What are the 3 revolutions that blockchains bring?

The disruptive technology of the blockchain brings three essential innovations that will revolutionize many sectors in the coming years.

First, digital payment: being able to make transactions by exchanging value at real speed without the need for the approval of a third party, called an intermediary or trusted a third party, will have a considerable impact on the banking and insurance sector in particular.

Secondly, notarization: being able to write certain data on a blockchain has several advantages as we saw in the first chapter: security, immutability, transparency… the data recorded in the blockchain will thus be preserved.

Last but not least: smarts contracts: software that automatically executes a task such as paying compensation in case of bad weather, for example. It will also have a significant impact on the financial world. As more and more connected objects are (being added on networks) connected, the possibility of having them interacting with smarts contracts is endless.

These major innovations will revolutionize many trades, but they also represent a threat. A threat, in relation to the well known “trusted third parties”: these professionals such as bankers and notaries will be the first to be impacted and they will have to reinvent part of the added value of their professions if they want to survive.

Missing such important innovations is more synonymous with extinction than sustainability (let’s mention the example of Kodak, which misses the digital revolution, or BlackBerry, which misses the tactile revolution…).

In this chapter, we will try to cover the main applications that companies can make of blockchain by citing some of the most striking examples of how multinationals inject huge sums of money into the most ambitious blockchain projects.

1) Digital payments

It is thanks to digital payment that the blockchain has really become known. While it is true that today Bitcoin in particular, and cryptocurrencies more generally are essentially used as speculative assets as we have studied, paying in crypto-currencies does not have only disadvantages.

Transaction security

With a traditional credit card, fraud is possible and countless. We can easily remember the scandals that have affected some companies that have had their confidential data stolen, including their customers’ credit card numbers. This is simply not possible in the cryptographic field as long as you pay with cryptocurrencies like Bitcoin for example.

The merchant who sells you the product or site on which you buy has access only to your public key, he has no knowledge of your private key.

Reduction of transaction costs

The advantage of Bitcoin is also felt through the cost of transactions.

Indeed, during a traditional banking transaction, many intermediaries take commissions, which considerably increases the invoice: fees to validate transactions, account management fees, fees of all kinds… According to PanoraBank, the average price of a bank card in France in 2017 was €43 (an increase of 7.5% compared to 2016).

In the end, it comes down to a very simple way: pay to have the right… to pay. With the peer-to-peer system of decentralized networks such as Bitcoin, costs are much lower. But this does not mean that it is free of charge: the intermediaries who make it possible to obtain Bitcoin and other crypto corners are remunerated on transactions, as traditional banks would do. What’s the point then?

An intermediary such as an exchange platform will charge you between 0.20% and 0.50% based on whether you buy or sell foreign currencies, far from the 1 to 2% charged by banks when you pay for a credit card purchase (one fixed part, the other variable). This is why many merchants refuse the card below a certain amount: small transactions are not profitable for them. With Bitcoin, this disappears: micropayments are much more profitable for merchants, and therefore for the consumer, and therefore for the entire ecosystem.

To imagine these words, let’s take an example: the payment of a newspaper article on the Internet. Generally, items for sale by the unit on sites like Les Echos (a well-known newspaper on French finance) cost between 1.50€ and 2€. However, no one pays €2 for an article when it is the price of the entire newspaper. But journalists cannot sell it for less, 10 or 20 cents in our example because the bank charges would be equal to, or even higher than, the price of the article itself.

In the economy of micropayment, cryptocurrencies would allow small transactions for a few tens of cents for these items, their fair value, without paying exorbitant fees: the sale of items by the unit would finally become possible. And the possibilities of application and declination are endless.

However, it is necessary to mention the major disadvantage of this method of payment in crypto-currencies: volatility. If you are paying for a purchase in Bitcoin and in the meantime it has changed significantly in value, it is possible to make an excellent deal… or not.

More generally, it must be understood that Blockchain technology (unlike banking and other intermediaries) knows no borders. For example, a money transfer with a specialized company like Western Union and its 550,000 branches around the world costs between 8% and 10% of the total transfer. Just that.

At HSBC, an international transfer can reach up to €12.50 (for the issue) and up to €25 for the receipt depending on the country concerned. This is why many startups have embarked on digital payment with a vengeance. This is particularly the case for ABRA.

You are in Hong Kong and want to send money to Miami? You can use the ABRA application which transfers the value of your funds from one currency to another without you having to worry about it. The interest? Fees, ranging from 1.75 to 2% of the transfer amount. Compared to the 10% of Western Union…

American Express has invested several million dollars in ABRA. This is additional proof that the major players in modern finance, and in particular all intermediaries in the banking sector, have clearly understood the enormous potential of these companies, which are trying to revolutionize digital payments.

But according to a study conducted by the World Bank, some 2.5 billion people around the world are not banked. Once in a lifetime opportunity for these companies to try and develop on these continents and try to ‘’banked’’ as many people as possible… without a bank.

With an application like ABRA, all you need is a mobile phone and an internet connection. Some startups are seeking to expand mainly on the African continent, where nearly 70% of the population does not have a bank account.

Ripple has also entered the high-paying international interbank business and is now competing with industry giants such as SWIFT. Ripple has developed a payment protocol that is much faster than Bitcoin’s and has introduced its own cryptocurrency, the XRP ((3rd capitalization of cryptocurrencies at the time of writing these lines).

As a result, many of the world’s leading banks have joined RIPPLE to benefit from its payment services and improve their transaction costs.

As of today, more than 100 banks and financial institutions around the world use the XRP token, including Bank of America, UBS, Santander, Standard Chartered, Crédit Agricole, HSBC, and others.

The blockchain and financial companies

Many companies are interested in the payment market, starting with NASDAQ, which has experimented with the blockchain for unlisted securities trading. According to some executives, this Blockchain technology has the potential to help accelerate the clearing and settlement of transactions, current equity market standards (three days today, and about 10 minutes with the blockchain).

As a result, exposure to settlement risk could be reduced, which would reduce capital costs considerably and would reduce the potential for systemic risk accordingly. In addition, this technology could allow issuers to significantly reduce the amount of which could be described as an administrative burden.

“We believe that these transactions will represent a major step forward in the financial sector and represent a decisive moment in the application of blockchain technology”, said Bob Greifeld, CEO of Nasdaq.

In practical terms, blockchain technology would eliminate many lengthy and costly administrative procedures. There are many obligations and documents to provide when you want to open a bank account, take out a loan or take out life insurance. Procedures to verify the identity of the customer, to combat money laundering or terrorism known as KYC for Know Your Customer, considerably slow down procedures.

Today, if you open a bank account in any bank, the procedure for opening the second one in the next bank will be the same: administrative paperwork and lengthy documentation. The blockchain could change that.

But these changes legitimately concern some actors who are already well established. When we talk about “blowing up banks”, Nicolas RIVARD, innovation manager at Euronext Paris, answers with one of his tweets: “Using the #blockchain just to reduce costs is illusory”.

Indeed, the latter believes that the blockchain and the digital payment business model, rather than transforming the entire value chain, will mainly lead in improvement and efficiency. Is this proof of distrust, even mistrust, on the part of financial institutions with regard to a technology that could, in the years to come, completely reinvent their business model?

There is no way for the heavyweights in the sector to fall behind: several consortia have thus been set up in order to pool the high research costs. Banking groups have emerged in recent years, such as R3 in the United States. Created in 2015, this consortium consisted of 8 banks: Credit Suisse, Barclays, BBVA, Commonwealth Bank of Australia, JP Morgan, Royal Bank of Scotland, Goldman Sachs, State Street, and UBS.

Within a few months, other big names joined the consortium, such as the Company

Générale, which was the first French bank to do so, closely followed by BNP Paribas and Natixis.

Adapting or dying. In a constantly changing world, banks and similar institutions have understood that they must advance on a technology of the future, the blockchain. We must not believe that bankers and other intermediaries will disappear. It will always require someone upstream to validate certain operations are reserved for the human being (the famous trusted third party I refer to in Article ‘’The DAO: The Illusion of the Immutability of Blockchains’’). The changes will be mainly logistical and but to maintain their advantages, companies must act quickly, otherwise, they will have to see their competitors gain a head start. And the financial world has understood this very well.

But in the end, digital payments have only one prerogative: to pay.

The following concept will allow impacting domains and fields of applications much more than the simple field of payments. Registering authentic instruments, classifying them and dating them on a blockchain to which everyone, or on the contrary only certain authorized persons can have access, is an enormous technological advance. This is called notarization.

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2) The Notarization

According to the Wikipedia definition: “Electronic notarization is the certification of the different stages of the evolution of an electronic document in order to:

→ allow, during an exchange between two parties, to guarantee the content, origin, date, and destination of an electronic message

→ securely archive digital documents

Electronic notarization allows the verification and archiving of proof of electronic exchanges and archiving by an approved trusted third party (in the same way as a notary). This technique improves the security of electronic exchange and archiving by providing the parties with different mechanisms for tracking and archiving transactions issued and received (integrity, origin, date, and destination of data).”

Would all this be possible on a blockchain? Yes, but to really understand and interpret what it is, you have to stop for a moment on a computer concept still misunderstood: cryptographic hashing.

A hash function is a kind of mathematical function that converts a numerical value of a certain size into a numerical value of another size. In summary, cryptographic hashing transforms a message of so-called arbitrary size into a fixed size message, called a ‘’condensed’’ message.

Hash functions are used in many areas. Among those of interest to us are digital signatures, message authentication. Cryptographic hashes have the particularity of being:

• Unavoidable
• Forgery-proof (if the condensed version is modified, the message will be different)
• Quick to calculate
• Resistant to collusion (normally, two different messages cannot succeed to the same condensed version)

In blockchain terms, cryptographic hashing makes it possible to “disintermediate intermediaries”. The expression can make you smile. The question of the removal of the trusted third party is one of the major issues of the blockchain. In a banking transaction, for example, it is the bank that verifies that the payer actually has the funds available, and it is still the bank that agrees to validate the transaction. In the context of a blockchain, these checks are carried out by the blockchain itself, as we have studied.

This may seem difficult to conceive, and yet. Blockchain technology is therefore used to verify the recording of information, certify it, without having to resort to the famous trusted third party.

No fraud is possible as all blocks, i.e. all the “transaction packages” recorded on the blockchain, would have to be modified. Impossible (except by certain procedures that will not be explained here).

The centralized institution thus becomes a distributed consensus.

But this formidable possibility of registering documents, acts and patents of all kinds on a blockchain represents a real threat to certain professions.

In the case of notarization, for example, the possibility offered by the blockchain to register all types of documents in a completely dematerialized way threatens notarial circles whose job it is precisely to register and index deeds.

As a result, many professions have realized that they will have to modernize. At the risk of being killed.

Here is a list, although not exhaustive, of possible applications and areas covered by the blockchain:

- All types of assets

- Art: possibility thanks to the blockchain to certify that a work is authentic

- Insurance: automation of compensation payments

- Cadaster: Many countries do not have them. This can cause problems with urban planning or property rights

- Contracts: all smarts contracts

- Diplomas: certify the diplomas by registering them on the blockchain

- Diamonds: establish traceability, fight against blood diamonds and certify their authenticity?

- Documents: proof of existence, proof of ownership

- Data: whether or not to share data of any kind

- Energy

- Finance: banking businesses will be affected by digital payments, the insurance trades will be affected by smarts contracts, all will be affected by notarization…. It is probably the financial professions that will be the most likely to be modified in the coming decades

- Identity: certifying an identity (persons, companies) in order to dematerialize documents and procedures. This would also help to combat identity forgery

- Real estate

- Medical: authorize first aiders in case of problems to have access to data quickly, certify the origin and traceability of medicines, the medical sector will also be very strongly impacted by blockchain technology

- Messaging

- Music: fight against piracy of works. Micropayments being much less

expensive than traditional payments, it could be ensured that the producer of a musical or even literary work is paid by the number of times the piece is downloaded/listened

- Objects: objects connected with smarts contracts

- Payment: international payments, micropayments, loans of all kinds

- Intellectual property: to register a dated, irrefutable and unchanging document to which we will choose to restrict access to certain persons or, on the contrary, to authorize them access to all

- notarization

- Social networks

- Storage of all kinds

- Traceability: food products, medical products

- Transport

- Votes: Many States are subject to fraud and cheating of all kinds. Notarization will make it possible, in the coming years, to certify votes in order to bring more transparency in the electoral field.

This is only a glimpse of the possibilities and changes to come. The number of activities and areas covered by this technology is too numerous to list them all. Security, archiving, immutability and transparency are the watchwords. Eliminating the risk of loss, fraud and error will now be possible.

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3) Smarts contracts

The birth of the blockchain Ethereum

In 2013, Vitalik BUTERIN, a cryptographer passionate about technology and adept at the Bitcoin blockchain, created his own blockchain. But unlike Bitcoin’s, which he considered “not permissive enough”, he decided to create a blockchain that would allow, in its first version, the circulation of a cryptocurrency but also and above all the possibility of registering what is now called smarts contracts on this blockchain. This blockchain is called Ethereum.

But what is a smart contract?

Smart contracts, or smarts contracts, are contracts based on IT protocols and whose clauses have been defined and drafted using IT technology. When two contracting parties sign a paper’’ contract, a third party must execute the clauses of the contract if one of them is fulfilled (for example, the payment of a salary at the end of the month: a person must make the transfer electronically). In a smart contract, the clauses are frozen in a blockchain and when one of the contractual conditions is met (end of the month for example), the smart contract itself performs the predefined action without the need to do it manually (salary payment).

The insurance sector

The insurance sector is very interested in Blockchain technologies.

Once again, transparency (although this particular criterion may represent a major disadvantage rather than an advantage for some societies), immutability and decentralization can be cited as key characteristics. But this is not the major contribution of this technology to this sector. What is of particular interest to insurers is the automation of reimbursements through smarts contracts that will be registered on the blockchain.

Groups such as IBM, AXA and Allianz are already working on this issue.

Imagine: your flight is late? You have to make a complaint. And it takes a considerable amount of time: the time it takes for the claim to be noted, recorded, validated, then for an internal person to manually refund you…With a smart contract, this whole process is automated: during the delay, one of the conditions of the smart contract is self-executed and a compensation / refund occurs as soon as possible without you even having to make a claim.

Another example: in the event of bad weather conditions, this would automatically compensate the farmer for his fields and plantations: a clause would be inserted in the smarts contracts which would regularly check rainfall records and automatically pay compensation if a certain rainfall threshold is exceeded.

Some go even further: they experiment with 100% decentralized insurance! How is that possible? Smarts contracts simply replace the insurer: they are automatically executed to guarantee the payment of the indemnity / reimbursement in place of the insurer itself.

Currently, Wekeep.io is one of the start-ups working on this type of project. In fact, the company’s Linkedin summary states:”.

It is a kind of “Crowd-Insurance” that follows the same principle as the beginnings of insurance with Lloyd’s in London in the 1690s.

And the possibilities of use and applications are very varied in terms of insurance.

The banking sector

The banking sector is concerned by smarts contracts.

This is evidenced by a study by CapGemini (1), according to which the establishment of smart contracts in blockchains could accelerate decision-making cycles in investment banks, increasing demand by 5% to 6% with an increase in their revenues of around $3 to 8 billion in dollars and on an annual basis.

For retail banks, the cost of loans could decrease significantly. This would save nearly $10 billion a year in transaction processing costs. A highly profitable business in which the banks will not fail to participate.

Internet of Things

A connected object is an object that has the ability to store, process or even transmit some data. He can receive and give instructions if he is connected to the Internet. It’s called ‘’the Internet of Things’’ (IoT). Which is interesting, it’s the link that can be made with the blockchain. Indeed, the system, which is decentralized by nature, could allow a connected object to perform certain tasks by communicating with other objects or automating its decision making. This sector is still very young, but some companies are already experimenting with it.

For example, IBM is experimenting with patents that would allow devices to be connected to a blockchain in order to execute intelligent contracts.

Do you know the connected washing machine? This could, if the laundry tank is almost empty, automatically order soap, or trigger the arrival of a technician in case of a breakdown, again without any human intervention. All this while hosting smarts contracts on a blockchain.

It helps to understand how IoT and blockchain can be implemented and how promising these technologies are for the future.

This is not just a simple possibility of limited use for information storage, but a technology with tremendous innovative potential that can be applied to an infinite number of applications and business models…

All companies (public or private) can suffer from internal problems such as database maintenance, activities that are often time-consuming, expensive and not very rewarding. Blockchain technology and the use of smarts contracts can solve this problem by automating certain tasks and functions, thus increasing transparency, speed and maintenance costs.

But if smarts contracts offer an infinite number of possible fields of application, they pose, just like crypto-currencies, difficulties, particularly in terms of their legal qualifications which we will discuss in a future article.

In summary, just remember that the famous ‘’blockchain’’ has three functions with such enormous potential that it is unquantifiable: digital payments (cryptocurrencies), notarization and smart contracts, which probably represent, on these 3 areas, the one that will have the most impact and development opportunities in the coming years.