Fintech, the application of information technology to the world of finance, is the topic of discussion in The Economist’s latest special report on banking (Special Report on International Banking). Bitcoin was featured in one of the articles, but this time the focus is not on bitcoin the currency per se, but the blockchain, Bitcoin’s underlying protocol that enables distributed ledger management using cryptography and powerful computers spread across world’s data centers.
The blockchain, since its invention by Satoshi Nakamoto (the obscure inventor behind Bitcoin and its protocol), has taken the world of fintech by storm. The blockchain is being touted as the next big thing, not unlike the Internet and its underlying protocols for communication, that has the potential to revolutionize everything from money transfer to real estate transactions and the internet of things. Blockchain, as a concept, is being bastardized to serve multiple applications, including communication, agreements, asset transfers, record tracking etc. Numerous startups are cropping up that provide value added services on top of the original Bitcoin blockchain, such as CoinSpark, an Israeli startup that has devised a technology to add information and metadata to the blockchain, one application of which is being able to provide “notary” services to agreements and documents recorded on the blockchain. There are other outfits, however, that are fundamentally trying to re-architect the original blockchain to make it better or to make it work for specific purposes.
Colored Coins, for instance, enables the storage and transaction of “smart property” on top of the blockchain. Smart property is property whose ownership is controlled via the blockchain using “smart contracts,” which are contracts enforced by computer algorithms that can automatically execute the stipulations of an agreement once predetermined conditions are activated. Examples of smart property could include stocks, bonds, houses, cars, boats, and commodities. By harnessing blockchain technology as both a ledger and trading instrument, the Colored Coins protocol functions as a distributed asset management platform, facilitating issuance across different asset categories by individuals as well as businesses. This could have a significant impact on the global economy as the technology permits property ownership to be transferred in a safe, quick, and transparent manner without an intermediary. Visionaries see many other exciting opportunities too, including linking telecommunications with blockchain technology. This could, for example, provide car-leasing companies the ability to automatically deactivate the digital keys needed to operate a leased vehicle if a loan payment is missed.
Ethereum is another outfit that has created technology to develop blockchain based smart contracts. Ethereum—an open-source development project that provides a platform for developers to create and publish next-generation distributed applications—uses blockchain technology to facilitate the trading of binding smart contracts that can act as a substitute to conventional business documents. The technology allows the contracts to be traced and used to confirm business deals without the need to turn to the legal system. Then there are outfits such as Ripple Labs that are devising their own blockchain like protocols to facilitate quick and secure money transfer.
Other blockchain innovation involves combining blockchain technology with conventional technologies. IBM and Samsung are developing a blockchain-powered backbone for Internet of Things products called ADEPT that combines three protocols – BitTorrent (file sharing), Ethereum (smart contracts) and TeleHash (peer-to-peer messaging). ADEPT is a blockchain powered secure communication and transaction protocol for devices. When a washing machine, for example, is bought by a consumer, ADEPT will allow the washing machine to be automatically registered in the home-based network of things, not just sending out to/receiving messages from other registered devices, but also automatically initiating and fulfilling transactions on its own for say replenishing the washing powder by placing an order with the local grocery store.
These innovations are at the leading edge of the blockchain technology and it will be several years before their use will be become widespread, if at all. In the meantime, more mundane application of blockchain has great potential to flourish. Future fintech entrepreneurs should not discount considering the blockchain as the grounds of their creative pursuits. All that is needed is a “killer app” that will niftily apply the concept to solve a present-day problem. Just as Marc Andressen’s NetScape Navigator unleashed a wave of innovation in the history of the Internet, so too will a blockchain startup in the world of distributed ledgers and asset registers.