Bitcoin? BlockChain? Hyperledger? Hashgraph?

I have noted here previously that trying to cover all the moving parts in terms of things that might impact the global monetary system has become much more complicated than I ever imagined when I started this blog. This post is going to be part tongue in cheek (for some comic relief) and part serious in trying to be educational. 

By now a majority of people you know have probably at least heard of Bitcoin because the the enormous move up in its price per coin in 2017. That has vaulted Bitcoin (and to a lesser extent blockchain ledger technology) into more mainstream media reports so that now both mainstream and alternative media cover it a lot.

But most people don't have much depth of understanding because the technologies behind all this are somewhat complex and require a lot of determined effort to learn in very much detail. One economist I hear from now and then whose views I value greatly sent me this video which I will use for the humorous part of this discussion. I suspect a lot of people can relate to it.

But seriously, all these terms can get confusing very quickly. First we have Bitcoin which is separate from the blockchain technology it runs on. But wait, all blockchain is not alike either. So, we have to figure how the different kinds of blockchain work. But wait, now we are being told in the very latest "next big thing" conversation that blockchain (all versions of it) are already obsolete because we have now have Hashgraph that will take care of everything that Bitcoin and blockchain cannot.

Let's take a breath. Is there some place where we can learn about Bitcoin, Blockchain, and Hashgraph basics that is at least possible to understand? Perhaps. Mike Maloney recently released this video on YouTube that tries to do that. It does have some good animations that can be helpful to try and understand these complex technologies.

In this video, Mike walks you through his 3 year long quest to try and understand all this. How he first thought Bitcoin/Blockchain would change the world, but then later learned of some problems they faced. Now he believes that Hashgraph might be what changes the world and explains why in the last half of this video presentation. He points out in this video that things are changing so quickly the Hashgraph technology emerged while he was in the process of making the video.

So where is all this going? I don't know and I believe we are at a point in time where no one knows where all this is going. I would encourage readers to learn as much as possible because I don't think anyone knows for sure where all this is going. 

When you dig into all this in any bit of detail and follow a variety of media sources that cover this, it becomes clear that the world is in a state of flux at this time. This new Fintech has disrupted existing paradigms and started the world on a discussion of new ideas. But there is no indication I can find that any kind of global consensus that would lead to any one new currency or technology emerging as dominant over the system we have now. I base that conclusion on the hundreds of news articles and discussions like the one in this video I try to follow and from input from people I trust as experts on these issues from around the world. One leading expert in global payment systems recently told me, "I don't think the monetary system is going to change a lot."

My conclusion at this time is that no one knows for sure how all this will turn out

First, we have to see if we get some kind of major new crisis that destabilizes the current monetary system. Without that, I believe any changes we get will be slow and incremental. If we do get a crisis, who knows who most people will believe or trust if the current system they have relied on doesn't work any more and they suffer significant personal financial loss in the process? It is clear that millions of people are already looking into a variety of alternatives (precious metals, Bitcoin, other cryptos, blockchain, hashgraph, etc).

Who they trust will be more important than what technology may or may not emerge or what kind of currency is proposed. That is the one thing I feel I have learned working on all this. The most critical thing a currency and monetary system must have is the trust of the end users. I have no idea who people are going to trust in the future, especially if a huge crisis does unfold. I suspect that whoever gets blamed for that crisis will not have much trust with the public and I don't know who they might blame for such a thing. 

Honestly, I just hope we don't have to find out. Right now, I don't think anything is really ready to step in quickly to replace our current monetary system on a global scale. Chaos seems more probable as different alternatives compete for public trust. Then again, perhaps the reality is that "the monetary system isn't going to change a lot".

Fintech Innovation - Where is it Headed?

We have clearly entered into a new world in terms of financial technology that is slowly but surely altering the landscape of banking, payments systems, and even perhaps legal tender currencies. All this technological innovation is filled with buzzwords and companies trying to become "the next big thing" that changes the world in a truly meaningful way.

We have "Bitcoin", "Blockchain", "Distributed Ledger", "CBDC" (Central Bank Digital Currencies) as new buzzwords that have popped up in recent years. Lately we see even newer efforts to try and innovate to improve "blockchain" (see Hashgraph here). I believe there are now over 1,000 private "cryptocurrencies" vying for capital in the marketplace. 

Right now there is so much happening so quickly in terms of competing ideas and technologies, it can quickly become overwhelmingly confusing to most people who are not technological experts and just want a simple, inexpensive, and secure way to transact their business with a currency that holds it value over time. 

We have covered this topic pretty well here, but as it can be quite confusing and things keep changing constantly (funny how innovation works that way), I thought perhaps an analogy that most people can relate to might be helpful to see where things stand right now. With that in mind, let's use the old Sony Betamax vs. VHS technology battle as our guide. 

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Readers from my generation will quickly recall this technology battle. Younger readers might find it an interesting footnote in history that illustrates how there is a constant technological struggle to gain universal adoption that really never ends. Even in this case, after the VHS technology for video players won out in the marketplace, it was eventually replaced by DVD's, then Blue Ray etc. But perhaps this process can help us understand the ongoing technology battles in the fintech arena?

First, here is how the Betamax vs. VHS battle played out as described in this wikipedia article on the topic:

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Videotape format war

"The first video cassette recorder (VCR) to become available was the U-matic system, released in September 1971. U-matic was designed for commercial or professional television production use, and was not affordable or user-friendly for home videos or home movies. The first consumer-grade VCR to be released was the Philips N1500 VCR format in 1972, followed in 1975 by Sony's Betamax. This was quickly followed by the competing VHS format from JVC, and later by Video 2000from Philips. Subsequently, the Betamax–VHS format war began in earnest. Other competitors, such as the Avco Cartrivision, Sanyo's V-Cord and Matsushita's "Great Time Machine" quickly disappeared.

Sony had demonstrated a prototype videotape recording system it called "Beta" to the other electronics manufacturers in 1974, and expected that they would back a single format for the good of all. But JVC in particular decided to go with its own format, despite Sony's appeal to the Japanese Ministry of Trade and Industry, thus beginning the format war."

. . . .

"Sony had met with Matsushita executives in late 1974 or early 1975 to discuss the forthcoming home video market.^[6] Both had previously cooperated in the development and marketing of the U-Matic video cassette format. Sony brought along a Betamax prototype for Matsushita's engineers to evaluate. Sony at the time was unaware of JVC's work. At a later meeting, Matsushita, with JVC management in attendance, showed Sony a VHS prototype, and advised them it was not too late to embrace VHS "for the good of the industry" but Sony management felt it was too close to Betamax production to compromise."

Outcome

"The main determining factor between Betamax and VHS was the cost of the recorders and recording time. Betamax is, in theory, a superior recording format over VHS due to resolution (250 lines vs. 240 lines), slightly superior sound, and a more stable image; Betamax recorders were also of higher quality construction. But these differences were negligible to consumers, and thus did not justify either the extra cost of a Betamax VCR (which was often significantly more expensive than a VHS equivalent) or Betamax's shorter recording time.

JVC, which designed the VHS technology, licensed it to any manufacturer that was interested. The manufacturers then competed against each other for sales, resulting in lower prices to the consumer. Sony was the only manufacturer of Betamax initially and so was not pressured to reduce prices. Only in the early 1980s did Sony decide to license Betamax to other manufacturers, such as Toshiba and Sanyo.

Sony's decision in 1975 to limit Betamax's maximum recording time to one hour (for NTSC systems) handicapped its chances of winning this marketing war. VHS's recording time at first release (1976) was two hours—meaning that most feature films could be recorded without a tape change. It was not until the early 1980s that Betamax offered recording times comparable to VHS. In UK, the L-750 Betamax tape lasted 3 hours and 15 mins, while VHS was limited to a 3-hour maximum (The E-180), though later on an E-240 tape lasting four hours became available, though picture quality wasn't as good.

By the time Sony made these changes to their strategy, VHS dominated the market, with Betamax relegated to a niche position."

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So, how can we relate this old technology battle to what we see going on in Fintech today? I think in a number of ways. 

 As with most technology battles, what is being sought is a universal standard that everyone can easily use and will want to use. Before a universal standard is adopted for anything, there are usually competing versions of new technology vying to become the universal standard. Once most manufacturers pick what they want, one technology tends to "win out" and become what everyone adopts. Sometimes it matters less which technology is actually "superior" than it does which one gets adopted by the most manufacturers. Once a critical mass of adoption takes place, the standard become accepted across the board.

Applying this idea to the new banking and currency technologies we see just about everywhere now, I think we are in the process of seeing which innovative technology will gain the broadest adoption by the key "manufacturers" in this arena. In this analogy, I think the major banks and central banks are the "manufacturers" because whatever most of them adopt is more likely to become the global "standard".  The general public (as always) will have the final say because whatever end "financial product" is adopted will have to meet the needs of the end users (we, the people). 

It is important to distinguish between the underlying ledger technology that is used to support a currency system and payments system (blockchain and hashgraph for example) and the actual currency unit itself. As an example, one new Fintech innovation just introduced (Glint) does not use blockchain at all, but does hope to re-introduce the idea of gold as a currency people can use in daily transactions. Ben Davies of Glint has this to say about the ledger system they are using:

"One way we did it was to create our own ledger systems using micro-services architecture. It was about taking cutting edge technology and integrating into financial services. The innovation is in the application of that technology.”

Right now what we are seeing is that the major banks and central banks around the world are looking at which underlying supporting technology (like blockchain, hashgraph, various hybrids, etc) works the best in real world testing. 

Until we can get to a universal standard for this kind of underlying ledger technology, it is not really possible for central banks to move forward with the concept of central bank digital currencies. The currencies themselves are not really the innovation. They are just another electronic version of the legal tender currencies they already produce now. 

What is needed is an underlying ledger system that makes it possible to implement a digital version of their currency that is inexpensive, fast, and secure.  It also needs to be "interoperable" (connect to) other banks and central banks existing systems (Bitcoin running on very slow blockchain ledger technology cannot do this and will remain a private virtual currency).

The first technology that central banks can adopt that meets these goals will likely "win out" and gain widespread global adoption in the existing banking system. At that point in time, it becomes more realistic to think in terms of a new "global digital currency" that can utilize whatever new underlying ledger technology eventually gains adoption as the universal standard. Just as VHS became the standard for video players, some new underlying ledger technology will likely do the same in the banking system.

Conclusion

I see the process above as playing out over time in stages. I believe right now we are in the middle of the technology battle for universal adoption of an underlying ledger system that all banks and central banks can plug into. Until that stage is completed, I would expect most central banks (and the IMF) to hold off on moving towards so called central bank digital currencies. I would expect a few central banks to step into the central bank digital currency waters first on test basis using what they believe will become the universal underlying ledger technology that all banks can plug into relatively easily (I am watching Singapore in 2018 for now). 

If and when these initial tests prove successful and the general public finds it attractive, I would then expect to see more and more central banks join in around the world further cementing the technology chosen as the "universal standard" that everyone can plug into. After all that, it would not surprise me to see the IMF look more seriously into the concept of an "IMF Coin" as they mentioned recently. 

This seems to me like the logical way for things to progress over time and why I have said I expect this process to take some time to unfold. What is sometimes overlooked is that it always takes more time than many expect to test out various concepts in the real world and make sure they will actually work and truly meet the end objectives of the final end users. In this case, the final end users would be the general public which will have the final say on what they prefer to use. I

I view that as a good thing. The final product (for a new official global reserve currency) will have to be easy to use, safe, and inexpensive. Any such currency will need to be able to demonstrate it can hold its value over time and retain the public confidence. If legal tender currencies fail in that regard, people will look elsewhere (perhaps to new gold payment systems or virtual currencies like Bitcoin). These days, there are more of choices available for people to consider. That also helps keep the system more honest. If people have real choices, then you must offer them a genuine product that meets their needs and has their confidence or they will opt out to another choice one way or another.

Meanwhile, innovation moves forward as it always does and we wait to see what emerges as the universal standard (or if one actually does emerge).