Key words: blockchain, innovative technology, decentralization, finance
Decentralization is an idea whose time comes in the 21st century. The Internet is so huge and dynamic that it can contribute to the development of decentralized models in various areas, including financial ones. The development of digital technologies contributes to the decentralization of the economy in the world, as well as the movement of companies towards the creation of ecosystems — networks of organizations that are created around a single technological platform. Blockchain is the first large-scale implementation of decentralization models, deployed at a new, more complex level of human activity.
For the period from 2009 to 2019, blockchain became one of the innovative technologies (along with Big data, OpenAPI etc.), which are actively transforming the financial sector in many countries around the world. The capitalization of the decentralized technology market is increasing annually, due to the expansion of the line of innovative products and services, the emergence of new startups that successfully compete with traditional financial organizations.
The desire of the global business community and government structures to explore the new technology and find the most effective areas of its application requires a lot of resources. Per analysts McKinsey [1, p.41], the process of technology development is not fast enough. With that amount of money invested and time spent, real progress in the industry is insignificant. Of the many applications of technology, a large number of projects are still at the concept creation stage, while others are at the development stage, but without significant results. Despite billions of dollars in investment and active promotion in the press and the Internet, the effectiveness of the blockchain's scalable use is highly controversial.
From the standpoint of economic theory , the uneven path of technological development is not entirely surprising. Blockchain is a relatively unstable, quite expensive and difficult to use technology. It is also not subject to regulation and is still not standardized internationally. The classical theory of the life cycle suggests that the evolution of any technology, as well as products and solutions based on it, can be divided into four stages.
At the first stage «Research and Development», testing of a new technology begins. Based on it, prototypes of future products are created. Organizations are actively investing their own resources in technology research, as well as engaging third-party investors. An assessment of potential consumers, areas of application, the level of competition of technologies with similar functional properties is made. Sales of technology-based products are generally small, and the return on investment is at a negative level.
At the second stage «Growth», there is an increase in demand for technology, the market is actively developing and technology-based products are becoming popular. The supply of products outpaces the demand for them until the technology is sufficiently tested.
At the third stage «Maturity», the market adopted innovative technology. Growth is stable, companies are actively releasing new products and solutions based on technology. In case of confirmation of the expediency of applying a new technology in a certain direction, the demand for products (solutions) begins to outpace the supply. Technology becomes popular.
At the fourth stage «Decline», new technologies appear, which noticeably surpass the existing technology in functional properties. More technological products and solutions are coming to the market. Gradually, there is a replacement of technology and a complete withdrawal from the market.
After examining enough blockchain projects of leading financial institutions, it can be concluded that the technology remains in the first stage of the life cycle: the majority of developments are still in the test phase (or are in liquidation), many companies have not been able to invest enough in blockchain projects. In 2015–2016, the future of technology looked quite promising: investments grew, and some structural problems of the industry disappeared. But by the end of 2017 many financial sector experts agreed that the blockchain technology was not ready for use on an industrial scale. There are also doubts about the effectiveness of the application of technology in some areas. In 2019, the practical value of the blockchain in the financial sector is mainly located in 4 specific areas:
1) Implementation of the payment function: making transfers and payments, commission payments, crowdfunding, microfinance operations outside the chain of transactions.
2) Certification of legally relevant circumstances: user identification, confirmation of property rights, confirmation of participation rights (corporate rights), voting (for example, at a meeting of shareholders of the company), tracking expenses, cadastral records, digital signature with automatic date indication.
3) Smart contracts: payment of conditional remuneration under an employment contract, registration of trust management of property (registration of hereditary trusts), escrow accounts, automatic arbitration clause, payment of insurance premiums, ICO.
4) Decentralized autonomous organizations (DAO): design of global value chains, distribution of corporate rights, logistics and supply chain management, asset management.
However, there are no guarantees that any blockchain-based solution can approach the second stage of the industry’s life cycle. This will require significant funding, the development of standardization, as well as sufficient grounds to confirm the industry’s need for this solution. Leaders of the financial and technological industry must consider in more detail the targeted areas of technology development. Three key principles can be singled out for companies to achieve their goals in blockchain solutions.
Firstly, companies must first focus on the problem. If there are no significant problems in the company's business processes that could be solved with the help of the blockchain, then the implementation of the technology would not be an expedient solution. In addition, the most simple and affordable solution on the market should be implemented. Companies must objectively assess all potential risks, as well as the potential benefits of technology implementation.
Secondly, there should be a clear economic rationale and target level of return on investment. Companies must determine the rationale for investments, which will reflect their position in the market and which will be supported not only at the level of the board of directors, but also by employees. Organizations must consider their level of capabilities in shaping the blockchain ecosystem, developing standards and overcoming regulatory barriers. All this will determine their strategic approach.
Thirdly, after choosing a suitable use case for the technology, companies should evaluate their possibilities for its implementation. For this, first, sufficient financial and technological support will be needed. The next step will be the launch of the design process and the collection of all elements of the project, including the basic blockchain platform and hardware. Then, performance targets should be set for the future blockchain ecosystem (for example, transaction volume and speed). Companies must also create the necessary organizational structures for the most effective interaction of all participants.
To sum up, participants in the financial sector are asked legitimate questions about the future of innovative technology. The modern blockchain in most areas related to finance is not considered an effective asset (or information) management tool. However, with the right use of its benefits, it is still able to transform some areas of the financial sector.
- Higginson M., Nadeau M.-C., Rajgopal K. Blockchain’s Occam problem, October 2018 / McKinsey on Payments, pp. 41–47.
- Levitt, T. Exploit the Product Life Cycle, 1965 / Harvard Business Review, Vol. 43, No. 6, pp. 81–94.