The goal of disintermediation is to reduce the number of middlemen and intermediaries between a product and the consumer. While the term originated back in the banking world in 1967, the internet boom of the 1990s dramatically increased its effects. The establishment of transparent internet marketplaces allowed for lower prices and a wider variety of available goods and services. The next wave we are entering will utilize the blockchain to bring about levels of disintermediation never seen before.
While companies like Amazon, Uber and Airbnb created massive disruption in their respective industries, until recently, the financial world was largely excluded from such innovation. Before Bitcoin, all transactions not done in cash or person required third parties such as banks, payment processors, etc. These third parties were usually large institutions with billions in overhead. This not only created a system of incessant fees, but also facilitated the subjugation of customers to the whims of the institutions that they used. However, this all changed in 2009.
For the first time, peer-to-peer transactions no longer had to be conducted in person, but could be done digitally without any oversight. This not only led to the disintermediation of financial institutions through the solution of the Byzantine Generals’ Problem, but set off the next internet revolution.
While blockchain may seem like the holy grail to the inefficiencies of today's intermediaries, a lot remains to be seen. Nevertheless, various applications have been released with many more in development. They include:
Decentralized cryptocurrency exchanges are utilizing the power of the blockchain for real-time price discovery and peer-to-peer transactions. Such exchanges have no central point of failure and provide users with custody over their private keys.
Reliance on clearance and settlement houses is being reduced with distributed ledger technology that allows for instant real-time settlement recorded on-chain. This also eliminates much of the middle and back-office costs as well as many compliance hurdles.
Displacing institutions in this area would not only broaden credit access, but allow for lower interest rates. This is due to the higher supply of options one would have when choosing a loan originator instead of having to go through a limited amount of local banks. Individuals and small businesses could potentially access an international investor base they never could before.
Tokenizing is not only allowing for fractional ownership but opening the market to new participants while reducing many costs associated with such transactions. A virtual marketplace would lessen the reliance on intermediaries such as real estate agents and compliance departments while significantly increasing liquidity.
While being one of the largest markets in the world, much of the industry is still paper-based. The over-reliance on brokers and obscure information creates many opportunities for fraud. The immutability of blockchain could seel these holes and save millions on fraud detection and prevention.
ICOs (Initial Coin Offerings) created a revolutionary fundraising model that surpassed many financial regulations, delays and limitations. It also allowed companies to raise money at an incredible pace and get to market faster than a traditional venture capital system would allow.
A decentralized blockchain energy management system would allow for smart regulation to govern the consumption and production of energy. This would not only save utility companies millions, but save consumers money as well.
Despite the benefits of disintermediation, there are certain negatives as well. These risks primarily revolve around capital raising and the obscure creation of middlemen in a system that is supposed to be decentralized. The two main risks are:
The biggest risk of disintermediation for investors is the burden of due diligence they must conduct. Since they are dealing directly with virtually unknown and private companies, there is significantly less information publicly available.
While Bitcoin may be the holy grail of decentralization and disintermediation, many subsequent blockchain applications most certainly were not. While capitalizing on the hype of the blockchain movement, many companies placed themselves in the middle of their decentralized applications. Ultimately, blockchain itself does not automatically guarantee disintermediation and many blockchain companies violate its core principles being:
For example, many blockchains have the power to freeze tokens on their network while some DEXs (Decentralized Exchanges) act as intermediaries in the very transactions they claim to decentralize. Furthermore, the ability of developers to customize smart contracts allows anyone to circumvent any real “consensus mechanism” all the while pushing the utopian idea of decentralization. This led to the creation of Initial Coin Offerings of ERC20 tokens that did not have intrinsic use cases. Instead, they functioned as blockchain-based capital raising methods and glorified databases.
Ultimately, while disintermediation may displace many people and systems offering middleman type services in the short term, it would serve as a net benefit in the long run. From democratizing access to providing lower costs, inclusion and transparency may once again revolutionize our world just like the first wave of the internet in the last century.