February 14, 2016

Take 3, Scene 2: Introduction to Blockchain Technology

For the 2nd installment of our Take 3 audio series, Adi Chikara and Michael Lisse join us to talk about blockchain technology. Blockchain is the technology that underlies the Bitcoin cryptocurrency, and it’s being heralded as a revolutionary technology that could change the way currency is exchanged, trust is established between buyers and sellers, and even the way entire markets function.

Episode Highlights

Among the highlights of the episode are:

  • Adi & Michael give background on the burgeoning blockchain partnerships like R3 that have been formed between some of the biggest players in banking & finance
  • The 2 share their thoughts on whether blockchain can and will be used to disrupt companies like Uber and Amazon
  • Adi talks about the power of distributed systems and why they are here to stay
  • Michael discusses possible roadblocks to widespread adoption of blockchain: government regulation and entrenched players

About the Guests

Adi Chikara is a part of 3Pillar’s Solutions Management & Advanced Technology Group. He is currently working with a 3Pillar client to help them build out a blockchain-based cryptocurrency. Adi spoke at the DEVCON1 Ethereum Developers conference in London in November 2015, where he presented a blockchain canvas based on Alexander Osterwalder’s Business Model Canvas.

Michael Lisse is 3Pillar’s Global Lead of Strategic Business Development. He has two decades of experience helping clients bring products to market. Michael specializes in working with customers to develop products that  blend digital, mobile, social, and emerging technologies.

Read the Transcription

Read the transcription of the episode, which is given below.

Julia Slattery: Adi, you recently wrote a blog post for the 3Pillar site that gives readers an introduction to blockchain, which is a distributed ledger technology. Now for those listening that may not know what a distributed ledger technology is, can you give a quick definition?

Adi Chikara: So blockchain is a distributed growing database, that is almost public to anyone. It is a product similar to what git uses with its Merkle tree. The difference between git and blockchain is: blockchain adds consensus on top of this distributed system. What this means is, there are very specific rules on how data can be added and how it can be verified. The transactions that happen on the blockchain are added in blocks. These blocks must go in an exact order to create a chain, thus the name blockchain.

Julia Slattery: Alright great, thanks. And it seems like you can’t go to a tech news website these days without reading about breaking blockchain developments. Earlier this week it was announced that nine of the world’s largest financial institutions would be forming a blockchain partnership. Now, I know it was just announced, but what would you expect to see coming out of a partnership like this, Michael?

Michael Lisse: Alright so, the reason behind the partnership or the alliance or consortium, pick a name for it, is really to make sure that no one is committing the sins of the past in financial services—pick an industry, the graveyard is littered with them. I personally participated in the newspaper industry and saw their fortunes turned. No one in financial services wants blockchain to get ahead of them, so we’re going to see a number of announcements around commitment to blockchain, we’re going to see a number of experiments not only around currency, but also around general transactions that are secure and enabled in a way that decreases friction and increases speed around transactions.

There is going to be a bunch of visionary statements that come out, but it’s going to be a progression for the more entrenched players. It allows the entrenched players to really understand how the market is developing, how new entrants are approaching the market, and how new entrants are staking claims and gaining a little bit of traction. It’s going to be a bunch of study from the entrenched players and then ultimately movement either in terms of M&A or actual development around blockchain.

Julia Slattery: Okay, great, thanks. Bitcoin brought blockchain into the mainstream, but potential applications extend beyond just the financial services space. In your blog post on blockchain Adi, you say that it could be used to create decentralized marketplaces that would replace market leaders like eBay, Amazon, and Uber. That seems hard to fathom based on the dominant position some of these companies have; do you really think it’s a likely scenario?

Adi Chikara: So the technology is there to disrupt the industry. Would it be that the big companies apply this technology and still remain the leaders, or someone new comes into the market and takes over? That is the question. But definitely, the tech industry is something that you need to keep moving forward, so either you innovate or you let someone else innovate and they take you over.

More importantly, the model has to change—the model of there are 7 billion people in the world, the population keeps on growing and companies think that they can just manage everything—it’s not that realistic. Google manages about 2 billion lines of code to run the different services they do. That is a big task; not every company is successful in doing that.

Running something like Uber where, at the end of the day, everything is controlled centrally is great, but imagine if you can get a cab if you want, a normal cab anywhere you go, but the end relation is just between the cab and you, there is no third-party vendor that is trying to take cash out of it, trying to even for privacy reasons, get your information. There is no reason, from the business model, technically, or just privacy-wise, the industry won’t move it. It would definitely cut costs from 15% to .02%. It would be more secure for people in terms of their data is not being used in any way and it is more convenient, you can use it in more places. So the industry would move, but the question is: who will move first as a company?

Julia Slattery: Alright, interesting. So when bitcoin first came out, it was widely disregarded across the board. Do you think with all of this new research coming out, that financial institutions will start taking bitcoin seriously?

Michael Lisse: So one thing that is important to note is the progression with which financial institutions in particular have been approaching blockchain. So you went from, call it 24 months ago and actually a little bit further, where it was this big feared technology, the Mount Gox obviously is probably the biggest kind of cautionary tale, forgetting about the fact that that was actually supposed to be a Magic the Gathering trading card platform that was turned into a bitcoin training platform. That aside though, it’s interesting to see the progression from financial institutions going from 24 months ago to saying it’s a joke, blockchain and bitcoin, and why would we ever want to get involved in it to 18 months ago where they were still more or less publicly saying that, but secretly setting up skunk works to be able to examine it, to not get bowled over by any new upstarts.

Certainly we see that in the financial services industry, to 12 months ago, actively announcing “Yes, we are looking at this right now, we are studying it.” The study now has led to public acknowledgment of the importance of the protocol, of the potential implication on their industry, and saying publicly, this is something that we want to get behind and understand so that it serves our customers well. By extension, it serves our shareholders well to not be actively pursuing this, to understand what it means for your industry, understand what it means for the way that you could potentially serve customers in terms of decreasing transaction costs, decreasing friction, providing better service. For those that are not looking at it – my opinion is they are going to get bowled over. You should be looking at it at this time.

Julia Slattery: So to continue that thought, what could be the consequences of the financial sector or some financial institutions not taking blockchain or bitcoin seriously?

Adi Chikara: So here’s the thing. How many years can you remember that banks were the prominent space of just handling money? I don’t know, I am pretty sure before I was born, before any of us were born, banks were in our lives of hey, this is how we handle our finances. It’s so tightly tied into our lives, that a small fluctuation in the stock market sent waves of breaking news all over the world. So it is scary that such an important piece of our lives is controlled by 10 institutions. Now obviously, there needs to be governance, there needs to be control, but at the same time, that control can lead to just making decisions as well.

Michael Lisse: Abuses.

Adi Chikara: Exactly. And if you don’t want a system to be abused, you distribute it, you distribute the power. And this is how democracy works as well—you let the people decide what they want. Even in that case, even if the failure is there, at least you have a bigger chance of succeeding and the failure is distributed among the people—okay we decided and failed rather than a couple of institutions deciding how our finances should be run. So in that sense, the financial industry, in terms of banking itself, hasn’t changed for more than 200 years, I guess thousands, because the idea of someone else keeping your money has always been there and the idea of lending and borrowing.

Blockchain changes that and everything else around us has changed. People who never have thought of a computer outside of a big laboratory actually carry around tablets. Still nothing in finance has changed and I think this is exactly a point where it’s time for the finance sector to just re-ramp, and blockchain is there to do that for them.

Julia Slattery: So all of this talk has been about the future where blockchain takes off and becomes not only extremely successful, but also extremely revolutionary. But what about the other path, the one where blockchain isn’t the revolutionary catalyst you think it will be? What then?

Adi Chikara: So one of the main things to look into this is technology moves very fast. Bitcoin was there, wasn’t successful. Down the line is blockchain and it seems very promising. We think it’s going to be the breakthrough. But the important thing is that even if blockchain doesn’t, for whatever reason, turn out to be the technology that revolutionizes everything, the idea of distributed systems will definitely be the answer. So it is possible that someone does a variation of blockchain that is different, but the idea of distributed systems is the way forward. You can’t run a global economy without it.

Julia Slattery: So blockchain is still a very complex technology and the jury is out on how widely it will be adopted. Do you foresee any issues or roadblocks around the adoption of something this large?

Michael Lisse: So there’s two main issues around adoption for something this large and this potentially impactful. The first is the issue of regulatory: is it the case that our legislators are going to allow alternative currencies or alternative means to transact that they are, quite frankly, unfamiliar with or maybe just haven’t caught up to? That’s going to be a big question. So the regulatory environment clearly has to be able to catch up to this, to realize the use of blockchain as the visionaries see it.

The second is lobbying groups and entrenched players. Everyone that is involved in say a real estate transaction today has been there for hundreds of years, at least 100 years. You think about the time that you bought a house, the number of parties that came in to be able to help you conduct that transaction—I’m talking about lenders, I’m talking about title companies etc. In the grand vision of blockchain, all of that goes away; however, if I own a title company, I’m going to have a lot to say about that because that disintermediates me from that process. The question is for the smart players, the folks that really understand it, if you’re going to get disintermediated, you’re going to get disintermediated, but smart players are going to figure out how to use the technology in a way that allows them to pivot from what they’re doing today. I’m not exactly sure how a title company would go ahead and do that, but I know that if I’m a title company, then I’m concerned about it and I do want to figure that out. So both regulatory as well as entrenched players are important components to overall adoption and use of blockchain technology.