Is Blockchain for Real?
Banks are doing it. Businesses are doing it. Blockchain is everywhere—so is the hype warranted? As with any new technology, blockchain has been oversold, but there are some legitimate use cases for consumers, small businesses, and accounting professionals that are here today.
But before we dive into those use cases, let’s take a step back and clear up the ultimate blockchain myth.
Blockchain is not Bitcoin
As a latecomer to the cryptocurrency party, I did purchase some Bitcoin in December in a total #FOMO moment. Four months later, my Bitcoin investment is not holding its value, but a lot of good has happened in the blockchain ecosystem.
To break it down: Bitcoin and other cryptocurrencies are underpinned by a distributed ledger—this is known as blockchain.
Now you’re probably familiar with databases. They are the workhorse of all web apps and financial websites. They store your name, email, your purchase history—you name it—and they’re hidden away behind your favorite website. A distributed ledger is a massively replicated database, but it’s out in the open so no single entity owns the master copy. Everyone who needs access gets their own copy that is identical to every other copy out there. When someone updates one of the ledgers, everyone gets that update. In this model, everyone has access to the data, and the transactions are transparent and permanent. If one of the ledgers gets lost or corrupted, there are many other copies out there. And there’s a secure way to write the ledger—enforcing that the data is always encrypted. Each block added to the ledger is encrypted, and only the required participants in that transaction can decrypt that block and access the data. The entire blockchain, however, is publicly available with multiple copies distributed around the world. In this way, the distributed ledger can’t be hacked, and it can’t be held ransom.
Sure, blockchain was originally developed as the distributed ledger to support bitcoin. But since then, there have been many variants of distributed ledgers and cryptocurrencies. For example, Ethereum is another blockchain, which supports the Ether cryptocurrency (just to keep things interesting).
So how does Blockchain work?
When you purchase or sell something, it needs to get recorded. In the 1700’s the good people of Venice invented double-entry accounting to record all those debits and credits. Over the last 400 years, advances in technology led to those same debits and credits being recorded in fancy databases wrapped by online accounting software and online banking websites.
Blockchain is basically a distributed ledger that is not locked within proprietary accounting software or banking websites. It’s available out in the open, for anyone to access, but transactions can be encrypted in ways to protect personal information. For example, say you purchase something (like bitcoin), that transaction is written to the blockchain—who sold the bitcoin, who purchased the bitcoin, and how much. Each person’s identity is not needed, but you have a token (cryptographic hash) that proves who you are. You need that token to access your transaction, so don’t lose it.
Think of that as the key to your safety deposit box that’s stored in a bank vault. Everything in your box is secure, and you may have a couple of keys for family members. No one else can get into your box, but your family members know where that box is stored just in case.
Now there are different types of blockchains out there. Ethereum is a single public blockchain that is available worldwide, which is convenient. Think of this as one giant branch location that everyone wants to access. The upside is a single place where you can do everything, But imagine the teller lines in that branch! That’s exactly the problem with Ethereum. Because there are lots of parties using that blockchain, it can take 15-30 minutes to post a transaction. Yep, the lines are really long.
To borrow on the banking metaphor, there are many variants of Ethereum, where different companies are creating different “branches” literally and figuratively. JPMorgan has their own blockchain, Quorum, which is targeted towards enterprises and will offer faster transactions. No long lines! R3 is a well-capitalized startup based in Singapore and London that offers a blockchain for financial services. In addition to recording transactions, they allow you to record “smart contracts.”
What the heck is a smart contract, you ask?
When was the last time you purchased or refinanced a house? Probably too often? Remember all of those closing costs, especially that random $500 for “title insurance?” Okay, I bought a house that was built in the 1960’s, I purchased it from the original owners 30 years later, and I’ve probably purchased 5 separate title insurance policies each time I refinanced. I’m pretty sure one of those covered my house, and anyone who could have made a claim to that deed probably isn’t around anymore. So why I did purchase all of those title insurance policies?
Well, land deeds are one of the most old-fashioned contracts around, and they’re basically pieces of paper sitting in some country clerk’s office, possibly on microfiche. (Wow, that’s even older than VHS. Millennials, you can google both of those “technologies.”)
The country of Georgia has decided to modernize titles and deeds and has turned all of these into smart contracts that can be stored on a blockchain. The smart contract tracks the sale and purchase along with the seller and owner. Buh-bye, title insurance! The blockchain record proves ownership, it’s permanent, and visible to all parties. Title insurance companies probably just cringed, but it’s great savings for consumers in the country of Georgia. Expect that same type of modernization to come stateside. State of Georgia, ya hear me?
How does this blockchain help little ol’ me?
Michael Cembalest from JPMorgan has cited two use cases that are tailor-made for blockchain: vendor to vendor payments and international payments. Both of these are highly relevant for small businesses today, and there are solutions in place today if you happen to live in the UK, Poland, France or Spain. Yep, those are the countries that pop into my mind when I think progressive technology. And they’re being brought to you by Banco Santander based out of Madrid and a tech startup, Ripple.
Here’s an example of a small business and vendor. Savannah supplies the best Alpaca wool and dyes from South America. Sam runs a boutique store that sells high-end doggie sweaters, tailor-made for Italian greyhounds. His best customer is Henrique, who loves his dog, Brown. Sam has great products, but he is not always a timely payer. Savannah knows that, but she needs Sam’s business in the USA to keep feeding her lovely llamas. Sam normally pays by wire transfer, which is a hassle, and he’s not the most prompt payer.
Well, technology is here to save the day! Sam and Savannah decide to use an international payments solution that moves money the same day and also conveniently records the transaction, so the old “check is in the mail” excuse doesn’t hold up. Today, the transaction is recorded in a private database, but increasingly that transaction will also be posted to a blockchain as proof of that transaction. Sam can pay his vendors on time, Savannah gets her payments faster, Henrique can keep purchasing clothes for Brown, and Brown can do what he does best—looking fly in an alpaca sweater.
So what’s next?
At Bill.com, we have created a leading payments platform that enables business-to-business payments. We have a network of 3 million participants, and we process over $50 billion of payments each year. Many of the technologies we described here are a natural fit for our customers, and we are in active development. So consider this a “peek behind the curtain” for now, but stay tuned for more announcements in the near future…