In this post and infographic, we want to explain one of the biggest financial breakthroughs in a century to you, built on top of Bitcoin. This innovation will eventually enable new, consumption-based business models, microtransactions and even the livestreaming of money. The implications of this are hard to overstate.
Why haven’t you heard about this before?
You’ve probably heard some things about the cryptocurrency Bitcoin, the global network that allows people to directly transfer value without middlemen.
The media has been talking a lot about the explosive price action over the past year, but they’re not doing a great job at educating people how all of it works and what amazing innovations are being created. Admittedly, explaining Bitcoin isn’t an easy job. Even the inventor struggled with it!
Writing a description for this thing for general audiences is bloody hard. There’s nothing to relate it to.
– Satoshi Nakamoto, 05/07/2010
Bitcoin is complex to understand, because it combines so many different fields. It’s like trying to understand how the Internet technically works. Most people don’t, but they still trust it with their sensitive information.
When it comes to money, we’re much more reluctant with our trust. Even though most people don’t have a clue how the existing financial system works either, we still want to understand this new thing. So let us explain!
The simple idea behind Bitcoin
In essence, Bitcoin allows you to be the absolute owner of your money, instead of trusting someone else to take care of it at a cost. Not everyone is interested in that or happy about it, which is fine. It can help a lot of people that don’t have access to financial services today.
Bitcoin was not invented to replace your bank, but to provide an alternative financial system that allows you to transfer value anytime, anywhere in the world. It consists of several components that make this possible.
One of them is the widely praised Blockchain technology. This is a database that permanently records ownership of the money and value on the network throughout time. Contrary to popular belief, it is an unattractive tool for criminals, because they don’t want to leave permanent evidence of their crimes.
Bitcoin’s popularity problem
Over the past years, this system has become more popular than the technology can handle. There are huge amounts of people that want to send near instant and near free transactions anywhere in the world, because they can’t do this with their banks.
To process so many transactions, you would eventually need a centralised system with a small amount of powerful computers, with the best Internet speeds in the world. Unfortunately, most of the world does not have that luxury, but we also don’t want a small amount of people to be in control of Bitcoin.
As a result, only a few hundred thousand transactions can be processed per day, and when there is a lot of demand, it can become slower or more expensive to do so.
So a bunch of developers have been spending a lot of time to create promising solutions for this scalability problem.
We created an infographic to explain their innovation to you in simple terms.
You can find it at the bottom of the post.
The Lightning Network
Lightning is a system that works on top of the Bitcoin blockchain, so it uses actual bitcoins. It is like a checking account to your savings account, which allows you to instantly transfer money at almost no cost.
On the blockchain, everyone who helps to secure the network needs to store all of the transactions, but on the Lightning Network this is not needed. This way bitcoin can be used cheaply, by far more people around the world.
The Lightning Network is already live today, but is still in its very early stages. On this site you can see all the connections people have already set up (About 1000 at the time of writing this).
This is what the early Internet looked like as well, hopefully the Lightning Network will become a global success as well.
How can you get started with the Lightning Network?
Later this year, more and more applications will allow you to use the Lightning Network yourself, keep an eye out for this! For now it is being tested by experts.
If you want to learn more about the Lightning Network, we highly recommend you to check out this megathread on Reddit.
If you’re interested in more simple explanations about Bitcoin, Cryptocurrencies and Blockchains, you can follow @SDWouters and @CnuddeLouis on Twitter, or hire them as speakers for your event or organisation. We can bring you an accessible story, tailored to the interests of the audience.
We also give workshops to work out the possibilities for your organisation to use blockchains and/or cryptocurrencies, and to set up new types of business models and revenue streams using innovations such as the Lightning Network. Contact us for more information.
A few months ago our blockchain consultant Sam Wouters wrote a post on LinkedIn about “How blockchains can be used in Insurance”. One of the few thousand readers was John Davison, CIO at First Central Group. This is the parent company behind several insurance and reinsurance businesses, such as UK-based motor insurer 1st Central.
Blockchain use case in insurance
John had 2 use cases in mind and invited us to come help his architects and developers to figure them out. So Sam and Ward flew over to Guernsey for 2 days of workshops with 2 objectives.
1. Create a thorough understanding of blockchains.
2. Determine whether it makes sense to use a blockchain for the 2 presented use cases.
For the first objective we gave an introduction to open and private blockchains, a deep-dive into where we stand in the Financial and Insurance industries and a presentation on smart contracts.
It was most impressive to us how quickly the team picked up on the blockchain knowledge. These are definitely some of the smartest people we’ve worked with so far.
We solved the first case pretty quickly. It was about ensuring data integrity across different steps in the Insurance value chain, to save large amounts of time and money on the auditing process. While that sounds like a heavy operation, we decided on an elegant, lightweight solution. It can be implemented using either open or permissioned blockchains and FCG will start working on it later this year.
The second case was about managing insurance capacity, a process that helps insurers and reinsurers assess their risks. Today this is a slow process which makes running an Insurance business a lot more risky and complex.
We can’t tell you anything more about our solution right now. FCG will create an MVP to see whether it works as well in practice as it did on the whiteboard. It’ll be more challenging but potentially highly disruptive for the Insurance industry.
We have a lot of faith in the team’s capabilities to execute the plans and we look forward to further helping them do so.
“At FCG we’re constantly evaluating technology advancement across all industries, looking for disruptive opportunities in our current businesses. Sam and Ward from Duval Union Consulting are well-known and well regarded experts in blockchain and associated technologies and it was an easy decision to ask them to collaborate with our in-house technologists here in Guernsey.
We set out to deliberately challenge the current insurance paradigm, testing whether and how the technology underpinning bitcoin could be utilised within our vertical.
As CIO of FCG it was really encouraging to see how the two day whiteboard session unfolded, with valuable input from all attendees. The output of these sessions is intriguing, promising a revolutionary approach to traditional retail insurance – I eagerly await a proof of concept later this year.
Many thanks again to Sam and Ward for their input, their constructive challenge and their contribution to FCG’s forward thinking. I look forward to working with them over the coming months”
If you’re looking into how blockchains can be used for your business, contact us for a presentation, workshop or bootcamp!
Guernsey itself was a lovely place to visit by the way!
Last month, Airbnb CEO Brian Chesky took to Twitter to ask people what Airbnb should launch in 2017.
One of the top suggestions was for Airbnb to start accepting payments in bitcoin.
— Stephen Cole (@sthenc) 26 December 2016
Thanks for the 2,000 submissions. Most popular: Bitcoin, Guest Loyalty, upgraded homes & services, group travel, things to do, and Mars https://t.co/DbrBSTDlCl
— Brian Chesky (@bchesky) 30 December 2016
I think it’s a great fit. People that are likely to choose one “digital” solution are also more likely to use another. The big question is of course: Will we see it happen this year?
How else could a blockchain be used?
Unsurprisingly, among the discussions about this news, there were some people that suggested we should take things a step further and decentralize Airbnb on a blockchain.
— Matt Liston (@malloc8) 26 December 2016
This once again emphasized the problem I have with Ethereum. As a speaker on Bitcoin and Blockchains, people sometimes ask me why I don’t talk about Ethereum more, which is the second biggest blockchain by market cap. It’s because I remain unconvinced of the problems Ethereum solves for the foreseeable future. (Please prove me wrong though)
Ethereum aims to be “the world computer”, by providing a platform for decentralized applications and smart contracts. Putting apps on decentralized networks would be great…IF the cloud hosting industry was an overly expensive oligopoly, with a lot of downtime and censorship for those using it. Instead, it is a highly competitive market that is getting cheaper and more reliable year after year.
Decentralizing control of Airbnb, Uber… by using smart contracts, also does not solve a problem in my eyes. It would probably create them, considering the complexity involved.
Yes, this would cut out the 6-12% cut Airbnb takes on bookings, but customers are already saving a lot of money by using Airbnb. We also love that we can fall back on a company when we are travelling abroad and things go sour.
Don’t decentralize for the sake of it
The main investment firm in the cryptocurrency & blockchain space, Digital Currency Group, seems to think the same way about decentralization for the sake of it. (and reminded me that I still wanted to write this article!)
“Our view is decentralizing a company or an idea for the fact of decentralization does not necessarily solve a real problem,” said Silbert. “Although, we haven’t seen everything, so maybe there is a decentralized project out there with merit.
“We’ve essentially looked at every Ethereum company looking to raise capital in a traditional way, and we’ve passed on all of them,” added Silbert.
In my eyes the real killer solution that cryptography could bring to Airbnb and the whole “sharing economy”, is transferrable reputation. I initially hoped this was the reason Airbnb acquired the ChangeTip team, considering their experience in cryptography and integration with various platforms.
With transferrable reputation, I mean the ability to transfer the trustworthy reputation that you built up on one service, to others, so you can get started there quicker.
If you’re a new host on Airbnb without any reviews, it can be hard to get your first booking even though you’re verified. However, if you can prove that you’ve been buying and selling on eBay for years and have dozens of reviews, if you can prove that you’ve been helping your neighborhood out through TaskRabbit or that you’ve been providing services through Fiverr, to name a few, then this could give you a reputation boost to get started.
Creating an ecosystem of businesses
There is a major win for all sharing economy businesses to get on board with a model like this, as they are all up against the incumbents in their own industries. Like I said in the beginning of the post, people that are likely to choose one digital solution, are also more likely to use another.
If users carry the effort they’ve put into a platform with them through one shared identity, then they have even more of a reason to stay on-board of this ecosystem.
Ideally, this identity would be fully controlled by the user and not by a centralized, vulnerable intermediary. After all, we’re doing things in radical new ways here. To do this, we would need to use a blockchain.
Like everything in crypto-land, there is a trade-off though. Digital-first businesses are all about our data and users being in control could challenge that if they become less willing to give up their information. I personally believe that if these businesses continue to be as transparent as they have been, it’ll all be fine, but perhaps that’s naïve.
A universal, user-controlled digital identity is a long shot, but worth it for all of us. I’m interested to see how this will play out!
Want to learn more about blockchains and Bitcoin? Get in touch!
Most banks are currently investigating or “leveraging blockchain”. Some of them are even testing “use cases” to go beyond the talk and hype.
“We have 13 use cases!” “We have 25 use cases!” “All our business lines are involved” “We traded our first share using blockchain!” “We are conducting our biggest blockchain experiment yet!”
Save a few financial institutions, all of them are working towards the same future scenario: one without the internet of money and the banks in control of a permissioned financial system.
I think this is dangerous and want to share my thoughts on this in my slides/blogpost below.
The blockchain was invented to eliminate the need for trusted third parties, but banks are convinced they can turn this around and use it to become more efficient and save costs. The financial sector is actually the ONLY sector in which disintermediation is considered an opportunity rather than a threat by the incumbents. You can call that optimistic, stupid, arrogant… I think it’s wishful thinking and more importantly, dangerous.
“The financial services environment seized on blockchain, because they saw within it the possibility of using some elements of bitcoin without being disrupted.” ~Andreas Antonopoulos
If you look back at Kodak, they invented the Digital Camera in 1975 and then hid it for years as they saw how it would cannibalize their highly profitable business. The problem was, if they could invent and use it, it would only be a matter of time until someone else would. History has shown us that once a viable and problem-solving solution has been invented, it will become part of our world until it is replaced by something better.
The open blockchain is here to stay
The technology to facilitate the “Internet of Money”, the (open) blockchain, was invented in 2008. It now exists as open source code, which makes it unstoppable by default.
The truth is, the open blockchain is going to continue to exist, regardless of how many people desperately insist on Bitcoin dying. Whether it is Bitcoin, “Bitcoin 2.0”, Ethereum or something else is irrelevant in this case.
There are few financial players that acknowledge this, I’ve only seen a handful of executives do so. Of course I’m not expecting them to praise or support Bitcoin and I’m definitely not saying banks should abandon their current initiatives. What I do expect from financial service companies is to adapt their strategy to the possibility that an open blockchain will continue to exist and take away part of their business.
Strangely enough, even the notion that this may happen seems to completely elude them. People tend to go as far as reading a few blogposts about Bitcoin, instantly dismissing Bitcoin itself (often based on poorly informed journalism) and then subsequently praising “blockchain” to the heavens as a way to “revolutionize everything”. Next up they begin to experiment with this technology, usually without having the slightest clue what exactly they are doing, while completely ignoring the 7 year old Bitcoin blockchain and everything they can learn from it.
If you assume an open blockchain can never succeed so early into its development and completely focus on a single future scenario, you’re putting all your eggs in one basket. I find it astonishing that people with so much money on the line are willing to take this risk. It’s like libraries hardcore denying the legitimacy, potential and success of the Internet 15-20 years ago, instead of starting to think how they could play a role in the new, open network. History tends to repeat itself, people just wear different costumes.
7 things financial players should do with blockchain
Criticism without offering suggestions is easy, so here are 7 things I think financial players should do if they want to stop focusing on one scenario and consider a future in which an open blockchain will continue to exist alongside them.
1. Educate everyone, top to bottom, on Bitcoin and the (open) Blockchain
If an open Blockchain is here to stay, your entire company needs to realize this and understand why that is the case. From the presentations I’ve done for financial institutions, I see time and time again how almost nobody in finance really gets it. I can rarely hold a decent conversation without constantly having to correct misconceptions. I don’t blame them, because these are complex topics on top of their existing workload. It is important to address this problem first, before moving on to bigger things.
2. Consistently monitor how the major cryptocurrencies are developing
Any player that is in a sector which is getting disrupted should consistently monitor the market for trends and new players that are developing in it. In finance this is no different. Financial players must actively watch and get involved with the fintech startup scene if they want to react to the developments in it and make the right strategic decisions.
If they want to do anything with a blockchain themselves, they can’t go around the major cryptocurrencies. A cryptocurrency (such as Bitcoin) allows a blockchain to be both open and decentralized due to the incentives it creates for all participants in the network. This enables the same kind of global permissionless innovation that allowed the Internet to grow to billions of users. Your private distributed ledger can never be developed, experimented with and tested to such degree as an open blockchain, so you must carefully watch their developments and learn from them. Your company can’t afford the same mistakes a decentralized network can, as people will know exactly where to complain and who to blame.
3. Get an executive/entrepreneur in a Bitcoin/blockchain company on the board
The Digital DNA of your leadership largely determines the Digital DNA of your company. If most of the executives or board don’t understand the new (digital) world we live in with its new business models and players, then they will never stimulate the rest of the company to start playing on the level of the disruptors. Get people on board with a fresh mindset who understand where the future of money is headed. Start at the top to improve the digital DNA of your company.
4. Integrate with a Bitcoin exchange
Highly controversial? Definitely. The USAA is doing it with Coinbase nonetheless. There is a lot to learn by working together with major players in the Bitcoin industry and getting direct feedback from customers in a live environment. This means giving legitimacy to the Bitcoin space, which is why few banks will dare to do it and thus they will miss out on all the potential learnings.
5. Stimulate Bitcoin/Blockchain development
Host or sponsor events where people try to innovate in the Bitcoin/Blockchain space. Your big company is a slow tanker with a lot of legacy constraints. If you want to play a role in a fast moving space, you will need to work with or start ventures alongside your mothership. This is also a great way to identify talents that could potentially add a lot of value to your company, if they are willing to work for it.
6. Create a service for cryptocurrencies
Even more controversial. This service doesn’t need to (and really shouldn’t) be bank-branded, consider it a corporate startup. It is the best way for you to truly gain experience with a working ecosystem, rather than private, small scale testing. It does require you to solve a problem or fulfil a need while using a cryptocurrency, unless you want to copy an existing business model and roll it out in a different market.
7. Innovate outside of your existing (regulatory) framework
For decades, the financial sector has had barely any true innovation. You can tell me whatever you want, but it is 2016 and we still can’t send money around the world as fast and cheap as sending a text message through the existing financial system.
There are clear reasons for this, the system is so incredibly complex and fragile that nobody dares to innovate on it internally. Additionally there is the insane amount of regulation that “protects” the financial sector which makes external innovation near impossible and forces all new players to work with the same rules and constraints as the old ones. At the end of the day, the customer doesn’t care about the reasons, they just want a solution as soon as possible. It is unlikely we’ll get one if we remain within the existing regulatory framework.
If you want to do anything at all with a blockchain or cryptocurrency, do so outside your core business. If you won’t, it will take years and millions to get anywhere, while the open alternatives blast on globally. Speed and the mandate to be able to execute are crucial here.
These are my 7 pieces of advice, I hope they opened some eyes and minds to the opportunities. Instead of hoping Bitcoin will die, start playing on the disruptors terms and build a better open, decentralized, immutable and censorship resistant, global financial network.
Need help understanding the impact of the blockchain on your business? Contact us!