Could Blockchain be a real game changer?

The four most important general-purpose technologies (GPTs) that have, so far, drastically changed humanity have been steam engines, electricity, information technology (IT), and artificial intelligence (AI). And contrary to what Mr. Gates argues, blockchain has just been added to that list.

Blockchain is a globally distributed public ledger technology. It enables a secure way of recording information as well as being a secure peer-to-peer method of verifying information, movement of assets, documents, and, in particular, real-time money transfer across the world economies. And it does so with significantly small costs due. It also provides transparency, decentralization, and increases efficiency and decreases transaction costs thanks to no intermediaries.

Although there were a number of similar technologies as late as the 1970s, the blockchain technology itself was first publicly introduced by the famous Nakamoto (2008) paper of Bitcoin, following the Global Financial Crisis of 2008. And today, almost all cryptocurrencies have their own blockchains as in the bitcoin or Ethereum blockchains.

Decentralization or the decentralized nature of the blockchains basically means that the validation process is not through a central authority, but rather via a consensus algorithm in a distributed network. It decentralizes digital records of products or information and is user verified. It also provides anonymity, without revealing the true identity of a user.

Fundamentally, blockchain helps deal with the trust issue. That’s why The Economist once called it the “trust machine.” This new mechanism of proving trustworthiness is particularly important for small and medium-sized enterprises (SMEs), startups, or individuals that don’t usually have a built-up reputation yet. One should not forget that the conventional financial system is also primarily built upon “trust.” And this is, in the meantime, a fundamental weakness (for conventional finance) considering the frequent financial distress periods.

Blockchain could be used in smart contracts in the shipping industry, in digitalizing the supply chains, payments, and in financing trade. Blockchain’s use in supply chain management, in business strategies, and in dealing with trust-related challenges as well as in security, privacy, payment, and settlement systems should be well-noted. It could help balance between cooperation and competition, and deal with modern issues of opportunism and adverse selection.

Its extensive use in finance is already popular. However, companies such as Maersk and Walmart have also been effectively using this new technology to decrease costs, increase quality, and facilitate their business processes. Smart contracts supported by blockchain technologies can increase efficiency by fastening digitalization and decreasing operational workload in conventional business models. They can provide transparency, speed, and security to all parties.

Third-party trust issues (related to intermediaries such as banks) are already addressed by the blockchain technology. However, how about first-party and second-party trust issues? Indeed, as rightly pointed out by Kshetri (2022), the combination of blockchain with the other technologies such as AI could help overcome the other dimensions of trust-related challenges as well.

The Fourth Industrial Revolution or Industry 4.0 (digital revolution) is of critical importance at this point as it can be used to increase the productivity and efficiency of the blockchain technology. The Industry 4.0 (digital revolution or IoTs) could be used to deal with the other dimensions of trust, and increase the productivity and efficiency of the blockchain technology.

Blockchain-based identities to replace missing legal identity documents are a key first step in the introduction of the blockchain technologies in many industries. An efficient and reliable property, house, or land registry system could be a huge plus particularly in underdeveloped economies. Developing sustainable supply chains is another critical contribution. For example, PWC estimates effective use of blockchain in SCM (supply chain management) could increase global GDP by almost $1.8 trillion by 2030.

Blockchain technology attracts even more investment and venture capital as its use in finance, banking, cybersecurity, payments, and smart contracts increases. The global blockchain technology market was a little over $2 billion in 2018 and $5-6 billion in 2021, according to Polaris Market Research, PWC, and a few others. It is expected to exceed the $10 billion threshold in 2022. Between 2022 and 2030, on the other hand, it is expected to grow by 80-90 percent per annum, and eventually reach somewhere between $1.2 and $2 trillion. The Asia Pacific, including China and India, in particular, is expected to raise its share the most.

Blockchain helps create new networks, organizations, and models; functions as an intermediary instrument or authority of verification; and replaces the conventional trust instrument in any formal business relationship or business contract. Meanwhile, just as in the decentralized autonomous organization (DAO) example, blockchains are likely to lead to new business models and new-generation organizational setups.

Blockchain-backed decentralized and automated validation mechanisms can create new business models and new setups where you could even earn a passive income in an automatic investment scheme. A self-driving car, automated financial transactions such as paying bills or money transfers, loan applications, and access to low-cost capital could be also be enabled.

Real estate assets, which are heterogenous and immobile, are another example. The market is illiquid, localized, and highly segmented. High information asymmetries and room for private bargaining make it difficult for authorities to follow up on the transactions. High transaction costs due to the large number of trusted intermediaries and confirmation authorities is another issue here. This is, indeed, where blockchain steps in. And, these blockchain-based land records are particularly beneficial for developing economies.

Blockchain is mostly associated with finance and cryptocurrencies, as its first application was in the introduction and transfer of bitcoins. The fast and efficient transactions made possible by financial technology (FinTech) along with its ordering, payment, and settlement aspects increase its efficiency and attractiveness. Blockchain could even be effectively used in international money transfers and liquidity flows or remittance transfers, just as in the RippleNet (XRP) or Stellar Lumens (XLM) networks.

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