Author(s): Peter Bryer
In 1971, Nasdaq was established as the first stock market to implement electronics-supported trading, and eventually automated electronic trading. It was disruptive, narrowing the spreads between buy and ask prices and driving down the cost of financial transactions. The Nasdaq exchange used the latest technologies to usurp legacy processes, changing the lives of many intermediaries.
Now the company that owns the Nasdaq exchange is evaluating a new method of changing things all over again. The implications could be significant across many industries, from e-commerce to the Internet of things. IBM and Samsung, for example, have set up a proof of concept for the Internet of things which they claim moves us toward the "democracy of things". Ethereum has grand plans to employ the technology for a wide range of uses including land registry, shareholding registers, online voting, insurance and file storage.
The Nasdaq OMX Group said this week that it will use a blockchain to maintain records of the Nasdaq Private Market — a relatively small market for trading shares of companies before an initial public offering. This use of blockchain will be followed closely by the financial industry.
Blockchain is the key supporting software architecture behind Bitcoin, and has gained significant traction as an enabler of all things peer-to-peer. If the Internet backbone was a spin-off of military projects and the Web a spin-off of CERN, blockchain is a spin-off of Bitcoin. Whether bitcoins succeed or flounder as a currency is a separate issue.
Blockchains use a distributed method of keeping track of a player's stake in transactions, meaning the blocks of information are spread across thousands of nodes. There's no single ledger that can be altered, creating an extremely high level of security that could eliminate the need for intermediary services or individuals. Financial transactions could reach a fantastic level of efficiency, with practically no overhead (though this currently supports the market capitalisations of companies totalling hundreds of billions of dollars). The fees for moving money between countries or making simple credit card payments quickly add up.
Nasdaq's blockchain trial will be one of the most high-profile attempts to bring the technology to real-world transactions. The Nasdaq Private Market isn't an entirely open marketplace, so offers an ideal setting for blockchain testing.
Hype can be infectious, and new-technology hysteria can build and spread quickly. It's too early to say if excitement about blockchains is fully justified, but company forecasting groups should have blockchain on their maps as a potential long-term disruptor. Nasdaq's trial could make it 1971 all over again.