As 2017 draws to a close and will be remembered as a successful year of many pilots and proofs of concept in blockchain technology, Hugh Halford-Thompson, Co-Founder and Chief Innovation Officer of BTL Group, provides the latest BTL Insights to explain why businesses are so excited about the technology.
Over the past two years BTL Group has been working with enterprise clients and learnt what it really is that they really want from blockchain. Its potential to restructure the way certain businesses processes is now clear, but what is also clear is that we have only just scratched the surface and the blockchains can totally restructure businesses or whole industries.
Below are three applications of blockchains that have gained the interest of our clients:
- Processes and Systems on Blockchains (in part 1 click here)
- Breaking Down Silos (in part 2 below)
- Restructuring Industries (in part 2 below)
2. Breaking Down Silos with Blockchains
For years companies have been implementing central systems to store data so that all parts of the organisation can refer to a single source of truth. Looking at why silos exist in organisations it’s often not evolved that way by accident, but by necessity. In a system where multiple parties need to access data to run their individual areas of business, they are often not happy with the data they rely on being hosted by another part of the business. This may be to ensure system outages elsewhere in the business don’t affect them or because they can’t trust each other as in a contract dispute.
By using Interbit to connect together various internal departments or subsidiaries you can break down the last of those silos and have a shared ledger of information as well as automating shared processes using smart contracts shared between various parts of the business.
What if you could go even further? Within any organisation, there is a lot of value to be unlocked. What if you could break down silos between counterparties, both internal and external? It turns out you can, so please read on!
3. Restructuring Industries with Blockchains
As markets evolve different companies end up playing different roles. Where you have many counterparties trading there are central services that are provided to those trading businesses. In yesterday’s markets, these central roles appeared out of necessity, but later became very powerful as the whole industry becomes dependant on their services. This is especially true with trading marketplaces as they are more efficient if all counterparties use the same system. Some of these now powerful industry incumbents were set up by a third party looking to profit from services they offer to the industry, others were formed by the counterparties themselves as for profit, or even non-profit ventures, but as any marketplace evolves the central parties that emerge inevitably grow more and more powerful over time.
The power that central parties have is:
- They hold control over the software roadmap and the maintenance or updates of the system
- They act as gatekeepers to the platform
- A huge reliance is created upon the central platform - if it crashes the whole market becomes dysfunctional
- They see and hold every counterparty’s data
That last point is important; if they hold everyone’s data they have to be trusted and regulated which means they have to have expensive processes in place for compliance. It also makes it harder for new entrants to be trusted.
Blockchain changes the requirements of central parties which enables fundamentally different market structures. Some central parties become obsolete, others are presented with huge opportunities and others still are given a chance to displace industry incumbents.
With a blockchain system the central party has:
- Control over the software roadmap and the maintenance or updates of the system
- They act as gatekeepers to the platform
- The software is installed on all the clients’ servers creating no centralised reliance on any system or operating entity
- The central party never has access to the data of any counterparty, therefore it:
- Has no requirement to be trusted with the market’s trade data
- Has no regulatory overheads hugely reducing the running costs
The following image shows a comparison in the amount of power held by central parties in a traditional marketplace VS a blockchain marketplace.
At BTL we have been operating in both the finance and the energy sectors, but what we have built is applicable across all industries wherever you see reconciliation issues in the back office. The ability to transform a marketplace is linked to whether critical mass can be achieved in terms of gaining traction from a majority of the biggest players in that market.
If you take the European gas market as an example, twenty traders perform over 80% of trading volume. In power this is similar, as it is in the US gas and power markets. If you look at oil trading however, a much larger group is required to gain critical mass which adds to the complexity of transforming a market. Outside of energy, our solution is also applicable to helping with back office issues in grain, metals or any other commodity trading, bonds, mutual funds, derivatives, FX, supply chains and any other market with regularly traded assets.
The transformation we are going to witness over the coming years is going to be disruptive and it is going to present significant opportunities, as well as threats to incumbents offering products, systems, and services in every major market. Contributing to this transformation is what we find most exciting about what we do at BTL, with Interbit being at the heart of this.