What is Cryptocurrency & Why the Term Doesn't Apply to Most Coins & Tokens Today – Blockchain Review

What is cryptocurrency? Why is the term so inaccurate? Today, across the crypto industry, from experienced institutional investors and fund managers to those just getting started in the market, there is widespread confusion and misunderstanding. The primary cause of this confusion is a combination of incorrect terminology and the rapid evolution of cryptos over the … Continue reading “What is Cryptocurrency & Why the Term Doesn't Apply to Most Coins & Tokens Today – Blockchain Review”

What is cryptocurrency? Why is the term so inaccurate?

Today, across the crypto industry, from experienced institutional investors and fund managers to those just getting started in the market, there is widespread confusion and misunderstanding.

The primary cause of this confusion is a combination of incorrect terminology and the rapid evolution of cryptos over the last decade or so.

The term cryptocurrency has proliferated rapidly ever since the inception of Bitcoin, which as a platform primarily used as a means of exchange and storage of value, was a fundamentally correct use of this term.

However, as the market has expanded and new coins and tokens have entered the scene, the term has retained significantly less relevance. This is because the vast majority of coins and tokens today are in fact not currencies at all.

Thousands of “cryptocurrencies” that exist today are misrepresented under this umbrella term. The fact is that they’re not currencies. You can’t use the vast majority to make payments, they don’t effectively store value, and they’re not a unit of account either. These are the main attributes of a currency. Aren’t they?

The term cryptocurrency is, therefore, a misnomer and does a big disservice to the crypto industry as it misleads and does not accurately represent the 2018 crypto market.

This post will focus on a more accurate set of terms that are better suited for the current crypto market. Instead of labeling everything a cryptocurrency, it will explore the crypto asset class and three different types of sub-asset classes that make up the market today.

What is an asset class?

Robert Greer, author of “What Is An Asset Class, Anyway”, a seminal paper on the definition of an asset class, states:

“An asset class is a set of assets that bear some fundamental economic similarities to each other, and that have characteristics that make them distinct from other assets that are not part of that class.”

What is a crypto asset?

According to the International Monetary Fund – 

“they are digital representations of value, made possible by advances in cryptography and distributed ledger technology. They are denominated in their own units of account and can be transferred peer to peer without an intermediary.”

I define the term crypto asset as the following, which is similar to above –

“an emerging asset class that uses cryptography, P2P networking, and public/private ledgers that generate new digital units, while verifying and securing transactions without an intermediary.”

You can find a number of different definitions by doing a simple online search, however, most definitions will be pretty close to the above examples.

Dividing the  crypto asset class

The crypto asset class can be divided into separate sub-classes, each with their unique properties. They function and similarly react to the market, follow similar valuation models, and act within similar regulator risks and compliances.

In traditional finance, analysts apply different investment strategies for stocks and bonds, so, why wouldn’t we think the same when analyzing Bitcoin and Ethereum?

This is precisely what Chris Burniske and Jack Tatar propose in their book – CryptoAssets: The Innovative Investor’s Guide to Bitcoin and Beyond. Here, they separate the crypto asset class into three distinct sub-classes: cryptocurrencies, crypto commodities, and crypto tokens. Let’s break down each one.

Cryptocurrency

The primary term used in the market today, a cryptocurrency is a form of digital currency that uses cryptographic principles. Currencies have three main purposes:

  1. Means of exchange
  2. Storage of value
  3. Unit of account

The most popular cryptocurrency today is Bitcoin, an open-source P2P payment system that allows transactions to get sent via a decentralized platform, without a financial intermediary. A cryptocurrency’s primary use is to provide a means of exchange between two parties with a unit of account. Bitcoin, besides its use of speculative value, allows two or more parties to send transactions to each other without an intermediary.

Stablecoins such as Tether and MakerDAI also fall into this category. In general terms, a stablecoin is a type of cryptocurrency that has price stable characteristics. Most stablecoins are pegged against the US dollar, and they help investors retain their trading profits without the need to withdraw into FIAT currency and hedge against market volatility.

Crypto commodity

A commodity is an “economic good or service that has full or substantial fungibility.” A crypto commodity uses fundamental cryptographic principles within a platform to allow for the creation of new, independent digital assets that can represent an entirely unique set of values.

A helpful analogy is Gold. Gold as a commodity, and a gold necklace as a refined version of the commodity with different values.

The largest crypto commodity in the market today is Ethereum, an open-source distributed computing platform, and operating system. Unlike Bitcoin, Ethereum enables the ability to develop uncensored, decentralized applications known as dApps. Decentralized applications under the Ethereum network utilize smart contracts that can be used to differentiate from another, in the form of ERC-20 tokens. These tokens are classified as crypto tokens, which will be explained in more detail in the next section.

Although it could be argued that Ether, the payment system that allows Ethereum’s machines to execute requested operations, could be valued as a medium of exchange, the primary functionality of it is to provide a fungible, economic good or service.

Crypto tokens

With the launch of Ethereum, the crypto asset market has been swarmed with a large number of dApps, each with its unique use-case and native unit. These native units are usually referred to as crypto tokens, and supported by platforms.

Think of Apple like Ethereum, a crypto commodity with its operating system and each app in the App Store as a crypto token.

Each crypto token tries to tackle a use-case that targets a specific industry. WAX for the gaming industry, OmiseGo for the payments industry, etc. Tokens are a representation of an asset or utility and are usually fungible and tradeable.

There are three main types of tokens: utility, security, and hybrid tokens.

Utility tokens, also known as user tokens or appcoins, provide future or current access to a company’s products and services.

Security tokens primarily derive their value from an external source, usually a tradable asset. These tokens provide the ability for companies to issue tokens that represent shares of a company stock. However, security tokens are subject to federal securities regulations. If you want to learn more about the laws and regulations for ICOs, check out this article.

Hybrid tokens are tokens that do not necessarily carry the traditional features of a security but may be valued for both practical uses on a platform and investment purposes. Hybrid tokens provide benefits for two different types of holders: participants who want to access the right to a specific product or service, and investors who hold for speculative value.

Removing confusion from the crypto/blockchain market

By separating the crypto asset market into distinct sub-classes, enthusiasts and investors can differentiate each crypto asset. This removes the confusion when generalizing every coin as a cryptocurrency, and enables new ideas and investment strategies for each subclass.

Furthermore, with the increased involvement of governments and their efforts to carefully evaluate the crypto asset market, it is crucial to define the asset class accurately.

Here are some examples of each sub-class of crypto asset:

Bitcoin, Ripple, and ZCash fulfill the three dimensions of a cryptocurrency: means of exchange, store of value, and unit of account.

Ethereum and SIA represent crypto commodities, a more tangible form of crypto asset that allows its blockchain platform to create value and establish new units of value.

EOS, TRON, and VeChain represent crypto tokens, utilizing existing blockchain platforms to create a unique set of values and use-cases.

In summary, crypto assets all contain the same fundamentals, such as the use of cryptography, P2P networking, and public/private ledgers. However, it is apparent that there are clear differences as well. It is these differences which must be noted if the overall crypto market to grow and mature.

Did you enjoy the article? Please take a quick moment to share it with your network. Also, if you have any questions or would like to connect you can email me at [email protected] I’m always interested in meeting people working, learning, or involved with the blockchain space.

Also published on Medium.

The 5 Major Problems with Bitcoin and Blockchain Technology – Blockchain Review

Unless you’ve been living under a rock the past years, you have probably encountered a lot of blockchain related hype and listened to a seemingly endless drab of utopian predictions about a decentralized wonderland-like world that is all but imminent. But what are the current problems with Bitcoin and other blockchains? Is the technology the … Continue reading “The 5 Major Problems with Bitcoin and Blockchain Technology – Blockchain Review”

Unless you’ve been living under a rock the past years, you have probably encountered a lot of blockchain related hype and listened to a seemingly endless drab of utopian predictions about a decentralized wonderland-like world that is all but imminent.

But what are the current problems with Bitcoin and other blockchains? Is the technology the great liberator and equalizer, the miracle cure to all societal and industry ills like it’s portrayed in the media? Are today’s blockchain platforms limitless, free of deficiencies, weaknesses, and vulnerabilities?

Of course not. At least not at the moment anyway.

Current blockchains suffer from several limitations that are inhibiting usability and adoption. Overcoming these limitations will be necessary if the technology is to meet its true promise.

So, what’s the story? How far have we come and what are the major problems preventing the technology from meeting the hype?

The last decade (or so)

Emerging in 2009, the cryptocurrency Bitcoin and its core operating technology, a blockchain, laid the foundation for a new era of digital peer-to-peer transactions. It also paved a path for how networked systems, web services and digital communities of the future are to be designed and built.

Bitcoin has since gained legitimacy among millions of people around the world, and even some governments. It is now accepted, managed, and sustained by a vast international community as a platform to exchange value. 

While Bitcoin introduced one specific application of blockchain technology, a peer to peer electronic cash system that enables online payments (transfers of value), the advent of the Ethereum open software platform, served to realize the broader potential of blockchain technology beyond Bitcoin.

In doing so, it opened up a world of unimagined decentralized possibilities, where more complex constructs of value can be built, transferred, and managed with greater ease and transparency.

The past decade has seen developments beyond these two blockchains, but innovations have been piecemeal and singular in their approach, and have failed to provide a comprehensive solution to the prevailing problems that blockchains and cryptocurrencies face – especially relating to usability and adoption.

We still have a long way to go

Together, Bitcoin and Ethereum have so far proven that blockchain technology, decentralized systems, and global collaborative communities can work. They have also revolutionized usability among an elite developer community.

This is no small achievement.

However, and very importantly, they have fallen short of making the development of cryptocurrency, blockchain technology, and decentralized applications easy and accessible to entrepreneurs, innovators, and corporations around the world.

A new decentralized world awaits, but only if we can produce a new generation of blockchains that solve some tough challenges.

1) Scalability

Bitcoin is fascinating and innovative. A completely decentralized system where financial actions that require a high level of trust, can be executed without trusting anybody. However, ‘trustless-ness’ comes with a price: hard limits on the number of transactions that can be processed in a specified time interval.

Almost all of the well-known first-generation blockchain systems have hard limits on the number of transactions. Bitcoin limits the maximum block size, Ethereum limits the total amount of gas in a block, as examples.

The current scaling crisis

Due to the increased adoption of cryptocurrencies in recent years, the number of users and transactions have skyrocketed, testing the limits of first-generation blockchain systems.

Conventional blockchains like Bitcoin are now constrained in transactional throughput because of the nature of their protocol and blockchain design. Currently, the primary design structure of most existing systems is a linear linked-list style blockchain. As adoption increases and more miners are attracted to the system, all mining capability is dedicated to mining the one next block in the linear blockchain. Therefore, the increased mining capability doesn’t facilitate scalability at all.

Scalability issues have given rise to significant transaction fees, clogged mempools and long drawn debates resulting in forks and community splits. Ethereum’s ambitions are currently constrained by the transactions per second (TPS) factor. For it to replace Visa, it should have a TPS of 45,000; however at its current TPS of 15 – one popular application like CryptoKitties suffices to make the network unusable.

2) Limited Programming Ecosystem

As a first-generation, blockchains have established a base programming ecosystem. Blockchain-based smart contracts have also ushered in a new era of computational law whereby contracts are backed and agreed on by a blockchain which is unbiased and universally prevalent.

Ethereum Virtual Machine was a significant step-up from the highly limited (by design) Bitcoin programming environment. However, with increasing adoption; the EVM has hit design limits and security pitfalls.

So, although Ethereum created the application development aspect on a blockchain, building complex applications remains very difficult.

3) Blockchain Security Vulnerabilities 

Credit needs to be given to first-generation blockchains for their protocol layer security. Very few instances of the Bitcoin protocol or the Ethereum protocol being vulnerable have been reported – which bodes well for their security considering these networks have now been around for years.

However, application layer security has been inadequate thus far. Lackluster application layer security has resulted in multiple incidents from the Parity Multi-Sig Wallet issue (which led to 500,000 Ether being stuck) to the infamous DAO attack – which caused an irrevocable forking of Ethereum into two different blockchains and communities. These are just two of many examples.

Smart contract security

Security has always been one of the controversial topics for smart contract platforms. It started with the DAO hack (~$60M) but has been followed by a string of incidences. There is widespread agreement in the community that blockchain platforms have room for improvement in this particular area. At the moment, smart contract security is addressed at various levels:

Code Analysers – to check for at least all known exploitable code patters at development stage (Mythril, Oyente, Manticore)

Formal Verification – to create some form of a mathematical proof to ensure that a smart contract will work as intended.

Manual Validation – using validation services involving real humans and code review processes (Zeppelin) before launching real projects.

Unfortunately, these checks are proving inadequate. Much more needs to be done to tackle such a complex problem, especially considering that the consequences of a small mistake or oversight can have major financial and human costs.

4) Usability

Today’s developer tools are basic and often require hacky third-party tools or centralized platforms to fill the gaps. Additionally, light client implementations targeting mobile platforms are also needed to enable massive deployments.

Providing feature-rich tools for third-party developers has not been a priority as of yet. This has had a negative impact on system security (smart contract flaws) and has prevented widespread usage (lack of presence especially on mobile platforms).

Currently, a parallel can be drawn between blockchain technology and TCP/IP (Transmission Control Protocol/Internet Protocol) in terms of adoption and disruptive potential. The reason for this is simple: blockchain technology is still considered to be in the early stages of development, and platforms are dealing with infrastructural challenges. Ethereum’s Light Client has been integrated in an experimental stage, tools required for secure smart contract development are still in progress, and mobile applications interacting with blockchains are extremely low in numbers.

Due to the lack of necessary frameworks, third-party companies stepped up and provided more centralized solutions for multi-platform availability. If we follow the analogy, the development of the TCP/IP which started in 1970’s and was adopted by ARPANET in 1983, has come a long way until the first versions of HTML and HTTP were introduced in the early 1990’s.

However, the real products that popularized the web are browsers: Mosaic in early 1993 and Netscape Navigator in late 1994. Similar to that, next-generation blockchain platforms will need to aim to create the ‘browser equivalent for blockchain technology’. 

5) Governance Mechanisms

First-generation blockchains didn’t foresee the governance challenges that a decentralized system, with no central party, would face. Hence, we have witnessed the divisive Bitcoin scaling debates and Ethereum forks which illustrate that governance mechanics should be part of the blockchain protocol. The current governance challenges faced by today’s blockchains are best summed up by Preethi Kasireddy –

“While we definitely want to keep the development of blockchain technology as decentralized as possible, we still need some organization amongst developers and others in the ecosystem to agree on new standards, features and upgrades. It’s unclear how you achieve this without leading to at least some centralization (e.g. The Ethereum Foundation).”

She continues,

“Finding a balance between centralized and distributed control will be key to keeping development on the right path.”

As stated in one of our previous articles by Odysseas Sclavounis – whilst governance by network protocols can indeed lead to novel ways of organizing social life, it does not circumvent the fact that the network must itself be created and governed. Next-generation blockchains will need to embed governance into the blockchain structure to provide steady inbuilt governance and preserve distributed control. 

If you’re interested in blockchain 3.0, we’re building a blockchain platform called Metabase that seeks to solve the problems discussed in this article. We’re passionate about taking blockchain technology to the next level. 

We have lots of great content for you to dig your teeth into. Here are some must-reads –

The Metabase ICO: Everything you need to know in less than 3 minutes

How is Metabase Different from Ethereum and Blockchain 3.0 Projects Like EOS & Cardano?

Blockchain 3.0 Demystified

Intrepid Ventures: The Driving Force Behind Metabase Blockchain

If you want to dive deeper, check out our in-depth docs where you’ll find our whitepaper, technical deep-dives and more.

Contribute to the Metabase ICO

The main-sale starts September 4th, 2018, with stage one offering a 15% discount on all tokens purchased. If you would like to contribute you can do so here: https://ico.metabase.network

Need some help? Here’s an easy to follow step-by-step guide on how to buy Metabase tokens.

Did you enjoy the article? Please take a quick moment to share it with your network. Also, if you have any questions or would like to connect you can find me on Twitter or email me at [email protected] I’m always interested in meeting people working, learning, or involved with the blockchain space.

Anthony is the head of content and research at Intrepid Ventures. He has spent the past several years researching and analyzing technologies and working with a diverse mix of blockchain companies to help them gain insight and develop authoritative content.

Also published on Medium.

Blockchain Technology – A Simple Guide on How it Works | BR.

Welcome to the first installment in the How does blockchain technology work series! Update: July 22, 2017: I want to thank the 175,000+ people that have read this article, and due to the high volume of questions I get on a daily basis, I’ve decided to add some direction to this post, which is a now … Continue reading “Blockchain Technology – A Simple Guide on How it Works | BR.”

Welcome to the first installment in the How does blockchain technology work series!

Update: July 22, 2017: I want to thank the 175,000+ people that have read this article, and due to the high volume of questions I get on a daily basis, I’ve decided to add some direction to this post, which is a now a 4 part series.

If you really want to get into the blockchain and cryptocurrency world, I would highly recommend that you start your journey by reading these two white papers:

Bitcoin: A Peer-to-Peer Electronic Cash System

and;

Ethereum: A Next-Generation Smart Contract and Decentralized Application Platform

and then read them again….and again…

If you’re like many people asking questions like: “I have an idea and I want to know if my project is suitable for a blockchain”. — read these two papers, plus this one –

How to hire a blockchain developer

or;

“I’m looking for investments and I want to know if this token or that token will go up in value” — read these two papers.

I wish you all the best on your journey….and here we go.

Well here is a simple explanation that cuts through the hype.

Blockchain technology is a hot topic around the world these days, yet for many, it remains an elusive concept. Yet it shouldn’t, the concept is simple once you get your head around the architecture and theory of basic crypto economics.

When you do have your “a Ha” moment, the world will never seem the same to you again.

This blockchain basics guide is designed to deliver a clear, non-technical introduction to one of the most transformational & misunderstood technologies of our time. If you want to know what blockchain technology is, how it works, and it’s potential impacts, without all the technical lingo, then this post is for you.

Historically, when it comes to transacting money or anything of value, people and businesses have relied heavily on intermediaries like banks and governments to ensure trust and certainty.[1] Middlemen perform a range of important tasks that help build trust into the transactional process like authentication & record keeping.[2]

The need for intermediaries is especially acute when making a digital transaction. Because digital assets like money, stocks & intellectual property, are essentially files, they are incredibly easy to reproduce.

This creates what’s known as the double spending problem (the act of spending the same unit of value more than once) which until now has prevented the peer to peer transfer of digital assets.[3]

But what if there was a way of conducting digital transactions without a third party intermediary?

Well, a new technology exists today that makes this possible. But before we dive into the mechanics of this revolutionary technology, it’s important to provide a little context.

Bitcoin first appeared in a 2008 white paper authored by a person, or persons using the pseudonym Satoshi Nakamoto. The white paper detailed an innovative peer to peer electronic cash system called Bitcoin that enabled online payments to be transferred directly, without an intermediary.[4]

While the proposed bitcoin payment system was exciting and innovative, it was the mechanics of how it worked that was truly revolutionary. Shortly after the white paper’s release, it became evident that the main technical innovation was not the digital currency itself but the technology that lay behind it, known today as blockchain.

Although commonly associated with Bitcoin, blockchain technology has many other applications. Bitcoin is merely the first and most well-known uses. In fact, Bitcoin is only one of about seven hundred applications that use the blockchain operating system today.[5]

“[Blockchain] is to Bitcoin, what the internet is to email. A big electronic system, on top of which you can build applications. Currency is just one.” [6] — Sally Davies, FT Technology Reporter

One example of the evolution and broad application of blockchain, beyond digital currency, is the development of the Ethereum public blockchain, which is providing a way to execute peer to peer contracts.[7]

Simply put, a blockchain is a type of distributed ledger or decentralized database that keeps continuously updated digital records of who owns what. Rather than having a central administrator like a traditional database, (think banks, governments & accountants), a distributed ledger has a network of replicated databases, synchronized via the internet and visible to anyone within the network.[8] 

Blockchain networks can be private with restricted membership similar to an intranet, or public, like the Internet, accessible to any person in the world.[9] [10]

When a digital transaction is carried out, it is grouped together in a cryptographically protected block with other transactions that have occurred in the last 10 minutes and sent out to the entire network.

Miners (members in the network with high levels of computing power) then compete to validate the transactions by solving complex coded problems.[11] The first miner to solve the problems and validate the block receives a reward. (In the Bitcoin Blockchain network, for example, a miner would receive Bitcoins).

The validated block of transactions is then timestamped and added to a chain in a linear, chronological order. New blocks of validated transactions are linked to older blocks, making a chain of blocks that show every transaction made in the history of that blockchain.[12] 

The entire chain is continually updated so that every ledger in the network is the same, giving each member the ability to prove who owns what at any given time.

“A blockchain is a magic computer that anyone can upload programs to and leave the programs to self-execute, where the current and all previous states of every program are always publicly visible, and which carries a very strong crypto economically secured guarantee that programs running on the chain will continue to execute in exactly the way that the blockchain protocol specifies.”  — Vitalik Buterin

Blockchain’s decentralized, open & cryptographic nature allows people to trust each other and transact peer to peer, making the need for intermediaries obsolete. This also brings unprecedented security benefits.

Hacking attacks that commonly impact centralized intermediaries like banks would be virtually impossible to pull off on the blockchain.

For example —

if someone wanted to hack into a particular block in a blockchain, a hacker would not only need to hack into that specific block, but all of the proceeding blocks going back the entire history of that blockchain. And they would need to do it on every ledger in the network, which could be millions, simultaneously.[13]

Make no mistake about it. Blockchain is a highly disruptive technology that promises to change the world as we know it. The technology is not only shifting the way we use the Internet, but it is also revolutionizing the global economy.[14]

By enabling the digitization of assets, blockchain is driving a fundamental shift from the Internet of information, where we can instantly view, exchange and communicate information to the Internet of value, where we can instantly exchange assets.[15]

A new global economy of immediate value transfer is on its way, where big intermediaries no longer play a major role. An economy where trust is established not by central intermediaries but through consensus and complex computer code.[16]

“The technology likely to have the greatest impact on the next few decades has arrived. And it’s not social media. It’s not big data. It’s not robotics. It’s not even AI. You’ll be surprised to learn that it’s the underlying technology of digital currencies like Bitcoin. It’s called the blockchain.” —  Don Tapscott

Blockchain has applications that go way beyond obvious things like digital currencies and money transfers. From electronic voting, smart contracts & digitally recorded property assets to patient health records management and proof of ownership for digital content.

Blockchain will profoundly disrupt hundreds of industries that rely on intermediaries, including banking, finance, academia, real estate, insurance, legal, health care and the public sector — amongst many others.[17] This will result in job losses and the complete transformation of entire industries.[18]

But overall, the elimination of intermediaries brings mostly positive benefits. Banks & governments for example, often impede the free flow of business because of the time it takes to process transactions and regulatory requirements.

The blockchain will enable an increased amount of people and businesses to trade much more frequently and efficiently, significantly boosting local and international trade. Blockchain technology would also eliminate expensive intermediary fees that have become a burden on individuals and businesses, especially in the remittances space.

Perhaps most profoundly, blockchain promises to democratize & expand the global financial system. Giving people who have limited exposure to the global economy, better access to financial and payment systems and stronger protection against corruption and exploitation.[19]

“Every human being on the planet with a phone, will have equal access. Expanding the total addressable market by 4X” — Brock Pierce

The potential impacts of blockchain technology on society and the global economy are hugely significant. With an ever-growing list of real-world uses, blockchain technology promises to have a massive impact.

This is just the beginning.

Many of the most exciting applications and platforms haven’t even been invented yet!

If you want more information, that is friendly and easily accessible, please see the rest of our series here:

How does the Blockchain Work? (Part 2)
The top 5 things you need to know

How does the Blockchain Work? (Part 3)
What is Consensus and why does it matter?

How does the Blockchain Work? (Part 4)
What are the differences between private, public, and consortium blockchains?

I’m always interested in meeting blockchain founders, academic researchers, and technologists who are working on challenging projects, so please feel free to contact me on LinkedIn, or by email at [email protected]

Collin Thompson is the Co-founder, and Managing Director of Intrepid Ventures, a blockchain startup studio that builds, and accelerates Blockchain powered companies.

Also published on Medium.

What is Cryptoeconomics? An Introduction for Beginners – Blockchain Review

Understanding the mechanics or technical attributes of a blockchain can be challenging – especially if you don’t come from a technical background. Most people continue to struggle to comprehend how a blockchain works and that doesn’t bode well for the industry. Having worked in the space for several years now I believe it’s fundamental to educate … Continue reading “What is Cryptoeconomics? An Introduction for Beginners – Blockchain Review”

Understanding the mechanics or technical attributes of a blockchain can be challenging – especially if you don’t come from a technical background. Most people continue to struggle to comprehend how a blockchain works and that doesn’t bode well for the industry.

Having worked in the space for several years now I believe it’s fundamental to educate yourself on all the key elements that enable a decentralized blockchain network to run – particularly if you are professionally involved in the industry.

Out of all the elements you’ll need to grasp, mastering what is known as the cryptoeconomics or tokeneconomics of a network is perhaps most critical.

What is cryptoeconomics?

Cryptoeconomics = Cryptography + economics

In its simplest form, cryptoeconomics refers to the use of economics (through incentives) and cryptography (through encryption) to design a secure system or network with predefined desired properties.

– The cryptography aspect underlying these systems is what allows communications and interactions between peers in the network to be proved and secured.

– The economic incentives defined inside the system encourages all actors to behave in a way that holds desired properties and enables the network to operate smoothly and thrive over time.

Creating sound cryptoeconomics is both the genesis and the goal for a system to become a robust decentralized network that can prevail and thrive against malicious actors attempting to disrupt the network.

When Satoshi Nakamoto developed the Bitcoin blockchain, the first decentralized digital currency, and implemented a Proof of Work (PoW) protocol to the system he/she/they were doing so to secure the network through cryptography and using an incentive system for settlement.

Explaining the Proof of Work consensus algorithm demands an entire article by itself, but in a nutshell, it is what allows transactions on the blockchain to take place. Through it, members of the network with high levels of computing power (called miners) prove that a specified amount of work has been completed in order to validate transactions.

Why is cryptoeconomics so fundamental to decentralized blockchain networks?

Cryptoeconomics enables parties who do not know one another to reach consensus about the state of a blockchain. Without the application of cryptoeconomic principles, decentralized blockchain networks like Bitcoin and Ethereum simply cannot work. And so, it is the elements of cryptoeconomics – cryptography and economic incentives that allow the creation of decentralized networks and the ability of these networks to reach consensus, without the need to rely on a trusted central authority.

What are the challenges of building incentive mechanisms?

Building sound incentive mechanisms into a decentralized system that has no trusted or central authority is a complex task. The main reason for this is that cryptoeconomics attempts to combine the “perfect” world of technically implemented rules with the unpredictable behaviors of human nature.

Aleksandr Bulkin, co-founder of Coinfund expresses it very well:

“Cryptoeconomics of a token is a hybrid between rules programmatically implemented on a blockchain and the entire world of interactions real human beings have with it.” [1]

In this same line of thought, Bulkin very accurately analyzes the differences between cryptoeconomics and traditional economics. As the latter is a product of centuries of research, governance, and observations of social dynamics, he states that more appropriate than talking about designed economies is to talk about partly designed, partly discovered, partly self-evolved economies.

In contrast, thinking (or designing) the cryptoeconomics elements of a network demands that most of its characteristics be designed from inception. It requires designing predefined rules based on all the possible ways human beings can interact with the system. Accordingly, designing good rules entails understanding and predicting the way humans will interact within a decentralized system.

This is what makes cryptocurrencies so hard. We are not used to designing economic structures from scratch, and predicting all future human interactions is close to impossible. We are entering new territory and learning on the fly.

At the same time, this is the reason why cryptoeconomics is so essential. If rules are not correctly defined, a decentralized system is bound to collapse and fail. This is where proper mechanism design comes in. Mechanism design is a field in economics and game theory focused on designing mechanisms to incentivize or disincentivize behaviors within a system toward desired objectives.

What role do tokens have in a blockchain protocol?

At the core of cryptoeconomics, a token exists as the primary tool to control a protocol’s micro-economy. A well-designed system properly manages the incentives and distribution of tokens within the corresponding network of participants. When tokenized incentives are accurately aligned a decentralized system thrives.

Cryptoeconomics is helping us create systems where those who adhere to and protect the rules of the game receive rewards, while those attempting to break the rules face financial walls which disincentivize their behavior thus safeguarding the network. In Bitcoin, for example, miners who are honest and verify transactions receive block rewards (currently 12.5 new minted bitcoin plus fees) for their work, while those who are dishonest face wasting their computing power, energy, and money, making it an expensive, unprofitable and fruitless endeavor.

Lately, the evergoing ICO craze has diverted attention away from the importance of tokens within a decentralized system. ICOs are an innovative way to raise capital from a wider audience of supporters without having to give away any shares of a company. However, it is essential to understand that tokens are not just a tool for an ICO, but a vital cog in a blockchain system’s ability to function.

Tokens must be an integral element of the network in which they exist to have any value. A token’s utility should be what secures and governs the behavior of the users within the network. Failure to achieve this will ultimately result in the failure of a system. Conversely, blockchain networks that effectively utilize cryptoeconomic principles to operate can offer new and innovative decentralized systems built with internal mandates and incentives that encourage all stakeholders to act in the interest of the network.

If you want to learn more about the blockchain in a simple and easy to understand way check out our How does the Blockchain Work series:

How does the Blockchain Work? (Part 1 )
A simple and easy explanation

How does the Blockchain Work? (Part 2)
The top 5 things you need to know

How does the Blockchain Work? (Part 3)
What is Consensus and why does it matter?

How does the Blockchain Work? (Part 4)
Differences between Private, Public and Consortium Blockchains.

If you have any questions or would like to connect you can find me on Twitter or email me at [email protected] I’m always interested in meeting people working, learning, or involved with the blockchain space.

Also published on Medium.

In-depth Guides on Blockchain, Cryptocurrency & ICOs | BR.

Still confused about Ethereum? This easy to follow guide is designed to help people without an advanced degree in computer geekery understand the Ethereum white paper and gain a clearer grasp of where Ethereum fits into the emerging blockchain story. DownloadView This guide breaks down the Bitcoin white paper section by section so that people … Continue reading “In-depth Guides on Blockchain, Cryptocurrency & ICOs | BR.”

Still confused about Ethereum? This easy to follow guide is designed to help people without an advanced degree in computer geekery understand the Ethereum white paper and gain a clearer grasp of where Ethereum fits into the emerging blockchain story.

DownloadView

This guide breaks down the Bitcoin white paper section by section so that people without an advanced degree in computer geekery can understand what Bitcoin is, how it works and the problems it solves.

DownloadView

A comprehensive guide covering a broad set of considerations that founders will need to address when launching an ICO. Topics include regulatory compliance, trust, transparency, credibility, marketing, long-term development and much more!

DownloadView

Blockchain Technology Applications in Healthcare | BR.

As an important step in becoming a doctor, graduating medical school students swear to some form of the Hippocratic Oath. One of the vows within that oath is “first, do no harm” or “primum non nocere”.  While most medical professionals live up to this promise on a daily basis, the same cannot be said for … Continue reading “Blockchain Technology Applications in Healthcare | BR.”

As an important step in becoming a doctor, graduating medical school students swear to some form of the Hippocratic Oath.

One of the vows within that oath is “first, do no harm” or primum non nocere”. 

While most medical professionals live up to this promise on a daily basis, the same cannot be said for the healthcare systems within which they operate.

Despite significant leaps in the medical field, from devices & wearables to genome sequencing and regenerative medicine, individual improvements have not created the fundamental transformation that national healthcare systems require.[1]

Health management and administrative systems remain relatively untouched by technology & regulatory reform and stand ill-equipped to serve the current and future needs of their target populations.

Demographic stresses

The world is getting older, especially in developed countries, which is placing a significant strain on healthcare systems. According to a 2015 report by the United Nations Department of Economic & Social Affairs[2] –

  • Between 2015 & 2030, those aged over 60 years will grow by 56%
  • In 2015, one in eight people worldwide aged 60 or over. By 2030, seniors are projected to account for one in six people globally.
  • The aging process is most advanced in Europe & Northern America, where more than one in five people are aged 60 or over as of 2015.
  • By 2030, the elderly are expected to account for more than 25% of the populations in Europe and Northern America, 20% in Oceania, 17% in Asia and Latin America and the Caribbean, and 6% in Africa.

In the developing world, particularly Sub-Saharan Africa and Asia, future challenges in healthcare will stem from population increases and economic factors rather than aging.

High population growth coupled with a trickle down of innovations is driving a growing middle-class.

With growth coming almost exclusively from emerging nations, the world’s middle class is expected to expand by another three billion over the next two decades.[3]

Delivering efficient, sustainable and affordable healthcare to the world’s aging population and emerging middle class will become more difficult without profound and substantive changes to national healthcare systems.

While problems are complex, systemic and by no means easily fixed, the vast majority of constraints experienced by healthcare systems can be traced to a single, yet highly corrosive root cause.

Myopic, outdated and restrictive compliance regulations

The costs, risks and societal sensitivities surrounding healthcare are profound. Due to the sensitive and central role healthcare plays in society, fearful government officials have been scared to make the deep regulatory changes required to reform healthcare.

“Officials know they will be punished by the public and politicians more for under regulating – approving a harmful drug, say – than for tightening the approval process, even if doing so delays a useful innovation.”[4]

Remember the Obama care saga?

Sure you do.

It’s still going on today, many years later. 

The divisive public and congressional debates. The multitude of vested interests and the tangle of regulations.

It’s not hard to understand why the implementation of far-reaching regulatory reforms have been unattainable and generally avoided by politicians.

Data sharing and privacy laws have resulted in gross inefficiencies, industry-wide fragmentation, and the prevention of real innovation in healthcare.

HIPAA, for example, the US Health Insurance Portability and Accountability Act, designed to protect health information, imposes strict rules on healthcare providers.

Despite the Act’s noble intention to keep patient data secure and private, it remains a large impediment to efficient patient care mainly because of the difficulties in accessing patient information and restrictions on electronic communications.

“Many physicians may be reluctant to embrace EHRs because of malpractice concerns. They may believe that they are better protected against malpractice lawsuits by the handwritten chart system. Furthermore, HIPAA has raised many new issues about data handling. There are also international legal issues about sharing health information. Many unresolved legal concerns surround legal liability in the event of medical errors that are byproducts of health analysis software or EHR data encoding.”[5]

Government regulations like HIPAA have caused a host of flow on problems.

Healthcare management systems designed to adhere to such restrictive regulations are antiquated and fragmented. Bloated systems that run on paper and siloed record-keeping practices have created healthcare management systems that are inefficient, fragmented, isolated and opaque.

The shift toward electronic health records (EHR) has done little to improve the splintered nature of healthcare. A severe lack of interoperability within organizations and at the inter-organizational level means that coordination remains minimal.

EHR’s are fragmented across hospitals, private practices, labs, pharmacies and many other industry players.[6]

“On average, Americans visit 16 different doctors in their lifetime. While both the HITECH and the Affordable Care Act’s now enable and in some cases mandate that data from your doctor’s visits be stored digitally, medical records and results from different facilities and physicians are often stored in incompatible databases.”[7]

Real-world implications for patient health

The inability to exchange and make use of electronic health records serves as a major impediment to the development of a robust data infrastructure.[8]

As you can imagine, when hospitals, clinics, insurers, governments, and doctor’s offices are unable to share information, this has negative outcomes for patient health.

Einer Elhauge, Founding Director of the Petrie-Flom Center for Health Law Policy, Biotechnology & Bioethics at Harvard writes –

“Just as too many cooks can spoil the broth, too many decision makers can spoil health care. Individual decision makers responsible for only one fragment of a relevant set of health care decisions may fail to understand the full picture, may lack the power to take all the appropriate actions given what they know, or may even have affirmative incentives to shift costs onto others. All these forms of fragmentation can lead to bad health care decisions.” [9]

Take a look at this example scenario.

A patient seeks medical advice to find a remedy for his constant fatigue and muscle aches.

He visits a number of doctors, each a specialist in their respective areas and even visits the hospital on one occasion.

He receives a battery of tests from each doctor as well as the hospital and is prescribed a range of drugs.

The patient’s condition proceeds to deteriorate, so he decides to visit a new doctor who continues a new testing and treatment regime.

Throughout the process, the medical professionals treating the patient have little communication and share minimal information on the patient’s medical history.

Even though the doctors who treated the patient in this fictitious, albeit credible real-world example may have followed the right medical procedures to treat the problems they were trained to handle, the fragmented nature of the healthcare system resulted in no co-ordination and ultimately substandard patient care.

The incapacity to share vital information led doctors to be unable to see the patient’s bigger picture which could have shed further light on the health condition.

Information sharing between doctors would likely have resulted in better treatment and a reduction in patient, doctor and insurer costs that accompanied needless treatments.

The corrosive impact of government regulations doesn’t end here

Fragmented, siloed record-keeping practices and systems that lack basic levels of interoperability are responsible for other major problems in healthcare.

There is now a severe lack of advanced data available for clinical and scientific research and economic, behavioral and infrastructure purposes. With little meaningful data, it’s difficult for governments and the healthcare industry to see the bigger picture and make informed decisions to improve the quality of patient care.

There is also insufficient insurable data for the most at risk and underserved citizens and the tracking of population health trends.[10]

Perhaps the most destructive impact of fragmentation and the inability to share information is that it has caused deep inefficiencies. Healthcare costs, in the United States, for example, have spiraled out of control. According to the CDC, health expenditures as a percentage of GDP have risen some 4.5% since the year 2000.[11] 

Health expenditures % of GDP: 2000 – 13.3% 2009 – 17.3% 2014 – 17.4%

2015 – 17.8%

High costs have contributed to insurance companies’ reluctance to insure the population and provide an adequate range of services.

Many national healthcare systems are so inefficient they have become unable to deliver any form of care to the most vulnerable and at-risk members of society.

Many are even failing to deliver adequate care to those that can afford it. As demographic shifts take place, these inefficiencies will worsen. The reinvention of national healthcare systems is now required. 

As demographic shifts take place, these inefficiencies will worsen. The reinvention of national healthcare systems is now required. 

Blockchain  is a key tool to achieve healthcare objectives for developing & “re-developing” nations

One of the fundamental goals that governments and industry seek to achieve is to provide improved quality of healthcare at lower healthcare costs. [12]

Making this goal a reality will require governments and industry to play different, but equally important roles.

Governments 

Must lead change through regulatory reforms that incorporate technological advances and foster an environment designed around competitive collaboration and innovation amongst insurers, healthcare providers, and regulators.

It’s equally imperative for governments to participate in technological innovation programs and R&D to support the development of a robust health data infrastructure.

Industry 

Transforming the mindset of healthcare from a system centered around the care of individuals to a system focused on the overall health of individuals will be foremost. [13]

Industry will need to incorporate new technologies that redefine the value proposition and collaborate with other industry players that provide valuable yet asymmetric information. Industry must also seek new ways to reach beyond current customers by developing innovative business models that reach underserved and high-risk population groups.

Together 

Governments and industry must become more efficient with population growth and globalization.

Lowering administrative costs through innovative technologies, while scaling services, and enhancing outcomes is imperative for the sustainability and competitiveness of both nations and industry.

Growth will reward those who can embrace the technological arms race and create greater internal capabilities and efficiency.

Healthcare is a high-stakes game

Inefficiencies in healthcare systems bleed into all other parts of a society and the economy. Achieving improved quality healthcare at lower costs will prove key to the future success of developed and developing nations.

Overcoming the myriad of challenges will demand a new approach that focuses on the convergence of technology and networked alliances.

Blockchain technology is an important tool that can enable both government and industry make the fundamental changes needed to overhaul national healthcare systems and meet their objectives.

Blockchain is a resilient digital infrastructure for governments to become more efficient

Technology is driving rapid change in the global economy. National governments are awakening to the realization that innovation and broad regulatory reforms will be the foundation for national success in the new digital economy.

As the world becomes more urbanized, vast megacities are serving as innovation centers and primary drivers of economic growth. [14]

Challenges that accompany urbanization and population increases mean that cities must become smarter in all areas including healthcare or risk losing out on key economic benefits.

A Blockchain is a networked database that can fuel and support smart city initiatives and drive economic growth. It enables the creation of a digital infrastructure that is necessary to enable mass transformation to occur and vital national industries to grow.

Cities, municipalities, and governments are turning to blockchain technology to prepare for current and future challenges.

From the US state of Delaware to Singapore, Estonia, Russia, Sweden, UK, South Korea and many others, blockchain based solutions are being sought to provide a better digital infrastructure now and into the future for governments. [15]

William Mougayar sets out four main areas where governments can utilize blockchain technology. They include[16]

  • Verifications
  • Movement of assets
  • Ownership
  • Identity

The accurate and efficient verification of information such as licenses, permits, transactions, identities can solve a number of problems for government operations. Data lineage and integrity when handling sensitive information is in the public interest.

The ability to verify data has not been tampered with, identify the source of information and track a chain of custody from creation holds benefits that are self-evident. [17]

Just imagine the benefits to healthcare data and information sharing…

Governments and smart cities could issue e-identities to the population, enabling the frictionless use of a variety of national and municipal services. [18] Digital ID’s that act like a digital watermark to every transaction, will help governments check identities in real-time, dramatically reducing the rate of fraud other criminal activities.

Increased levels of data integrity could also redefine the relationship between citizens and their governments in terms of transparency and trust.

Another area where blockchain technology can be of great benefit is in the movement of assets. Blockchain can enable the direct and automatic transfer of payments or assets between governments and citizens for services rendered.

This will cut out excessive intermediary costs, redundancies and greatly improve the efficiency of government operations in healthcare and many other areas.

Entire government departments could be replaced by blockchain based registries saving billions of dollars of taxpayer funds. Government offices could become far more efficient as new registries powered by blockchain securely record data, transactions and track provenance.

“The truth about ‘Smart Cities’ is that there is only going to be one way that they can become truly ‘smart’: through data and analytics”. [19]

One of the most profound benefits of blockchain technology, however, is the ability for governments to securely utilize vital sovereign data.

For governments, this presents unique opportunities to streamline operations. Real-time analysis of pseudonymous data can be conducted to find trends in health, transport, security, city planning, crime, future proofing and a host of other important issues.

Armed with valuable data insights, governments can utilize resources in areas that will have the greatest impact on society. This newfound capacity will be a game changer for governments and their citizenry.

Blockchain technology is an effective foundation to help industry redesign organizations, products, and services

It’s important to recognize early on that the drivers of business success are changing as we enter a new globalized digital economy. Consortiums and networked alliances are the new competitive advantage.

Companies and industries must connect, collaborate and build networks to help become more efficient and agile.

Those that choose to insulate themselves will find an already volatile and competitive global economy even more inhospitable.

“The emerging business models are founded on the notion of community: success will be achieved by those who involve their suppliers, their infrastructure providers, and-perhaps most important-their customers in a network where they can build value together. Networks that enable trading, sharing, and enhancing knowledge to build value for mutual benefit are essential.” [20]

There are three main categories of blockchain database applications.

A public blockchain is a fully decentralized platform where anyone in the world can view and add information to the platform as well as contribute to the consensus process. [21] A private blockchain, on the other hand, is centralized within one organization, allowing only the owner of the database to view and write information onto the blockchain. [22]

Arguably of most consequence to the healthcare industry are consortium blockchains which differ to private & public blockchains in that they are partially decentralized. As Vitalik Buterin explains,

“a consortium blockchain is a blockchain where the consensus process is controlled by a pre-selected set of nodes; for example, one might imagine a consortium of 15 financial institutions, each of which operates a node and of which 10 must sign every block in order for the block to be valid”. [23]

He continues –

“In general, so far there has been little emphasis on the distinction between consortium blockchains and fully private blockchains, although it is important: the former provides a hybrid between the “low-trust” provided by public blockchains and the “single highly-trusted entity” model of private blockchains, whereas the latter can be more accurately described as a traditional centralized system with a degree of cryptographic auditability attached.” [24]

Blockchain-based consortiums are key to the survival and success of the healthcare industry for several reasons.

Market pressures are now more intense than ever before. International competition, the need to develop new products & services at speed, concerns about meeting new regulatory requirements, reductions in corporate R&D budgets and other industry-wide problems, mean that companies are under constant pressure.

Consortium blockchains are an efficient way for industry players with shared goals to collaborate and create unique products and services.

Blockchain consortiums deliver everything that older style consortiums do but in a more efficient and secure way.

Intellectual property and other sensitive data sets have high-level integrity and information sharing is efficient and safe.

The construction of a shared industry data infrastructure where companies can gain and share knowledge and develop new technologies without compromising privacy and security is now possible.

Blockchain consortiums can serve as the backbone for innovation in healthcare products, services, and delivery.

Alliances are  forming

The healthcare industry is already witnessing the makings of some great alliances.

In early 2016, Gem launched the Gem Healthcare Network with Phillips Blockchain Lab. The Gem network, powered by Ethereum blockchain, aims to develop applications and shared infrastructure for healthcare. [25]

Phillips Blockchain Lab, the R&D wing of Phillips is the first healthcare operator to join the network. The network plans to build an inclusive ecosystem of industry players to identify and solve healthcare problems.

This is a step in the right direction.

Alliances will need to work outside the walls of the organization and across industry to find collaborative ways that provide mutual benefits to each party.

The future of the healthcare industry cannot be secured with isolationism and insularity, rather success will belong to those that are networked, open and nimble.

Efficient government, re-aligned industry, new products and service paradigms create sustainability in a changing and dynamic world

It all starts at the top.

Governments must lift their game. Innovation and deep regulatory reforms in the digital economy will be the foundation for success.

Restrictive and outdated government regulations currently stand as the single biggest inhibitor of healthcare transformation. Governments must release national healthcare systems from the regulatory prisons they have constructed to unlock true innovation.

Of course, industry will also need to come to the party.

Health management and administrative systems are rife with inefficiencies, misaligned incentives and remain relatively untouched by innovation.

Industry must follow government regulatory changes with the implementation of new technologies that enable collaboration and interoperability. They must reinvent their product and service offerings and adapt to new customer expectations. [26]

It’s also imperative for industry to seek new ways to reach beyond current customers by developing innovative business models that extend to underserved and high-risk population groups.

Governments and industry must cooperate, lead and utilize technologies that enable an unprecedented level of data access, interoperability, integration, and scalability. [27]

There are no grand delusions here.

The transformation of healthcare will be challenging and painful.

Mistakes will get made and temptations to revert to old systems and processes will be overwhelming.

But..the current trajectory is simply unsustainable.

Something must be done.

Technology and globalization, along with current global demographic shifts are demanding innovation and deep changes.

Blockchain technology is a key tool to achieve the central healthcare objectives of nations who must find ways to become more efficient with population growth, globalization, and increased demands on healthcare systems.

The technology is an effective foundation to help industry redesign organizations, products, and services at a time when collaboration, consortiums, and networked alliances are the new competitive advantage.

Countries and industry must begin utilizing blockchain technology as a foundation to explore the convergence of a variety technological tools to address customer centric needs and social problems that provide excellent business opportunities.

Nations and industries that embrace blockchain will be rewarded with a resilient and antifragile digital infrastructure that enables the cultivation of efficient ecosystems, better products, and services, lower costs at scale, and improved sustainable outcomes for all.

While the path forward may be complicated.

We can no longer use that as an excuse for inaction. The only thing stopping us moving forward and accessing a future of untapped potential is fear, uncertainty, and doubt.

In blockchain technology, we now have a tool that can help solve many of our greatest challenges.

If you like this article on blockchain in healthcare, discover blockchain and identity, trade finance, supply chain, compliance, insurance, and government

Anthony is the head of content and research at Intrepid Ventures. He has spent the past several years researching and analyzing technologies and working with a diverse mix of blockchain companies to help them gain insight and develop authoritative content.

Realizing the revolutionary nature of blockchain technology and the existence of a significant knowledge gap among entrepreneurs, industry, and government, Anthony now concentrates his time on creating educational content, researching potential use cases and analyzing the impact of the technology on global industries.

Also published on Medium.

Understanding Public Blockchain Governance – Blockchain Review

The crypto-anarchist narrative and vision behind blockchain technology hold that blockchains are powerful tools with which to decentralise many of society’s social, political, and economic infrastructure. Blockchains – which can be thought of as general-purpose transaction ledgers – could be used to symbolically represent any asset. Bitcoin, for example, represents digital cash and aims to … Continue reading “Understanding Public Blockchain Governance – Blockchain Review”

The crypto-anarchist narrative and vision behind blockchain technology hold that blockchains are powerful tools with which to decentralise many of society’s social, political, and economic infrastructure.

Blockchains – which can be thought of as general-purpose transaction ledgers – could be used to symbolically represent any asset. Bitcoin, for example, represents digital cash and aims to change the nature of money in society by challenging the state’s control of monetary policy and taxation.

However, the applications of blockchain technology extend beyond digital cash. Though corporations and governments provide the economic and political infrastructure for human exchange and interaction, technologists argue that blockchain applications could provide this same infrastructure without the intermediaries and gatekeepers, thus redressing existing power asymmetries.

Concretely, a blockchain is a distributed ledger that records all the transactions that take place within its network. Exchange on blockchains follow the rules prescribed by their protocols, leading them to be characterised as being decentralised, immutable, apolitical and trustless.

Their protocols, defined in code, are unambiguous, comprehensive and hard to change. Removing human agency also eliminates what makes the enforcement of rules arbitrary, corrupt or inconsistent; unlike in the social world, within a blockchain, the protocol is the law that defines and regulates how people interact.

I refer to this idea as ‘governance by the network’.

This is a notable achievement. In the social sciences, sociologists and political scientists have long been preoccupied with how to foster trust and overcome what is called problems of cooperation and coordination.

Game-theoretic models like the prisoner’s dilemma illustrate the sordid outcome of human interaction in the absence of institutional and organisational fall-backs.

The resulting challenge has been to find ways to impose limits on the power of these necessary institutions and organisations.

Blockchains are a game changer because they can replace these corruptible and fallible social constructs with an impartial technological tool that would resolve the problem of cooperation and coordination.

However, whilst governance by the network can indeed lead to novel ways of organizing social life, it does not circumvent the fact that the network must itself be created and governed. Blockchains are sophisticated and complex technological systems.

The protocol that defines a blockchain, the software in which it is instantiated and the hardware on which it ultimately runs are all inputs that are produced by diverse groups of people.

Moreover, these components are constantly changing to integrate better technology, render the network more efficient or patch vulnerabilities. This process of development is both a necessary part of a blockchain’s growth and a fundamentally social process.

How the actors come together to produce, maintain or change the inputs that make up a blockchain is a question of governance.

I call this the governance of the network.

For a while, it was assumed that this process was purely driven by technical standards and constraints. However, it is hard to maintain this assertion in the face of mounting evidence to the contrary. Bitcoin’s block size debate is perhaps the most prominent example of a blockchain community facing complex governance problem that goes beyond the technical.

What began as a disagreement about how best to scale the network evolved into a struggle over control of the protocol. The Ethereum community faced the DAO crisis where a significant hack led to the rollback of the Ethereum blockchain to neutralise the hack. Some in the Ethereum community disagreed with this, arguing that it violated the principle of immutability and went against the social contract of the project.

They split from the community and continued running and maintaining the version of the blockchain where the hack had happened. These conflicts have been divisive and costly, and they have undermined trust in the technology.

Most importantly, these governance problems are unlikely to stop. Blockchains, by regulating human exchange, have serious distributional, ethical and political consequences. In other words, the rules that a blockchain enforces will inevitably create winners and losers. Those that produce and maintain a blockchain have varying degrees of control over these outcomes.

Naturally, this results in conflict over what the rules will be; and, more importantly, over who gets to set those rules. The development of the blockchain becomes politicised as different interests try and assert control over the evolution of the protocol to shape it to suit them.

Understanding blockchain governance is critical for mitigating social conflict over a blockchain protocol and in ensuring it remains functional.

The promise of governance by the network – a techno-institutional solution to solving the problems of cooperation and coordination – can only work if the governance of the network is robust, fair and predictable.

There has been a tendency within the wider blockchain community to dismiss governance issues, sometimes even to deny that they exist. There are a number of reasons why this is mistaken.

Social scientists have long known that even in supposedly non-hierarchical social communities, power relations and politics emerge to structure human interaction. Studies of open-source software projects and Internet governance, both comparable to blockchains, have shown the existence of governance in this context, whether formal or informal.

The study of the governance of blockchains does not need to call for the formalisation and institutionalisation of current practices; instead, it should be seen as a necessary step to better understand the current ways in which blockchains are produced, how they change, and how conflicts over their protocols are resolved.

Odysseas is studying a PhD at the University of Oxford – Oxford Internet Institute and the Alan Turing Institute. His research looks at the governance of public blockchains, such as Bitcoin and Ethereum. The purpose of his research is to better understand how different blockchain communities are able to reach collective action to resolve issues to do with the development, maintenance, and control of blockchain protocols.

This article also appears on Oxford Internet Institute.

Blockchain, Smart Cities, and the New Digital Economy – Blockchain Review

A technologically accelerating and globalizing world means governments in both developed and developing countries must tackle increasingly complex issues from economic volatility and pandemics to mass migration, money laundering, and terrorism. They must also find ways to bring prosperity in a rapidly changing global economy by attracting the businesses and industries that will succeed in … Continue reading “Blockchain, Smart Cities, and the New Digital Economy – Blockchain Review”

A technologically accelerating and globalizing world means governments in both developed and developing countries must tackle increasingly complex issues from economic volatility and pandemics to mass migration, money laundering, and terrorism.

They must also find ways to bring prosperity in a rapidly changing global economy by attracting the businesses and industries that will succeed in the digital economy.

Blockchain technology can serve as the digital foundation for the smart cities of the future helping governments raise their attractiveness and amplify their competitiveness in the new digital economy where human capital and industry are vital to success. 

Current systems are failing – governments are running blind

In developing nations – An emerging middle-class demand for government services and high population growth have placed acute pressures on civil services. Outdated and disparate governance systems, widespread corruption and budgetary constraints have led governments to be unable to deliver essential services like healthcare and education to large swathes of the population. Inadequate record keeping systems have caused citizenry to lack official identification and property rights and resulted in vast informal economies and poverty.

In developed nations – Demographic stresses and aging populations are intensifying pressures on government budgets, forcing civil services to do more with less. Siloed record keeping systems that lack basic levels of interoperability and transparency have meant that there is a lack of actionable data available for economic, behavioral and infrastructure purposes.

With little meaningful data, governments remain unable to see the bigger picture and make informed decisions that can improve the lives of their citizens. Antiquated administrative systems at the national and regional levels are also eating away at the ability of governments to react effectively to crisis’ and fight against money laundering, corruption, organized crime, terrorist financing, and other destabilizing forces.

The root cause

Delivering efficient, sustainable and affordable government services to the world’s aging population and emerging middle class and attracting the businesses and industries that will succeed in the new digitally based economy will become increasingly difficult without substantive changes to current systems.

Although the challenges faced by governments are complex and widespread, the vast majority of problems trace back to a single, yet corrosive, root cause. Fragmented, siloed record keeping systems that lack interoperability have resulted in mismanagement, corruption, waste and a severe lack of advanced data available for economic, behavioral and infrastructure analysis.

To overcome the complex and diverse impediments to social and economic progress will necessitate governments rearm themselves with new capabilities.

Nations and cities that redesign their core systems based on blockchain and distributed ledger technologies will be rewarded with a resilient and antifragile digital infrastructure that enables the implementation of more potent government policies which meet the evolving demands of their citizens and deliver stability in a rapidly changing world.

A new foundation for competitiveness

Blockchain technology can create the resilient digital infrastructure necessary to enable the mass transformation of government administration to occur. This will allow governments to better assess the effectiveness of their services, deal with the changing demands of their citizens and tackle complex issues, making them more attractive to future industry and the intellectual elite.

The technology has key benefits in verifications, the movement of assets, ownership, and identity.

  • The rapid verification of licenses, permits, transactions, and identities can be achieved with far greater accuracy, enabling the complete digitization of services and unprecedented efficiencies.
  • Direct and automatic transfer of payments and other assets between government agencies and citizens for services rendered can eliminate excessive intermediary costs and redundancies. Entire government departments could be replaced by blockchain based registries saving billions of dollars of taxpayer funds.
  • The technology’s decentralized, open & incorruptible nature makes it easier for governments to share data between government institutions and use sovereign data securely and eliminate government corruption/mismanagement which has long afflicted much of the developing world.
  • Real-time analysis of pseudonymous data in transport, security, city planning, health and crime give civil service the ability to utilize resources in areas that will have the most profound impact on society.
  • With a blockchain based identity registry, governments have the opportunity to issue e-identities to the population, making the frictionless digital use of a variety of national and municipal services a reality. Digital ID’s that act as a digital watermark to every transaction will help government agencies check identities in real-time, reducing the rate of fraud and other criminal activities and decreasing the costs associated with the provision of many public services.

By improving the capacity to analyze and manage trusted sovereign data, conduct instant digital asset transfers and ensure a high level of security, blockchain technology can deliver game-changing improvements for governments, their citizenry, and industry. Governments and cities with enhanced capabilities raise their attractiveness and amplify their competitiveness in the new digital economy where human capital and industry are vital to success.

“The truth about ‘Smart Cities’ is that there is only going to be one way that they can become truly ‘smart’: through data and analytics”.

Smart contracts

Smart contracts introduce major efficiencies in compliance and enforcement. Despite unprecedented regulations and enforcement efforts over the past decade, governments are struggling in their fight against a growing and evolving tide of illicit activities.

Money laundering and terrorist financing are having a corrosive and corrupting impact on society as a whole and now pose a significant threat to the economic stability and security of almost every country in the world.

According to the United Nations, Office on Drugs and Crime (UNODC), Global money laundering transactions estimate at 2 to 5% of global GDP or roughly $1 to 2 trillion annually. Less than 1% of the global proceeds from these criminal activities are seized and frozen.

Regulators and industry have the opportunity to become far more potent by capitalizing on the technology’s ability to deliver greater accuracy and timeliness of monitoring activities. Rules set out by regulators could be hard-coded into a smart contract ensuring automatic compliance with specific AML & CFT regulations and triggering alerts for any predefined suspicious activity.

With hyper-efficiency brought about by smart contract automation in concert with greater accuracy and security, governments and smart cities gain the agility and robustness needed to overcome an array of serious threats and become world leaders.

A new  foundation for the  digital economy 

Despite significant leaps in technology, government management and administrative systems at the national and regional levels remain relatively untouched by technology and stand ill-equipped to serve the current and future needs of their target populations.

These outdated systems are eating away at the ability of governments to react to crisis’, fight against money laundering and terrorist financing and deliver cost-effective programs to their citizens. They are also preventing countries and cities from becoming the economic leaders of tomorrow.

The harsh reality is that the very systems designed to assist civil servants to do their job have now become the biggest impediment to their current and future success. 

The new digital economy requires nothing less than a new digital foundation. Economic competitiveness depends on a streamlined civil service with supercharged capabilities that deliver efficient services to citizens and enables industry to thrive. 

Governments that embrace blockchain to reform their systems will be rewarded with a robust and agile digital infrastructure built for the hyper-connected and digitally-based economy. A new foundation that enables the cultivation of productive ecosystems, better public services, lower costs, and improves sustainable outcomes for all.

The digital economy has arrived. What’s your next move?

Metabase Network – A Blockchain Toolbox for Smart Cities and Industry 4.0

If you’re interested in building the smart cities and industries of the future – check out Metabase.

Metabase is a high-performance blockchain business engine and developer toolbox designed to empower innovators and entrepreneurs, high growth startups and small businesses and kick ass designers, developers and engineers to create, build, and lead the industries of tomorrow.

It’s a multi-dimensional platform to facilitate the development of applications for the new economy. It provides a comprehensive foundation to build and monetise next-generation businesses and complex dapps for smart cities, IOT, energy distribution, supply chain, healthcare and more.

Head over to the Metabase blog. There’s lots of great content for you to dig your teeth into. Here are some must-reads:

How is Metabase Network Different from Ethereum and Blockchain 3.0 Projects Like EOS & Cardano?

The Metabase ICO: Everything you need to know in less than 3 minutes

Blockchain 3.0 Demystified

Intrepid Ventures: The Driving Force Behind Metabase Blockchain

For more detailed information, check out the in-depth docs where you’ll find the whitepaper, technical deep-dives and more.

Also published on Medium.

Why Market Cap is a Meaningless Valuation Metric in Crypto Markets – Blockchain Review

Much like the traditional stock market, the crypto asset market overflows with people who invest their own and others money in a state of mind-boggling ignorance. In some cases driven by cynical greed and almost always by a sheep-like mentality and a sublime inability to question established concepts, investors, both newbies and even those considered … Continue reading “Why Market Cap is a Meaningless Valuation Metric in Crypto Markets – Blockchain Review”

Much like the traditional stock market, the crypto asset market overflows with people who invest their own and others money in a state of mind-boggling ignorance.

In some cases driven by cynical greed and almost always by a sheep-like mentality and a sublime inability to question established concepts, investors, both newbies and even those considered “astute” with millions of followers and dollars under management, have been reduced to delusion on an industrial scale. 

Market cap or market capitalization is a calculation that emerged from traditional finance but one that has also seeped into the crypto world. It’s used everywhere as a justification for investment decisions and as a metric to measure the size and value of a cryptocurrency or token.

But there’s a big problem.

Market cap is meaningless, easily manipulated and creates a false sense of value. It’s actually even more than this. It’s downright dangerous because it misleads investors and plays a role in the crypto panics and wild swings that so often impact the space. The fact that its use continues to proliferate despite its clear uselessness speaks to a reality that investors are lazy. They require a simple way of finding an answer to what is a very complex subject – the value of a network. It also speaks to the greed of some investors who use it cynically and the media’s insatiable appetite for sensationalist headlines.

How is market cap calculated for cryptocurrencies and tokens?

Market cap or market capitalization is calculated by multiplying the circulating supply of a cryptocurrency or token by its last transaction price. 

It’s a simple calculation, which is perhaps why it’s so widely used. However, the real question is, what can it be used for? What does it mean? The Answer, ABSOLUTELY NOTHING. Here’s why.

Market cap doesn’t = value

When making an investment, it’s essential to find out what the company or asset you are investing in is worth. If you understand what something is worth (its value) it’s possible to judge whether an investment is over or underpriced.

Herein lies the problem. Market cap is about price, not value. It does not reflect the value of the company or crypto asset you’re investing in. This is a fundamental distinction that is often overlooked. Price is only what you pay for a coin or token, it has nothing to do with what you actually get aka value. It’s an indication of what people are paying for something, and this is usually driven by irrational sentiment which has little connection to an assets real value. And so, assuming that whatever the market is willing to charge for an asset is equal to what it’s worth is a big mistake.

Think about the gains experienced by crypto assets in the last few years. Sometimes overnight, Bitcoin or Ethereum has added billions to its market cap. But what actually changed? Did they get more users, launch a new technology or achieve more mainstream adoption? What change/s occurred to the underlying fundamentals?

All that happened was more investors were willing to pay a higher price. In the vast majority of cases, no underlying value was added to these assets, just more sheep willing to pay higher prices which resulted in the market cap skyrocketing. As the market cap skyrockets, more sheep mistakenly believe the asset to have an increasing value, and the cycle continues.

The critical takeaway. Market cap is about price and price has NOTHING to do with value. It’s just a multiplication of the last transaction price by the circulating supply, and, therefore, has no use when trying to assess value.

Market cap only reflects the last transaction price

Like I said in the previous section, the market cap of a cryptocurrency or token is about price not value which misleads many investors. But it’s more than that. Market cap only reflects the last transaction price multiplied by the circulating supply. When you compute this, all you’re doing is multiplying the price that the last purchaser paid by the circulating supply which gives you an irrelevant number with no meaning. The price of the latest transaction ceases to exist as soon as it is completed, all previous transactions have a different price and those made right after will be priced differently as well.

In other words, the outcome of the market cap calculation applies to a specific moment of time. Yet it assumes that all sellers and buyers and even all holders, including those that aren’t selling or buying, are at the last transaction price. If you wanted to calculate market cap, a pointless task anyway, you’d have to calculate what everyone who has ever invested actually paid and total it all up. But even this would be inaccurate and misleading because of issues with circulating supply.

Circulating supply is over accounted for

Circulating supply has several issues that impact market cap. Coin-Market-Cap defines it as: “the best approximation of the number of coins that are circulating in the market and in the general public’s hands.”

This is an oversimplification and misleading for investors. The problem is that it’s hard to tell how much of a coin or token’s supply is available for trading at any given time. Sites like Coin-Market-Cap do not exclude lost coins from the circulating supply count because there is no way to know how many are lost.

Take Bitcoin for example. It’s estimated that there are approximately 3 to 4 million lost Bitcoins. If these get taken into account, the circulating supply of Bitcoin wouldn’t be the 17,425,512 BTC, at the time of this writing, but rather around 13.5 to 14 million which would reduce the market cap considerably. Whatsmore, circulating supply doesn’t take into account illiquid coins or tokens in long-term storage. Much of the current Bitcoin supply is made up of bitcoins that have been inactive for more than a year.

Market cap doesn’t represent real money invested

This may sound obvious to some, but it isn’t to most. Market Cap does not represent how much money has been pumped into a coin or token. In fact, this could not be further from the truth. If, for example, a coins market cap rises or falls by $100 million, it doesn’t mean $100 million has entered or exited from the asset.

Here’s an example that illustrates this and also shows how easily market cap can be manipulated. Let’s say I create a token with a 10 billion supply, I develop a simple ERC20 contract and deploy it on Ethereum, and on an exchange. I then convince my friend to buy one of these tokens for $1.

Boom there you have it. A token with a $10 billion market cap. Congratulations to me! I have now created a promising new project that has received lots of investment. As you can see, this is all absolute rubbish. It doesn’t mean $10 billion was invested in my token and it in no way helps in understanding its value. The reality is, it’s worth nothing. Market cap only serves to obscure and create a false sense of value when actually it’s just a multiplication of the last transaction price by the circulating supply.

But let’s go even further. Let’s say my friend turns around and sells the token I made for $2 to someone else. The market cap would go from 10 billion to 20 billion, even though only $2 has changed hands. So, if you see a token with a $1 billion market cap, it may have only $10 or $20 million invested in it. If it collapsed and went to zero, investors would lose only lose $10 or $20 million not $1 billion.

“Market cap created the perfect tool to attract newbies by artificially inflating the numbers. They mine 1 million coins they release a thousand in reality which they can buy for 10$ a piece. And suddenly that crapcoin has a 10 million market cap and noobs flock. And in one week time, most of them get fleeced.” – Unknown

The bottom line. Crypto assets with a low float and high total supply can game the system and make themselves look valuable. Market cap and changes in market cap are meaningless and deceiving.

Market cap is a useless comparison tool

Measuring one coin or tokens market cap with that of another is a meaningless excersize. All that’s achieved is a comparison of what the last person paid for each multiplied by the circulating supply of each. The number deduced from this calculation delivers no actionable or useful insight.

Furthermore, even if the market cap of a crypto equaled its value, comparing them would still be pointless because each coin or token is different and should be measured differently. Investors often say things like, “X coin has a market cap of $1 million while Bitcoin has a cap of $57 billion, so X coin is undervalued and a great investment opportunity.” Or X coin has a market cap of $1 million compared to Bitcoin or Ethereum, thus they are overpriced and due for a decline.” Or” X Coin could never have a market cap of $100 billion, Bitcoin’s is only $57 million.” This is all pointless and here’s a question that is rarely asked. Why has Bitcoin been assigned a god-like market cap that no other crypto can ever surpass? 

To sum up. Market cap is meaningless. But even if it weren’t, the market cap of one coin, be it Bitcoin, Ether, Ripple or some altcoin has nothing to with the market cap of any other whatsoever. Crypto assets are designed for different market segments, users and purposes and so comparing their market caps is stupid.

Market cap? More like market crap

To say that the value of a coin or token network is equal to its market cap is not only untrue, but it’s also ridiculous. The market cap equation is the last transaction price multiplied by the circulating supply which does not in any way tell you how much a crypto asset is actually worth.

It’s used as a leading valuation metric by the masses because most investors, including those considered smart, are lazy, unquestioning and have a sheep-like mentality which leads them to want quick and easy answers to complex topics. It’s also a handy metric for the media who need sensationalist inflated numbers to get clicks and in some cases cynically steer the herds of sheep.

No one has come up with a reliable way to establish what the value of a network is. NOBODY. Valuing a crypto network is difficult and dependent on many things that can even be specific to a particular network. Investors will undoubtedly continue deluding themselves trying to answer complex questions by fitting things into neat equations. They will come up with new ones too like NVT Ratio. Unfortunately, it’s all a pointless exercise, it’s just not possible.

Find out where we’re at in the blockchain & crypto hype cycle and what’s coming next.

Also published on Medium.

Improving Trade Finance Platforms with Blockchain Technology | BR.

A few weeks back we had a look at how blockchain can redesign global supply chains. In this closely related post, global trade rewired – exploring blockchain trade finance platforms, we take a deep dive into the broken state of trade finance and investigate how blockchain can build the dynamic trade finance platforms of the … Continue reading “Improving Trade Finance Platforms with Blockchain Technology | BR.”

A few weeks back we had a look at how blockchain can redesign global supply chains. In this closely related post, global trade rewired – exploring blockchain trade finance platforms, we take a deep dive into the broken state of trade finance and investigate how blockchain can build the dynamic trade finance platforms of the future.

Trade finance is a centuries-old industry that has played a pivotal role in the creation of a competitive and productive global economy.

But legacy trade finance platforms built on old world technologies are rapidly proving ill-equipped to handle the globalized nature of the economy and increased speed of trade flows.

There is now an acute need to streamline trade finance to drive efficiencies, reduce costs and enable the proliferation of trade in emerging economies.

It’s a complex world out there.

As supply chains have grown more intricate, often spanning hundreds or even thousands of stages and dozens of geographical locations, the financing of trade has become more risky and cumbersome.

Beyond the challenges stemming from the geographically dispersed nature of supply chains, rising customer expectations for cheap and customized products delivered on demand require companies to be more time and cost-efficient in every way.

Securing quick access to trade finance is now one of many challenges businesses must overcome. But financing has been made more difficult by the continuing fallout from the 2008 financial crisis as banks de-risk.

According to an International Chamber of Commerce (ICC) survey of 357 respondents located in 109 countries, global trade had yet to recover from pre-financial crisis levels in 2008. 2016 was the fifth consecutive year of world trade falling below 3 percent. 61 percent cited a global shortage of trade finance as a major issue.[1]

The absence of trade financing is especially acute in developing nations where many entrepreneurs are unable to start businesses and established companies remain unable to grow.

“SMEs in developing economies – given their opacity, lack of collateral and audited financial statements, are considered as high risk by banks.” [2]

What’s driving this?

The shortage of trade finance is primarily due to risk and the complexity and high costs associated with regulatory compliance, which today can span across diverse regulatory jurisdictions in multiple regions.

Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance has become a debilitating pressure on financial institutions, resulting in many organizations scaling back their operations due to risk. In some emerging markets, banks have withdrawn their services altogether due to regulations like Basel III.[3]

“Sanctions have now become a political weapon in foreign policy, leading to trade finance business coming under increased pressure from increasingly stringent compliance and regulatory requirements. Both financial institutions (FIs) and corporates must ensure they have the necessary solutions and processes to enforce embargoes, whether they are imposed on countries, FIs or goods. Sanctions are an integral part of foreign policy and as regulations tighten, countries are moving towards a zero-tolerance policy for FIs that contravene them.” [4]

According to the Asian Development Bank, there is a gap of as much as $425 billion in trade funding in Asia alone.[5] A massive market made up of millions of micro, small and medium-sized enterprises has yet to be tapped into by trade finance providers.

The failure to provide trade finance for SMEs is inhibiting economic growth in the developing economies of Asia and preventing global economic growth, as Asia increasingly becomes the world’s main growth engine.

Old world trade finance processes are full of inefficiencies

Inefficiencies are ingrained in every part of today’s opaque supply chains. This makes trade finance complicated, risky and cumbersome.

Here is a summary of the main pain points –

Multiple parties and legacy systems = an inefficient and costly process

As supply chains have become more complex and globalized, the number of parties involved has increased. From the importer, exporter, the importer’s bank, the exporter’s bank to shipping companies, receiving companies, insurers, and other service providers, mass amounts of paper documents must flow through a tangled web at each stage.

All this paperwork must be checked and confirmed by each party to ensure accuracy as well. Manual transaction processing of complex ownership and transfer related documents by multiple intermediaries through a range of communication points is time consuming, costly and often results in a delay in the shipment of goods.

“A dizzying number of manual checks must be carried out to verify the legitimacy of a client, its trading partners and the goods that change hands. Most checks require the physical presence of a person, and the administrative work conducted by bank middle offices is overwhelmingly paper-based. The high cost of this process restricts access to trade finance for smaller businesses and especially those in developing economies whose credit-worthiness is difficult to establish.”

[6]

Intermediaries are heavily relied on throughout the trade finance process as the trustless environment demands third parties to verify the delivery of funds to the appropriate entities.

Making things even more challenging is the utilization of disparate and siloed recordkeeping systems by each party. Miscommunications are common and significant version control challenges exist as changes get made to contracts and other documents.[7]

Minimal transparency and traceability increase the risks of fraud

A lack of transparency and traceability caused by fragmented and siloed record keeping infrastructures means trade financing can be used to hide the illegal movement of funds.

From the misrepresentation of prices, quality or quantity of goods to faking the existence of a product altogether, fraudulent activities are easy to disguise.[8]

“Because there is no common platform for banks to screen transactions financed by other banks due to confidentiality concerns, there is a possibility that customers may capitalize on this information-sharing gap to obtain financing from multiple banks using the same invoice.”

[9]

With separate and siloed infrastructures housing vital information like invoices, contracts, approvals and previous financing transactions, duplicate invoices are hard to detect, and any malicious activity is difficult to identify.[10]

Unable to gain a complete picture of internal processes in real-time, companies and the financial institutions have limited capabilities to investigate fraudulent activities efficiently.

Regulatory compliance and reporting is a constant drain on resources

Financial institutions that offer trade financing services must complete several compliance steps as a part of the onboarding process for new clients.

These steps which create significant time and cost delays include the collection, validation, and verification of key documents such as proof of identity, proof of address, proof of business registration and many others.[11] [12]

The introduction of stringent regulations like Basel III is forcing financial firms to dedicate more resources to compliance than ever before and placing enormous burdens on them.

New regulations also necessitate intensive reporting of counterparty exposures and transactions by companies and the maintaining of accurate records to be audited by the regulators. Due to disparate legacy systems, paper-based documentation processes and siloed record keeping, the aggregating and assessing the large volumes of data for reporting is difficult and a constant drain on resources.

“Until fairly recently, compliance in trade finance was limited to the examination of documents. Nowadays, added to this is extensive screening – against multiple country lists – of numerous data elements embedded in ancillary documents, regardless of their role in the letter of credit (LC) and international guarantee. The traditional view that the main risk within trade finance is one of fraud has been superseded by a modern three-part categorisation of risk – namely embargoes; terrorist financing (including fraud); and sanctions/proliferation financing.” [13]

Regulatory and compliance challenges have been exacerbated by the global nature of trade and the increase in both volume and speed of international trade flows.

Using blockchain trade finance platforms to transform the financing of trade

Efforts to improve centuries-old processes that sit at the heart of trade finance have failed to provide the necessary reforms.

“There still exists a fundamental divide between vital business information, like invoices and trade contracts, and the financial transactions that need to be executed by banks and other institutions to complete the transaction. At the end of these processes remains a herculean effort to reconcile the business logic and related documents with the financial transaction.” [14]

Unlike most ‘technology wrapper’ solutions, blockchain is no band-aid fix.

It’s the real deal.

The technology’s promise lies in its ability to remove the cause of almost all the pain points within trade finance.

By replacing rigid, siloed and insecure centralized trade finance systems with a unified IT and record keeping infrastructure, blockchain technology provides trade parties the ability to track and immutably record the movement of goods and information across entities on a shared ledger. [15]

The manually intensive and paper-based processes which have opened trade finance to human error, fraud and settlement delays are eliminated as all documents are digitized and stored on an unchangeable ledger.

By digitizing documentation like contracts and invoices and storing them on a unified ledger, it becomes safer and more efficient to move documents around between parties.

“We’re moving pieces of paper around, moving information between banks and other players in the supply chain, and that is where we will see lots of efficiencies created as a result of blockchain.”

[16]

Storing all ownership documentation and transaction records on a single and immutable ledger that is accessible and visible to all entities also stops the need to manually check document changes and share data other parties which have traditionally taken a considerable amount of time.

With a blockchain trade finance Platform, there is no need to store copies of the same document on numerous databases across various entities. Fixing needless errors, duplications and reconciling data sets across geographically dispersed parties is no longer necessary.

Beyond these game-changing benefits, companies, financial institutions, and government regulators can also gain granular traceability and auditability into the trade financing process as blockchain enables real-time, system-wide visibility into a single source of truth.

A quick note on privacy in blockchain trade finance platforms

Privacy and confidentiality are vital considerations when it comes to solutions for trade finance and other financial services as well.[17] It’s understandable that many trade finance professionals may be wondering how privacy is protected in a shared ledger system.

“The challenge of maintaining Chinese walls or data privacy among counterparties to trade transactions could be overcome by utilising tokenisation as a form of cryptography, whereby parties are only allowed to access permissioned information.”

[18]

Due to privacy-related considerations, permissioned blockchains are likely to see faster adoption as issues of this nature are more easily resolved within a consortium of known parties. Private or consortium blockchains, can restrict access to information and deliver members of the network greater control over privacy.

Trade finance is ripe for automation

Blockchain enabled smart contracts have the potential to make transformational improvements in trade finance.

When run on a blockchain, smart contracts become self-executing contracts where contractual enforcement, rights, and obligations, performance, and payment are automatically executed by an autonomous system that’s trusted by all signatories.[19]

Smart contracts can end the reliance on costly and inefficient intermediaries and eliminate many of the manual and paper-based processes involved in trade finance like letters of credit and structured commodity finance as well.[20]

“For example, various inputs can be collected on a blockchain platform to automatically execute the release of funds or transfer of digital assets (such as receivables) based on smart contracts.”

“This process allows for a qualitatively different approach to trade that has the potential to marry information, transactions, trade contracts and business logic to provide automated digital asset transfer alongside real-time settlement.This idea, taken to its logical extreme, could mean truly automated supply chain and financial operations between businesses (and even machines) with no-touch straight-through processing.”

[21]

With secure, tamper-proof digital trade documents available to all parties, fraud and other execution risks can be reduced or even eliminated as the immutable and programmable nature of a blockchain enabled smart contract prohibits manipulation and nonperformance.

Just imagine a blockchain trade finance platform that tracks goods and automatically releases payments as these goods move around the world? An automated trade finance platform.

Realizing a new inclusive digital era of trade finance

Blockchain trade finance platforms have the potential to solve debilitating inefficiencies in trade finance.

The technology is uniquely qualified to replace the outdated, siloed IT systems and paper-based processes which facilitate the exchange of data and serve as the backbone of trade finance workflows.[22]

By digitizing the entire trade finance process from order to settlement and bringing all the participants to a single platform, blockchain technology transforms trade finance into a more efficient, less complex and risky process.

“Blockchain technology continues to show the greatest potential to streamline trade finance and maximise the value it delivers to business and financial institutions alike.”

[23]

With many of the inefficiencies, risks, and complexities taken out of the trade finance process, financial institutions can begin to address the financing gap experienced by small and medium enterprises (SMEs) in Asian emerging economies and around the world.

A shortage of trade finance which has inhibited business growth and slowed financial inclusion can finally come to an end as the risks, complexities, and costs associated with the provision of finance are almost eradicated altogether.

“Small and medium-sized enterprises (SMEs, i.e. companies defined as employing 250 or fewer workers) constitute the vast majority of companies registered in both developed and developing countries. Their role in economic activity, generating growth and innovation cannot be overstated. According to the World Bank, SMEs contribute to over 60 percent of total employment in developed countries and 80 percent in developing ones, including the estimated informal sector.” [24]

New and dynamic blockchain trade finance platforms have the potential to provide millions of micro and small businesses access to trade financing as improved efficiencies and risk assessment abilities give financial providers the ability to offer more affordable financing terms.

Trade financiers gain access to previously inaccessible revenue streams, new trading relationships are initiated and unprecedented economic growth can be unlocked.

Progress has little to do with technology

When it comes down to it, realizing a new digital era of trade finance through the utilization of blockchain has little to do with technology.

Legal and structural challenges need to get resolved if blockchain trade finance platforms are to become a reality. This will require unprecedented inter-industry cooperation, industry-government partnerships, and the development of new paradigms of understanding.

This will not be easy.

Governments must begin to understand blockchain technology on a deeper level and start to build new regulatory frameworks.

Without updated regulations alongside the introduction of blockchain based trade finance platforms, the impact will be minimal.[25]

“The extent to which this new technology realizes its potential will depend in substantial part upon how well stakeholders steward its development. There remain important open governance questions regarding both the functioning of the technology and its current and potential applications.” [26]

Major players in the trade finance industry have already begun to build blockchain trade finance consortiums of mutual interest.

IBM has been chosen by a consortium of seven of Europe’s largest banks to construct and host a new trade finance platform. The platform is designed to simplify trade finance processes for small and medium enterprises in Europe by addressing the challenge of managing, tracking and securing domestic and international trade transactions.

“Consortiums make sense because the success of shared ledger and blockchain technologies requires significant levels of market participation, collaboration, and investment.  The consortium is less about a technology solution or a particular business model.  It’s more about how companies who haven’t been able to trust each other in the past can come together and collaborate and share information.” [27]

With enhanced and efficient trade finance processes come far-reaching benefits.

These go beyond the game-changing advantages delivered to the providers of trade finance. The effective use of blockchain based trade finance platforms will also lead to the realization of greater levels of financial inclusion for millions of people living in developing economies.

The flow-on impact for global economic growth will be unparalleled.

If you like this article on blockchain trade finance platforms, discover how blockchain technology can transform identity, global supply chains, insurance, compliance, civil services and national healthcare systems.

Anthony is the head of content and research at Intrepid Ventures. He has spent the past several years researching and analyzing technologies and working with a diverse mix of blockchain companies to help them gain insight and develop authoritative content.

Realizing the revolutionary nature of blockchain technology and the existence of a significant knowledge gap among entrepreneurs, industry, and government, Anthony now concentrates his time on creating educational content, researching potential use cases and analyzing the impact of the technology on global industries.

Also published on Medium.