Blockchain: from hype to first successes

Both the private and (semi)public sectors will benefit from blockchain in the coming years. Smart contracts in particular will bring many improvements in digital business, said Louis de Koning, Ramon van den Heuvel and Guido Rademakers From consultancy firm Improven.

Blockchain, for those who don't know, is a digital decentralised shared ledger of transactions, jointly maintained by all participants, to which transactions can be added securely. The stored information is visible to all participants, who can see and approve changes at any time.

Sobering

Louis de Koning: 'We are still in the hype phase right now.'

The enthusiasm with which blockchain was initially embraced has been tempered here and there. 'The development that won't change your life for a while yet', headlined the Volkskrant recently. Louis de Koning, consultant and partner at Improven, is not surprised by such reports; such sobering up is part of the experience, he says. As is scepticism, says consultant Guido Rademakers, who does understand: 'The added value of blockchain is as difficult for some to assess as the added value of the internet was in the early 1990s,' he says.

Improven helps companies with blockchain developments, often together with developer Nerds & Company. This includes working out the business model, application and governance, as well as hedging risks. 'Companies are really looking for protocols that work for their industry or business,' Rademakers said. According to him, Blockchain will increasingly be used as a standard for data exchange between companies, especially for collaboration in the chain. Especially if an intermediary such as a notary or bank is currently used for that.

Hype curve

King points to Gartner's hype curve, a life cycle that almost all new technologies go through. After discovery, expectations are briefly very high. Then, less patient early adopters drop out and go-getters remain. Only then does the phase of maturity arrive and the market flourishes.

'We are still in the hype phase right now,' says De Koning. 'Some of our customers, especially in government, have an innovation budget and want "something with blockchain". In such cases, sometimes contrived applications are devised; things you don't really need blockchain for,' Van den Heuvel adds.

Added value

Guido Rademaker

Organisations should think carefully, according to De Koning and Rademakers, about whether and where blockchain has added value for them. That there is for many organisations, they do not doubt for a moment. Although the consultants do differ with parties advocating open blockchain.

Improven sees more potential for closed chains. De Koning: 'With public blockchains, you have the big problem of ownership and issues of payment, financing and liability. In closed chains, you can solve governance challenges relatively easily. Privacy legislation need not be an obstacle either, because it is clear who owns and who processes data.'

Rademakers: 'Parties managing closed blockchains will soon determine what the fees and rules are on the platform. This could create blockchain platforms that have as much power within an industry as Google has on the internet.'

Smart contracts

Blockchain, he says, is already proving itself in various sectors, and here De Koning is not so much talking about cryptocurrencies, the most well-known and also most controversial application. He sees smart contracts as the most beautiful application of blockchain so far. Like traditional paper contracts, these are agreements with legally binding terms and agreements.

Unlike in paper contracts, all agreements are programmed into smart contracts and the agreements are managed decentrally by the participants in the blockchain. Payments, for example, can therefore be made automatically when conditions are met.

De Koning: 'When certain triggers go off, the contract is executed. Manual actions such as verification or bank transfers can be skipped. As soon as contract fulfilment occurs or delivery takes place, payment is made automatically.'

Letter of credit

For companies and institutions, smart contracts offer more certainty than 'regular' contracts, according to De Koning. Other advantages are the speed with which they are executed, but almost certainly lower costs. As an example, he mentions the letter of credit, a guarantee issued by the bank to the seller/beneficiary at the request of the buyer.

'If I order something in China, I can agree with a letter of credit that the moment, according to an independent party, the goods have been delivered in Rotterdam in the right quantity and quality, payment will be made by the bank without me as the buyer being able to stop it. Actually, that is already half a smart contract. In a smart contract, that last part is automated.'

'A letter of credit is an expensive payment instrument,' says Van den Heuvel. 'A payment easily costs between 1,000 and 3,000 euros. If you can solve that via blockchain then you could offer that for maybe 300 euros. Still not free. Nothing is for free; someone has to pay and maintain the platform and that app.'

Better processes

De Koning and Rademakers add to the list of realised applications. For example, Rabobank is participating with other European banks in a European blockchain-based trading platform, where business partners find each other on the platform and conclude transactions. Then there are numerous promising proofs of concept, which Improven expects to speed up and improve processes.

Ramon van den Heuvel

The Port of Rotterdam, for example, is on the eve of a pilot around the supply and transfer of containers, together with ABN AMRO and Samsung. Blockchain should reduce port bureaucracy and speed up processes. An average transport involves around 30 parties and stacks of documents are currently sent back and forth at each link in the chain.

ABN-AMRO offers third-party accounts based on blockchain technology, a godsend for trade and stock exchanges, notaries, lawyers, foundations or bailiffs, where money is "parked" to prevent it from going up in smoke in the event of bankruptcy. Furthermore, exchange platform Nxchange where (especially SME) companies can raise money from investors without the intervention of advisers.

Behind many large and sometimes already successful platforms are major parties such as Morgan Stanley, Microsoft and IBM. 'That such large parties are investing in blockchain will accelerate its maturity.'

Energy guzzler

On the way to blockchain's maturity, some problems still need to be solved, De Koning acknowledges. For instance, the process currently still requires a lot of CPU power, which consumes a lot of energy and leads to delays. 'A bitcoin transaction sometimes takes up to 10 minutes. As there are more parties on a blockchain, it takes longer. That is one of the things that still needs to be optimised. But if you compare that to a bank taking half a day to a full day for a payment, an hour is still fast.' Think also, for example, of processing changes in pensions, which now also often have a very long processing time.

Again, technology is going to remove barriers, is his belief. Moore's law, which states that the processing power of chips doubles every 18 months for the same cost, has not yet come to an end, according to De Koning. 'The performance problem we are facing now is being solved. The computing power of computers is still growing.' His conviction: 'Blockchain is not a bubble but is here to stay. But again: you have to deploy the technology where it comes into its own and adds value.'