As the financial technology (FinTech) space continues to evolve, both institutions and retail consumers alike are becoming more knowledgable about blockchain and the opportunities it may present, on many levels and in many areas of banking.
This week, we kick off a special series: Blockchain In Emerging Markets. Taking a closer look by starting with the basics–what it is, why it matters and how emerging economies cannot not only keep pace but not be left behind.
Up first, we speak to Peter Borovykh, a New York City-based FinTech expert and blockchain solutions architect at BlockchainDriven. Borovykh is a widely known speaker on blockchain and instructor. In Part I of our interview, he explains exactly what blockchain is, why it matters and the potential of the technology for emerging markets.
What is blockchain?
Disruptive technologies such as blockchain, the internet, or electricity are often difficult to define in a short scope of two or three paragraphs, especially if you have never experienced this technology yourself. The best way to describe a disruptive technology often includes the definition itself, the problem it solves, its analogy to a different, well-known technology, or its practical implementations.
Blockchain is a shared database that is run on a network of distributed servers. Thus, it has two moving parts: the database and the network where this database is shared. Every transaction that enters the database is confirmed by the entire network, members of which act in good faith, being financially incentivized to do so. Therefore, instead of a centralized authority confirming transactions, the entire network of independent validators are performing this task.
Blockchain represents a peer-to-peer network where every permissioned user has access rights and every permissioned validator can verify transactions placed into the ledger. Many experts compare blockchain to the internet, and there is a definite degree of validity to it. However, while the internet solves the problem of communication, blockchain solves the problem of trust. The internet is decentralized communication, while blockchain is decentralized trust.
Why was blockchain formed?
It is tough to say exactly why or how blockchain technology was formed.
Some say that the financial crisis of 2007-08 became the boiling point after which many became completely disillusioned with the governments that allowed banks to take on obscenely over-leveraged derivatives, partially from over-the-counter and off-balance-sheet toxic ones, such as credit default swaps.
Developers who lost trust in centralized authorities started looking for ways to outsource the trust to masses, and the first blockchain network, Bitcoin, was born. Others say that technology got to the point where blockchain could be spread at such a massive pace.
First of all, the more integrated and interdependent global economy needed a solution to become more frictionless and efficient, and technological developments encompassing global networks were needed to facilitate that efficiency. The internet almost got it with Wikipedia, but blockchain came stronger and more powerful due to thought-out technological aspects, and
Socio-economic aspects engrained in the incentive mechanisms for validators in terms of tokens (realizing that volunteering works, but incentive mechanisms work much better).
Secondly, it is quite natural for humanity to evolve as one united organism. As a huge fan of behavioral economics and financial markets, the wisdom of the crowd is becoming more and more evident to me. The notion that the hive is more intelligent than the individual comprising it is very true. Both of the aforementioned points make logical sense.
“Blockchain is exactly that – technology of the masses, completely aligned with the needs of a global decentralized, peer-to-peer economy.”
What is the potential of blockchain in emerging markets?
Money is trust, from both economic and metaphysical perspectives. Blockchain is a network of trust. Thus, blockchain is first and foremost the disrupting force of all business models that have to deal with money. Banks will feel the impact of blockchain the most due to the nature of the problems being solved by the blockchain technology.
Banks all over the world are seeing the enormous potential of blockchain. Yet, too many regulations associated with mature economies prevent blockchain from spreading faster. It is the emerging markets, therefore, that are destined to take advantage of blockchain technologies the most in the near future. While the SEC came out with yet another restriction of Initial Coin Offerings (ICO), naming ICO as securities, China and Russia expressed interest to consider the digitalization of their currencies with one of the public blockchain networks, Ethereum.