Experts Examine Blockchain’s Present, Future at Marquette Conference
Many non-techies first heard about the digital currency Bitcoin as something people could use to anonymously buy illicit drugs and weapons, or even to hire an assassin, through websites such as Silk Road.
But Bitcoin’s image has improved in recent years as more people hear about and begin using cryptocurrencies for more conventional purchases, said Lamont Black, an assistant professor of finance at DePaul University.
“Some people are like, ‘Oh, Bitcoin is just for money laundering and drugs,’” Black said. Online black markets were perhaps an inevitable consequence after Bitcoin’s unknown creator(s), known as Satoshi Nakamoto, circulated a paper in 2008 introducing the “peer-to-peer electronic cash system.” However, Black said he believes Nakamoto’s main reason for floating the concept was to determine whether society could move to a payment system that excludes banks and other “trusted third parties.”
Black explained why he’s bullish on Bitcoin—and the technology that underpins it, known as blockchain—before an audience of investors, computer programmers, and others Thursday during a conference held at Marquette University in Milwaukee. At the event, numerous professionals with expertise in blockchain discussed current and potential future applications of the technology, as well as some possible roadblocks to mass adoption.
For the uninitiated, blockchain is a way to create a public record of transactional data so that those transactions later can be authenticated, but which also allows the parties involved to keep certain information private by encrypting it. A blockchain is designed so that data about a transaction between two or more parties are stored in “blocks,” which are then linked together sequentially. These chains are visible to the public, but those involved in an exchange can use encryption tools to ensure that certain information contained in individual blocks is kept private.
Marc West, chief technology officer at the Brookfield, WI-based banking software company Fiserv (NASDAQ: FISV), said blockchain can offer “greatly improved speed, security, transparency, and efficiency” compared with current technologies banks and credit unions use to process payments and deposits, among other functions.
West described how blockchain works by comparing it to safe deposit boxes at banks that can only be unlocked by inserting two distinct keys. Typically, an account holder holds one key to the box, and a manager at the bank holds the other. The bank manager does not necessarily know what’s inside the deposit box, West said, only that she has one of the keys needed to unlock it; this is similar to storing money or information in a blockchain, he added.
“Here’s the difference with a blockchain: I can mint a third, fourth, fifth, [and] sixth key,” West said, before asking the audience to envision a virtual safe deposit box containing 100 $1 bills, and suppose he gave a digital key to another man allowing him to unlock the box and take one of the dollars out.
“I can specify, by serial number, which dollar” the man is allowed to take, West said. “He can pick that dollar up whenever he wants. Because I know his public key and who he is and everything else, I can turn around and know it went to him. And because [blockchains are almost without exception] immutable, I can make sure that it didn’t go to somebody else and that … nobody went back and rewrote history to say it wasn’t picked up. It’s much more about recording who has ownership, not the actual asset underneath it.”
Blockchain offers the promise of new products and efficiency gains in insurance, pharmaceuticals, and other industries. But many banks and financial services firms have already started implementing the technology, putting them ahead of other sectors, said Michael Adam, the founder of Milwaukee-based companies DocLaunch and BankMyBiz. (DocLaunch, the younger of the two firms, plans to launch its blockchain-based software for managing financial documents later this month.)
Adam said that some of the largest banks in the world have begun creating their own blockchains and forming multi-company blockchain consortiums, such as the one led by R3 CEV. JPMorgan Chase (NYSE: JPM), like R3 based in New York, left the consortium earlier this year and last month Jamie Dimon, the bank’s chairman and CEO, reportedly called people who buy bitcoin “stupid.” Block, the DePaul professor, said Thursday he feels Dimon’s comments were “ironic” because JPMorgan is building a private blockchain based on Ethereum, a digital currency similar to Bitcoin.
So if even a bank led by a Bitcoin-bashing executive appears to see promise in blockchain, what stands in the way of the technology becoming more widespread? One challenge is ensuring that there’s sufficient processing power across the worldwide blockchain network to manage the growing volume of data stored related to these transactions. According to a Goldman Sachs (NYSE: GS) report published in June, the most established blockchains, such as the one used to track Bitcoin payments, can currently process five to eight transactions per second. Many popular credit card networks can process about ten thousand times that many transactions in a second, according to the report.
Bob Cornell, lead emerging technology analyst at Milwaukee-based Northwestern Mutual, said “transactional throughput” hinders many blockchain-based systems today. However, he pointed to Plasma, a concept Ethereum co-founder Vitalik Buterin helped introduce in August, as a potential remedy. Part of the idea with Plasma is to move certain data into “child” blockchains controlled by a parent chain, which “can allow for incredibly scalable, low-cost transactions, and computation,” Buterin and co-author Joseph Poon wrote in their paper on Plasma.
Cornell said that with Plasma, blockchain networks could “go from a reduced capability mode versus a Visa transaction network, [for example], to something that is potentially able to handle far more [volume] than the established networks out there.”
Right now, there’s a fair amount of “frothiness” when it comes to blockchain and digital currencies, particularly with the initial coin offerings companies have increasingly been using to raise money, said Derek Urben. He’s the chief financial officer of Coinigy, a Milwaukee-based startup that develops tools for trading on the exchanges that allow users to change U.S. dollars and other fiat currencies for digital currencies.
More people and organizations—everyone from institutional investors to recreational traders—are engaging with digital currencies and other blockchain technologies. Despite the flood of new entrants, Urben said he believes that over time, the companies that will emerge as the biggest winners are already active today—even if they’re not making much noise at the moment.
“I do think there are [future] Amazons and Googles and Facebooks that are in this space already,” Urben said. “They’re already here, but I don’t think anybody knows what they are.”