To fully understand this, let's go back to our example of buying a house. What if all records of all houses in your city were in a secured trusted publicly available block chain, would you still need the title company? No. The job of the title company will probably be replaced by an app that can check the ledger in a user friendly matter for a minimal cost per transaction, or even for free if you manage to subsidize it with a couple of advertising banners. Cutting out the middleman is not only saving users money, but it is fundamentally changing where business value can be created. Let's look at a few other examples. We have talked about bitcoin, which is probably the most popular example of blockchain disintermediation. As you can understand by now, bitcoin relies on a thousand and thousands of computers storing and exchanging replicas of an open ledger, using a specific blockchain protocol. To manage your bitcoins in a user friendly manner, you would have a digital wallet, managing your interactions with the ledger. The app will manage to record your transactions. Alice earned 50 new bitcoins, or Alice paid Bob 10 bitcoins. Transferring bitcoins from Alice to Bob is a matter of adding a transaction in the open ledger. To do the same, a typical bank will charge you five percent of the amount you are about to transfer, and the transfer will take a few days at best. For now, let's compare this to bitcoin. Transaction will happen freely at least for now, and it will maybe take a couple of hours to be effective. Not surprisingly, banks have started their own blockchain ventures. More than 70 banks around the world have founded the consortium R3, to develop what they call a new operating system for financial markets, and that using their own distributed ledger platform called Corda. This is a typical move from incumbents to protect their competitive advantage by adopting the technology or even by shaping it. Now, instead of storing bitcoin transaction value, you can also store information about a diamond or a vote. You are building a totally new application that way, for tracking diamonds for example or for monitoring election results. Nothing less by transforming democracy. Very ambitious plans. Blockchain has also the ambition to disintermediate certain platform based businesses in what you might think of as the next wave of digital disruption. You probably see Airbnb being described as the digital disruptor of the hotel industry. Now, imagine that instead of advertising your property on a platform that takes a cut from your rents, you publish it on an Ethereum open ledger, with price tags and time windows. Ethereum is a blockchain that is built specifically to allow the creation of smart contracts. Those are little pieces of code that can execute an action on the blockchain if certain events happen. For example, pay Alice $50 if her account goes below $10. So, you publish your property on Ethereum. And if another member of the network is interested, you set up a smart contract that will pay you the agreed amount, take the deposit, then release it once the house is returned in perfect condition. All of that can be automated. No need for intermediaries. This last application though assumes that you have some sort of high reach blockchain, a network that can map all individuals, their houses, maybe their bank accounts et cetera. When you think about such a wide network, the problem of trust becomes non-trivial. We said that blockchain generates trust, but it generates trust only in the transactions that happened within the network. You will need another way to guarantee what we call peripheral trust, trust at the edge of the network. This can be some form of identity proof to guarantee that you are who you say you are. And that the house represented in the network has a physical presence in the real world. Let me share with you an interesting perspective Philip Evans and colleagues have described in a paper titled "Thinking outside of the blocks." It basically draws a parallel with the theory of the firm. The bigger is the network, the more expensive it will be to guarantee trust in every single network node. And at the same time, the bigger is the network, the cheaper you hope it will be to transact. So, if you take those two costs into account, you know that the optimal size of a blockchain network might land somewhere in the middle. So, not a single blockchain that covers all use cases at once, but maybe one for each group of use cases. Of course, the specifics of the model will be defined by how blockchain adapts to a variety of unsolved questions. How can money be made from blockchain? And who will capture most of its value more, the application layer or the protocol layer? What should be the regulatory framework around the blockchain? How to handle the capacity limitations of 10 to 30 transactions per second with a typical credit card system for example handling 2500 transactions per second. Those are still open questions. But few takeaways that you should keep in mind. Blockchain is a protocol to implement a distributed open ledger that securely keeps record without the need of a trusted third party. Although block chain is at the beginning of it's journey, it has already applications in financial services, assets traceability, contract management, and many other domains. There are still multiple challenges associated with blockchain from technology difficulties to questions about the business model and the regulatory framework. However, if blockchain makes its way, it can completely disintermediate established platform players in today's business ecosystem.
