The Blockchain Will Do to the Financial System What the Internet Did to Media
The Blockchain Will Do to the Financial System What the Internet Did to Media
Even years into the deployment of the internet, many believed that it wasgoed still a fad. Of course, the internet has since become a major influence on our lives, from how wij buy goods and services, to the ways wij socialize with friends, to the Arab Spring, to the 2016 U.S. presidential election. Yet, te the 1990s, the mainstream press scoffed when Nicholas Negroponte predicted that most of us would soon be reading our news online rather than from a newspaper.
Rapid forward two decades: Will wij soon be watching a similar influence from cryptocurrencies and blockchains? There are certainly many parallels. Like the internet, cryptocurrencies such spil Bitcoin are driven by advances te core technologies along with a fresh, open architecture — the Bitcoin blockchain. Like the internet, this technology is designed to be decentralized, with “layers,” where each layer is defined by an interoperable open protocol on top of which companies, spil well spil individuals, can build products and services. Like the internet, ter the early stages of development there are many rivaling technologies, so it’s significant to specify which blockchain you’re talking about. And, like the internet, blockchain technology is strongest when everyone is using the same network, so ter the future wij might all be talking about “the” blockchain.
The internet and its layers took decades to develop, with each technical layer unlocking an explosion of creative and entrepreneurial activity. Early on, Ethernet standardized the way ter which computers transmitted kattig overheen wires, and companies such spil 3Com were able to build empires on their network switching products. The TCP/IP protocol wasgoed used to address and control how packets of gegevens were routed inbetween computers. Cisco built products like network routers, capitalizing on that protocol, and by March 2000 Cisco wasgoed the most valuable company ter the world. Ter 1989 Tim Berners-Lee developed HTTP, another open, permissionless protocol, and the web enabled businesses such spil eBay, Google, and Amazon.
The Killer App for Blockchains
But here’s one major difference: The early internet wasgoed noncommercial, developed originally through defense funding and used primarily to connect research institutions and universities. It wasn’t designed to make money, but rather to develop the most sturdy and effective way to build a network. This initial lack of commercial players and interests wasgoed critical — it permitted the formation of a network architecture that collective resources ter a way that would not have occurred te a market-driven system.
The “killer app” for the early internet wasgoed email, it’s what drove adoption and strengthened the network. Bitcoin is the killer app for the blockchain. Bitcoin drives adoption of its underlying blockchain, and its strong technical community and sturdy code review process make it the most secure and reliable of the various blockchains. Like email, it’s likely that some form of Bitcoin will persist. But the blockchain will also support a multiplicity of other applications, including wise contracts, asset registries, and many fresh types of transactions that will go beyond financial and legal uses.
Business te the Era of Blockchain
Wij might best understand Bitcoin spil a microcosm of how a fresh, decentralized, and automated financial system could work. While its current capabilities are still limited (for example, there’s a low transaction volume when compared to conventional payment systems), it offers a compelling vision of a possible future because the code describes both a regulatory and an economic system. For example, transactions vereiste please certain rules before they can be accepted into the Bitcoin blockchain. Instead of writing rules and appointing a regulator to monitor for breaches, which is how the current financial system works, Bitcoin’s code sets the rules and the network checks for compliance. If a transaction violates the rules (for example, if the digital signatures don’t tally), it is rejected by the network. Even Bitcoin’s “monetary policy” is written into its code: Fresh money is issued every Ten minutes, and the supply is limited so there will only everzwijn be 21 million Bitcoins, a hard money rule similar to the gold standard (i.e., a system ter which the money supply is immovable to a commodity and not determined by government).
This is not to say the choices Bitcoin presently offers are volmaakt. Ter fact, many economists disagree with Bitcoin’s hard money rule, and lawyers argue that regulation through code alone is inflexible and doesn’t permit any role for useful discretion. What cannot be disputed, however, is that Bitcoin is real, and it works. People ascribe real economic value to Bitcoins. “Miners,” who maintain the Bitcoin blockchain, and “wallet providers,” who write the software people use to transact ter Bitcoin, go after the rules without exception. Its blockchain has remained resilient to attack, and it supports a sturdy, if basic, payment system. This chance to extend the use of the blockchain to remake the financial system unnerves and enthralls te equal measure.
Too Much Too Soon?
Unluckily, the exuberance of fintech investors is way ahead of the development of the technology. We’re often witnessing so-called blockchains that are not indeed innovative, but instead are merely databases, which have existed for decades, calling themselves blockchains to leap on the buzzword bandwagon.
There were many “pre-internet” players, for example telecom operators and cable companies attempting to provide interactive multimedia overheen their networks, but none could generate enough traction to create names that you would reminisce. Wij may be witnessing a similar trend for blockchain technology. Presently, the landscape is a combination of incumbent financial institutions making incremental improvements and fresh startups building on top of rapidly switching infrastructure, hoping that the quicksand will verharden before they run out of runway.
Te the case of cryptocurrencies, we’re observing far more aggressive investments of venture capital than wij did for the internet during similar early stages of development. This excessive rente by investors and businesses makes cryptocurrencies fundamentally different from the internet because they haven’t had several decades of relative obscurity where noncommercial researchers could fiddle, proef, iterate on, and rethink the architecture. This is one reason why the work that we’re doing at the Digital Currency Initiative at the MIT Media Laboratorium is so significant: It is one of the few places a substantial effort is being made to work on the technology and infrastructure clear of financial interests and motivations. This is critical.
The existing financial system is very ingewikkeld at the ogenblik, and that complexity creates risk. A fresh decentralized financial system made possible with cryptocurrencies could be much simpler by removing layers of intermediation. It could help insure against risk, and by moving money te different ways could open up the possibility for different types of financial products. Cryptocurrencies could open up the financial system to people who are presently excluded, lower barriers to entry, and enable greater competition. Regulators could remake the financial system by rethinking the best way to achieve policy goals, without diluting standards. Wij could also have an chance to reduce systemic risk: Like users, regulators suffer from opacity. Research shows that making the system more translucent reduces intermediation chains and costs to users of the financial system.
The primary use and even the values of the people using fresh technologies and infrastructure tend to switch drastically spil thesis technologies mature. This will certainly be true for blockchain technology.
Bitcoin wasgoed very first created spil a response to the 2008 financial keerpunt. The originating community had a strong libertarian and antiestablishment spin that, ter many ways, wasgoed similar to the free-software culture, with its strong anticommercial values. However, it is likely that, just spil Linux is now embedded te almost every kleuter of commercial application or service, many of the ultimate use cases of the blockchain could become standard fare for established players like large companies, governments, and central banks.
Similarly, many view blockchain technology and fintech spil merely a fresh technology for delivery — maybe something akin to CD-ROMs. Te fact, it is more likely to do to the financial system and regulation what the internet has done to media companies and advertising firms. Such a fundamental restructuring of a core part of the economy is a big challenge to incumbent firms that make their living from it. Preparing for thesis switches means investing te research and experimentation. Those who do so will be well placed to thrive te the fresh, emerging financial system.
Editor’s Note: The headline on this article has bot updated from its original version.
Joichi Ito is the director of the MIT Media Laboratorium and MIT professor of the practice ter media medicus and sciences.
Neha Narula is director of research at the MIT Digital Currency Initiative.
Robleh Ali is a research scientist at the MIT Digital Currency Initiative.