Essay Sample on Blockchain in Investment

Introduction

Blockchain technology is primarily a database that enables stakeholders to write and read to it at the same time without the interference of administrators or third parties. Although the technology is still young and faces regulatory, commercial, and technological challenges, it has the potential to transform many aspects of the financial sector (Collomb & Sok, 2016). The best-known companies using blockchain is Bitcoin-a digital token that pays for its maintenance without the need of managerial overhead. The technology can improve automation and widen financial access across organizations. Therefore, Blockchain can help to execute organizational functions without the need of a trusted intermediary, thereby replacing it with a digital handshake. However, although the blockchain technology has increased its applicability, it is still faced with some challenges including governance, interoperability, security, privacy, scalability, and performance (Heiskanen, 2017). The blockchain is here to stay, and it cannot be un-invented, and it will play a significant role in the transfer of information between parties. This paper addresses the impact of the blockchain in the next ten years on the relationship of trust between the stakeholders of the investment.

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The Impact of the Blockchain Technology

Overcome Trust Barriers

Blockchain technology will provide a general record of truth to mutually distrusting stakeholders. Benefits will be realized from removing the need for stakeholders to trust administrators or entity to maintain that record on their behalf (Narula et al., 2018). Stakeholders will be able to work together particularly where transactions are private but can still be verified by all stakeholders. The cost of trust in the blockchain technology would, therefore, manifest itself within the financial system. It is born by transacting stakeholders since they depend on their trusted intermediary or counterparty to honestly record the transaction completion (Aste, T., Tasca & Di Matteo, 2017). The trust costs exist from those linked to anti-fraud regimes, security guards, compliance teams, user identification, settlement procedures, and cybersecurity. Stakeholders in the investment must costly back-office processes to reconcile accounting systems and centralized ledgers.

Blockchain technology would overcome barriers of trust and bring automation and transparency to existing processes. The technology would forge access to business relationships and services and reduce reconciliation and accounting procedures (Guo & Liang, 2016). The technology would also achieve trust with its own set of costs and trust-related costs and benefits of the blockchain solution. According to Ronald Coase's theory of the firm provides an essential way that trust barriers can be overcome through the implementation of the blockchain technology by the investing stakeholders. In 1937, Ronald developed the theory to describe why most economic activity is conducted by companies or centralized entities instead of being organized primarily by the price mechanism during market transactions. The theory is today well established in both economics and legal literature pointing to transaction costs as the cost trust barrier among investing stakeholders (Coase, 1937). Coarse argued that activity is organized by a firm by involving all stakeholders through a series of market transactions to reduce higher trust cost issues. By applying coarse theory in blockchain technology, stakeholders can be able to assess the benefits and relative costs of operating a given type of financial without relying on the third parties or administrators but rather on a distributed basis. Although the blockchain will reduce transaction cost, distributed applications would become more attractive. The improvement of the blockchain technology will come to how the investing stakeholders can mitigate the transaction costs within the incumbent processes and organization.

Blockchain technology would make it easier for the verifiable and secure transfer of value between stakeholders who do not trust one another, without using a mutually trusted administrator or third party (Deshpande, Stewart, Lepetit, & Gunashekar, 2017). This would be realized through a decentralized network to process each capacity constraints, creating latency, and every transaction. In other words, blockchain will reduce the economic rents and cost of the trust securely imposed by mutually trusted intermediaries. This also leads to a more independent, machine to machine, peer to peer, and direct execution of smart contracts. Therefore, the technology will be able to reduce friction in the system, lower barriers to entry, cut processing time, and minimize the back-office cost involved in reconciling data among stakeholders (Tapscott & Tapscott, 2016). Business models that would have never been possible due to trust barriers inherent in a particular arrangement might have never been imaginable.

Security and Privacy Concerns

There will be concerns about security and privacy that will result in somewhat contradictory tensions. Most stakeholders of the investment are concerned about the pseudonymous nature of blockchain-based records. They also worry that there is no strong enough privacy protection because ledgers were designed before with transparency in mind, enabling all stakeholders to view their transactions. According to Meiklejohn et al., 2013, stakeholders' information would be gleaned from patterns in the transactions balances and graphs in the unspent outstanding transactions.

There would also be much at stake. For example, the financial sector would want to foster market integrity, customer protection, investor protection, financial stability, and guard against illicit activities like terrorism financing, tax evasion, and money laundering (Sun, Yan, & Zhang, 2016). Stakeholders involved in the investment will also want to protect their data privacy, and they would have the legal and commercial reasons to do so. Solutions will be developed to address the concerns between detecting illicit activity and privacy. Stakeholders in the investment would demand to preserve their privacy and allow regulators to look into the operation of the blockchain technology(Sun, Yan, & Zhang, 2016).

Digital store of value and the security of data are also critical issues that will arise. Although Bitcoins has always been resistant to hacking incidences, because their ledgers are well preserved, there will be reports of hacks within the blockchain system (Hawlitschek, Notheisen, & Teubner, 2018). The stakeholders are not sufficiently versed about the best security practices, which will put the system vulnerable to attack. Besides, since the blockchain applications drive their value through some stakeholders in collective action, regulatory uncertainty may also increase its perceived risks.

Conclusion

The blockchain technology will play a significant role by bringing beneficial and negative disruptions to every investing stakeholder in the ecosystem. Blockchain technology will provide a general record of truth to mutually distrusting stakeholders. Benefits will be realized from removing the need for stakeholders to trust administrators or entity to maintain that record on their behalf. Blockchain technology would overcome barriers of trust and bring automation and transparency to existing processes. The technology would forge access to business relationships and services and reduce reconciliation and accounting procedures. Therefore, the blockchain technology would make it easier for the verifiable and secure transfer of value between stakeholders who do not trust one another, without using a mutually trusted administrator or third party. There are also privacy and security barriers that would be brought by the blockchain technology in the future. Most stakeholders of the investment are concerned about and worry that there is no strong enough privacy protection because ledgers were designed before with transparency in mind, enabling all stakeholders to view their transactions. Stakeholders involved in the investment will also want to protect their data privacy, and they would have the legal and commercial reasons to do so. Digital store of value and the security of data are also critical issues that will arise.

References

Aste, T., Tasca, P., & Di Matteo, T. (2017). Blockchain technologies: The foreseeable impact on society and industry. computer, 50(9), 18-28.

Coase, R. H. (1957). The nature of the firm. economica, 4(16), 386-405.

Collomb, A., & Sok, K. (2016). Blockchain/Distributed Ledger Technology (DLT): What Impact on the Financial Sector?. DigiWorld Economic Journal, (103).

Deshpande, A., Stewart, K., Lepetit, L., & Gunashekar, S. (2017). Distributed Ledger Technologies/Blockchain: Challenges, opportunities and the prospects for standards. Overview report The British Standards Institution (BSI).

Guo, Y., & Liang, C. (2016). Blockchain application and outlook in the banking industry. Financial Innovation, 2(1), 24.

Hawlitschek, F., Notheisen, B., & Teubner, T. (2018). The limits of trust-free systems: A literature review on blockchain technology and trust in the sharing economy. Electronic commerce research and applications, 29, 50-63.

Heiskanen, A. (2017). The technology of trust: How the Internet of Things and blockchain could usher in a new era of construction productivity. Construction Research and Innovation, 8(2), 66-70.

Meiklejohn, S., M. Pomarole, G. Jordan, K. Levchenko, D. McCoy, G.M. Voelker and S. Savage

(2013), "A fistful of bitcoins: characterizing payments among men with no names", Proceedings of the 2013 Internet Measurement Conference, Association for Computing Machinery. Narula, N., W. Vasquez, and M. Virza (2018), "zkLedger: Privacy-Preserving Auditing for

Distributed Ledgers", 15th USENIX Symposium on Networked Systems Design and Implementation (NSDI 18), USENIX Association.

Sun, J., Yan, J., & Zhang, K. Z. (2016). Blockchain-based sharing services: What blockchain technology can contribute to smart cities. Financial Innovation, 2(1), 26.

Tapscott, D., & Tapscott, A. (2016). Blockchain revolution: how the technology behind bitcoin is changing money, business, and the world. Penguin.