- Blockchain technology – What is it?
- Latest developments – Royal Mint Gold & CME, Goldman Sachs and Santander
- Why do we need it? It’s about value
- Blockchain is an extension of economics
- Blockchain allows us reduce uncertainty and risk
- How will it change your life?
For those of you who follow anything to do with blockchain and blockchain technology, you will know that the space has had its ups and downs in the last couple of weeks.
The exciting news is that two major players in the gold market, the Royal Mint and CME Group have announced a blockchain-backed gold project, and the surprising news is that the R3CEV consortium is apparently under threat.
Making a mint on the blockchain
The Royal Mint and CME Group have announced that they are working on a blockchain project together. The project will see the creation of Royal Mint Gold (RMG) digital tokens which will each be backed by 1g gold.
We will look at the Royal Mint’s announcement in more detail shortly, particularly at how they expect the implementation of a blockchain-backed platform to mean that they are able to remove storage fees.
But the focus of today’s research note is to look at why blockchain is grabbing everyone’s attention.
The use of blockchain technology in the gold space is nothing new, it is something we discussed recently in regard to changes in the gold market and the risks posed to the London gold market.
However, the move by the world’s oldest gold organisation is an illustration of just how complimentary the technology that was first known for backing ‘digital gold’ (bitcoin) and the longest surviving money, really are.
Goldman Sachs and Santander Drop Out of R3 Consortium
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But what is it about this technology that is so groundbreaking and has the likes of Goldman Sachs investing millions and ex-senior JP Morgan banker, Blythe Masters breaking rank and joining a (well-funded) start-up?
Why are established gold-market participants deciding this is the technology they need to bring the space into the 21st century?
Uncertain about blockchain?
Bettina Warburg, presented a TED Talk over the summer in one of the best explanations we have seen for a long-time, that will help you to understand the power of blockchain technology.
Ultimately blockchain’s genius comes down to its ability to reduce uncertainty in the transfer of value – whether that value is information, a digital asset, a contract note, an agreement or a deed – you name something that is effectively information and it has value.
The exchange of value is something we have sought for millennia to reduce the uncertainty of, and it has resulted in the formal and informal institutions and systems we have today.
Ranging from regulators, to oversized banks like Goldman Sachs, to lawyers, to barter systems.
What is blockchain?
“So what is the blockchain?” Warburg explains it well:
“Blockchain technology is a decentralized database that stores a registry of assets and transactions across a peer-to-peer network. It’s basically a public registry of who owns what and who transacts what. The transactions are secured through cryptography, and over time, that transaction history gets locked in blocks of data that are then cryptographically linked together and secured. This creates an immutable, unforgettable record of all of the transactions across this network. This record is replicated on every computer that uses the network.”
Never seen before
The concept of blockchain, something that can be decentralised, can operate autonomously, is auditable and apparently immutable is something that is difficult to get our heads around. The closest description Warburg can provide is Wikipedia.
“We can see everything on Wikipedia. It’s a composite view that’s constantly changing and being updated. We can also track those changes over time on Wikipedia, and we can create our own wikis, because at their core, they’re just a data infrastructure. On Wikipedia, it’s an open platform that stores words and images and the changes to that data over time.”
There are of course further technical details to blockchain, but at its core it is a very similar concept.
“On the blockchain, you can think of it as an open infrastructure that stores many kinds of assets. It stores the history of custodianship, ownership and location for assets like the digital currency Bitcoin, other digital assets like a title of ownership of IP. It could be a certificate, a contract, real world objects, even personal identifiable information….It’s this public registry that stores transactions in a network and is replicated so that it’s very secure and hard to tamper with.”
This is where much of the attraction comes for the gold market. In itself gold is an immutable form of money, it cannot be edited, multiplied and in many ways it is an autonomous currency.
However the market that drives the prices is none of these things. By placing gold on a blockchain, we may get the first steps to a truly autonomous gold market that is about price discovery rather than price creation.
Why do we need it? It’s about value
Bettina points out that much of human behaviour comes down to how we exchange value. This has lead to a huge number of industries developing that are, at their core, about value.
They are about how we attribute value to items, how we exchange value and how we maintain value.
Blockchain will “fundamentally change how we exchange value”.
Why is this? Because the blockchain has a capability that no human-managed organisation has yet managed to master – the removal of uncertainty through technology.
Blockchain is an extension of economics
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The uncertainties of life
“Blockchains give us the technological capability of creating a record of human exchange, of exchange of currency, of all kinds of digital and physical assets, even of our own personal attributes, in a totally new way. So in some ways, they become a technological institution that has a lot of the benefits of the traditional institutions we’re used to using in society, but it does this in a decentralized way. It does this by converting a lot of our uncertainties into certainties.”
For Warburg there are three uncertainties when it comes to transferring value:
1) Not knowing who you are dealing with
2) Degrees of transparency in complex transactions and supply chains
3) Reneging on an agreement – no recourse if it goes wrongThe uncertainty of the unknown party
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Degree of transparency
At the moment there is very little transparency and accountability when it comes to the London Gold Market and it’s over-the-counter (OTC) trading. This can be difficult to contend with given so much physical gold demand is, in its simplest from, based on transparency and trust. Yet as gold product providers such as ETFs and digital gold providers grow in power we appear to forget why we trust gold in the first place.
For many one of the key issues with the way gold products are traded is a lack of transparency over the underlying asset or currency – physical gold.
However, blockchain can potentially be used to bring some of the much-missed transparency to the gold market. This is when we start to use the phrase ‘trustless’ which is a bit of a mind-upset for those who are new to bitcoin and blockchain.
A trustless transaction is where the participants do not need to trust one another, as instead a blockchain (which is verified, immutable and decentralised) is used to monitor and validate the information in a supply chain. Imagine what this could mean in a network of goods and data that currently can be tampered with – medicines, technology, designer items.
This means that in theory it should not matter when you are dealing with a multi-party horizontal supply chain, which each have different infrastructures, about whether you can trust them or not as there is ‘one single truth’.
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Reneging – no going back with blockchain
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Will it change my life?
The reason blockchain is so groundbreaking is because it is both a technological disruption and economic evolution. It has combined the human need to reduce uncertainty with mathematics and technology. Its end result is a system free of layers.
“…the very thing that keeps the blockchain secure and verified, is our mutual distrust. So rather than all of our uncertainties slowing us down and requiring institutions like banks, our governments, our corporations, we can actually harness all of that collective uncertainty and use it to collaborate and exchange more and faster and more open.”
It is difficult to see how it won’t change our lives.
The implications for a world that is affected from the top to the bottom by institutions that are required to manage our mutual distrust, is unfathomable.
But this is where many will take issue. Why would an institution be it government, bank, legal entity, regulator or compliance company decide to invest in and implement a system that is, at its core, designed to do their job?
Why embrace a blockchain that could expose unethical, illegal practices?
Why operate on a blockchain that removes the need for expensive lawyers, compliance officers etc.
In truth the concept of blockchain in practice is far more complex than it initially appears. There can be multiple blockchains. Some operate privately between a select network, some are public (such as the bitcoin blockchain) and others a hybrid of the two.
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For Warburg, we will soon see a world where blockchain technology and distributed, autonomous organisations will “have quite a significant role.”
We concur.
Full article: Blockchain Technology – What Is It and How Will It Change Your Life? (GoldCore)
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