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Blockchain based technologies need to focus on value creation by solving problems

The word "Blockchain" has become very popular amongst students when Michel started teachning at EDHEC. Many students had dabbled in cryptocurrencies and became vocal promoters of cryptocurrencies, without fully understanding the business models or the technology. In a course developed to demonstrate the technology , its mechanism, its potential, and more, using online simulations to explain concepts such as hash, block, blockchain, private and public keys, the students were challenged with two questions.

Recent events about the demise of a major player in the crypto-economy made me revisit a viewpoint written a few years ago.

A simple definition: What is the blockchain after all?

So with those three characteristics, blockchain technology allows untrusting entities to agree on the validity of a common digital trail of transactions, a shared history. It can be used to realize financial transactions and much more.

How to determine “Value” in blockchain applications?

The best know application of blockchain technologies is the “Bitcoin”. Bitcoins store value, but they also have value as you can exchange them for Euros or Dollars. But where is this value coming from? Basically, it is offer and demand. The bitcoin allows people to realize transactions that they cannot do as easily with other means, faster, more securely. Although there is no gold bullion and central bank reserves behind the bitcoin, nowadays, major currencies are not by a long shot fully backed by physical assets in central banks. Rather it is the trust and its ability to act as a facilitator of trade that helps determine the value of currencies. The Bitcoin, or other cryptocurrencies can ease transactions in countries with broken economies, but also for those transactions that want to remain under the radar of authorities. Some have analyzed that almost half of the funds exchanged in Bitcoins are illegal transactions (Foley, Karlsen, & Putniņš, 2018). If all were in Bitcoins, it would more than double. On the other hand, as authorities begin to understand how to unravel bitcoin addresses, the illegal trade moves to other currencies with more anonymity.

Beyond that exchange value that can become highly speculative, as it is primarily driven by demand, blockchain applications deliver improvements in terms of speed, transaction cost, and trust that can lead to business applications generating profits. Below are examples of situations in which blockchain can create value in the way it is used, rather than having intrinsic value. Those applications revolve around the improvement of operations and processes. Lets look at some examples.

Those are examples of applications where blockchain enabled services provide a clear and legitimate business proposition. There is a clear demonstration of a benefit for the parties using those services in terms of speed, trust, or ease.

Unfortunately, the fundamentals of value creation have been discounted by some promoters of the most visible blockchain technologies, the cryptocurrencies. There is a belief that cryptocurrencies will increase in value without asking what service they deliver, with a "sky is the limit" illusion. Then comes the bubble.