Imagine a world where you can purchase a house directly from the seller, without needing to go through banks, lawyers and real estate agents.
That idea sounds like heaven for some people.
It might be possible to cut out all those middlemen one day, thanks to an idea called de-centralised finance (“DeFi”) — which runs on blockchain (a technology that powers digital currencies like bitcoin).
This recent prediction from an English professor (specialising in blockchain) sums up what the future could look like:
“For example, you will probably be able to purchase a piece of land or house on a DeFi platform under a mortgage agreement whereby you repay the price over a period of years.
“The deeds would be put up in tokenised form on a blockchain ledger as collateral and, in the event that you defaulted on your repayments, the deeds would automatically shift to the lender.
“Because no lawyers or banks would be required, it could make the whole process of buying and selling houses cheaper.”
Some people reckon blockchain will become a breakthrough invention like the Internet, GPS and even the original telephone (back in 1876).
“We’ll definitely see a significant amount of jobs that will become redundant, particularly in financial services,” said Nick Abrahams, a Sydney-based futurist and technology lawyer.
“But ultimately what we’ll see with the technology is that it will create new jobs as well.”
It might take many years for the full extent of this “tech disruption” to happen (assuming it happens). It may possibly encounter resistance from governments and industry lobby groups.
Or it might take a while for the public to understand what blockchain actually is.
So how does blockchain work?
To understand blockchain, here’s a quick refresher on how they power cryptocurrencies.
The idea behind cryptocurrencies was to create an alternative payment method which cuts out the middleman.
In conventional finance, banks are the gatekeepers keeping track of when money leaves your account and reaches the other. So buyers and sellers are putting their trust in a single authority.
For those who don’t trust governments, banks or authorities — cryptocurrencies like bitcoin are appealing because of their decentralised system.
Basically, that means instead of one bank verifying the transfer, thousands of computers across the world are doing that same job.
All these computers are known as “miners”, who have access to the blockchain – which is a ledger or public record which lists all the transactions ever made using the cryptocurrency.
These miners are racing against each other to verify the purchase by solving a complex mathematical problem. The first of these miners to solve it gets rewarded with newly-minted cryptocurrencies like bitcoin.
At least half of this huge computer network needs to verify your transaction before it gets approved.
Therefore, the sheer computing power needed to verify cryptocurrency transactions (and the fact everyone has access to the ledger or blockchain) makes it practically impossible — and expensive — to hack.
That’s supposedly why you can trust anything you see on the blockchain (or decentralised ledger).
What’s the big deal with ethereum?
What’s special about ethereum (the biggest digital currency after bitcoin), is that users can build “DApps” (or de-centralised apps) on its blockchain, which is similar to software that runs on a computer.
Most DApps run on the ethereum network, and are powered by its “smart contracts”.
Smart contracts are basically, a bunch of sophisticated computer codes which can automate a lot of the work certain bankers, lawyers and other middlemen do (which is to manually verify that both sides have fulfilled their end of the bargain).
Instead, the terms of these “contracts” are in code — which have been programmed to, for example, transfer money into someone’s account automatically when certain conditions are met.
These tasks may include checking your ID and signature, verifying that you’ve completed the right forms, and processing mountains of paperwork.
What’s behind the ‘DeFi’ surge?
DeFi is the fast growing segment of the cryptocurrency market (worth almost $US50 billion), which some describe as a “parallel banking system”.
Its value has surged 2,580 per cent over the past year (up from just $US1.8 billion).
You can exchange cryptocurrencies on decentralised apps (like Uniswap) for stablecoins — like Dai or Tether — which are supposedly pegged to the US dollar to reduce volatility.
There are also decentralised apps like Aave, which allow you to anonymously lend or borrow cryptocurrencies (instead of conventional money).
Tether, in particular, has been controversial due to its legal troubles, which led to it getting banned from doing business in New York.
Tether (the firm which issues the stablecoin of the same name), along with its related entities (Bitfinex and Ifinex) settled a long-running court case for $US18.5 million in February without admitting fault.
They were sued by the New York Attorney-General, who accused them of moving hundreds of millions of dollars to cover up the loss of $US850 million worth of commingled client and corporate funds, and lying about each Tether coin being backed by one US dollar (1 for 1).
As for what fuelled the explosion in DeFi interest, Mr Abrahams (who gives legal advice to DeFi providers) said:
“A lot of people have made an awful lot of cryptocurrency gains over the last couple of years,”
“They want to be able to use that crypto without selling it for conventional money.
“So they’ve created the concept of ‘staking transactions’, which is putting crypto with an app — and getting a stablecoin in return – which they can go and spend.
“When they want to get back their crypto, they go and pay back their stablecoin which is a coin that’s linked to the US dollar so it doesn’t have the volatility of cryptocurrencies like bitcoin.
“Those players are investing in and believing in DeFi – that’s been the cause of the significant growth.”
Finder boss burnt after DeFi punt
Fred Schebesta, a big investor in cryptocurrencies, said the DeFi surge might also be explained by the global COVID-19 recession, which led to trillions of dollars in stimulus being pumped out worldwide.
“The biggest thing is you can’t get yield,” said Mr Schebesta, who also co-founded the financial comparison website Finder.
“There’s very low interest being paid from banks. Dividends have been cut. So people are trying to find places to get yield.”
“DeFi provides substantial yield, anywhere from 5 to 100 per cent.”
However, it goes without saying that high returns often come with very high risks.
Mr Schebesta said he recently lost a “significant” amount of money (but made “some money” as well) after he invested in a decentralised finance project called Iron Finance.
Its Iron Titanium token surged from less than $US2 to over $US60, then plunged to almost zero (all in the month of June).
The owner of the Dallas Mavericks basketball team, US billionaire Mark Cuban, also lost a significant chunk of cash betting on this high risk crypto.
When asked about what he would have done differently, Mr Schebesta said: “I should have pulled my money out earlier.”
“I knew the risk I was taking, and I didn’t put all my money into it.
“I got a bit greedy. It was paying 2 per cent interest per day, which is a lot of money!”
Nevertheless, he is optimistic about the future of DeFi.
“For a retail investor, the best thing is to start small – start with simpler, less risky options as it’s definitely the wild west out there.”
However, the advice from barrister Dr Philippa Ryan is a lot more cautious.
“If you’re investing with a cryptocurrency because you want to make a quick buck, well you’re just as likely to lose that buck quickly,” said Dr Ryan, who is also a blockchain academic at the Australian National University.
“Nobody ever went to the trouble of setting up a cryptocurrency as a philanthropic project in its entirety.
“Most of these projects are established with a lot of expense behind them and the purpose us to make money.”
Overall, Dr Ryan was very optimistic about the potential of blockchain technology.
But when asked when it might become mainstream, she said: “I think it would be 2030 to 2040, if I had to put a date on it.”
Useful for fighting counterfeiters
Blockchain is also being used in the beef exports business.
Warwick Powell, the founder of BeefLedger, uses this technology to track meat every step of the way to verify its quality.
The meat is tracked from Australian farms (while the cows are still alive), to abattoirs, all the way to overseas markets.
“Food counterfeiting and fraud is a $US50 billion per annum problem — particularly in an environment where there is growing demand for high quality product, and where [there is] limited supply on the other,” he said.
He explained that counterfeiting can happen by changing a label (saying the meat is from one brand, when it isn’t), or claiming the meat is from a certain country (which may be false).
It can also happen when suppliers wrongfully claim the meat is premium “Wagyu” or “Angus” beef (in other words, claiming the product is a higher grade than it actually is).
“Blockchain has helped tackle that problem in a number of ways, and it provides information transparency for consumers,” Dr Powell said.
“You can look back in time to see who had custody of the product progressively, going through the supply chain, and how the product was treated.”
Big companies embracing blockchain
Outside of the meat industry, there are some major companies looking into blockchain technology.
IBM and shipping giant Maersk have, for example, created a supply chain platform called TradeLens — which is intended to save time and money in the logistics business.
It also aims to significantly cut down on paperwork (which is estimated to make up 20 per cent of shipping costs).
Several major banks (Commonwealth Bank, Westpac, ANZ), along with Scentre Group and IBM have also been experimenting with digital bank guarantees — designed to make it quicker and easier for landlords and tenants to strike up commercial leases.
After years of delay, the ASX is hoping to launch a blockchain clearing system in 2023, to make it more efficient to buy and sell shares.
Even the Reserve Bank is interested in the idea of a digital Australian dollar — an idea it’s researching.
Meanwhile, other countries are also looking into central bank digital currencies, like the United States and China — which has already started trialling a digital yuan in parts of the country.