“Value creation in the past was a function of economies of industrial scale: mass production and the high efficiency of repeatable tasks. Value creation in the future will be based on economies of creativity: mass customisation and the high value of bringing a new product or service improvement to market” – in the Harvard Business Review, Jack Hughes, founder of software development community Topcoder, urged business executives to get obsessed with value.
He argued it was important to consider what new capability, product or service would be valued by customers, how it would make their lives better and what would amaze them.
For The University of Western Australia (UWA) Business School Lecturer, Researcher and Educator Andrzej Gwizdalski, the answer lies in blockchain technology.
“The technology can significantly reduce costs and improve economic efficiency, however, more than that, it changes how we deal with trust in the economy and this is nothing short of a revolution,” he said.
“Not all blockchains are made equal, though, which explains some of the common misconceptions, confusion and lost investments among those who misunderstand the technology.”
A definition of blockchain and cryptocurrency
Put simply, Dr Gwizdalski said blockchain was a type of database – it was not a new invention and had, in fact, been around for decades.
“The blockchain software records data into digital units known as blocks, which are timestamped and attached to each other in a sequential, append-only way using cryptography,” he said.
“This chain of blocks, known as the blockchain, is a relatively secure way of storing data and preventing anyone from changing previously recorded information – a function known as data immutability.
“However, storing this record on a single server makes it unsecure.
“To increase the level of immutability, the database (ledger) needs to be replicated and managed by a network of geographically distributed and interconnected computers.
“This process of recording and accessing data is known as distributed ledger technology (DLT) and blockchain is a subset of this technology.”
However, Dr Gwizdalski said a centrally governed DLT was not a revolutionary innovation, with a form of the technology in play whenever we used shared conventional databases stored in a cloud such as Microsoft Excel spreadsheets.
Our vital data is not as secure in a network privately owned and controlled by a centralised third party such as a big tech company that can modify and censor the data or deny us network access.
A central point of control also increased cybersecurity risks, but the centralised governance and intermediation between diverse participants had proved a necessary trade-off for enabling trust in societies.
“All our institutions – from government agencies storing land titles and keeping tax records, and hospitals keeping patient data to banks managing our money – are forms of centralised intermediaries facilitating trust among market participants,” Dr Gwizdalski said.
“This process can be costly and inefficient, and it encourages unethical behaviour such as corruption.”
Viable alternatives were scarce until pseudonymous researcher or group Satoshi Nakamoto introduced Bitcoin in a 2008 paper and effectively implemented it in early 2009.
It was at this point that blockchain met cryptocurrency, with Nakamoto creating the first peer-to-peer system for transferring digital cash. By doing so, it defined the standard for an open public blockchain.
“This decentralised payment system, Bitcoin, is open for anyone to join, is fully transparent and entirely managed by the network of participating computers,” Dr Gwizdalski said.
“There is no company, no chief executive officer, no chief financial officer, no office or phone number to call – just a network of volunteers maintaining the system.
“Those who contribute valuable resources, such as computing power to maintain the decentralised system, participate in a competitive process known as mining (a random process of validating new blocks).
“By doing so, they maintain the decentralised consensus and the security of the network.
“Their effort is rewarded with newly mined bitcoins, plus transaction fees included in the block.”
Dr Gwizdalski said every new block added 6.25 bitcoins to the system.
“This amount is halved approximately every four years until around 2140, when all 21 million bitcoins will be mined,” he said.
“It is the scarcity of the coins that further add to their perceived value.
“The reason that millions of people who own and use bitcoin worldwide value an alternative decentralised form of money is because it is not controlled by central or commercial banks."
"Bitcoin is the first global digital money of the people and by the people – many call it the digital gold.”
While Bitcoin was considered by many to be the blockchain standard for decentralised money, various forms of blockchain technologies emerged in the mid-2010s for other purposes.
The Ethereum protocol became the dominant blockchain-based, general-purpose computer, enabling anyone to access it without permission and build their own decentralised applications.
It led to a new wave of blockchain entrepreneurship in 2017-18, where anyone could create their own blockchain project and cryptocurrency in little time.
Dr Gwizdalski said in recent years other blockchain protocols, such as Cardano, Binance Chain and Polkadot, had emerged to compete with or complement Ethereum.
This included private blockchain consortia aimed at traditional industries, including supply chain management and provenance tracking.
However, Ethereum had maintained its position in pioneering the development of the decentralised Web3 economy with new emerging markets like decentralised finance (DeFi), non-fungible tokens (NFTs), metaverse and gaming.
“Today there are thousands of cryptocurrencies competing for user attention, but most are often poorly built and eventually fail,” Dr Gwizdalski said.
“The name ‘cryptocurrency’ is perhaps the only thing they may have in common with tokens of major decentralised open public blockchains like Bitcoin or Ethereum.
“It is therefore very important to remember not all cryptocurrencies are created equal.
“Decentralised governance, solid code/use case and strong community are some of the key features making the difference.”
The blockchain’s impact on business models and organisations
Dr Gwizdalski said understanding the innovative fundamental value proposition of open public blockchains allowed a better appreciation of the major socioeconomic and organisational change they were initiating.
“The possibility of removing traditional intermediaries and central power holders allows savings on transactional costs in business and on the design of flatter organisational structures,” he said.
“The new powerful business tools of the Web3 economy – cheaply and easily accessible to creative entrepreneurs – allow them to dynamically adapt to new markets and challenge current incumbents.
“As a result, we can see a more diverse, flatter and decentralised, but also more technologically advanced, digital economy emerging.
“These new organisational structures built on the internet of value, driven from the bottom and owned by the community, are likely disrupt in the same way that previous disruptors like Uber, Netflix or Airbnb did when they entered the market.”
How blockchain adds value
In summary, Dr Gwizdalski said blockchain technologies could improve economic efficiency and reduce costs for businesses.
“Catalini and Gans from Massachusetts Institute of Technology, demonstrated a few years ago how blockchain technologies can reduce two specific types of costs for organisations,” he said.
“The first is a significant reduction of verification costs for transactions and asset ownership.
“The second benefit involves reducing the cost of networking by bootstrapping a marketplace without the need for an intermediary.”
Various surveys by private service companies, selective research and government reports pointed to a fast-growing blockchain industry.
“For example, a study by Deloitte indicated more than 80 per cent of surveyed companies reported losing competitive advantage if they did not adopt blockchain,” Dr Gwizdalski said.
“Blockchain jobs were listed by LinkedIn as most sought-after in 2020.
“As reported by the Australian Government in the 2020 National Blockchain Roadmap, blockchain technology is expected to generate an annual business value of over US $175 billion ($242 billion) by 2025 and exceed US$3 trillion ($4 trillion) by 2030. These numbers are likely to be exceeded much faster given that as of May 17, 2022. The total market capitalisation of all cryptocurrencies alone is at least well above US$1.3 trillion ($1.8 trillion).”
Dr Gwizdalski said potentially all industries could apply blockchain technologies, but their nature and historical development meant some industries had benefited earlier than others.
“Finance and banking, both the disruptive innovators and current incumbents, were most suitable to first engage with decentralised money,” he said.
“Supply chain management and provenance tracking, whether in food, beverages or essential minerals, have also benefited from DLTs.
“Digital identity and credentials are next, and so are the emerging NFT asset industries, including entertainment, the arts and gaming.”
The many real-world examples included traditional industry leaders, like Maersk, using blockchain technologies to improve their efficiency and reduce costs along their supply chains.
Major global companies, including IBM, Microsoft and Tesla, were accepting cryptocurrency payments.
Credit card providers, like Visa and Mastercard, used blockchain to minimise their transaction costs.
Even major Australian banks, including the Commonwealth Bank, had started offering cryptocurrency accounts for their customers.
“Most recently displaced Ukrainian refugees in European countries have been offered prepaid crypto Visa cards from Binance to pay for their daily expenses,” Dr Gwizdalski said.
“Closer to home, Western Australia has a number of successful blockchain companies, like DigitalX, startups pioneering the gaming metaverse such as Supremacy Game, and emerging Indigenous art projects like CryptoMob.
“We also have an incredible pool of talent managing some of the leading global blockchain companies, including Binance Australia.”
Taking on Warren Buffett
Addressing Warren Buffett’s famous criticism of the cryptocurrency phenomenon, Dr Gwizdalski pointed out the legendary American investor’s decisions were not flawless.
He said Mr Buffet self-reported making several investment mistakes, not only in his early career but especially when he missed out on the technological innovation during the dot-com boom.
“His regrets on missing out on Google or Amazon are well known,” Dr Gwizdalski said.
“While his expertise in emerging tech is not the strongest, he compensates for this with his excellent knowledge of traditional industries.
“His investment portfolio is rather conventional, with a significant portion of mainstream finance and banking companies.
“These are the current incumbents that have been mostly challenged by blockchain technologies and cryptocurrencies.
“His criticism may be a way to attempt to protect his investment portfolio in the traditional finance and the banking sector.”
Looking to the future
Looking to the future of blockchain, Dr Gwizdalski said it was useful to recognise patterns of previous technological revolutions because they often repeated.
“For example, foundational innovations, like the railway, internet and blockchain, create expectations of radical socioeconomic change, which attract quick inflows of speculative capital and many charlatans,” he said.
“This creates an investment bubble that must burst at some point – think railway mania in the 1840s and the dot-com bubble in the 1990s.
“Early investors tend to make large gains, usually at the expense of those less educated who were late to the party.
“The blockchain bubble around 2018 was not much different. However, going through the innovation bubble is a healthy process in the long term, as it naturally selects the strongest, best-performing projects that best address particular market needs.”
Dr Gwizdalski said the adoption of blockchain technologies was increasing rapidly but was not evenly distributed across countries, regions and industries.
“This creates opportunities and pressures to learn and adapt as soon as one can,” he said.
“History tends to be brutal for those who fail to adapt, but the history of new technologies is the history of adaptation.
“Coachmen and a horse-drawn carriages gave way to cars, ice boxes gave way to refrigerators, video rental stores gave way to video streaming services.
“Will commercial banks and bankers be next to give way to new forms of money and payment systems?”
Learning about blockchain
Dr Gwizdalski said blockchain technologies and cryptocurrencies were here to stay and the full potential of new possibilities was just ahead of us.
Designing and teaching UWA’s introductory master level course BUSN5001 Blockchain and Distributed Ledger Technologies in Business since 2018 – the first of its kind in WA – Dr Gwizdalski said students would likely be enrolling in an interdisciplinary Graduate Certificate in Blockchain and Cryptocurrencies in 2023.
“I am currently developing this new certificate with a great team of colleagues at UWA,” he said.
“UWA Business School has also opened a new blockchain centre for research and runs a regular blockchain conference with a great contribution by Professor Dirk Baur.”
“However, those from diverse communities or the corporate world who are not able to attend UWA courses can contact the Blockchain Technologies Knowledge Network.”