekend. The complexities and dependencies in the current system constitute a procedural challenge for payment service providers, and highlights the need for a more efficient system for real-time payment, both domestically and internationally.

IoV, therefore, will be a way to overcome the existing challenges and bring in efficiency by providing a network of distributed ledgers which can track payments without the use of a central authority.

Can Blockchain deliver "value"?

A clear answer is yet to be determined. There are certain practical and philosophical limits to blockchain based solutions which have delayed the scale of its success. The problem for most banks, financial institutions, credit card companies and payment gateways is that they can't ignore blockchain and at the same time they cannot fully embrace it. Public blockchains (like Bitcoin) threaten the existence of intermediaries and so the value which they create is directly taken away from these mainstream institutions. From a practical point-of-view, there have been debates on various forums about the balance between privacy and security of blockchains.

However, we have already seen some very promising proof of concepts and pilot solutions based on blockchain and I hope that the startups working in this space along with governments, financial institutions, and key stakeholders put some serious thought into overcoming these practical and philosophical hurdles to move value across the globe as seamlessly as we move data today.

About the Author:

Udit Bhatnagar, A seasoned IT Consultant with an 8-year domain experience in global banking and insurance sector. He also holds an MBA from IE Business School, Spain with the focused interest in financial management, strategy and entrepreneurship. He also undertook a post-MBA exchange program at Rotman School of Management in Toronto, Canada.