The Advantages of Blockchain in Resolving Market Frictions

​Due to technological advances, the world of business is progressing at a rapid speed. Technology has enabled businesses to overcome the transactional barriers of distances across the world. Still, they are struggling with many old and new market frictions and obstacles. Blockchain promises to bring about the next revolution of changes. It will help global companies overcome obstacles in business transactions. Companies will be able to harness the power of blockchain to resolve market frictions that have slowed them down in the past.

​Types of Market Frictions

​Markets are complex mechanisms with many moving parts. The interactions between the parts can result in delays or interruptions of transactions. Taxes, regulations, bureaucracy, middlemen, conflicts in contracts and more can contribute to creating market frictions. Here are some of the problems observed across the world:

• Information Frictions: Information frictions can result from inconsistent, inaccessible, and corrupted data-sources. Business partners working on the same transaction might get incorrect information and make mistakes. It can lead to bad decisions. Businesses participating in a deal might not have access to the necessary data due to technological challenges. Data is still stored in central databases that are hard to access and corruption-prone. Also, cybercriminals and hackers can distort the market through manipulating information sources. They can create information crisis through privacy violations and identity theft.
• Interaction Frictions: Interaction frictions can result from technological mismatches. Even with today’s advanced technologies, transactions between parties often take days. The delays in interaction can impede business relationships across geological and economical boundaries.
• Innovation Frictions: Innovation frictions are often the result of company culture and positioning. Companies might fall prey to their own internal bureaucracy. They might have to fight an uphill battle to update legacy systems. Change is always uncomfortable. So organizations might be reluctant to change the status quo. On top of that, older regulations can become a point of friction. The organization might have to still adhere to outdated rules. And due to inertia and rigid regulations, established companies can lose to smaller and nimbler competitors.

​Using Blockchain to Overcome Market Frictions

Market frictions have always been part of the global trade. Every new generation of technology has helped resolve some of the issues of the past and magnify others. Even though transaction costs and time has gone down in recent years, the confusion due to misinformation and overflow of information has created new sets of problems. People can transact over the internet quickly, but there isn't a reliable way to ensure transaction authenticity. Blockchain technology promises to solve some of the new problems created by today's markets:

Reducing Information Frictions

Information is a valuable asset for businesses. They need information that is trustworthy and verifiable. Blockchain has properties that can help businesses decrease information frictions in the following ways:

• Common Ledger: From the beginning of trade, third-parties have played an important role in verifying transactions. From the village elders in tribal systems to today’s financial institutions, third-parties have held businesses settle questions of authenticity and identity. But the centralized verification method is a bottleneck. Blockchains promises a world where it will be possible to collect, store and share information through a common ledger.
• Identity Management: Blockchain can help businesses resolve the identity issue in transactions. Today identity verification takes up a lot of time. Blockchain can speed up and improve the process.
• Prevention of Fraudulent Information: Blockchain’s strong encryption mechanism makes it difficult for cybercriminals and hackers to manipulate information. If businesses have more trust in transactions, it can speed up the whole process.
• Rigorous Validation: Any block added to the blockchain goes through a rigorous process. it increases trust and decreases delays and interruptions.

Overcoming Interaction Frictions

Improving the transaction process can help with interaction frictions. The following blockchain properties can help:

• Common Ledger: The common ledger makes it easy for two parties to make a transaction of assets and record it. It provides a common ground for the parties to transfer value through the network without involving third-parties.
• State-Based Communication: Today financial institutions maintain records through local databases. When two banks are making a transaction, each bank has to keep track of it on a local ledger. Banks use secure messaging architectures like SWIFT to make these transactions. With blockchain, it’s possible for banks to share messages that represent the state of these transactions without the need for specialized secure messaging.
• Peer-to-peer Transactions: With blockchain, interactions between businesses don’t need to go through intermediaries. Companies can directly make transactions and verify it on the blockchain. It will save all the complications that come with multi-party interactions.
• Consensus: Because companies are able to validate and authorize transactions through consensus algorithms, blockchains speed up the business process.
• Smart Contracts: Businesses have to spend significant time developing and executing contracts. Smart contracts are code-based contracts that run on blockchains. They can automate a lot of the processes and make it easier for businesses to interact with each other.

Resolving Innovation Frictions

Innovation frictions involve changing human minds and attitudes. So it’s one of the most difficult market frictions to overcome. Here are a few ways blockchains can help:

• Reduce Complexity: As companies grow, their processes become more complex. Payments between departments or cooperation between teams become harder to handle. Blockchain provides a way to record information more transparently and opens up boundaries between departments and teams.
• Reduce Regulatory Costs and Delays: Businesses have to go through internal and external audits for regulatory purposes. Blockchain-based systems can help automate and speed-up a lot of these processes.
• New Opportunities: Businesses can use blockchain technology to explore new opportunities. Of course, exploration doesn’t guarantee success. But it helps companies take a chance on staying competitive in the marketplace.

Improved Ecosystems

​Blockchain technology has potential to transform entire ecosystems. It can help organizations prevail over the challenges and market frictions of today. Companies can use the technology to gain more visibility into their organization's processes and provide relief for any pain points. The technology is already having a big impact. Transportation, pharmaceutical, healthcare, logistics, manufacturing and many more industries are improving due to the intervention of blockchain technology. 

Other related articles on Blockchain:

• ​4 Best Business Startup Ideas using Blockchain
• Blockchain Technology: What Is It and How Can You Get In On the Fun
• Blockchain Can Save Billions for Pharmaceutical Companies
• 3 Pharmaceutical Supply Chain Challenges Blockchain Can Address
• The Evolution of Blockchain Software​