Competition to Drive Blockchain's Dominance, Not Technological Advancements

The financial sector is plagued by misconceptions, such as the notion that traditional finance is centralized, when in fact, the global banking system is highly decentralized. Another myth is that outdated technology is the primary cause of high costs and limited access to banking services, when in reality, regulatory hurdles and a lack of competition are often to blame. Mainframe transaction processing is efficient and cost-effective, and although the code may contain elements written decades ago, the mainframes themselves are relatively modern. For these reasons, I have long believed that blockchains may face challenges in replacing traditional credit cards, debit cards, and bank accounts, as older technologies have the advantages of excellent performance, lower costs, and large user bases. However, what traditional finance lacks is the intense competition that the blockchain sector is introducing. In theory, blockchains should never be more efficient than centralized systems for simple transactions like payments, as they require copying data across multiple nodes, whereas centralized systems process transactions only once. A similar logic applies to telephone calls, where the internet is not the most reliable or efficient way to set up calls, yet it has become the dominant form of communication due to its affordability, widespread availability, and intense competition. The same factors are now shaping the future of finance, as blockchains, although technically less efficient, are driving down costs and adding features at a pace that legacy service providers cannot match. Blockchain transaction prices are already consistently lower than those of traditional banking providers, with some blockchains like Solana, Aptos, and Ethereum Layer 2 networks reducing costs per transaction to well below a penny. Internal research at EY has shown that moving internal financial transactions on-chain could result in annual savings of over $100 million. Despite this, companies and individuals are slow to adopt on-chain transactions, largely due to inertia and the lack of key features like robust regulatory compliance, mature fraud prevention analytics, and privacy. However, these gaps are not insurmountable, and the programmability of blockchains means that missing features can be easily added, with implementation costs decreasing every year due to Moore's Law. The coming decade will be critical in shaping the finance sector of the next century, and traditional finance institutions should heed the lessons of the telecom industry, which underwent significant transformations with the advent of the internet and mobile technologies. The entire cycle of deregulation, monopoly breakup, reconfiguration, and shift to internet and mobile took place over 20 years in the United States, serving as a warning to traditional finance institutions to adapt to the changing landscape.