Blockchain as a Public Infrastructure

Blockchain as a Public Infrastructure

There is a lot of hype about blockchain technology, but not enough material describing its utility. Just like groundbreaking innovations in the past, simply inventing a new technology like blockchain does not directly create an impact: it’s the products built upon the technology that change people’s lives. In this article, I will demystify the essence of blockchain and show you what it can do for you.

I want to first start by defining what I consider a product to be: a set of technologies. The set transforms an undesirable situation to a desirable one. There is a common confusion between technologies and products: many people believe if there is a technology then it is a product; worse, some may dislike a particular product and on that basis dismiss the underlying technology. On the other hand, some people recognize a technology as being innovative but still defend it incorrectly because they try to argue that the technology is actually a product.

A specific technology can only be considered one part of any product, which has many properties. By way of a simple example, steel is heavy and hard, so it is a good material with which to make a hammer, but a chunk of steel by itself is not a hammer. To create a hammer, you need to find and dig iron ore, smelt and cast steel, forge the head, and mount it on a handle. Each stage of the process requires different materials and technologies.

How do we generate properties sufficient for a product? We learn and combine the properties of different materials and products to create what we need. Science discovers the properties of our universe, and technology creates new properties based on certain known ones. Some innovative technologies create properties that did not exist before and open new doors for us. However, a technology that cannot scale has a limited impact. A technology must be scalable for many people to benefit from it and for it to serve as a platform for our everyday lives. We call these infrastructural technologies.

Products we use today are often combinations of infrastructures. For example, an e-commerce website binds the Internet, advertisement channels, logistics, and wholesale markets to provide its services. Once the infrastructures required to build online shops were in place, shops sprung up everywhere to take advantage of them. Today, the e-commerce market is worth $2.3 trillion worldwide.

The history of computer science is a series of breakthroughs in infrastructural technologies, bringing new properties to the digital world. First, the invention of the computer itself provided automation: we could easily repeat our work. Second, the Internet created connectivity: we started to work together. Third, smartphones added availability: we were able to work anywhere.

Now, blockchain technology has forged a new and important property: objectivity. The technology can “record almost anything so that the information attached to a transaction is highly available, decentralized and tamper-evident.” Here’s an example showing how we can use this new property of blockchain technology in the digital world.

Many emerging countries are suffering from a lack of financial services. In Africa, government bonds have annual interest rates as high as 20%. For this reason, banks in the region have little incentive to invest in other opportunities — they can get high returns from bonds, so they avoid lending to individuals or businesses. For example, only 10% of the population can get credit from a bank in Nigeria. The other 90% cannot create a credit history since they cannot get credit transactions in the first place, leading to a vicious circle and an effectively creditless society.

Aella Credit, Gluwa’s partner company operating in Nigeria, has solved this problem in a creative way. Aella offers credit based on information outside that used by traditional financial institutions. The company has two major products. First, it offers salary-based loans to employees through their employers. Second, it offers a relationship-based lending product. Furthermore, they collect information from the user’s smartphone. As a result, they have been able to generate a 40% profit while maintaining a default rate of 5%.

However, Aella Credit’s business model had a problem, which was believing that it was a lending company. The product of a lending company is its capital, and growth of the company is directly correlated with the amount of its capital, which makes it impossible to grow exponentially. After analyzing Aella Credit’s business model, Gluwa realized that Aella’s true value was not in its capital but its ability to assess risk. The company’s ability to generate profits while maintaining low default risk is the evidence of Aella’s excellent credit scoring.

Accordingly, Gluwa suggested that Aella Credit convert its business model to being a credit scoring company. Doing this, however, required solving several problems. First, if Aella Credit only uses its own data, it is very subjective. There is no reason for other investors to trust the data that only exists in Aella Credit’s database. Second, if the company collects data from others, some will inevitably be inaccurate. Usually, a credit scoring company uses other financial institutions’ data to operate. However, in this case, there are a lot of errors that would end up contaminating the results. It is known in the industry that roughly 25% of the data that credit scoring companies use is incorrect.

These problems essentially boil down to the issue of data accuracy. Gluwa noticed that collecting and sharing data objectively via blockchain technology and opening up the market would solve the problem.

Creditcoin connects borrowers to lenders on a blockchain. The terms of a transaction are mediated among the participants directly, and the transaction history is immutably recorded on the blockchain. Credit scoring companies can use their own algorithms to assess the data generated on the blockchain and sell the result to investors. As a result, Creditcoin opens up the gate of capital injection and releases lending companies like Aella Credit from the continuous burden of raising capital. The blockchain lets companies focus on their core values, providing benefits to more people.

The future of blockchain is building useful infrastructure like Creditcoin. For example, you might build a YouTube-like service with a blockchain that stores video files, a blockchain that serves a CODEC to decode video clips and lets creators earn via an advertisement blockchain. The point is to build blockchains that provide utility for many people. If useful blockchains accumulate, like various websites have formed the current internet, the result will be a valuable ecosystem. Gluwa is continuously building blockchains for this reason.

A sustainable financial ecosystem is built on three pillars: savings, payment, and investment. You need to enable the ownership, transfer, and lending of money. Gluwa’s first product, Gluwacoin, is a cryptocurrency with a stabilized exchange rate (a stablecoin) specializing in payment. However, as we built an ecosystem for Gluwacoin, its users started to demand investment opportunities with Gluwacoin. The result was Creditcoin.

What’s next? Currently, we need digitized assets for a variety of crypto markets, universal identity for global transactions, and a decentralized exchange for the market to be sustained efficiently. How should you build what kinds of products? There is no way to answer that question other than imagining possibilities while continuously studying the evolving market and technologies. Blockchain technology and the world as a whole are changing rapidly. Just as a method that worked yesterday may not work today, you cannot rely on something that is working today to work tomorrow. Evolution is the only possible survival strategy.

One day I asked an artist about the difference between art and illustration. He said: “If you draw what you want to draw, it’s art. If you draw what you are asked to draw, it’s illustration.” I believe that it is similar for business. A technology designed without a user in mind is art; something created for its own sake. To apply it, you should first analyze the problem you are trying to solve, determine what features you need, and use technologies that make sense for the situation. Simply put, to become a business, you should make what other people need. Among the infinite possibilities enabled by blockchain technology, Gluwa aims to focus on necessities.