Everyone Knows the Blockchain/DLT Tsunami Is Coming but Very Few Know What to Do About It

August 26, 2018


Let’s revisit the history of Bitcoin, Crypto, Blockchain, and DLT before we ask some fundamental questions about their future.

In the year 1989, Sir Tim Berners Lee created the World Wide Web as a tool for decentralization. However, as of this day, the internet has proven to be as centralized – if not more – as the physical world. The internet behemoths such as Facebook, Amazon, Google, Uber, and others have more than 2-3 billion users combined, keeping tight control and influence over the global business dynamics by virtue of their vast collective customer base. They assume so much power today that it has become a big problem. Same is the case with the financial services industry, and we saw that during the 2008 meltdown.

In 2009, Bitcoin came onto the scene with the promise of fixing several major problems in the financial services ecosystem. With the underlying concepts of decentralization and transparency, Bitcoin (in Satoshi’s whitepaper) promised to introduce several fixes in the way we consume financial services by reducing fraud through immutability and cryptographic encryption, eliminating the need for trusted third parties in a transaction by using cryptographic proof over trust in a transaction, cutting down intermediary costs, digital contract execution through codified smart contracts, and so on.

With all these promises, Bitcoin presented a unique opportunity for us to go back to the decentralized way of doing things, thus giving power back into the hands of end users. Along similar lines, many other cryptocurrencies came to the fore, and ICOs went mainstream. In 2017, crypto token sales raised more than $3 billion.

However, more than 75% of these ICOs are now proving to be scams.

Most of the remaining ICOs which are genuine are now struggling because of the lack of a minimal viable product (MVP) that can sustain in the market.

Bitcoin’s emergence made it possible to have a true state of the ledger without trusting the participants. This property of bitcoin had a few trade-offs, such as low transaction throughput and public visibility, which made it** unattractive for enterprise users. Also, there was a notion among users – and enterprises as well – that cryptocurrencies such as Bitcoin cannot be the long-term solution because they are unregulated, illegal in many of the states/countries, and because AML/CFT issues abound. To solve these flaws, many companies came up with products, which would adopt the properties of Blockchain without the quirks of the Bitcoin Blockchain. **So a new narrative started: Forget Bitcoin, let’s look at the underlying tech called Blockchain. This narrative especially appealed to enterprises like banks and insurance companies.

At this point in this article, it will be prudent to discuss some of the prominent approaches – such as that of Ripple, Bitcoin, Dapps, Enterprise Blockchains, and Corda, which are the most talked about ones in the financial industry.

Let’s talk about Ripple

Ripple was founded in 2012 and was initially called Opencoin. It raised a total of $94 million in 3 years since it was established. The list of investors contained prominent VC firms like Andreessen Horowitz and Google Ventures. Ripple has three products under its umbrella – xCurrent, xRapid, and xVia. Of these three products, xRapid uses the XRP Cryptocurrency for making settlements in its Blockchain. xVia is still in the prototype stage, and xCurrent** is being used by banks for their cross-border settlements process** and is non-Blockchain based. Most of the partnerships that Ripple announced were for the xCurrent platform, and this created optimism for the XRP Cryptocurrency amongst naive crypto investors. Now it does raise the question of why banks are adopting the xCurrent platform for their cross-border settlements vis a vis existing platforms like SWIFT.

The selling point of xCurrent has been the instant settlement of payments compared to 3-5 days for SWIFT. xCurrent achieves this by introducing an interledger protocol, which involves setting up a segregated ripple account. So whenever a transaction is made between two banks, the message (richer than SWIFT) is passed consisting of the details of the transaction such as the exchange rate, fees, amount, etc. and the required amount is credited or debited from the Ripple segregated account. As can be inferred, the more the number of banks, the better the adoption of xCurrent.

Now let’s look at its second major product xRapid, which is a Blockchain based platform for cross-border payments. Most of the value that Ripple enjoys is because of its holding of XRP currency. Its use in cross-border payments is pretty straightforward: a currency is converted to XRP and then transferring this XRP to the intended recipient which can be converted to cash in recipient’s required denomination. The main advantage that has been touted by Ripple is that the transaction is way faster and cheaper than other cryptocurrencies such as bitcoin. The critics of Ripple point out that this advantage has come at the cost of compromise in the underlying Blockchain design philosophy. The whole idea of Blockchain is that it has to be decentralized without any control from a single entity, but the verification of transactions in xRapid is conducted by Ripple Labs. Besides the first pre-mined XRP coins which were around 100 billion is thinly distributed. Ripple holdings own about 60% of the coins, 20% is by the founders, and the rest has been distributed.

Besides xRapid’s questionable Blockchain design, it also faces certain challenges. Jed McCaleb, who was the initial founder of Ripple, left the Ripple project somewhere between June 2013 and May 2014 to start his project Stellar after dissatisfaction with the direction of the Ripple project.

The other challenges that Ripple might face are from the existing cross-border payments processor behemoth SWIFT. SWIFT already has around 11,000 financial institutions in its network and has been testing a proof of concept with 22 banks using the hyperledger fabric Blockchain. It is highly unlikely that it will not incorporate Blockchain technology into its existing technology framework. In conclusion, the optimism about Ripple has to be taken along with a bone of contention because of the above issues.

So the question to ask is that if Ripple makes so much noise (and all of that is xCurrent) what has it really achieved for enterprises. Has it been able to put a proportionate dent in the market (disruption) as it makes all this noise?

It is said that there have been more than 1000 blockchain pilots and POCs. But most are not going beyond pilots.

So, was the world wrong in thinking blockchain (and not Bitcoin) is the game changer?

Bitcoin, the first and the original blockchain, was all about decentralization and being permissionless. Bitcoin, undoubtedly, has the largest network and thus gains from the underlying network effect. The most important feature of Bitcoin is the way it uses the underlying concepts of open blockchain. Though it has few sub-optimal features (throughput, scalability challenges, etc.) compared to the newer counterparts, Bitcoin remains the most secure, robust, and resilient cryptocurrency which has stood the test of time. In fact, Bitcoin has the world’s richest bug bounty for anyone who can reveal any security flaws in the bitcoin blockchain network. Also, Bitcoin is the only digital currency without any influence from a group of people over the dynamics of the currency.

Is Bitcoin neglected/sidelined while it is the underlying tech that holds the keys to the kingdom? Enterprises don’t think so.

Banks and FIs are increasingly looking at custom-built private blockchains* as an answer to the throughput and scalability challenges. But we will come back to that.

Another approach is the emergence of decentralized applications or DApps. Decentralized applications (DApps) are applications that run on a P2P network of computers rather than a single computer. In the blockchain world, DApps are akin to a ‘blockchain enabled’ website, where the Smart Contract is what allows it to connect to the blockchain. There have been some interesting developments in the DApps space. A key example is that of Coinbase Wallet, which is a user-controlled crypto wallet and more importantly, a browser for Decentralized Apps or DApps. The wallet has a built-in browser for DApps like Peepeth and 0x Protocol, as well as a built-in messenger for P2P messaging. Coinbase also recently acquired Distributed System which is working on building a worldwide identity standard for DApps, known as the clear protocol.

However, the ugly truth is the fact that these DApps are barely being used by anyone. As per the reports by DappRadar, some of the most popular DApps have merely a dozen users.

Let’s talk about enterprise-grade solutions such as custom-built private blockchains

Commonwealth Bank and World Bank have recently announced the completion of the world’s first bond (worth AUD 110 million) delivered completely via Blockchain. As per CBA, the bond was created, allocated, transferred, and managed through a distributed ledger. The technology has been developed by Commonwealth Bank, and the issuance will take place in a private ledger after which the final transaction details will be uploaded in the Ethereum blockchain. Microsoft designed the architecture of the platform – it should be noted that Microsoft has been a significant supporter of the Enterprise Ethereum alliance.

This highlights a growing approach towards the use of blockchain/distributed ledger where banks and FIs are now developing their own distributed ledgers in house based on open source platforms such as Hyperledger/ Ethereum – or in collaboration with tech providers.

Let’s analyze R3’s Corda in this regard

R3, launched in 2014, had an initial strategy of developing its own version of a distributed ledger platform for a small group of FIs on an invite-only basis. It benefited from JP Morgan and Goldman Sachs as the founding members. However, as the list of participating institutions kept on growing, the project began to lose its sheen. In 2016, as the number of member institutions increased to reach 70, some of the blue-chip** members – Goldman Sachs and Santander – left the consortium.**

R3 Corda is not exactly a traditional blockchain, rather a distributed ledger. The Corda platform is inspired by the conceptual benefits associated with Blockchain. Though R3’s use of the word blockchain is more of a marketing gig for their product, Corda has no chain of blocks at all and is essentially a type of software that facilitates transactions by creating a secure ledger across multiple computers. Just like in Ripple, each node in Corda sees only some rather than all, transactions. No individual sees the ledger in its entirety, thus going beyond the very idea of transparency. This can create an issue in the verification of the transaction as the person cannot see the whole ledger, rather can see only from where the transaction is coming from.

To be fair, I like the Insurwave project that has been built on Corda. Insurwave, a blockchain platform developed by a collaboration of insurance and technology players, is being used to help manage marine hull risk and insurance. Together with Guardtime, a blockchain technology company founded in Estonia in 2007, shipper A.P. Moller-Maersk A/S, Microsoft Inc., broker Willis Towers Watson P.L.C., XL Group Ltd. doing business as XL Catlin, MS Amlin P.L.C and the Association for Cooperative Operations Research and Development, EY has helped develop and launch Insurwave. Insurwave was built on Corda. Unlike Ethereum and Hyperledger Fabric, where all the information is shared between every node on the network, Corda shares information on a bilateral and multilateral level only with parties that need to see it.

On a parallel note, there have been talks/rumors around the fact that despite funding of $107 million raised last year, R3 is facing financial difficulty in being sustainable, and has missed internal financial targets significantly. Some insiders have claimed that the revenues are 10X short. (Forbes link). However, the veracity of these claims cannot yet be substantiated.

To summarize, let’s look at some great work done by Outlier ventures (a UK based VC firm) – which bank/FI is using what provider/tech.


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