While the benefits stated in the previous posts and the possibilities in terms of settlement time are true, these issues have to be put in perspective. It is important to separate the hype from reality. This leads us to question of what reality are we referring to here? The reality we speak of is that of the possibilities given the market structure, regulatory bodies and technology. There are many other pressing areas, one of which is legality, from which I will abstain on commenting about given my lack of exposure to the subject.
A study done by BCG in 2013 shows that with the existing technological framework and some additional investment, t+0 settlements can be achieved. We also have technology that enables settlements at almost real time speed such as RTGS and Swift. The current system of settlement is a function of regulations, legal rules and market practice rather than technological problems. Markets with T+0 settlement tend to have more volatility and less liquidity than markets with a longer settlement time (Steenis, Graseck, Simpson, & Faucette, 2016).
While there is a lot of interaction taking place between the tech world and players in the financial services sector and the regulators, there is very limited knowledge regarding the regulations and laws surrounding the financial services. Material posted by some start-ups initially were too technology focused and may have overlooked the regulatory aspects of their solutions.
While DAOs have huge potential, there is still a long way to go. Recently the Ethereum DAO was hacked and an estimated $60 million (Cant P. , 2016). There are technological, regulatory and legal issues which still need to be developed. While the technology may be usable in the near short term, the required regulatory frameworks and laws are still not in place. It is imperative for such a support structure to exist for the smooth functioning of the market.
While looking at the sustainability of the technology, the power intensiveness of such technologies is overlooked. As the technology proliferates into various spheres, the computing power required to run these systems is large. Calculations done by a technology enthusiast estimate that the Bitcoin network could consume as much electricity as Denmark by 2020. The results show that “in an optimistic scenario, the increase in electricity consumption of the bitcoin network compared to now is not shocking, from around 350 MW to around 417 MW, but still on the order of one small power station. If things play out a little less favorably, however, the bitcoin network may draw over 14 Gigawatts of electricity by 2020, equivalent to the total power generation capacity of a small country, like Denmark for example.” (DEETMAN, 2016)
Now having covered some ground on the possibilities, problem areas and the hype, it is time to place the technology on the Gartner Hype Cycle to get a better understanding of the current macro landscape as well as a general idea of the direction in which it is headed.
The Gartner Hype Cycle “provide a graphic representation of the maturity and adoption of technologies and applications, and how they are potentially relevant to solving real business problems and exploiting new opportunities” (Gartner, n.d.). The Hype Cycle, which was introduced in 1995, tracks the evolution of a technological innovation from overenthusiasm through disillusionment to a period where the technology is truly understood and applied.
After comparing various methods to understand the evolution of Blockchain, the author feels that the Gartner Hype Cycle gives the best over-all view of the technology and its evolution.
The following graphic shows the phases of the Hype Cycle as made by Gartner. Based on the evidence that will be presented below, there is a strong case to show that Blockchain has recently crossed over into the Mass Media Hype phase and signs of supplier proliferation are seen.
Figure 1 : The Gartner Hype Cycle
Ripple was the first financial service provider to get funded in Q2 of 2013. With the establishment of Ripple, the R&D phase of application of Blockchain in Financial services began. Below is the graphic of round wise totals as well as cumulative funding of Blockchain start-ups in financial services.
Figure 2 : Total Funding For Blockchain Based Financial Services Start-Ups
The funding has substantially increased over the years to reach an all-time high of $84 Million Q1 of 2016.
The following years saw an influx of start-up service providers enter the market. There has been a period where technology experts started exploring and partnering with experienced professionals and institutions in the financial services area. The announcement of exploring a Blockchain based platform for transactions in May 2015 marked the beginning is of significance where one early adopter started investigating. The formation of R3 CEV as a consortium in September 2015 marked the beginning of the early adopters investigate phase.
The launching of Linq in December 2015 marked the beginning of the first generation products in the financial services sphere. Blockchain products have been developed earlier in other areas and have been put to use such as everledger. Though on the Hype Cycle the first generation products are marked before the early adopters investigate, the collaboration between Chain.com and Nasdaq could be viewed as a union of early adopters investigating as well as a first generation product.
TCS was one of the first established player to enter the Blockchain landscape back in 2014. Towards the end of 2015, IBM and Microsoft each announced their plans to develop Blockchain solutions and platforms. Early 2016 witnessed the launch of various products by multiple service providers who are established players such as Infosys coming out with their products. This could be the technology inching towards the supplier proliferation stage.
The Blockchain hype isn’t evenly distributed around the globe. There are some hot spots such as Israel, the United States which are at the forefront of developing solutions. The Central Bank of England is one of the first central banks to look at the application of cryptocurrencies and distributed ledgers very seriously and publish its views. Other countries are behind on the hype curve.