Global trade has been the single greatest creator of wealth in human history, and market friction the greatest obstacle to wealth. Over the years, businesses have overcome – multiple sources of friction. Institutions and instruments of trust emerged to reduce risk in business transactions.
How You Can Tap On 1000's of Available Digital Products To Make Commissions
Technology innovations helped overcome distances and inefficiencies. Still, many business transactions remain inefficient, expensive, and vulnerable.
Blockchain technology has the potential to remove much of the remaining market friction — the speed bumps that throttle the pace of business. As friction dissipates, a new science of organization will emerge, revolutionizing the way industries and enterprises are structured.
With transparency, the norm, a robust foundation for trust can become the springboard for further ecosystem evolution. Participants and assets once shut out of markets can join in, unleashing an accelerated ﬂow of capital and unprecedented opportunities to create wealth.
Market friction is anything that impedes the exchange of assets — anything that adds costs or delays, such as taxes, regulations, bureaucracy, fraud, the involvement of intermediaries, delays in executing contracts, and so on.
Various types of market friction impact diﬀerent industries in diﬀerent ways and to varying degrees, and they remain a drag on global business and trade, slowing business or even stopping it cold. In this section, you find out about the common types of market friction that blockchain is capable of alleviating.
Information frictions result from the following limitations:
» Imperfect information: Participants in a transaction don’t have access to the same information, giving one party an unfair advantage. Information may also be incorrect or inconsistent, leading to bad decisions or delays while reconciling it.
» Inaccessible information: The potential value of abundant data and information is greatly constrained by the technical challenges of storing, processing, sharing and analyzing it.
As a result, much information is not collected or remains inaccessible.
» Information risks: Technological risks to information, from hacking to cybercrime and privacy concerns to identity theft are on the rise. These incur growing costs, as well as damage to brand reputations.
Interaction frictions arise when either the cost of the transaction is too high or the degree of separation (physical or otherwise) between parties is too great. Business transactions that take days and are costly to manage via intermediaries are prime candidates for disruption by nimbler competitors.
Interaction frictions are often magnified by the number of interactions required. Blockchain’s peer-to-peer architecture can often reduce the number of interactions or parties required to execute a transaction, thus reducing the number of potential sources of interaction friction.
Innovation frictions are any conditions, internal or external, that compromise an organization’s ability to respond to market changes, such as the following:
» Institutional inertia: Internal bureaucracy and legacy systems along with the natural human resistance to change can impede a company’s responsiveness.
» Restrictive regulations: While regulations may be required to control industry behavior, they have the side eﬀect of introducing costs and delays.
» Invisible threats: New competitive business models made possible by new technologies are threats for which organizations can’t plan. For many, this growing uncertainty will disrupt continued business success. Both small organizations and nimble larger ones will try new approaches, and though many will fail, some will redefine entire industries.
In every century, innovations have chipped away at the sources of friction — the inefficiencies stiﬂing progress. The first letters of credit established a new basis for trust in the 14th century. The telephone-delivered real-time voice communication over great distances.
The Internet threw into hyper-drive what was once a slow march to dissipate friction. Technologists and economists alike began to anticipate a world that was friction-free. Friction, in theory, could be “digitized away.” The Internet did ﬂatten some frictions, such as transaction costs.
And while it has ameliorated some forms of imperfect information, it has not resolved the issue completely. The frictions that remain are consequential. Indeed, they have become the basis for competition as start-ups race to capitalize on their destruction.
At the same time, other frictions have grown. Conﬂicting cross-border regulations throttle globalization. New threats such as cyber-attacks are costly to prevent and even more expensive to recover from.
Ecosystems are choked by intermediaries ready to take their cuts. The good news is that a new technology — blockchain — holds the promise of eliminating or at least significantly reducing these remaining frictions.
Uncertainty over the information needed to make business decisions often acts as a barrier to business. Blockchain has several properties that reduce information friction, including the following:
» Shared ledger: Blockchains shift the paradigm from information held by a single owner to a shared lifetime history of an asset or transaction. Participants can validate transactions and verify identities and ownership without the need for third-party intermediaries. All relevant information can be shared with others based on their roles and access privileges.
» Permissions: A blockchain for the business network can be set up as a members-only club, where every participant has a unique identity, and participants must meet certain criteria to conduct transactions. Participants can conduct transactions confident that the person they’re dealing with is who she claims to be.
» Cryptography: Advanced encryption, along with permissions, ensures privacy on the network, preventing unauthorized access to transaction details and deterring fraudulent activity.
» Consensus: Ensures that all transactions are validated before being appended to the blockchain, and the blockchain itself is highly tamper-resistant.
The blockchain is particularly well-equipped to reduce interaction friction because it removes the barriers between participants in a transaction. Blockchain properties that reduce interaction friction include the following:
» Shared ledger: Asset ownership can be transferred between any two participants on the network and the transaction recorded to the shared ledger.
» State-based communication: Today, banks communicate via secure messaging architecture, such as SWIFT, to accomplish tasks, with each bank maintaining its state of the task locally. With blockchain, banks can send messages that represent the shared state of the task on the blockchain, with each message moving the task to the next stage in its life cycle.
» Peer-to-peer (P2P) transactions: On a blockchain for business network, participants exchange assets directly, without having to process the transaction through intermediaries or a central point of control, thus reducing the costs and delays associated with the use of intermediaries.
» Consensus: In place of intermediaries, blockchain uses consensus algorithms to validate and authorize transactions. Participants can conduct business at a pace that is more in-line with the pace of their business decisions.
» Smart contracts: Smart contracts eliminate the hassles and delays inherent in contracts by building the contract into the transaction. Through smart contracts, the blockchain establishes the conditions under which a transaction or asset exchange can occur. No more faxing or emailing documents back and forth for review, revision, and signatures.
Innovation friction is possibly the most difficult to overcome through technology alone, but blockchain can help in the following ways:
» Eliminate the cost of complexity: As an organization’s operations become increasingly complex, its growth results in diminishing returns. Blockchains have the potential to eradicate the cost of complexity and ultimately redefine the traditional boundaries of an organization.
» Reduce costs and delays of regulatory processes: Automation can’t entirely eliminate governance through regulation, but it can lower the costs and reduce delays inherent in regulatory processes.
» Expand opportunities: Blockchain can be both good and bad for businesses by providing the technology that enables businesses to develop new competitive business models. Some businesses will fail, while others redefine entire industries.
For more insight into how market frictions can be reduced or eliminated, read the study from the IBM Institute of Business Value at here.
By improving visibility, blockchain has the potential to transform entire ecosystems. Supply chains are prime examples of blockchain’s potential for transformation that spans industries. Initial blockchain eﬀorts could have a quick impact by transforming even a small portion of the supply chain, such as the information used during import.
If import terminals received data from bills of lading earlier in the process, terminals could plan and execute more efficiently and without privacy concerns.
Blockchain technology could make appropriate data visible in near real-time (for example, the departure time and weight of containers) without sharing information about the owners or value of the cargo. Costly delays and losses due to missing paperwork would be avoided.
On a grander scale, blockchains could enable a robust and secure exchange for shared logistics, coordinating a vast array of activities from sharing spare space in a warehouse to optimizing truck ﬂeets and shipping containers.
Retailers and manufacturers could greatly improve demand forecasting and stock replenishment.
Financial institutions, armed with a detailed track record of a supplier’s reliability, could extend much-needed credit to fuel growth.
Regulators could trace the origin of goods from raw materials, making it easier to identify counterfeit items, as well as sources of tainted materials.
Blockchain in action provides examples of more specific use cases in which you can utilize blockchain technology.