Blockchain: Unlinking Hype from RealityJune 21, 2017 | Jay D. Kenigsberg |
On June 15, 2017, AIG and Standard Chartered Bank announced the first multinational smart contract-based insurance policy to function on the blockchain.
AIG partnered with IBM to manage and place multiple insurance policies across multiple countries by using an advanced blockchain framework. In essence, the bank’s clients in the U.K., U.S., Singapore and Kenya will now be able to share policy data and convert numerous policies into one “smart contract.” This innovative solution to multinational risk transfer may provide hard evidence of the blockchain’s ability to efficiently deal with regulatory complexity and to execute contracts.
The CEO of AIG noted: “Any technology, including blockchain, that can increase trust and transparency for an industry whose pillars are built on that, should be fully explored.” Without a doubt, the time has come for all of us to reach a better understanding of blockchain technology’s actual capabilities.
As a potentially transformative tool within the financial and insurance industries, blockchain technology has naturally caught the attention of executives in the healthcare, supply chain management and music industries, to name just a few. As various investment groups and business stakeholders ponder the technology’s promise in a vast array of applications, one question looms: Where does the hype end and reality begin for the blockchain?
Blockchain technology is not new. It has been around for about 10 years, staying under the radar as the technology powering the cryptocurrency known as Bitcoin. Once the technology became unleashed from Bitcoin, its projected uses and benefits seemed to multiply on an almost daily basis. The details have been tabulated in the media, each promise met either with magnified optimism or extreme doubt. It really depends on whom you ask.
Just as the Internet expanded our understanding of how information is exchanged, blockchain technology will alter our concept of how value is exchanged. It will harness the power of the Internet to allow parties to directly engage in global transactions without the need for middlemen. Think of the purchase of a music file over the Internet that automatically provides the artist with a royalty payment without iTunes or Spotify collecting fees and distributing payments. This decentralized transaction would be based on distributed ledger technology (DLT), which tracks information related to a transaction, makes it viewable in real-time and then creates a record of historical transactions in a permanent and secure digital form.
Today, computer coders are working on ingenious ways to program this digital ledger through software known as a “smart contract.” Basically, a smart contract is a set of rules transactions must adhere to on the blockchain if they are to be approved. The smart contract allows private agreements to be algorithmically enforced on the blockchain.
Are coders and algorithms the future of big business? Well, this is where hype comes into the analysis. The Gartner Hype Cycle, which offers a graphic representation of the maturity and adoption of emerging technologies and analyzes how a technology or application will evolve over time, currently places blockchain technology at the uppermost point in its “hype” curve, the “peak of inflated expectations.” This means that blockchain is getting a lot of buzz, especially in the media, but too many reports are over-selling the product for personal gain (let’s face it; venture capital itself is big business). Just a brief glimpse of the daily news reports involving the technology reveals that blockchain has become a panacea for any process involving multiple parties that share data, require verification and is currently weighed down by intermediaries.
The truth is, blockchain will not be a perfect fit in every situation. Some systems we currently use are performing required tasks quite well, and despite all of the hype, the new technology will not provide any real advantages. So for now, the way we pay our water bills and plan our vacations are not going to drastically change.
But, that’s not to say the technology will not be a game changer, especially in those industries that can move to more efficient systems that save money in the long run. Emin Gun Sirer, a Cornell University professor who studies emerging technologies, states: “Imagine the World Wide Web in 1993. It seemed overhyped back then, but then, the hype was all about dumb ideas . . . after the first culling, we ended up getting multibillion-dollar companies that no one ever dreamed we’d ever have. WWW was an extinction-level event for many companies, and I believe the same for blockchain broadly construed.”
The blockchain community is watching some significant players who may very well usher in this “extinction event,” chief among them, Vitalik Buterin of Ethereum. At the age of 23, Buterin stands to become the Steve Jobs of blockchain by having provided a programmable DLT poised to become the standard for transactions beyond cryptocurrency. Buterin sees a future in which blockchain is the genesis of the Decentralized Autonomous Organization (DAO) – a fully automated business entity that is self-governing and under the control of an incorruptible set of business rules.
It sounds “Jetsonian,” but it isn’t. Between the use of smart contracts and the advances in artificial intelligence, a DAO may soon be operating the self-driving car that takes you to and from work each day and out to dinner on the weekends. With human intervention at a minimum, this is truly the soul of a new machine.
But what risks do DAOs pose? In order to perform optimally, the blockchain will have to be programmed, and any program (the smart contract) is capable of having a bug. Thus, a coding glitch might result in a transaction not performing as intended by the parties. However, without a central authority or intermediary to question the transaction, how will bugs be caught in a timely fashion? How can we stop the self-driving cars from picking us up on our lawns as opposed to our driveways? And exactly how much damage will occur before the DAO can be shut down? As we replace legacy systems with blockchain systems, will it be necessary to obtain cyber insurance because our transactions are now susceptible to cyber-attacks? We will need real answers to these questions if we are prepared to give in to the hype.
For now, blockchain technology needs to mature and emerge from all the hype. As more applications of the technology make it through a proof of concept stage, key questions and answers about the technology will come into better focus.
Rivkin Radler’s cyber group is uniquely situated to address those issues as it continuously tracks new and emerging technologies and the cyber insurance products that will smooth out the bumps along the ride. As Marie Curie said, “Nothing in life is to be feared, it is only to be understood. Now is the time to understand more, so that we may fear less.”
Blockchain is going to disrupt many industries. Understanding why and how will make us much better prepared for the coming business evolution.