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Large institutions will drive blockchain growth through network effects

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Large institutions will drive blockchain growth through network effects

Blockchain is finally being adopted in live applications and will be in use for smaller projects in 2018, according to panelists at S&P Global Market Intelligence's recent Fintech Intel event. But achieving widespread adoption will take a little longer, as network effects need to spread and companies are working to ensure they have a real business case and will see a good return on investment.

As International Business Machines Corp. Blockchain general manager Marie Wieck explained it, 2016 was the year of blockchain tourism, as companies explored different ideas without much commitment. This year companies started to develop and test new implementations, and some of these networks will go live in 2018.

Dan O’Prey, chief marketing officer of blockchain solutions provider Digital Asset Holdings, said greenfield applications are the easiest place to start when creating a new network. Replacing systemic infrastructure is a much more difficult task. This is largely due to the issue of getting participants on board at the same time. According to Tom Jessop, president of blockchain network operator Chain Inc., it is not necessarily a technology issue that makes it hard to scale blockchain networks, but a social issue.

Digital Asset was recently selected to replace the posttrade settlement system for ASX Ltd. In order to overcome the issue of instant adoption across numerous financial institutions, the Australian exchange operator is giving market participants the option to continue using the legacy system or switch over to the new system. Large institutions are likely to see more immediate benefits because of their higher transaction volumes.

O’Prey believes that the network effect will take hold as large institutions start achieving cost savings on the new network and others see a rational reason to invest in upgrading their infrastructure. This strategy reflects a more measured approach from companies that started experimenting with blockchain over the past two years across a range of potential applications.

Caitlin Long, chairman and president of blockchain software provider Inc., provided an example of how the network effect can take hold not only with participants but with the actual use cases for blockchain networks. Symbiont has worked with U.S. states including Delaware to issue corporate records on a blockchain. This starts with the genesis of the record, when the corporation is first registered. Today this is done through paper filings. If a corporation is registered directly on a blockchain, all future administration can be handled digitally. This could create new opportunities for blockchain applications, such as in the area of stock issuance.

Delaware will see benefits due to the large number of corporations that are registered there. Long said that Delaware is home to two-thirds of S&P 500 companies and that 75% of initial public offerings are from Delaware registered firms. Once the benefits for the first movers become clear, other states are likely to follow in the push for digitized records.

While creating digital records leads to efficiencies through less paperwork and reduced errors, it also creates unique revenue opportunities. Digital record-keeping and contracts will allow Delaware to more easily track and enforce the escheatment process, which provides revenue for the state.

Once the network effect takes hold and allows smaller implementations to grow into larger platforms, we will truly see the potential of blockchain technology. Charley Cooper, managing director at distributed ledger consortium R3 CEV LLC, compared the new technology to the adoption of email. The first email was sent in 1971, but over time it became hard to remember what life was like before email. In Cooper’s view, blockchain adoption “will happen over time, but once it has happened we will look back and have a hard time remembering before that.”