March 20, 2016
The end game for public and private blockchains isn’t just digital currency—it’s digital business flows.
During the past three decades, businesses have been learning digital transformation one step at a time. Each step has reduced friction in a business process by directly empowering both producers and consumers. In the 1990s, the web eliminated content friction: anyone could be a publisher. In the 2000s, the cloud eliminated IT resource friction: anyone could lease compute cycles, storage, or applications in a public cloud. In the 2010s, GitHub eliminated friction in code sharing and crowdsourced development: anyone could contribute code, build on anyone else’s code, or connect and collaborate with anyone else.
The next step is the blockchain. By the 2020s, PwC expects that blockchain-based systems used by leading enterprises will have reduced or eliminated many categories of validation and verification friction for simple transactions: anyone will be able to exchange a wide range of digitized or digitally represented assets and value with anyone else. Moreover, these simple transactions will become the basis for smart contracts, a way to automate processes and make them legally binding and self-enforcing at the same time.
The blockchain phenomenon is no longer just about bitcoin or cryptocurrency; it’s about removing friction from any transaction-related process, including the process of reaching contractual agreements. From a business standpoint, it is about automating parts of organizations in established enterprises, especially in financial institutions at the heart of the global transaction environment.
The blockchain is a shared, tamperproof, peer-to-peer digital ledger that enables a single, global version of transaction truth. The first public blockchain, supporting bitcoin, became operational in 2009.
The most significant aspect of the blockchain is what is happening within enterprises. Specifically, financial institutions are starting to roll out their own private blockchains. PwC expects other businesses to follow suit, especially as the value and power of blockchain-based smart contracts (computable agreements) become apparent.
Smart transactions enable smart contracts
Blockchain ledger technology opens the door not only to decentralized transactions, but also to smart (that is, automated and computable) transactions and smart (computable and self-executing) contracts that can take advantage of smart transactions. A smart contract is a digitally signed, computable agreement between two or more parties. A virtual third party—a software agent—can execute and enforce at least some of the terms of such agreements.
The success of bitcoin’s blockchain has been pivotal; it made the business community realize an automation-friendly transaction environment in a wide-open setting could be protected and could function reliably year after year. The staying power of bitcoin’s blockchain is a testament to the power of open-source cryptography and advanced distributed computing. It is a proof point that anonymous, peer-to-peer transactions without a centralized authority can happen at scale—hundreds of thousands of transactions daily or more—in a reliable fashion. It provides a technological foundation for low-friction, automated transactions and dynamic, agent-based interactions.
Over the long term, the blockchain concept is about creating new entities and processes that can be automated in whole or in part. New blockchain-inspired systems—public, private, or both—will be essential to the growth of the Internet of Things. They will be fundamental to machine-to-machine transactions at scale.
Blockchain-inspired systems are entirely consistent with the increasingly distributed nature of the Internet, the web, and the secure peer-to-peer infrastructure that will come after the web. Because time is money and because orders of magnitude more efficiency is at stake, enterprises will need to use the shared ledgers that blockchain technology provides as the basis to transact business competitively.
Among all the online systems that could potentially serve billions of users globally, the system behind bitcoin and the currencies that emulate it is unique in that no one owns the system. It’s controlled by algorithmic design, it evolves by crowdsourced development talent, and it lives as an online equivalent of a fleet of ships permanently under way in international waters—replenished periodically by the crowd and just out of the reach of any national government or corporate entity.
Austin Hill, CEO of Blockstream, noted in an interview with PwC that the bitcoin core undergoes 20 times as much testing as an average fiduciary software project: “The amount of test coverage is incredibly high because a single mistake could bring down the entire ecosystem. So these developers have built a stress test and have hardened a very strong set of tools and platforms.”
Forecast: How and when smart contracts will inform business
- In the 2020s, smart transactions could clear in a fraction of the time that traditional transactions take today, and sequences of smart transactions will become core elements of smart, self-executing contracts.
Fundamentally, smart transactions have been the missing piece in the smart contract puzzle. Once you can mathematically validate and enable a rule-based flow of transactions, smart contracts are the logical result. In the bitcoin blockchain, each smart transaction is itself a smart contract in miniature. In more complex scenarios, smart contracts consist of sequences of smart transactions embedded in localized legal context.
- In the 2020s, self-enforcing contracts could become possible at scale. For complex transactions, the computable code in smart contracts will clarify and streamline legal language, simplifying compliance for whole categories of transaction types.
The bitcoin blockchain will spawn ever more sophisticated transaction capabilities and more ways to automate more and more steps in financial processes. Blockchains, both public and private, have triggered a global hunt for ways to build an Internet of flowing digital assets, or digital business flows. Financial institutions are already working on how to create these flows. PwC expects other enterprises to join the quest.
- Between 2016 and 2020, enterprises will seek various paths of least resistance to test and refine their use of blockchain-based smart contracts. Significant obstacles, particularly legal and business process transformation obstacles in the developed world, will persist when commercializing these efforts at scale.
E-commerce took 20 years to take hold, began with business-to-consumer (B2C) commerce, and took another 20 years to mature. An Internet of flowing digital assets3 would likely start small and local by contrast, and there should be many short-term, localized successes. A truly autonomous and distributed Internet of Things empowered by an Internet of Transactions and software agents could take much longer to develop. The remainder of the 2010s and the 2020s will likely be a time of learning how to build and scale autonomous systems in earnest.