The Blockchain’s Killer App

Let me spell it out. The killer app for a cryptocurrency is to be a currency. OK, so I’m stating the bleeding obvious, but I encounter this “killer app question” far too often while perusing news sites of the cryptosphere. It even exists as a question on Quora.

Shame on you Quora. I can find no equivalent question that asks:

“What is the killer app for the dollar?”

And by the way, what is the killer app for the dollar? Is it money laundering? Is it drug trafficking? Is it leaving tips at restaurants or is it just buying stuff from Amazon?

Let’s talk money. Bitcoin Cash, Litecoin, Ethereum, Dash, Monero, Zcash and one or two other cryptocurrencies see frequent use in person-to-person payments and digital retail. It’s low volume admittedly; you can track the stats for such coins on bitinfocharts.com. You can know how many transactions are transacting during the day (eat your heart out fiat).

The use of cryptocurrencies as money shouldn’t surprise anyone. Most of those cryptocurrencies — the exception is Ethereum — were designed to be money. So Duh!

As money they are very competitive with fiat. Crypto transactions are inexpensive, swift and cross national boundaries without being stopped at any checkpoint or by any kind of wall. That’s why, for example, the United Nations’ World Food Programme uses the Ethereum blockchain to make payments (rather than using traditional banks).

Send Not For Whom The Bell Tolls

In the world of banking, the most visible crypto success so far is Ripple. It competes with SWIFT in the banking sector and has over a hundred committed banks including some big names. Ripple was designed for speed, as was its younger brother Stellar Lumens. IBM, a long time technology favorite of the banking world, is partnering with Stellar Lumens. It has spawned many financial sector projects, including a sizeable interbank project — the result of which may become visible this year.

No doubt many banks will make use of blockchain technology. Aside from making the odd snide comment (I’m looking at you Jamie Dimon) the banks gave up without a fight. Yes. — the revolution is already over, and the crypto guys won.

It wasn’t much of a fight really, but that’s how it is with technology revolutions. It proceeded like this.

Question: Which is the better technology for an open ledger: a distributed blockchain or a centralized database?

Answer: A distributed blockchain.

The Banking Shadow

Because the revolution is over, an ominous shadow hangs over the whole banking sector — just as an ominous shadow hung over the whole of retail once the dot-com revolution got going. Sure, it took a few years before Amazon and eBay grew tall, but no-one doubted that they would. The only question was how high?

And it took a long time before the prior retail giants began to stumble, and then come crashing down.

This is precisely what will happen to the banks.

How Much Do The Banks Make?

The banks needed some healthy competition anyway. Here’s why:
Banks are financial intermediaries. They make their profits from the financial transactions they get involved with, whether that’s checking account transactions or buying stocks or getting car insurance.

According to New York University economist Thomas Philippon, the “total compensation of financial intermediaries (profits wages salary and bonuses) was about 9 percent of the US economy” — or if you prefer the dollar amount, $1.4 trillion.

The skinny is this: for the last thirty years or so, Wall Street has been increasing its take. It’s take was about 5% in 1980, and now, almost 40 years later, it’s 9%.

If like me, you spent most of the years since 1980 working in IT, you’ll know that the costs of processing data in any way has fallen and fallen and fallen for IT heavy businesses like banking. And banks have merged and consolidated. Costs have collapsed.

You don’t need a weatherman to know which way the winds blows. The big banks are either inefficient or greedy or both.

And now they face the blockchain. And they are in no shape to compete, even if that were possible.

The banks are dinosaurs, and the blockchain is a big bad asteroid.

And, By The Way, That’s Just The Beginning

The killer blockchain app is banking (i.e. money) and, as a consequence it will gradually bring the current banking sector to its knees.

Nevertheless, the blockchain revolution is far more profound than that. It will have an impact at many levels. It will gradually rebuild the Internet from the ground up. Here’s why:

  1. Blockchain technology is far more secure than current Internet technology. In fact, if built properly, and it usually is, it is bulletproof.
  2. The blockchain is capable of securely storing self-identifying data that knows who owns it. It makes it possible for people and businesses to enforce ownership of their data. (This is something we’re working on furiously at Permission.io, previously Algebraix.)
  3. The blockchain can securely share data between parties. That’s why it can create digital currencies. But this capability is also useful for sharing knowledge of transactions of any kind — such as in a supply chain.
  4. Blockchain technology makes it possible, via smart contracts, for program code to enforce “trust” and thus it can in many circumstances eliminate or diminish the need for trusted third parties such a retail banks and financial brokers.

The blockchain revolution is in its early stages — a little like the Internet was in, say, 1997. Consequently, much of what is currently visible is only just out of incubation. Much has yet to become clear.

What is not in dispute is that this revolution will come to the doors of the banking industry first.