There is some amazing technology being developed by blockchain startups, but the reality is that the first mass-market applications will use very little of it. In fact, the earliest big use-cases are likely to be nothing more than what bitcoin, the very first blockchain protocol, has offered all along. Businesses do not need complex functionality. They need simple ways to access simple functionality provided by extremely complex protocols – a reality that has big implications for the future development of distributed ledger platforms.
The pace of development in the blockchain world is breathtaking. The ground-breaking concept of a secure peer-to-peer ledger was first articulated in 2008, and the reality launched in January 2009. In the following eight years there has been a staggering acceleration in the expansion of the technology that underpins bitcoin.
- We’ve progressed from a shared ledger that deals with the most straightforward value transfer to the complex world of smart contracts – software that unstoppably executes on a distributed network of computers.
- We have distributed autonomous organizations (DAOs), which make decisions based not on an executive board but on the sum total of the wishes of their members, expressed through a process of decentralized voting.
- We have advanced anonymity features that protect the financial privacy of users, and protocols that offer data storage and processing provided by thousands of computers.
It’s remarkably diverse and promising technology, but initially, almost none of it will find mass-market application.
The reality is that mainstream businesses, like regulators, lag the technology by some years. Moreover, the easy wins – the really big use cases, where huge efficiencies are possible through blockchain adoption – are actually very straightforward, technically speaking. And so after eight years of blockchain development, the killer apps that everyone was looking for will look an awful lot like what bitcoin has done almost since the start.
Very briefly, consider bitcoin’s history and ecosystem. The white paper was written in 2008, the protocol itself launched in the opening days of 2009. For the first 18 months of its existence, bitcoin was a curiosity – an interesting piece of technology that geeks and libertarians played with. The very first exchange, the now spectacularly defunct MtGox, opened in July 2010, giving speculators a chance to dabble in it for profit.
Bitcoin’s first real-world use case did not arise until February 2011, with the advent of the online drugs market place, the Silk Road (the shadow of which has followed the virtual currency around ever since). Demand from this real if murky economy, coupled with speculative interest as a result, pushed bitcoin into its first real bubble.
But if you think about it, what more is needed for mainstream blockchain adoption than this? A peer-to-peer token (such as bitcoin); a means of interfacing with the real world (MtGox); and a use case (the Silk Road). Two years into its life and bitcoin had already blazed the trail that regular, legitimate business are only just following now.
Blockchain’s killer apps
Take remissions, for example – a $600 billion global market that is ripe for disruption thanks to the inefficiencies and injustices embodied in the current money transfer industry. In low-income economies it is not unusual for middlemen to take 10 percent of migrant workers’ pay cheques for the privilege of sending their own money home to their families, often through informal and insecure networks. The reason is that banks typically don’t want to bother with these people; they don’t move enough money to make it worthwhile, and they may not have the right paperwork anyway. Even in wealthier economies, customers still experience long delays and punitively high charges along with unfavourable interest rates when they send money across national borders and currencies.
What is needed to address this problem beyond what bitcoin was already doing in 2010? A suitable token and a gateway between the blockchain and the financial world is enough, at least in technical terms. Remember, a token on a blockchain can stand for anything you want it to, so long as you’re prepared to honour that arrangement. Thus a company can create their own blockchain token and back it with reserves in, say, US dollars, Chinese yuan or any other real-world currency. In a world of increasingly clear regulation around blockchain enterprises, and best practice learned not only from the failures of MtGox but also the shortcomings of the banking system, money transmission businesses would ideally operate a ‘100 percent reserve’ system. That is, every token issued on their blockchain would be backed 1:1 by a dollar or yuan in an insured, audited account. There would be no fractional reserve banking and no danger that tokens could not be redeemed for their real-world equivalent currency. These blockchainUSD and blockchainCNY tokens could then travel around the world near frictionlessly, with low transaction costs and non-existent delays, and with funds remaining within the blockchain until such time as they needed to make the transition back out into the traditional banking system again.
Take another major use case for blockchain technology: the loyalty sector. Once again, little technical is needed here beyond the ability to issue and transfer a token, which is redeemed by merchants for whatever they specify. Loyalty is a $65 billion industry, and it’s riven with problems. Blockchain offers much here, both in terms of efficiency and effectiveness – that is, doing existing loyalty programs better, and creating new and more attractive paradigms for fostering customer engagement. Take a look at some of the other major upcoming use cases, including recruitment and gaming, and the same is true. Technically, they’re nothing that bitcoin doesn’t do. A token, a gateway organization, a use case. That’s all.
In the lexicon of the cryptocurrency world, these are ‘appcoins’ or, increasingly, CATs (custom applications tokens). CATs are vanilla blockchain tokens created for a single, dedicated application – the blockchainUSD token, the loyalty point, the value transfer mechanism, where ‘value’ is whatever the issuing company wants it to be. There are, of course, dozens if not hundreds of applications for distributed ledger technology in the short- to medium-term. But at the beginning, the vast majority if not all of them will employ the very simple functionality offered by CATs.
There are extremely good reasons for this. Blockchains are complex things, with multiple layers. Get any of those layers wrong and you create attack vectors that could cost businesses and customers huge amounts of money. Right now businesses do not need complex functionality. They need simple ways to access simple functionality on extremely complex protocols. This means token creation and transfer, in the main, although embedding messages in the blockchain to create a permanent record of one sort or another will also naturally find applications. The rest is down to the chiefly administrative task of interfacing with the financial system, and to maintaining compliance.
Businesses do not want the cost and headache of creating their own blockchains. Large financial corporations may have the resources to research and build their own, and many are. But the smaller enterprises that have so much to gain from blockchain use simply want a secure, off-the-peg solution. They will want the ability to create and distribute a token, and a wallet they can customise to allow their consumers to send and receive it. The more easily and securely they can do this, the better. The implication is that the platforms that offer this will, all things being equal, be the ones that own the brave new world of blockchain-enabled applications.
This article was originally published on Due.com.