BLOCKCHAIN
Keep the Crypto. The Future is the Technology. By Jake Harris & Juan Huerta Imagine a bank that was purpose-built to handle nothing but projects. Every party associated with a project was welcome to come in and get their own bank account so they could buy and/or sell goods and services to others in the bank. Even the project itself could get a one-time-use bank account through which all the funds for the project would flow. This bank’s entire purpose would be the safe and successful movement and transactions of the project funds from the source through the project’s bank account until they were distributed directly to the bank accounts of the parties who supplied labor or material for the project. All of this through a single platform with simple universal rules and procedures, and all traceable down to the last penny. Blockchain is that bank. Pre-programmed smart contracts move funds between the digital wallets upon authorized release with full accountability and transparency and without human error at the speed of a single platform verification cycle (around 12 seconds). Of course, as with any new technology, things are not necessarily as simple as they first appear. Banking in blockchain comes with some “debates” you should understand. Open vs. Closed System debate Everyone knows of the rivalry between Bill Gates and Steve Jobs and their lifelong battle for Open vs. Closed systems for rival software and technologies Microsoft and Apple. Gates took the position that open systems allowed greater application and integration. Anyone could make a complementary add-on and plug-in at any point for greater inclusion. Jobs took the approach that systems (both hardware and software) are too delicate and fragile to work efficiently with random input from non-qualified engineers and technicians. So Apple was built in a closed-loop system to ensure the greatest customer experience. Blockchain resonates with the Jobs closed-loop-system approach. Everyone who wants to engage in a project needs to be on that blockchain and create a personal digital wallet. This allows smart contracts to easily transfer their payload (funds or other) from digital wallet to digital wallet. However, with the rigidity of a closed-loop platform comes the control and performance for the highest customer experience. Perhaps that is what Blockchain can provide the lending community: a more rigid platform to lend, but one that will result in less problems, confusion, and overhead to track and keep tabs on funds distributed. Proactive vs. Reactive Cost Accounting The current lending model with its reactive cost accounting is very time consuming and not very accurate, relying on an individual’s arbitrary quantitative guesses — a perfect example being the reporting of percent complete (PC). Funds are released for a project, then before additional funds are released the loan servicer spends time and money trying to identify exactly where the previous money went. With blockchain, loan funds may be “programmed” prior to releasing, then using Smart Contract to transfer the payload (funds) to a specific destination digital wallet upon approval and release, thereby providing full transparency and instant trackability into exactly where the funds went. Think about how much time would be saved by “programming” the fund distribution so funds can only be used for their explicit purpose. Then having instant and ongoing verification of fund transfers for future reconciliation, all at the lender’s fingertips. Death of Percentage Complete? One of the interesting by-products of the blockchain lending movement is that smart contracts (the vehicles that transfer the funds from one digital wallet to another) does not work well with fractional delivery. For example, Smart contracts are an “IF/THEN” statement and have a tough time being fractured for partial delivery. Instead, the smart contract needs to be written in a way that the full amount is split into smaller sub-smart contracts that can be delivered as written. Line items need to be delineated into their individual payment milestones and written at the onset. An example of two smart contracts in sequence would be that a painter will receive $1,200 upon start of the project at 123 Any Street, and $1,200 upon the successful completion of painting 123 Any Street. These two smart contracts run in sequence and are two separate transactions in the blockchain, both trackable from inception and funding to distribution and verification of receipt. What about Lien Releases? Lien releases are both a verification of funds received by parties who worked or performed services on a specific project, and a promise that no further liability is left open through secondary purchase or commitment made by the signor. While blockchain lending won’t be able to verify any secondary commitments, it can with exacting specificity detail who was paid on the project and for what. That is the real beauty of blockchains’ immutable ledger system. It keeps a distributed ledger system showing what was paid and to whom, when for all time. It never changes and not held in one location, so it is impossible to corrupt, change, or loose. Think about the ability to pull up any project and instantly trace funds from the source all the way down to the final mile provider with the confidence in blockchain that every transaction of funds was transacted and recorded in the blockchain forever. Reading the contracted commitments (smart contracts) and verified distribution of funds to each party’s digital wallet is like a detailed financial book. With this level of transparency, lien releases (and construction payment arbitration all together) will become all but obsolete. In a world of simple transparent financial commitments and fulfillments, all parties can focus their time and brainpower on the work at hand and find ways to innovate and upgrade both their projects and their operations for greater return for all! Psychological Impact of Blockchain Lending More than 50% – that is the amount of time key personnel in small/mid-sized businesses think, task, and worry about cashflow/money management. Blockchain lending allows the parties involved to not worry about the cashflow because the funds are being handled by an
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