June 30, 2016 | Written by: Arvind Krishna
Categorized: Blockchain | Cognitive Commerce
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Experience teaches us that those who move quickly to embrace disruptive technologies benefit the most from them. The same will be true for the emergent technology called blockchain. As a powerful instrument of trust, blockchain enables parties to exchange goods and services with one another or make payments with far greater confidence. This provides distinct advantages to users as detailed in a new IBM study.
Throughout history, technological advances have radically expanded trust through innovations such as paper money, the banking system, the printing press, electronic payment systems, the internet and secure e-commerce. Each such advance has spurred economic activity by creating systems that instill the trust required for parties to engage with each another.
That’s why blockchain has captured the imagination of industry, academia and governments around the world. IBM is working on this exciting technology in collaboration with leading companies through the Linux Foundation’s Hyperledger Project.
Blockchain has its roots in the technology underlying the digital currency known as Bitcoin. However, its applications extend well beyond the digital realm to the physical world, with the potential to touch all aspects of the real economy.
Blockchain replaces antiquated and restrictive business practices — the “friction” that slows down global commerce — with a trusted distributed ledger secured by advanced cryptography. A permissioned network of participants protects the integrity of the ledger, and each party can only view the information they are authorized to see within a transaction.
Real trust happens when multiple independent parties keep their own copies of critical information. That’s what blockchain’s distributed systems allow. There’s no need for a single authority to govern the process, whether a central government or big bank.
Only parties involved in the transaction can see and make alterations to it. A permanent record of all transactions is set in “cryptographic stone” on the ledger, which means no one can rewrite or deny history.
In other words, it’s impossible to cheat with blockchain because everything is in the open to those involved and authorized to see. Risk is minimized in a system in which governance is truly shared. I can’t think of a better definition of trust.
International trade is especially ripe for blockchain disruption. Imagine a clothing store owner in New York City who wants to import some sweaters from China. Like most companies, the retailer today must first go to a bank to secure a letter of credit, and then show it to the manufacturer as a guarantee of payment.
Next, the sweaters are transported by one or more shipping companies through customs authorities in both countries before arriving at their destination, steps that require additional paperwork. Upon receiving the goods, the store owner contacts the bank and confirms that the terms of the agreement were fulfilled. Only then is the manufacturer paid.
This is a process that hasn’t fundamentally changed in 700 years, since the days of Marco Polo. Instead, why not put all of the parties in the transaction on a blockchain, where everything is visible and terms can be executed automatically?
A “smart” contract could state that when goods cross a specific point and customs authorities approve it, money flows back from the receiver’s bank to the sender’s bank immediately, no waiting involved. These contracts sit on the blockchain, with participants only seeing and signing the part that pertains to their role.
Such features make it possible to reimagine entire business ecosystems, as the code assumes many contractual obligations. By having a single version of the truth on the ledger, the cost of vetting potential trade partners will plummet, many disputes will simply disappear and the circle of economic participants will dramatically expand.
With blockchain, the need to “trust but verify” and all of the burden that entails will become a thing of the past.
Blockchain’s benefits are already being explored by many different entities who grasp the incredible potential of this technology. To name just a few:
- The retailer Overstock won government approval to use blockchain technology for the global issuance, settlement and trading of corporate bonds.
- Together with NASDAQ, the country of Estonia is now offering a blockchain based e-voting service that allows shareholders of companies listed on Estonia’s NASDAQ exchange to vote in shareholder meetings.
- IBM is working with both the London and Japan stock exchanges to test blockchain’s application for trading in low liquidity markets.
Blockchain reduces cost, lowers risk, enables new business models and leads to more efficient transactions. It will dramatically expand access for new entrants into the global marketplace. For those willing to embrace this disruption, the future will indeed be bright.