By Laura Shin for Forbes
From the beginning, one of the defining characteristics of Bitcoin has been its decentralized nature.
But over the last year or so, as banks and other financial institutions have begun to try to capitalize on the efficiency, reduced costs and security that Bitcoin’s blockchain technology offers, many have wondered how incumbents will integrate such technology into what has traditionally been a more centralized system.
One of the companies helping guide enterprise companies in integrating blockchain into their work is Chain, a San Francisco-based startup that has raised $44 million from Visa, Citi, Nasdaq, Capital One, Khosla Ventures and RRE Ventures, among others. Last year, its partnership with Nasdaq resulted in the launch of the first live private blockchain, a product called Linq that uses the blockchain to manage shares in private companies. The company has also authored a blockchain protocol called the Chain Open Standard, which is being used by its partners like Nasdaq and Visa to implement such networks. And Ludwin himself recently presented at the Federal Reserve to bankers from 90 countries, including Janet Yellen, as well as officials from the World Bank and International Monetary Fund.
On the latest episode of Unchained, my podcast exploring blockchain and fintech (iTunes, Stitcher, TuneIn Radio), Chain chief executive officer Adam Ludwin talks about what makes blockchain different from previous database systems, notes a surprising commonality among the companies jumping on the opportunity offered by the technology and speculates on how blockchain might change the landscape of financial services. He also reveals why he is certain central banks will one day issue digital currency.
Compared to databases, which work well within individual organizations, he notes that blockchains are better suited for moving assets across organizations. “A blockchain is similar to a database in that it’s a record-keeping system that is digital and becomes the source of truth,” he says. “It’s fundamentally different in that it can also be considered a network.”
Before blockchains, organizations had two ways of moving assets digitally, says Ludwin: either by empowering a single organization to keep track of all the assets in the ecosystem, or by having each player maintain their own database and then reconciling at the end to ensure that the duplicate ledgers reflect the same truth, which Ludwin says is an “expensive error-prone” process.
Blockchains offer a third choice: a shared infrastructure that doesn’t require reconciliation.
The way Chain is helping its partners come to market with blockchain is by having them roll out networks that require the participation of several organizations, each with its own role. He concedes that this transition presents both a opportunity and a threat to incumbents: “The opportunity is to get out ahead of this and be among the leaders deploying and operating these networks… The threat of course is, when market structures change, everything is up for grabs again in terms who captures what value in the value chain.”
But in looking at the short list of companies that are actually ready to disrupt their own businesses for this opportunity, Ludwin says “the truth is, if we were simply offering the opportunity just to trade up to a better incumbency position, they would have all jumped at it by now. The reality is those who are best positioned often have the most risk as well.” He says that those who actually make the leap are those with executives who believe their company will be more of a software and network business in the future.
Additionally, he says many of them are “challenger firms — firms that are known, like you know their names for the most part. But maybe they eye a market that they’re not in today. And they want to be in that market. Maybe they’re number 2 or number 3 and they want to be number 1. Maybe they’re huge in one geography but they want to get into another. So in almost every case, the motivation to be initiating networks is strategic, and they’re often challenger-oriented projects.”
Ludwin, who was previously a venture capitalist who invested in a number of fintech companies such as Venmo, Braintree and OnDeck, says that what separates blockchain from fintech is that it transforms the inner workings of banking.
“Fintech for the most part right now is web-enabled user-interface innovation that connects into the same old financial infrastructure that’s been around for 40 years,” he says. “Yes, we have online banking but we still have fundamentally the same core banking infrastructure we’ve always had and the same players.”
After he first read the Bitcoin white paper in 2010 or 2011, he realized that the internet didn’t have a form of digital cash until Bitcoin and that it represented a new opportunity to make assets digital.
This is why he’s certain central banks will one day issue digital currency. “It is fundamentally a medium that’s consistent with where the world is going. It’s no surprise to anyone that the internet, digital commerce, digital payments, cross-border movement of assets, infeasibly complex financial instruments and derivatives — all these things are technology-enabled, software-enabled, and yet the medium in which we issue legal tender is still paper,” he says.
Listen to the full episode on Unchained (iTunes, Stitcher, TuneIn Radio) to find out when he thinks it makes sense to use the bitcoin network vs. a private one, how his parents’ failed experiment with a bulletin board system (BBS), a precursor to the web, got him hooked on the internet from a young age and why blockchains and digital fiat currencies will be a boon to central bankers.
First appeared at Forbes