Blockchain technology lures with a promise of being transparent, comprehensible, tamper-proof and economical. Moreover, it gets by without any intermediaries – some can already envision a future full of banks with no bankers, contracts with no lawyers and administrative bodies with no staff. Where trust is still needed today – in the bank, the lawyer or the insurance company – the algorithm of a blockchain may suffice tomorrow. Today, almost all industries are doing research on this decentralized database technology and its currently best-known application, the controversial and highly speculative cryptocurrency bitcoin.
At the event “Metzler meets Fraunhofer“, Prof. Wolfgang Prinz (PhD), Deputy Director of Fraunhofer Institute for Applied Information Technology (FIT), and Michael Klaus, personally liable partner of Metzler Bank and in charge of the business area Capital Markets, spoke about the myths and reality of blockchain.
Michael Klaus: Interest in blockchain technology has grown over the years – both in industry and among private individuals. Many have heard of it, but very few have a clear idea of how it works. To put it simply, blockchain is a decentralized registry of transaction data. Each newly added block of data is dependent on already existent, preceding blocks, making subsequent manipulation of transaction data virtually impossible.
Wolfgang Prinz: Exactly. Blockchain is a technology for managing transactions in a secure, undistorted and traceable manner in a network of known or unknown partners.
Michael Klaus: Even more well known is the cryptocurrency bitcoin, which is based on blockchain technology.
Wolfgang Prinz: In my opinion, this connection is still emphasized too often – I don’t think blockchain technology should be reduced to this. And I’m sure people now recognize that the potential of blockchain goes beyond cryptocurrencies.
Michael Klaus: And the volatility of the bitcoin price in the past two years has probably made everyone realize that, so far, bitcoin is a speculative commodity rather than a reliable currency, even though it’s called a "cryptocurrency". I also believe that a basic understanding of blockchain, which is often still so obscure, would help us accept this technology and recognize the added value it can bring.
Wolfgang Prinz: Blockchain technology can be used in many ways. For example, simple processes can be automated if blockchain is combined with so-called smart contracts. Examples include processes for managing time-limited training certificates that are monitored by a smart contract, or simple insurance policies that come into force under certain conditions; for example, if a flight is delayed or cancelled. Or when a device fails on the Internet of Things; for example, a door only opens if the user has paid in advance. It would also be possible to set up decentralized autonomous organizations. Such applications include self-governing entities in a supply chain network. In any case, I believe this technology’s greatest potential lies in the possibility that transactions and network processes can be organized without the need for a central platform.
Michael Klaus: Yes, especially standard processes are still relatively inefficient from today's perspective. Blockchain could, for example, improve or even automate lengthy processes in large administrative bureaucracies. Based on the extent of current research, I assume there will be numerous blockchain applications in the future – even reaching beyond the financial sector.
Wolfgang Prinz: Interestingly enough, blockchain is not a new technology in and of itself, but rather a very interesting combination of known – and in some cases quite long known – technologies in the fields of cryptography or distributed systems. It has become the focus of numerous start-ups in Germany and research is addressing it increasingly. The race for market leadership is on.
Michael Klaus: In my opinion, Germany is very well positioned in terms of research and development of new technologies. However, marketing of research results is more successful in the Anglo-Saxon region, which is also true for artificial intelligence and electric motors. We can still catch up here. The problem with start-ups is often a lack of capital. Promising start-ups are making increasing use of so-called initial coin offerings (ICOs) as an alternative source of venture capital.
Wolfgang Prinz: There still seems to be a lot of wild-west-style mentality here. I think it remains to be seen how sustainable this approach really is. If this market can be regulated, then buyers other than the most daring speculators could certainly be reached.
Michael Klaus: Investors must also be aware that, unlike new share issues, they are not acquiring a share in the future profits of the company. ICOs are still mainly aimed at private investors and meet only extremely low transparency standards due to a lack of regulation. They are therefore critically observed; in China they are even banned. Despite all these hurdles, we see potential for ICOs in the future.
Wolfgang Prinz: How about regulating the market for cryptocurrencies? Surely that would be urgently needed.
Michael Klaus: Yes, regulations are necessary to make cryptocurrencies safe for the consumer. In my opinion, the interesting aspect here is how the basic idea of the bitcoin as a decentralized and unregulated currency can be reconciled with the real economy. A theoretical ideal clashes with practicality. Current efforts to obtain approval for conventional financial derivatives denominated in bitcoin could mean that this conflict is being passed on to the supervisory authorities. I believe that a functioning market requires a minimum level of transparency, which would greatly undermine the anonymity of bitcoin transactions.
Wolfgang Prinz: Another aspect of bitcoin that is increasingly being discussed is the immensely high energy consumption caused by public blockchains such as ethereum or bitcoin.
Michael Klaus: Why is energy consumption so high? And are there any already-existent solutions for throttling it?
Wolfgang Prinz: The consensus mechanism (proof of work) used in an open network with unknown partners is based on solving a cryptographic puzzle. Many computers try to solve this puzzle and consume a great deal of energy doing so. However, solutions without high energy consumption are already available if blockchain technology is used in a closed environment, for example in a consortium. Here, procedures such as proof of stake or, in the simplest cases, explicit validation nodes can be used, which minimizes the computing effort.
Michael Klaus: With blockchain, a future full of banks with no bankers or contracts with no lawyers is already a done deal for some people, but we don’t envision this quite so clearly. While it’s very likely that many standardized processes will be highly automated in the future through blockchain and artificial intelligence, it’s also a great opportunity for lawyers and bank advisors to spend less time on administrative duties. The result would be more time for in-depth client advisory services. What do you think of this future scenario?
Wolfgang Prinz: There will certainly be a number of changes. Currently, however, change is still taking place in the optimization of back-office processes. This will make organizations more efficient and facilitate the development of new business models. In my opinion, complete replacement of bankers and lawyers will not happen any time soon.
Michael Klaus: Thank you very much for the interview, Professor Prinz.
Prof. Wolfgang Prinz, PhD, studied Computer Science at the University of Bonn and received his doctorate from the University of Nottingham. In 2001, he became a professor at RWTH Aachen University and Deputy Director of Fraunhofer Institute for Applied Information Technology (FIT), where he heads the research division Cooperation Systems. This division realizes projects that use cooperation platforms, mixed reality and flexible communication infrastructures to address the challenges and opportunities of digitalization and develops solutions for application in mobility and digital energy. At Fraunhofer FIT’s blockchain lab, Mr. Prinz examines the technical principles of blockchain and develops and analyzes blockchain-based applications. Wolfgang Prinz has organized international conferences, is editor of several scientific journals and coordinates national and international research projects.
Michael Klaus has held various functions for B. Metzler seel. Sohn & Co. KGaA since 1991. In 2005, he became a member of the Partners’ Committee B. Metzler seel. Sohn & Co. Holding AG. In 2012, he was appointed member of the Executive Board of B. Metzler seel. Sohn & Co. Holding AG and became personally liable partner of Metzler Bank. Mr. Klaus is in charge of the business area Capital Markets and also Head of the Treasury Committee and Managing Director of Metzler Securities GmbH. Additionally, he is responsible for Human Resources, Corporate Communications and Metzler’s US Real Estate business. Before joining Metzler, Mr. Klaus worked in various positions at Salomon Brothers AG in Frankfurt/Main, London and New York. After completing an apprenticeship at Deutsche Bank in Frankfurt/Main, Mr. Klaus studied business administration at Goethe University in Frankfurt/Main.