"Blockchain all the things" has become the battle cry of many Bitcoiners. In the last year, blockchains have been touted as panaceas that can solve all the "bad" parts of Facebook, the "insecure" parts of databases, and even as a solution for income inequality and government corruption.
But while the blockchain will doubtless offer some amazing innovations, much of the hype has focused on obtuse applications in existing markets rather than an exploration of how the technology will be used to create entirely new markets.So far in this series I have discussed what a blockchain is, how it works, and who the blockchain providers are. And in this article, I will examine the big changes that are being pursued by the best and most ambitious minds in the fintech industry.
To really understand how the blockchain space will develop from here, it helps to first survey the edges of the network. Much like the Internet itself, advancements in the blockchain space are far more likely to start in the extremes of finance and eventually move toward its center.
A blockchain's primary efficiency is that of censorship-proof value transfer and settlement. This efficiency is particularly useful in environments where regulatory inefficiency and/or counterparty risk is high. This is why blockchains have been so readily adopted by illegal drug markets, and the politically unpopular sites wikileaks.com and backpage.com.
While there is no shortage of valid criticism for these businesses, it is important to note that if blockchains can reduce risk in these environments, they will also offer similar efficiencies incomparatively tamer markets. Investors appear to recognize the potential for blockchains to route value in economically hostile conditions, and capital flight applications appear to be primarily responsible for the recent Bitcoin price rally. While the technology is still too new and underdeveloped to offer Greek citizens an easy path to route their earnings outside the country's banking infrastructure, many in the Bitcoin industry are working hard on innovative solutions to this problem. And solutions are fast on their way.
Bitpagos offers one such solution for companies in volatile economies. Bitpagos enables merchants to accept credit cards, typically from visiting tourists, and converts payments into Bitcoin instead of local fiat. It's no wonder that tech-literate Venezuelans and Argentinians are keen on this technology: the value preserved in Bitcoin is already much easier to route, convert, and store than the value kept in their country's bank accounts.
As technological literacy, user interfaces, and liquidity improve, companies are likely to find cost reductions when employing previously inaccessible foreign labor by paying them in bitcoins. This will allow American businesses to cross borders, particularly for knowledge-economy services, without fear of running into a foreign country's regulatory roadblocks.
While the obvious problem of Bitcoin's price volatility would appear to restrict its potential for success, here too lie many clever new solutions. Projects such as Open Assets, Omni, and Counterparty enable banks with stable assets, such as U.S. dollars, to issue these assets for trade and use on the Bitcoin network. [Editor's note: the author is affiliated with the Counterparty project.] Such assets use the Bitcoin blockchain as payment rails in much the same way that ACH and SWIFT route dollars over their networks.
We're already seeing the beginning of this trend with virtual assets like the dollar-backed "Tether." It's very likely that we'll be seeing U.S. dollars backed and insured by companies like Coinbase, Circle, and perhaps even Citibank listed in our Bitcoin wallets soon.
In foreign markets, these virtual assets will be redeemable for paper money at bodegas and ad-hoc local networks. If desired, those with established banking relationships in these markets will be able to redeem the assets from a sender, into their own account, via traditional banking systems.
Projects that leverage the Bitcoin network will greatly expand the reach of our mainstream banking infrastructure to new markets and more depositors. And further blockchain innovations will create entirely new forms of banks and financial products.
Many headlines trumpet the death of banking amongst millennials, but these declarations could not be further from the truth. Online banks for this demographic are in wide abundance, but aren't typically identified as banks due to their inability to settle funds with one another and with traditional financial providers.A quick look at a young adult's Xbox Live account, and its corresponding balances, achievements, and add-ons, should be enough to understand that children already have relationships with the bank of Microsoft.
The risks involved in servicing these unorthodox institutions have thus far been too exotic for any meaningful price discovery or risk assessment. After all, how can you evaluate a child's credit rating? Or the trading cards held by an anonymous forum user?
The ability to transfer a Minecraft sword into a Candy Crush wallet may at first appear trivial. But these virtual assets will soon cross into the world of payments and banking.
The expansion of these online economies will offer profitable opportunities in new forms of arbitrage and securitization. As liquidity and depth are added to these markets, soon thereafter will arrive trade and specializations in realms that are inconceivable today. Users will reconcile accounting needs between their Facebook profiles, World of Warcraft guilds, and Instagram followings. Financiers will be able to create futures markets for ad impressions, airline tickets, and LinkedIn connections. And loans could be collateralized from the value earned by answering questions on StackExchange, alongside ownership of rare online goods and assets.
Picture the culmination of this technology: a citizen of Brazil might arrive at his or her local convenience store and issue a payment for their groceries in Candy Crush referrals. Those referrals will instantly be sold by the citizen's wallet at its market rate for either bitcoins or U.S. dollars, and immediately transferred as such to the seller's point-of-sale terminal. At the terminal, the Bitcoin will be again sold by the cash register for the store owner's preferred currency: a fractional share of a Vanguard S&P 500 ETF. The entire process will be efficient, risk-free, and frictionless for all parties.
The power of the blockchain lies in its ability to become the lubricant by which markets cross borders, risk profiles and silos. These changes will affect society in much the same way that the Internet crossed markets, reduced risk, and opened information silos in the first part of the 21st century. This is the future of the blockchain.