Blockchain – A Platform for Disintermediation

Nitin Gaur | Director at IBM Blockchain Labs

In this post, I would like to focus on an interesting emerging technology. Not only is this technology complex and difficult to understand, but it also is adding additional layers of complexity as itevolves. It kind of reminds me of the pre-internet era, when things were just popping up every week, claiming to change the way we live – and they did!

I am referring to blockchain, a cryptographic database technology that is known to the masses through its association with cybercurrency (bitcoins, altcoins). In fact, the technology itself, when disassociated with currency, has the promise to change the world (once again) as we know it. Blockchain technology has the power to provide a platform to remove middlemen, regardless of the industry, and it does not end there. There are real business models emerging that are backed by this technology. Those business models, based on such concepts as cyber trust, cyber equity, interledger, and cyber identity, all reflect the aim to establish networking that is trustless and yet secure. In the coming months, I will expend time and energy to understand and write about the complex business and technology landscape. In this post, though, my attempts start with the fundamentals of how we can expect a different world in the future – driven by a web of networks adhering to a set of rules that will govern our commercial interactions with the world – transferring money , buying a home or car, obtaining a loan – you name it!

I think we are living in the age of disintermediation (the removal of middlemen). Let’s look at this closely, with today’s examples:

  1. Uber – The largest taxi company with no vehicles. Algorithms drive their business model, and they connect market makers and market seekers. With an amazingly rich and contextually relevant user experience, they are one of the world’s most disruptive companies.
  2. Facebook – This is no surprise, with the world’s largest number of users and a single platform for all digital experiences, networks, and media. With users as its product portfolio, Facebook provides a platform to directly connect the products (you and me) to the consumers (companies that want to sell to us).
  3. Alibaba, Amazon – The world’s largest retailers and marketplaces, with no real inventory or retail space. Their success is attributable to directly connecting the vendors to consumers, along with harvesting insights derived from transactions. Those insights have led to intelligent marketing and selling.
  4. Airbnb, a couch surfing alternative that has no real inventory but yet exceeds any hospitality chain in numbers of transactions. It has created an internet-based marketplace while disintermediating the likes of tour operators and travel agents.

And more…

Disintermediation is defined as reduction in the use of intermediaries between producers and consumers, for example by investing directly in the securities market rather than through a bank. Historically, in the case of the financial industry, every transaction has required a counterparty in order to process the transaction. By definition, disintermediation goes hand in hand with disruption; after all, we are removing the middlemen and changing (in some cases, radically) the business model and incentive economies pegged to mediation. With the examples above, we have seen a wave of disruption that can be accredited to digital technologies. These technologies, in turn, have been driven by marketing insights and by the desire to provide a rich user experience. The latter has been a primary driver for adoption of these disruptions in the marketplace.

Blockchain, as a technology, aims to catapult this disruption to new heights with the introduction of trade, ownership, and trust into the equation. Blockchain databases and records represent an emerging technology pattern that can radically improve banking, supply chains, and other transaction networks, giving them new opportunities for innovation and growth while reducing cost and risk.

Fundamentally, blockchain addresses three aspects of the transaction economy:

  1. Trade – Goods, and services traded across web of consortia or partner networks (e.g., Interledger). What’s traded can be anything that is of value, such as a property, currency, reputation, or even identity. This would imply not just digitization of the assets, but also a reputation and validation system that is attached to the economies that surround the ‘Value of Things’.
  2. Ownership – The ownership of digital goods and services needs to be validated by a system that is playing by the rules, and by a network that is trusted by the users and yet based on a trustless system. This implies a complex set of mathematically validated algorithms that provide a vehicle (consensus or mining type activity) to guarantee the ownership associated with the ‘Thing of Value’.
  3. Trust –A system of trust in the network ensures that the system itself is trustless. That is, the system can store and validate ledger entries but is not centralized, nor can any single entity get control of the system. The term ‘trust web’ is often used to describe such a system.

Blockchain promises systemic security as a trust currency. Economic transactions on a distributed ledger can be programmed to record virtually anything of value:your identity, a will, a deed, a title, a license, intellectual property, and also almost any type of financial instrument. The technology landscape and the ecosystem are quite fragmented, as they are still emerging (and I promise to discuss those in future posts). The following are some notable concepts:

  1. Technology behind the trust system – Consensus, mining, public ledger
  2. Secret communication on open networks – Cryptography and encryption
  3. Non-repudiation systems -Visibility to stacks of processes

Industries that rely on intermediaries include (but are not limited to) the following:

  1. Insurance – Property and casualty, auto, life
  2. Health care – Electronic healthcare records, healthcare information systems
  3. Financial Services – Consumer/retail banks, investment banks, brokerage, etc.
  4. Transportation and logistics – Services associated with supply chains, including exports, imports, logistics, and related services such as finance, fund transfers, contracts, and Forex.
  5. Retail and real estate – Trade of durable and non-durable goods, which relies on huge margins and delays consumed by a system of intermediaries established centuries ago.

These are all scrambling to understand disintermediation. Many are involved with and invested into the rapidly growing ecosystem of blockchain companies, at times classified under the umbrella term of financial technology, or FinTech. I guess one way to keep up with disruption is to understand and disrupt one’s own industry, moving on to newer business models that thrive on disintermediation.

This start-up ecosystem has been evolving since the socialization of an academic paper on cybercurrency, along with some initial established network that was the proof point. I classify that evolution into three phases (see below). I think we are in Phase 3 of the blockchain evolution, while Phases 1 and 2 are still maturing. The growth in the business of value-add services in the blockchain ecosystem indicates the faith and confidence in the technology on the part of the business community.

Phases of Blockchain Innovation:

Phase 1 – Pioneering. Bitcoins, altcoins, the initial stage of blockchain technology.

Phase 2 – Overlay services. These include exchanges, wallets, and consumer and merchant services.

Phase 3 – Business value-add services and blockchain applications. These include embedded transactions, collateral networks (such as Interledger), conditional payments, and smart contracts and business applications that leverage the overlay networks.

Disintermediation is the investment magnet for blockchain-related ideas, riding on the success of the business and underpinned by peer-to-peer and crowdsourcing models. The promise of blockchain for enterprise goes beyond its role as an industry disruptor. It also has tremendous potential to improve existing business processes, as well as to improve efficiencies in existing transaction systems, leading to exponential cost saving for the enterprise and the end consumer.   I like to draw the analogy of the impact of information dissemination due to the internet serving as an information network. Blockchain technology promises a similar explosion in trade, ownership, and trust, as the tenets of both technologies rely on principles of distributed governance and rules established for a time-tested protocol.