Recently, blockchain is very hot, and the capital market shares of the “blockchain concept” are rapidly climbing. Kodak, which has been around for 130 years, has seen its shares soar 212.9% in the past two trading days after announcing the launch of KodakOne, a blockchain-powered photo ownership management platform, and the launch of KODAKCoin, a token to be used within the platform.
Is the blockchain really that valuable? We should probably calm down and think carefully about how blockchain can be applied in various fields and what it can do.
Goldman Sachs is an early researcher on blockchain. In 2016, Goldman Sachs provided its clients with an 88-page report on blockchain – Blockchain: Putting Theory into Practice. Practice). At the beginning of the report, it is mentioned that the current discussion on the potential role of blockchain focuses on the use of distributed ledgers to create decentralized markets and weaken the control of existing intermediaries, but the potential of blockchain is more nuanced and far-reaching than such thin claims.
What is blockchain?
The core potential of blockchain lies in the nature of distributed databases and how they can contribute to transparency, security and efficiency. In the past, institutions have used centralized data repositories to support transaction processes and calculations. Control of the database rested with its owner, who managed access and updates to the database, limiting transparency and scalability and making it difficult for outsiders to ensure that data records were not being manipulated. Distributed databases are largely impossible to implement due to technical limitations. But with advances in software, communication and encryption technology, a distributed database across organizations is now possible.
The entire network is cryptographically verified by combining common transaction information and unique signatures of specific two or more parties. If all nodes write the same result, the transaction is valid. and is added to the chain of previous transactions (as long as the block is verified). If the block is invalid, the “consensus” between the nodes corrects the results of the incompatible nodes.
The advantages and challenges of blockchain
The transparency, security and efficiency of blockchain will make it particularly suitable for the transformation of businesses that are bogged down by inefficiencies and for enabling new business models based on distributed markets and technologies. Blockchain is not a panacea or a replacement for broken business processes and is suitable for tackling the following problems:
Facilitating secure, decentralized transactions between multiple parties in the Internet of Things: Based on the naturally decentralized nature of the ledger, blockchain is particularly efficient for handling distributed transactions with particularly multiple parties involved. Moreover, based on cryptographic confirmation and verification processes between multiple parties, blockchain provides a high degree of security for every transaction. Enhances security and mutual trust and reduces fraud: Since each transaction is individually encrypted and such encryption is verified by other parties on the blockchain, any attempt to tamper with or delete transaction information is detected by other parties and then corrected by each other node. Promoting transparency and efficiency in multi-party transactions: In any transaction involving two or more counterparties, where transactions are usually recorded separately by each party in their own separate systems, blockchain can reduce significant capital and operational costs and improve the transparency and efficiency of transactions.
However, as with any new technology, applying blockchain in the real world will involve many challenges. Goldman Sachs believes that blockchain technology may face the following challenges:
Standards: Goldman Sachs expects to generate a number of special permissioned blockchains to serve a range of applications. In order to gain widespread adoption, we believe technical standards are needed to ensure that there are similar technology applications across industries – especially the need for interoperability between multiple blockchains in some cases. Business conflicts and business process differences: In many cases, a blockchain database is only as good as the data and business processes that form its foundation. If consensus cannot be reached between parties for reasons of business processes or business conflicts, then blockchain adoption will be greatly hindered or even stalled. Privacy issues: The application of distributed databases for business transactions leads to the question of whether institutions are willing to share information with each other and their counterparties. Likewise, the concept of “reputation management” can lead to concerns about permanent reputational impact. Users need to weigh these factors carefully. Speed and performance: Any distributed database is naturally slower than a centralized database, so is blockchain suitable for high-speed, high-volume applications. While many blockchain morphing products promise enhanced performance, this is still an issue for commercial applications.
blockchain five areas of application
report, Goldman Sachs turned its attention from theory to practical application areas, discussing the application of blockchain in the following five areas: sharing economy, power supply market, real estate, securities trading, and financial markets.
The sharing economy: building trust between multiple parties
Blockchain can drive the acceleration of the sharing economy through identity and “reputation management” systems that allow users to “credentialize” themselves by verifying their identity and history. “themselves. By building a secure, tamper-proof system to manage authentication information and reputation electronically, Goldman Sachs believes blockchain can help accelerate the growth of the P2P lodging industry, generating $3-9 billion in incremental revenue opportunities through 2020.” The
sharing economy is based on maximizing asset utilization by monitoring available resources in real time and adjusting to demand in real time. Through a “social blockchain” database, all social credentials and prior transaction history are aggregated to efficiently help users present their “social and trust credentials” across different merchant platforms. The
blockchain enhances the quality of users of sharing economy platforms, thus making the whole network more secure and increasingDemand and supply. Blockchain can play a role in every step of the P2P lodging process, from booking to payment to reviews.
Using Airbnb as an example, Goldman Sachs’ analysis suggests that even small changes in growth rates can have a significant impact on the number of rooms available for sale and expenses. Goldman Sachs estimates that Airbnb’s share of room night supply across the U.S. reached 3.6% in 2015 and could reach 14.1% in 2020. While traditional hotel industry room night supply grew by 1.2% in 2015, Airbnb’s supply has eroded the traditional hotel industry’s pricing power and this trend will only continue to increase in the future. By 2020, the traditional U.S. hotel room night supply growth rate is 2.2%, which combined with Airbnb’s industry-wide growth rate is 4.9%. It is important to note that because Airbnb has much lower occupancy rates than the traditional hotel industry, the company represents more of the supply of room nights across the U.S. than demand. In this benchmark scenario, Airbnb is projected to account for 1.5% of all U.S. room night demand in 2015 and 6.5% in 2020.
Goldman Sachs believes blockchain could have a far-reaching impact on the market acceptance of P2P accommodations, but faces obstacles to the perception of losing consumer privacy.
Power supply markets: constructing a distributed smart grid with blockchain
Today, consumers rely on energy produced centrally by utilities. Over the next few decades, Goldman Sachs expects the national grid to evolve from the existing centralized utility model toward a blend of more decentralized resources, a real-time quoting system, and closer matching of demand and supply. Central to this evolution is the modernization of the grid through the combination of smart meters, smart equipment, renewable energy and energy storage, a process that we expect will result in tens or even hundreds of millions of decentralized nodes that can not only send and receive data, but also execute P2P transactions. We believe blockchain technology will play an important role in facilitating communication, transactions, and security among millions of counterparties. In our view, blockchain will lead to a decentralized energy market that will not only significantly drive investment activity in distributed energy, but also redistribute $2.5-$7 billion in electricity revenues to new market participants (i.e., no longer to utilities).
The blockchain could facilitate the development of these new resources for the grid, ultimately creating a more decentralized grid in which electricity users are also electricity producers who trade directly with each other in the electricity market.” The
blockchain can create a decentralized energy market. In the most disruptive scenario, Goldman Sachs believes that a combination of blockchain and communications technology can facilitate more secure transactions and payments between millions of participants, empowering a decentralized energy market. Simply put, the naturally distributed nature of blockchain could allow distributed energy users to seamlessly sell electricity to nearby consumers, enabling truly localized energy production and consumption. At the same time, blockchain technology will drive more distributed grid infrastructure, potentially ending the net metering tariff mechanism.
Goldman Sachs believes that the application of blockchain in the electricity supply market may face six major challenges: first, regulatory policy, many state laws prohibit entities other than utilities from selling electricity; second, technical issues, the need to deploy smart grid facilities for about half of the entire U.S. grid today; third, physical limitations, blockchain can enable a secure transaction process, but must still actually transmit power from one node of the grid to another, and the grid is still managed and maintained by utilities/transmission dispatchers; fourth, cost issues, the economies of scale of large power plants will result in lower cost expenses compared to distributed power resources; fifth, user behavior, a dramatic change in consumer thinking is needed; sixth, security, blockchain can drive grid on millions of transactions.
real estate: reducing real estate title insurance transaction costs
homeowners who repurchase or refinance their properties are burdened with significant transaction costs, including title insurance, because the title search process is labor-intensive. As business processes change, blockchain can reduce title insurance premiums, with cost savings of $2-4 billion in the U.S. alone due to reduced errors and labor costs. And in emerging markets, a land registry system could also help reduce transaction and financing costs.
blockchain can eliminate the risks of existing land registration systems. If title records are stored on the blockchain, the information that constitutes clear title will be trusted and readily available to all parties, and transferring title will become more secure and efficient. In particular, we believe that the blockchain could replace away local real estate records and exist as the primary repository of real estate title information, thereby avoiding paper-based errors and making real estate title retrieval more transparent and efficient.
Most importantly, blockchain may fundamentally disrupt existing title retrieval methods. With greater data integrity and accessibility, the human resource requirements to retrieve and “repair” title records will be greatly reduced. As a result, blockchain could lead to significant cost savings, including fewer searchers, custodians, and extractors. Blockchain would also improve actuarial risk, as title information would be more easily verified, reducing claims losses for insurers. Ultimately, if these cost efficiencies are realized, the end consumer will ultimately benefit because the cost of insurance was originally intended to cover the cost of underwriting (plus a small profit). Blockchain can effectively reduce these underwriting costs.
However, the real estate industry is extremely fragmented with very low concentration, so title insurance varies wildly from region to region. As a result, the lack of consistency among the different parties involved in title insurance may pose a barrier to the adoption of an industry-wide blockchain standard.
Securities trading: optimizing the clearing and settlement of cash securities
Despite the relatively low transaction costs of securities such as equity, up to 10% of all transactions are subject to various errors, leading to manual intervention and extended transaction settlement times. By applying blockchain technology to the clearing and settlement of cash securities – particularly equity, repurchase agreements and leveraged loans – highSheng expects the global industry to save $11-12 billion in fees, operating costs and capital expenditures through shorter, even customized, settlement windows.” The main benefits that
blockchain brings to U.S. equity trading are improvements in clearing and settlement processes, specifically: reducing or eliminating trading errors, optimizing logistical functions, and reducing settlement times; the main benefits that can be brought to repurchase agreement trading are in clearing/netting, capital savings for banks from efficient trading processes; and capital savings for banks by providing a secure trading book database, which the parties access through a distributed private network, to shorten the entire cycle of leveraged loan transactions, update any one transaction in real time, and efficiently reflect changes in ownership.
Goldman Sachs estimates that blockchain could save the securities trading industry $11-12 billion in fees, operating costs and capital expenditures:
Cash equity markets: blockchain could reduce total fees by approximately $2 billion, with labor cost savings from lower settlement/clearing human resource costs of $650 billion to $900 million, and IT system savings of $500 million to $700 million. When combined with the economic savings from lower DTCC capital expenditures, an additional $500 million could be added. Repurchase agreements: There would be a $1 trillion increase in the amount of repurchase agreements that Wall Street could net settle, so blockchain could bring $5 billion in economic savings and $50 billion in lower capital requirements based on a 5% SLR requirement. Leveraged loan transactions: Blockchain could deliver approximately $300 million in annual cost savings, including $110 million in economic savings from reduced balance sheet collateral requirements, $130 million in annual operating expense savings from process optimization and human resource reductions, and $50-60 million in capital cost savings from shorter transaction cycles.
financial markets: anti-money laundering and know-your-customer compliance
blockchain can optimize and even transform anti-money laundering (AML) compliance processes. With a distributed database of transaction information that allows for better verification of counterparty information, financial institutions can significantly reduce the rate of false positives in transaction monitoring – which currently requires significant human intervention. In addition, a shared database of verified customer information could optimize the know-your-customer review process in the long run. Overall, blockchain could drive $3-5 billion in industry-wide cost savings from reduced labor expenses and AML regulatory fines.
As it stands, blockchain can help financial markets by bringing greater transparency and efficiency to transaction monitoring through the secure compilation of account details, a distributed ledger of current and past transactions that will streamline the recording and auditing process, and a distributed database of secure customer information shared between institutions that will reduce duplication of effort in customer audits.
Goldman Sachs expects blockchain to generate approximately $3-5 billion in cost savings by reducing the number of compliance personnel, technology expenses and anti-money laundering fines. From an operational perspective, blockchain can lead to better human efficiency as the human component of the transaction monitoring and account opening review process will be optimized. While blockchain alone is unlikely to be a panacea for anti-money laundering compliance inefficiencies, the technology behind it – coupled with better data policies and standards for our industry – will increase transaction transparency.
However, there are two major challenges to truly embracing this technology: one, regulatory reform, which needs to be undertaken to support the application of blockchain technology in order for financial institutions to be able to embrace it; and the other, infrastructure development, which needs to be compatible with current industry standards in order for blockchain-based infrastructure to be commercially available.
The unique nature of blockchain gives it the potential to not only optimize existing markets, but also the ability to reconfigure them and create new ones. However, we need to understand that the market size of blockchain technology applications predicted in the Goldman Sachs report is based on an idealized environment, and there is still a long way to go to turn the ideal into reality. Therefore, in the face of blockchain, we need more industrial applications and less concepts; more rational thinking and less chasing after the wind blindly.