Blockchain technology has given rise to a new platform for business relationships that combines ease of use, low cost and high security. It creates a new basis of trust for business transactions that could contribute to a considerable simplification and acceleration of the economy.
Trust is the foundation of every business relationship. Success is built on it, and it’s part of how we care for our business networks. We also use intermediaries in our relationships, and they create trust and must have our trust. Banks ensure that we deal with the correct counterparties and that the transactions are for the correct amounts. We employ lawyers to control that our products are not copied or illegally distributed. On the whole, the use of intermediaries it is very complex, costs a lot of time and money, and in this age of hackers, it also carries security risks.
What if there were a way to connect business partners directly, with near complete trust and almost without effort? Some might say that this possibility already exists with internet platforms. Amazon and eBay have created trading venues where business connections have become more direct, faster and easier. Uber and Airbnb have brought supply and demand even closer together. In all these cases a service platform serves as an intermediary, and the intermediary demands a fee. Trust still has its price.
Elaborate systems such as PayPal for payment transactions are used as a trusted basis of exchange. It is all undoubtedly more direct and easier than before, but as Uber has threatened traditional business models, Uber itself could be undermined by an even simpler platform for business transactions: the blockchain.
Until now the word “blockchain” has mainly been linked to bitcoin, the virtual currency and payment system, but the blockchain technology and its principles have almost unlimited application possibilities in business transactions. The basic idea is relatively simple and consists of two elements, which the name suggests: the block and the chain. The block is a highly encrypted list of entries related to transactions of a business. This may include tracking the delivery status of a product, the persons involved in the production process of the product or the payments made between parties. Whatever is important to the business can be documented in the block.
A main point is that the documentation is not only managed in one location, such as the central server of a bank, but it is distributed among the users of the blockchain. There are countless copies, potentially millions distributed throughout the network. The chaining of the blocks ensures that the content of the block remains trustworthy at all times. For example, if a change is entered in a block, such as a payment statement, then all the computers in the entire network check the blockchain to see if the transaction was valid. By combining encryption, decentralization, a multitude of stakeholders and community control, this system is nearly impossible for hackers to penetrate. Trust does not arise from the relationship between parties or through an intermediary but from the technology and the process of comparison in the network. Don and Alex Tapscott, who recently wrote a book on the subject, call the blockchain the “Trust Protocol.”
In addition, block information can also be linked to a “smart contract” (intelligent contract software) that automatically triggers transactions when a specific event occurs. For example, after the sale of a product, pro rata payments could automatically be made to all entitled to a payment under the contract. Instead of a central authority, a decentralized network is the authority. This increases security, lowers costs, increases speed, and creates confidence, all without any middlemen.
We are just starting to realize the potential applications of blockchain, but what is already clear is that this technology takes business relationships to a whole new level. Here are just a few selected examples that are already being used or planned on being used.
Creative products such as music or literature often travel a complicated path from the artist to the buyer. Countless middlemen from the label to salespersons want their cut. In addition, there are the licenses and concessions, and the complex rights management of online platforms. With blockchain, a direct connection between artist and consumer is possible. It can take over the management of the rights and also offers the advantage that all sales data can be aggregated and provide information on the market. The British musician Imogen Heap has already tried this out.
From the raw materials to the finished product, supply chains can go through countless stages in many different regions of the world, often making them difficult to track. Blockchains help make the process more transparent by confirming each step with a block entry. A corresponding entry in the block could even take place automatically via an RFID connection when the product passes a particular station.
At this point, it shouldn’t be surprising that the market analysts of Gartner include blockchain in the top 10 of the 2017 strategic technology trends. However, one must also take into account that, despite its potential, we’re still at a very early stage with this technology. On a large scale, the world is not ready for the technology yet: we don’t currently have the necessary computing power. It is also not to be expected that middlemen in large, international businesses will be replaced overnight by blockchain platforms. On the contrary, established financial service providers are trying to take advantage of blockchain technology and have already invested one billion US dollars in the technology. As industry figures show, by 2022, between €13 billion and €18 billion in savings could be achieved in banking infrastructure. In addition, Bitcoin is open-source software that can further help develop all market players with blockchain technology. On the consumer side, there is a similar picture, and according to a BearingPoint survey, the popularity of virtual currencies is quite high at 80% while use is still low at 5%. This should be a wake-up call for all market participants, not just financial services providers. Now is the time to adjust to a new platform of business relations that could become the new medium of economic trust in the next decade.