Arcane Financial Infrastructure and How Blockchain Can Help
I love amazing mobile experiences. I was recently traveling and realised I hadn’t purchased hold luggage for my upcoming flight. I pulled out the EasyJet app and within seconds I selected the luggage, paid with Apple Pay and my thumb, and received a confirmation email. The way we pay for things today is fast, convenient, and vastly improved from what it used to be!
On the contrary, the infrastructure on top of which these payments happen is complex, arcane and outdated. It’s like we’re trying to run the Hyperloop on rails that were built for 19th century steam locomotives. A step-by-step guide to how payments actually occur is beyond the scope of this article, but you can get a sense of it’s complexity from this image. (To dive deeper on how payments are processed I’d suggest starting here and here.)
With that many players and moving parts, it’s no wonder your favorite corner grocery store only takes cash! However, with blockchain, there is now a better way. We’ll look at three flawed areas of the current financial system, and explore how blockchain and digital currency can improve them.
Problem 1: Middlemen take a big piece of the action.
As shown above, in order to move money from customer to merchant, at least four different middlemen are introduced; each one exacting his fees. Credit card fees take roughly 2% of every transaction, and there’s interchange fees and a host of other variables besides that. In the UK alone last year it cost roughly £1 billion ($1.27 billion) in interchange fees and processing fees for debit and credit cards (source). What value are these players bringing to demand these types of prices? Essentially, it’s providing trust. Two random strangers can swipe a piece of plastic and exchange goods, because these other parties verify that transaction. But with blockchain, no longer is a middleman needed to establish that trust. The blockchain network inherently provides for trusted and verifiable transactions.
This is not only applicable to payments, but also the music industry, online storage, banking, etc. Even incredibly disruptive companies like Uber and AirBnB are really just acting as middlemen to connect the two parties who are adding value. There are countless industries where middlemen could be reduced or removed and return more value to the key players.
Problem 2: The current payment process is slow.
When I make a purchase, it typically takes 2-3 days in order for my money to go from me to the merchant. To send my money from the UK to the US it can take 4 days or longer. I can send an email around the globe in seconds, but it can take weeks to transfer money between banks in the same city! But again, with blockchain, the transfer of value or assets can happen as fast as sending that email.
I recently experienced this firsthand when I wanted to transfer newly purchased Bitcoin from Kraken to Coinbase. The process was simple and the Bitcoin were transferred within a matter of minutes. Contrast this to my experience of trying to switch from my current stock brokerage to E*Trade which has literally taken months due to siloed databases and forms that I had to print, sign, notarize and deliver by post.
Problem 3: The centralised middlemen get hacked.
When all of the data and value passes through the hands of organisations in the middle, there’s greater incentive to steal from them. There is a lot of responsibility to securely transfer people’s money back and forth, and companies are increasingly getting hacked which puts our privacy and financial assets at risk. (See Home Depot, Target, Bangladesh Central Bank, JP Morgan, etc.)
With blockchain, since the responsibility for verifying transactions is spread to every party in the chain, it becomes very hard and very expensive to hack the system. In order to commit fraud you not only have to hack the current transactions, but all the previous ones. And in order to do that you have to have majority control over the blockchain (this is called a 51% attack). This kind of attack would require loads of hardware and electricity costs for mining. Estimates are in the tens of millions of dollars just to get equipped to pull this kind of thing off (source).
These are just a few of the problems that exist in the current financial system. Problems that limit the future of how we can live, work and interact with one another. Currently I’m living in London and as I walk the streets I often marvel that this world metropolis has achieved its greatness built on infrastructure that is hundreds of years old. How would London look and feel differently if we built it from the ground up today?
In a sense, blockchain technologies allow us to rebuild our financial system from the ground up with greater security, increased speed, and lower costs. How are you using blockchain to solve problems and make the world a better place?