Brian Young, CUVIA Labs
January 2017
Blockchain is a cryptographic data structure that powers popular cyber-currencies like Bitcoin. The second generation of this technology led by Ethereum, The Linux Foundation, and the banking consortium R3CVD has freed the Blockchain from the limitations of the Bitcoin implementation and in the process created a structure that enables a much broader set of potential applications. A Goldman Sachs analyst (*Bourujerdi et al. 12/15) recently said “The Blockchain could disrupt everything “and we believe he is correct. Why?
Blockchain is a new type of data structure that guarantees consensus, uniqueness, validity, immutability and authentication. This functionality makes the technology suitable for any application in which multiple parties need to trust each other. Today, trust requires a third party. Every electronic financial transaction requires a trusted third party and multiple redundant ledgers. The Blockchain, via its distributed ledger, replaces the need for a trusted third party and in the process removes the need for each party to keep a redundant ledger of what transpired along with the need to reconcile that ledger.
The second generation players have taken this cryptographic data structure and added a Turing complete scripting language and virtual machine execution environment turning what was a single purpose payment system into a secure, decentralized, trustless, peer to peer computing platform with no single point of failure. This ‘Crypto-Cloud’ is in its infancy but has the potential to enable a disruption and disintermediation that will cause many companies in the finance, cloud, supply chain and government spaces to rethink their core business processes and revenue models.
Threat
Today, the Crypto Cloud should be considered a very promising live beta with a unique and disruptive feature set. It is not yet a general-purpose computing platform, but it is moving quickly in that direction. It is easy to imagine the appeal of a highly secure, decentralized, fault-tolerant cloud that offers a uniform programming and execution model with the world’s least expensive global payment system as a core service.
The banking consortium R3CDV recently conducted a successful proof of concept of its private blockchain platform, Corda. Corda is a private crypto cloud purpose-built for the banking industry with features like access rights management that are essential to its adoption by the banking sector. R3CDV is rumored to be raising additional financing at a $200M pre-money valuation. The banking industry used a similar model to fund Visa and MasterCard. We expect R3 to be a major player in the Crypto Cloud.
The tech industry has rallied around the Linux Foundation’s Hyperledger effort, which has garnered a long list of luminaries including IBM, Cisco, Intel, Microsoft, Intuit, R3, Redhat and VMWare along with a smattering of banks and first movers from other industries like AirBus. Hyperledger’s approach is very promising. Rather than hard code the system components, Hyperledger is an architecture that allows plug and play of all system components. This approach recognizes that one size does not fit all and that different industries will require different functionality to adapt the block chain to their specific requirements.
Finally, Microsoft Research has partnered with Consulsys to bring “blockchain in a box” to Azure cloud customers and IBM recently announced a strategic reorganization to form a block chain division. IBM is also heavily involved in both R3 and Hyperledger efforts.
Opportunity
Many large enterprises have technology, financial and human resources, and customer relationships that enable them to enter these emerging markets. Various analysts have predicted 10s of $ Billions of in cost savings to the financial sector alone as a result of adopting blockchain for clearing and settlement functions. In the not too distant future, we envision the entire global supply chain will coalesce around a set of purpose built blockchains. Although significant, these cost savings opportunities pale in comparison to the potential new revenue generating opportunities. Consider that two-thirds (2/3) of the world’s population does not have access to a bank account or financial services. Meaning that THEY CURRENTLY CANNOT PARTICIPATE IN THE INTERNET ECONOMY. However, the majority of these ‘unbanked’ have access to the Internet. The Crypto Cloud offers great promise as a means to address the needs of the majority of the global population that can’t be served by the current internet financial model. This is an enormous opportunity on the order of several trillion dollars that will provide renewed growth to North American companies facing mature markets with significantly lower growth rates.