"Is the hype around blockchain justified?" asks Goldman Sachs in a blockbuster 88-page note sent to clients this week.
The financial world has been going crazy for blockchain technology for the last year or so, hypothesising how it could rip out huge amounts of costs for big banks and streamline operations. Goldman itself was one of the key hype men, declaring in December that the technology "can change... well everything."
For those not up to speed, blockchain is a database protocol developed to underpin bitcoin. Rather than having a central record keeping system, identical records are spread across everyone connected to a network. They are all updated simultaneously and transactions only go through when enough parties on the network sign off on them. (You can read a more in-depth explanation and see a chart from Goldman explaining it here.)
This technology eliminates the need for costly middle men in financial transactions, but also presents plenty of other opportunities for new ways of record keeping and decentralising markets.
Goldman's report, titled "Blockchain: Putting Theory into Practice", says that "the discussion often remains abstract," and so is trying to "shift the focus from theory to practice," by looking at real-world applications for blockchain technology.
The bank has examined the technology's application in 5 markets. We've summed up its thinking below:
ELECTRICITY MARKET: Letting houses generate and sell their own electricity
Use case: Instead of having a central power provider which sends electricity to everyone's house and workplace, Goldman envisions a distributed network, built on blockchain's technology, that lets people generate their own electricity to sell on the network, using blockchain's identifying tech to buy and sell to strangers.
The fact that all transactions are signed off by the network means you can't get screwed over by a customer who goes back and says they didn't buy from you — it's right there in the blockchain records.
The bank says: "With the advent of rooftop solar and high-capacity battery technology, individuals can potentially act as distributed power providers. We think blockchain could be used to facilitate secure transactions of power between individuals on a distributed network who do not have an existing relationship."
Users: TransActive Grid, Grid Singularity.
Market size: $2.5-7 billion.
PROPERTY: Cutting admin costs by keeping records on the blockchain
Use case: Put property records on the blockchain so that prospective buyers can quickly, easily, and cheaply verify that the owner of a house really does own the place. At present, this process is done manually. Not only is that costly, there's also a greater chance of errors, which could add to costs.
Goldman looks at the specific-use case in the US for something called title insurance, which is usually required by lenders issuing a mortgage to protect their interests.
The bank says: "Homeowners buying or re-financing property are subject to significant transaction costs, including title insurance, where the title search process can be labor-intensive. Along with business process changes, blockchain could reduce title insurance premiums... by reducing errors and manual effort."
Users: BitFury, Factom/Epigraph.
Market size: $2-4 billion of savings.
SECURITIES: Cut out errors, thereby reducing costs
Use case: Goldman says: "Despite the relatively low transaction costs for securities such as equities, up to 10% of trades are subject to various errors, leading to manual intervention and extending the time required to settle trades.
"By applying blockchain to the clearing and settlement of cash securities - specifically, equities, repo, and leveraged loans - we estimate the industry could save $11 - $12 billion in fees, OpEx, and capital charges globally by moving to a shorter, and potentially customized, settlement window. While we do not treat other cases in detail in this report, blockchain could also potentially eliminate significant additional costs across FX, commodities, and OTC derivatives."
Users: Digital Asset Holdings, R3CEV, Chain.com, itBit, Axoni, Ripple.
Market size: $11-12 billion of savings.
FINANCE: Improveâ anti-money laundering and "know your customer" checks
Use case: Like with the Airbnb example, Goldman envisions identity data stored on a blockchain that could help finance firms easily and quickly check new customers as part of "know your customer" regulation — a bit like a digital passport.
Goldman says: "Storing account and payment information in a blockchain could standardize the data required for an account, thereby improving data quality and reducing the number of falsely identified 'suspicious' transactions. A tamper-proof record could also ease the process of getting to know a client and demonstrating compliance with AML regulations."
Users: SWIFT and others.
Market size: $3-5 billion of cost savings.