BLOCKCHAIN: THE FUTURE OF TRANSACTION?

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Written by Søren Gyde Sønnichsen with great input from David Yerger from Bitgo.com

Many people heard about Bitcoin in late 2013 when the so-called Cryptocurrency suddenly surged over 700% in value within less than 2 months, making early investors overnight millionaires. The following 2 years Bitcoin shook off almost 80 % of the peak value, while people discussed whether this seemingly volatile Cryptocurrency really is the future of payments. Is it secure enough? Can we have a stable economy without any room for monetary policy? The real innovation, however, is the technology underlying Bitcoin; the Blockchain.

The blockchain is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the blockchain. Once a transaction is added to a block, it is virtually impossible to remove it. Thus, you have a distributed chain of records, transaction history, time stamps of events, to refer back to. Those shared records are distributed across a global network updated in real-time.

Since 2013, the blockchain technology has begun to step out of the shade of the cryptocurrencies as blockchain companies have received almost $1 bn between 2014 and February 2016. Companies and investors alike are recognizing that bitcoin is just one of a wide range of applications. Imagine a world where you can buy a house in the Seychelles within half an hour while you are sitting in a café in France. Doing so with proper digital identifiers can reduce fraud of digital transactions to almost zero. The applications extent to voting, supply chain management, distribution of sensitive medical records or even reselling of concert tickets or limited edition shoes.

 

IoV: Internet of Value?

Recently, at a blockchain event hosted by VLAB at Stanford Research Institute, John Wolpert of IBM, noted that the buzz around this technology reminded him of the early years of the Internet 20 years ago. He attended an Internet event in the same auditorium back then where there was the same sense; the Internet will have a massive impact on our society.

Great innovation of the Internet in the early days was the ability to store and share information across the world at unparalleled speed. In recent years, Internet of Things (IoT) has evolved as the “second generation” of the Internet as we are becoming more and more connected to our material belongings through the Internet. We are storing massive amounts of data on the Internet, generated not only by our smartphones, TV’s or Coffee Machines but also generated by ourselves.

blockchain 3One might perceive blockchain as an Internet of Value (IoV). It is a database protocol that is extremely well suited at storing and sharing information about valuable assets because it is decentralized and distributed. In essence, blockchain is a chronological chain of bundles of information or “blocks”. The cryptographic nature of blockchain insures that no one can counterfeit or change it.

The fact that it is decentralized and distributed means that everyone is able to not only to use it but also to manage it because everyone on the blockchain holds a copy of the database as well as a “wallet” with a private key. This makes every user able to verify every transaction and in effect verify the assets of any user’s wallet and track the transaction history of the assets. It is exactly the secure verification that makes blockchain suitable for e.g. exchange of sensitive medical data or valuable assets that are easily counterfeited today such as art.

Of course, every user will not spend time verifying transactions – this is taken care of by so-called miners, who are paid (in Bitcoins) to verify transactions. The order of verification is random and the miner, who “solves” the “verification puzzle” the quickest, is paid. The “verification puzzle” takes a large amount of computing power to solve fast but once a miner has solved it the solution is easy to verify. This means that the transaction is not instant and can take anywhere between minutes and up to half an hour but miners are incentivized to solve them fast as only the fastest get paid.

Still, this speed of transaction and (importantly) verification of authenticity is unprecedented and the decentralized nature makes it insusceptible to corruption as it would be extremely difficult for any one person to take down the entire system since everyone holds a copy of the database.

 

Buying property on the blockchain

Returning to an example of a possible application of blockchain. Consider the steps involved in buying a house: a mortgage is issued almost instantaneously by a blockchain enabled auction and the investor (which could be a bank, a private investor or a crowd of investors) enters into a smart contract with the house buyer where the bank, as an intermediary, is cut out. The smart contract is self-executable in terms of making payments and continuously monitors and verifies whether all parties involved are upholding the conditions of the contract. Ownership of the house and payment are transferred on a blockchain betweeblockchain 2n buyer and seller, using Bitcoin or some other cryptocurrency. As there is no need for any human intermediaries (such as banks or lawyers), blockchain reduces the economic deadweight loss associated with these intermediaries, increases the overall economic surplus and potentially benefits both the owner of the mortgage and the house owner.

Consider the possible impact in developing countries where a well-functioning financial system is not present. A local farmer might not be able to loan money to buy a piece of land. No international bank will be willing to lend him money because there is no way to assess the assets of the farmer or the actual value of the piece of land. If property was exchanged on a blockchain, the bank could instantly verify (from anywhere in the world) the previous traded price of the land and verify the assets of the farmer, possibly enabling an extension of a loan and ultimately supporting economic growth.

When talking about Bitcoin, it is also worth mentioning that this removes the need for a central monetary institution such as a central bank. This could have a positive impact in countries with e.g. hyperinflation because of a corrupted monetary system or a central bank with no credibility. This will however be a drawback in countries that successfully use monetary policy to support economic growth in recessions and contain economic activity in booms.

 

Impacts of the Blockchain: Today and in the future

Today, the bitcoin blockchain manages around 200,000 bitcoin transactions a day, moving US$150 million around the world without interaction with any bank or financial intermediary. As mentioned in the beginning, a lot of funds are flowing into companies ´which are developing both consumer- and business oriented blockchain enabled applications.

Critics question the security because the decentralized nature of the database means that no central entity is able to step in and prevent a breach; the blockchain maintains itself, so to speak. Security is not an issue when assets are stored on a blockchain, however, security is a massive concern when those digital assets are secured in private “wallets” as is the case with Bitcoin. If the private key to this wallet is compromised, there is no way to retrieve your digital assets. However, many companies are working on how to strengthen security practices to reduce the likelihood of wallets being hacked. An example of a company is BitGo. This is an enterprise wallet and security company. More than $1 Billion USD moves through BitGo wallets each month by global businesses. They do this without taking custody of your funds, you maintain your funds. They enforce the security measures, policy and treasury controls on your behalf when you are ready to send a transaction.

Blockchain technology is already impacting international payments. Exchange infrastructure is in over 100 countries around the world. The questions no longer remain as to if this technology will change the way we live – the question is when. The possible applications are abundant but it remains to be seen whether blockchain is all hype or it actually will change the world with the same magnitude as the Internet indisputably has done.

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Sources:

CoinDesk

CB Insights

BitGo

American shopping culture spreads to Denmark

Black Friday is back II

Black Friday was the biggest sales day ever in Denmark, which is a clear indication that the Danes have fully adopted the American tradition of shopping on Friday after the 4th Thursday of October.

The tradition of Black Friday kicking off the holiday shopping season with great deals from retailers and customers shopping like on no other day of the year, originates from the US. Originally, the term “Black Friday” referred to the chaotic and congested traffic conditions on the day after Thanksgiving, but later it was given another interpretation as the day when shops’ accounting numbers go from red to black.

The tradition of shopping in the Thanksgiving Holiday has existed for several decades and is still alive and well. However a number of new trends seem to be emerging. As these might be imported to Denmark in the coming years, let us take a look at them before getting into the record breaking numbers of this year’s Danish Black Friday.

US Trends

As always, the Thanksgiving weekend, including Thanksgiving Day, Black Friday, small business Saturday, and yet-to-be-named Sunday, attracted hordes of customers to both retail- and online stores. According to a National Retail Foundation survey, 151 million people shopped online and/or in stores over the weekend, with online shopping surpassing the low-tech alternative measured in customers. On average, each customer spent $300 over the weekend with 33% of customers shopping consumer electronics.

Including Cyber Monday (marketing term for the Monday after Thanksgiving Weekend), Adobe estimates total online Thanksgiving sales to reach $11B. Online shopping was so intensive on Cyber Monday that some of the big retailers, such as Target were unable to handle the immense web traffic generated on this day, which resulted in web shop down time.

Cyber Monday, which is now a bigger online sales day than Black Friday, got its name from the online deals and shopping that characterize this day and is a good example of an important trend in American holiday shopping. The good deals are no longer exclusively to be had on Black Friday, but are spread out across a much longer period.

Whereas Black Friday used to kick start holiday shopping,  there are now talks of “Black November” and “Cyber Week”. This seems to indicate not only semantics but that Black Friday is losing some of its importance as holiday sales are being spread out over longer periods of time. In fact, Black Friday sales has decreased the last couple of years.

Time will show how these developments play out and whether we’ll have to come to terms with “Black November”, but for now let’s take a look at how the Danes have taken on the American tradition.

Danish Black Friday

November 30th, Black Friday, was the biggest sales day to date in Denmark. Eager Danes waited in line outside shops in the freezing weather to get their hands on the best deals. Traffic went black with so many people on the roads in the middle of the night, and several of the major web shops broke down. 40,000 online customers waited in line to get into the retailer Bilka’s web shop, and the price comparison site Pricerunner had 220.000 visitors within the first couple of hours on Black Friday. It turned out to be both the biggest sales day offline and online with total sales of DKK 2B from 5.5M transactions, which is quite a lot considering the size of the Danish population.

The numbers are even more impressive given that Black Friday has only existed in Denmark for the last five years and had its big breakthrough in 2013. From 2012 to 2014 Black Friday sales increased by 495% on 23 major web shops.

What is interesting compared to the US is that in Denmark, Black Friday began as an online event and only this year did retailers really jump on-board. This is the direct opposite development compared to the US, where online shopping is just now beginning to get a lot of traction.

One might wonder if general holiday sales patterns in Denmark will also follow a different direction than in the US. In Denmark, holiday sales have historically been spread out through November and December but might become more concentrated with the adoption of Black Friday at the same time that US holiday sales are spreading out. If that is the case, it might signal that even though Denmark adopts certain US traditions and sales patterns, they are being adapted to the Danish context.

It will be interesting to see how Black Friday evolves in the coming years and whether Denmark will have a Cyber Week or Black November. What is already certain is that discounted sales events are no longer just biannual events in Denmark but something that takes place several times throughout the year.

Maybe both the US and Denmark will be impacted by the disruptive sales event “Single’s Day”, which was invented by the Chinese company Alibaba and reached sales of $14.3B on November 11th?

Where holidays end and shopping events start seem to be increasingly difficult to predict.

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