Blockchain technology has been hogging the hype cycle for a few years now, but despite a great deal of optimism and investment, deployed applications outside of Bitcoin have been rather scarce. Bitcoin might itself continue to exist only on sufferance from the Chinese government, being that its primary use has been to provide one of that country's main stores of excess funds. Bitcoin and other cryptocurrencies have another fundamental problem, but more about that below.
In order for this technology to transition from promising to widely deployed one or more "killer apps" will be required which are capable of obsoleting current practices - always assuming that blockchain reconciliation latency issues will have been resolved in the relatively near future. As I see it, today such applications are primarily in the areas of FinTech and GovTech. As such, the killer app trifecta for blockchain would consist of payments, settlements, and identity verification. Let's discuss each application in its turn.
In order for this technology to transition from promising to widely deployed one or more "killer apps" will be required which are capable of obsoleting current practices - always assuming that blockchain reconciliation latency issues will have been resolved in the relatively near future. As I see it, today such applications are primarily in the areas of FinTech and GovTech. As such, the killer app trifecta for blockchain would consist of payments, settlements, and identity verification. Let's discuss each application in its turn.
Payments
Whether or not Bitcoin and other cryptocurrencies ever become established as mainstream payment methods, which in my view is fairly unlikely, it does not mean that blockchain-based payment solutions are dubious undertakings. To the contrary, I firmly believe that reliable, secure payment is a major killer application for this technology.
The main reason I believe that cryptocurrencies are unlikely to gain widespread traction as a medium of exchange has to do with the complex relationship between money and government. Money, as Econ 101 teaches us, has three functions: as a medium of exchange, as a store of value, and as a unit of account. Not so very long ago, all three of these functions were efficiently fulfilled by gold, and to a lesser degree by silver. Metal currency had the advantages of universal adoption, stable exchange rate and low propensity to be subject to monetary shocks. Even when paper money was first adopted as a medium of exchange after the mid-1700s (at least in Europe), it was backed by gold - that is until the crisis that was the Great Depression. Without going into a book-length disquisition on the history of abandoning the gold standard, I can safely say that the key reason was the need of governments to gain control over their collapsing post-war monetary systems. This control is not something that today's governments are likely to be prepared to relinquish, partly for fear that the monetary conditions that birthed the Great Depression might return. Partly also, those governments who now enjoy or seek to establish reserve status for their currencies would be loath to give up the benefits that accrue from it: benefits such as low cost of borrowing and control over quantity of money. Governments of many developing net exporter nations, such as China's, also seek to control cross-border money flows in order to limit capital flight, providing even more incentives for them to keep tight control of their monetary policies. Not least important, governments who lose control over their currencies also lose control of their monetary policies, and with it their economies - as the South European Eurozone members have found out to their ongoing horror.
The main reason I believe that cryptocurrencies are unlikely to gain widespread traction as a medium of exchange has to do with the complex relationship between money and government. Money, as Econ 101 teaches us, has three functions: as a medium of exchange, as a store of value, and as a unit of account. Not so very long ago, all three of these functions were efficiently fulfilled by gold, and to a lesser degree by silver. Metal currency had the advantages of universal adoption, stable exchange rate and low propensity to be subject to monetary shocks. Even when paper money was first adopted as a medium of exchange after the mid-1700s (at least in Europe), it was backed by gold - that is until the crisis that was the Great Depression. Without going into a book-length disquisition on the history of abandoning the gold standard, I can safely say that the key reason was the need of governments to gain control over their collapsing post-war monetary systems. This control is not something that today's governments are likely to be prepared to relinquish, partly for fear that the monetary conditions that birthed the Great Depression might return. Partly also, those governments who now enjoy or seek to establish reserve status for their currencies would be loath to give up the benefits that accrue from it: benefits such as low cost of borrowing and control over quantity of money. Governments of many developing net exporter nations, such as China's, also seek to control cross-border money flows in order to limit capital flight, providing even more incentives for them to keep tight control of their monetary policies. Not least important, governments who lose control over their currencies also lose control of their monetary policies, and with it their economies - as the South European Eurozone members have found out to their ongoing horror.
Today, payment systems tend to be either proprietary walled gardens operated by the likes of Visa and the larger commercial banks, or else low-penetration interoperable solutions advocated by mostly struggling startups. Blockchain technology, being based on an open standard, is capable of bridging such broadly adopted solutions without forcing users to rely on yet-unproven companies as clearinghouses. Furthermore, because blockchain takes the clearinghouse function out of any single vendor's hands, it lowers the costs of linking proprietary payment systems together vs. using available commercial solutions for banks and money managers. Costs can conceivably come down enough to enable the use of blockchain-based payments for even very small transactions. Of course in order for this application to gain acceptance, blockchain performance will have to be improved to the point where billions of transactions can be handled in near-real time.
Settlements
Transaction settlement is another area where blockchain can have a significant impact on the way we do business. Today, transaction settlement friction ranges from having to take e-commerce product delivery on trust after payment has long been processed to complex and pricey escrow services for real property transactions.
Once blockchain technology is developed to the point that offline events can be easily incorporated into the chains, I can see escrow services becoming functionally obsolete, especially if they are coupled with blockchain-based title insurance products, as I will discuss below.
I can also envision blockchain securities settlements, enabling efficient bond markets that do not rely on primary dealers, market makers or inventories, which could revolutionize the enormous global bond market and cause some large players to lose significant revenue streams.
The key to development of this application is the ability for blockchain to extend beyond pure-paper transactions such as securities trades by incorporating transparent tools for attaching and extracting hashes for offline events. Ironically, the larger transactions that today require sophisticated escrow and interbank settlement services would likely be easier to implement than a humble delivery verification for goods ordered online by virtue of them being fewer in number and harder to misplace.
Identity
The area where FinTech and GovTech can both benefit from adopting blockchain is in establishing positive identity of persons and capital goods alike. In theory, positive identification can be useful for even small items, down to the size of a container or a package, if performance for verification can ever be made sufficient to handle such large numbers of simultaneous transactions. However, even for such items as cars and real property the benefits can be enormous. The promise is so great that it has even become an election talking point.
Fundamentally, today our tools for establishing positive identity and ownership chains are, to say the least, quite poor. Government IDs such as passports, social security cards and driver's licenses are often enough forged, necessitating secondary ID checks like finger-printing that are costly, time-consuming and intrusive. Car theft has been on the decline in recent years, but should it mount a return, police ability to identify parts from broken-up cars would be as limited as it had been in the pre-LoJack dark ages. For real estate especially, each transaction requires title search and insurance services that add a significant percentage to transaction costs and often take weeks to finish.
Blockchain holds the promise of providing positive ID and ownership-chain tracing with much lower intrusiveness and at a very low cost and changing a good part of the familiar business landscape in the process. Such businesses as CarFax and whole industries like title insurance and customs/freight tracking would become threatened with existential crises, while our beloved trips through passport control and to the DMV might never be the same again. In order for this nirvana to become manifest, standards would have to be adopted for transparent, easy to use tools for indelibly attaching hashes to real-world objects.
Bottom line
It can be difficult to become used to so much disruption of so many industries in such a short time. It also can be easy to be over-optimistic about the better-hyped technologies that might never see wide adoption. No technology can hope to win in the long run absent a killer app that renders its use worth the new-tech risk because it lowers costs, improves ease of use, or even creates an entirely new use category. Blockchain is now at that precipice: ready to enter prime time, provided that it develops the extensions and standards permitting its killer apps to begin emerging. I will be waiting.
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