Innovations come to existence through different means and circumstances. Some of them start as meticulously planned inventions. Others – due to pure luck and uncontrollable external conditions. It’s never just one source that transforms promising innovation into a successful product or services. It’s usually mix of different factors. What about Fintech innovation, and blockchain Fintech challenges? Was it luck or the Invisible Hand of the Free Market? I’ll have to give you a bit of history first.
Let’s go back a decade…
We can’t talk about blockchain Fintech without mentioning Bitcoin. Bitcoin was the first successful decentralized cryptocurrency. It launched, at least as far as we can tell, before the financial crisis of 2008. In Bitcoin’s genesis block (the very first block created by Satoshi) there’s even a reference to a Times article mentioning a banks bailout program. There were several pre-crisis signs that could ignite Satoshi’s vision and spark Fintech innovation.
- fractional-reserve banking
- lack of transparency in government monetary decisions (inflation, printing new money)
- greedy financial institutions creating financial products to benefit mainly themselves (subprime mortgage derivatives)
Satoshi worked towards creating a truly stateless currency that would be used directly between parties. The parties interested would trade (person to person or between businesses) without any third party who could stop, corrupt, ban or censor transactions.
This ‘shock to the system’ amplified the focus on cryptocurrencies and its values in later years. We could see this during the Greek government debt crisis and later during the Cypriot financial crisis. Statistics gathered by Google Trends show how often people searched for the term “bitcoin” in Google. During these times of hardship, you could see a correlation between the economic climate and the Bitcoin price on major crypto exchanges. It shows that people were trying to partially escape from certain ‘difficult’ currencies. For instance, EUR deposits of some Cypriots were confiscated in 50% at that time. People considered moving to something that they saw as less susceptible to government oppression.
Blockchain FinTech technology stack
The above mentioned source of innovation helped cryptocurrencies to form their basic manifesto and define their initial properties. But to exist and work as advertised, cryptocurrencies needed a sophisticated technology stack. In its core, Bitcoin and other cryptocurrencies created later derive a lot from other technologies, created much earlier. This can be regarded as part of a ‘Watching others’ source of Fintech innovation. Starting with the Bitcoin White Paper that refers to such inventions as: hash functions (SHA256) for anonymizing data and summarizing digital signatures, Elliptic Curve Cryptography for signing transactions and Hashcash for its proof of work algorithm. All of these technologies have existed much earlier than Bitcoin (some even 50 years earlier). However, they created the product we now know only in combination.
Cryptocurrencies created after the publication of the Bitcoin protocol derive a lot from Bitcoin itself, but also from other inventions and technologies. These include: quantum computing, Schnorr signatures, Scrypt algorithm, Ring signatures, zero-knowledge proofs, Turing-complete programming languages for smart contract development or many more. All of these inventions were and are mixed and matched together, forming remarkable combination of various cryptocurrencies with distinct features.
Suddenly, entrepreneurs had many options to choose from to build products on top of existing cryptocurrencies. This spurred the ‘Recombination’ source of Fintech innovation. Companies and individuals from various industries started to look how they could utilize blockchains and cryptocurrencies in their fields of expertise. Also, they considered how they can disrupt other industries with trustless principles.
From cloud computing providers (experienced with delivering easy-to-use development experience) to software developers interested in particular technologies: various people started to offer blockchain-based technologies in the cloud. These were pre-configured and ready to use, for everybody who wanted to experiment. All without spending days or weeks on proper configuration of the servers and setting up nodes.
Things became easier then for blockchain Fintech innovators. Insurance companies started to work on top of blockchain technologies like R3 Corda. Small insurance startups now experiment with blockchain technologies to offer products that aren’t feasible for other technologies (Tontine Trust). Financial startups try to reposition funds and assets settlement markets. Internet of Things (IoT) firms are looking at blockchains to safeguard access to devices and to make sure data gathered by the IoT monitoring devices are not tampered with.
Risks and regulations
As the technological, social, financial and business revolution progresses, there are new risks emerging. We couldn’t anticipate them: lost of access to investors’ fund, complex fraud schemes, Ponzi schemes using cryptocurrencies, money laundering, breaches to capital controls or financing terrorism. No government would turn a blind eye on these problems. Hence, we are seeing various forms of regulations popping up in different parts of the world, trying to curb some of the risks observed. Some of these regulations try to ban a particular form of cryptocurrency activities. Others are trying to stop some of the business participants from using crypto. These blockchain regulations, constraints and additional external factors drive further innovations in cryptocurrencies. How? Creators try to make them regulatory compliant and still useful for the consumers.
The ICO as FinTech innovation
Cryptocurrencies show up more and more often in mass media. There’s a heightened awareness that there are more investments coming into crypto projects, especially from non-professional investors in form of the ICO. These investments are driven mainly by sophisticated and innovative marketing campaigns. They target private investors with relatively small capitals, but open to invest in high-risk ventures. There are advertising agencies solely created to support the needs of this type of activity. This Fintech innovation is curbed to some extent. Regulatory requirements change towards investments in risky startups, spurring even more innovations on the verge of these two competing forces. These include blockchain-based KYC or blockchain identities project.
I’ve been calling it Fintech innovation but to be honest, blockchain penetrates various disciplines. Finance, technology, governance or social needs. No wonder it receives academic attention. It’s pushing curious scientific communities to look into blockchain deeper and to conduct research projects on it and its potentials. Institutions like MIT Media Lab, Cornell University or University of Nicosia are investing substantial money and involving top researchers and lecturers to deepen our understanding of this innovation. What’s more, they spin-off further developments on top of their research outcomes. In addition to research institutions, there are also commercially-led research projects. A good example is Blockstream with their impressive list of Bitcoin Core developers involved. There’s also individual lead research (for example MimbleWimble).
Some blockchain Fintech innovators try to create completely new values in this space. They start from a different angle. Rather than innovating on top of the existing technologies and amending them, they try more of a design-driven approach. They learn from other projects’ mistakes and build better initial concepts. Then, basing on those concepts, they build new technologies better suited to fulfill different users’ needs. An example might be EOS. It was designed from scratch for massive scale, built from earlier experiments with BitShares technology.
The frustrated user as a source of innovation
Yet another Fintech innovation comes from the needs of the end users. It’s designed and developed by the frustrated (but technically capable) users. Examples could be cryptocurrency mixers. These try to hide the source and destination of the funds transfers in public ledgers by mixing many transactions into one. Another example is Monero, which tries to hide transfer details by cryptographic techniques.
This is further simplified by WYSIWYG-type of innovative platforms that will allow users to create sophisticated contracts by only interacting with intuitive wizards. ICOs are also an example of user-inspired innovations. Capital or years of development expertise might no longer be needed to set up innovative companies. If the project has enough convincing factors, an enthusiastic team behind it, it might get the funding needed to start off the ground.
So what do you need to be an innovator?
Each innovation is different and each can come into life differently. I hope that I’ve managed to explain how blockchain Fintech came to be . What I can tell you is that at the beginning, innovation definitely needs sufficient resources. These can be financial resources or a dedicated team focused on delivery (yes, one like ours). Those resources promote it to the stage where you can observe its value. Over time, as the snowball effect takes place, a different type of participant enters. And by mixing and matching one type of innovation with other innovations these varied participants create products that nobody even thought of at the beginning. This is the way industry disruption works. This same cycle happens until a new and significantly superior invention appears and takes its place. Then, the cycle starts from the beginning….