Article

Blockchain: 'the internet of asset transfer'

Is the potential of blockchain being underestimated by investors?
Is the potential of blockchain being underestimated by investors?

The internet impacts every part of our lives, but the underlying technology was first used simply to share information between two computers. Just imagine if you could have foreseen how that technology would progress and been able to identify companies that would drive global change.

The companies that would find new ways to use the technology are now among the largest in the world: Twitter pioneered a way for us to create information, Dropbox for storing information, Netflix for transmitting information and Apple for consuming information.

You could draw some comparisons between the internet and blockchain. With blockchain technology still in its early days, we think the potential for changing the global economy is underappreciated by the market. This could provide an opportunity for investors who can capture this hidden potential. 

Will blockchain do for assets what the internet has done for information?
Will blockchain do for assets what the internet has done for information?
Source: World Internet Stats, to December 2018. The placement and choice of companies shown represent a timeline only and are not intended to imply a direct connection to the growth of internet users. A selection of companies involved in blockchain technology are shown in the bottom righthand of the image. These lists are not complete and are for illustrative purposes only.

Many companies, particularly in financial services, are already investing millions of dollars in researching and building blockchain infrastructure1. There are numerous other applications for the technology going through testing or in consultation phase.

Blockchain is, or will be, everywhere
Blockchain is, or will be, everywhere
For illustrative purposes only

What is blockchain?

Blockchain is an innovative technology designed to manage the transfer of value and assets. It was introduced in 2008 as the public transaction ledger for Bitcoin, the world’s first cryptocurrency, but we think the potential for blockchain to change the global economy extends way beyond that initial application.

As it did with Bitcoin, blockchain is used to capture and store all the details of all transactions related to a specific asset. The transactions do not have to be financial, and the asset could refer to physical assets, a cryptocurrency, contracts, records or other information.

Why use it?

One attraction of using blockchain is that multiple parties can contribute to and trust a single record of ownership without needing to trust each other.

Some of the other objectives/capabilities:

  • Increase transparency and ease of auditability
  • Reduce the potential for fraud
  • Streamline business processes
Case study: Walmart’s use of blockchain technology
Walmart’s problem:
1

What do they do when there is an outbreak of a potentially life-threatening bacteria? For instance, in 2018, when there was e-coli found in lettuce in a certain part of the country. Walmart has a huge supply network of farms across the country, and without a way to trace the origins of its produce, they may be forced to pull all lettuce from the shelves.

Blockchain solution:
2

All of Walmart’s lettuce and spinach suppliers are now required to record the movement of produce onto a blockchain database. By tracking it from the farm (and even the specific section of the farm) to the store location, the blockchain provides secure, permanent and unalterable traceability, helping Walmart effectively manage any contamination as soon as it’s detected. This blockchain was developed by IBM. Following a two-year pilot programme, Walmart is rolling it out to more than 100 farms across the country and says it is now using blockchain to track other items from chicken to yogurt.

How blockchain works
How blockchain works
For illustrative purposes only

Every blockchain will have some similarities:

  • Unique address for each user (similar concept to email addresses)
  • Transactions
  • Ledger containing a complete history of all transactions

You need a blockchain address to request a transaction. In the example of a cryptocurrency, you may request a payment from your blockchain address to someone else’s blockchain address. The payment would be the transaction that, once verified as legitimate, is then added to the blockchain ledger. It is then a permanent, traceable and unalterable record. 

Blockchains may differ in two significant ways:

  Open (“permission-less”) Closed (“permissioned”)
Who can access the blockchain?

Anyone can access the blockchain network.

Cryptocurrencies are examples of an open blockchain.

Only a defined group of people can access the network.

Corporate or bank blockchains tend to be closed networks.

How are transactions added to the blockchain ledger? Transactions are added to the ledger through a process known as “mining” A central entity determines which transactions should be added to the ledger.
Case study: the use of blockchain technology in the real estate industry
The problem:
1

With any real estate transaction, there is a lot of paper-shuffling involved. Documents going back and forth between multiple parties by email, fax and courier is costly, inefficient and, particularly when you consider the need to transfer money at various stages, open to fraud

Blockchain solution:
2

“Smart contracts” are being used increasingly, with the blockchain ledger providing an unalterable, permanent and transparent record between the multiple parties involved throughout the transaction. Each party could also be required to validate each transaction, which reduces the potential for fraud

How do investors gain exposure to blockchain?

Blockchain is an emerging technology, and most of the current opportunities are within existing companies that are not yet realised. We believe the potential for blockchain to generate real earnings for these companies is underappreciated by the market, either because investors are unable to identify it or know how to assign value, or they assume synergies may only be relevant if the blockchain ecosystem continues to grow. 

Few pure blockchain plays are available in the market. Instead, most companies with the potential to generate earnings from blockchain have well-established businesses in other areas, and blockchain merely presents an additional source of revenue. This hidden potential may provide an opportunity for investors who can capture it, if they are first able to find it.

Footnotes

  • 1 Source: Elwood, February 2019

Investment risks

  • Investment strategies involve numerous risks. Investors should note that the price of your investment may go down as well as up. As a result you may not get back the amount of capital you invest. Data as at 28 February 2019, unless otherwise stated.

Important information

  • Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.