How Blockchain Technology is Transforming the Cost of Transaction

Written by: Jay Mart Panlaan | The Top Coins

Blockchain is a new information technology that allows for a wide range of decentralized applications because of its immutability, decentralization, and trustlessness. Despite its bright potential, some people are concerned that blockchain applications promise too much and deliver too little. Some experts argue that alternative technologies can do the same duties as blockchain more efficiently. The importance and influence of blockchain technology varies depending on the company and business strategy. However, because of the excitement surrounding blockchain technology, businesses are pouring money into it, producing pilots and proofs of concept, but little progress is being made.

Every commercial exchange with partners has two costs: transaction costs due to market imperfections and agency costs related to organizational conflict of interest and knowledge asymmetry. The question now is: how does the introduction of blockchain affect a company's transaction costs?

Let's have a look at these two components before we go any further.

Transaction Cost:

Three types of transaction costs have been defined and classified. First, search and information costs are incurred to reduce uncertainty prior to the execution of a transaction. Second, costs of bargaining are incurred during talks before a common agreement is reached. Third, policy and enforcement costs are incurred while a contract is being monitored.

Agency Cost:

Conflicts of interest between managers (the agent) and shareholders (the principal) and information asymmetry are at the root of the principal-agent problem within an organization. The principal-agent conflict is expected to be mitigated by blockchain. Both the principal and the agent want their counterparts to act in their best interests. The agent's activity is supervised and restricted under the terms of a contract. Monitoring cost, bonding costs, and residual losses are all included in the contract.

Through regular meetings/reports, the principal can lessen knowledge asymmetry and retain greater control of the parties' interests, which is referred to as monitoring cost. The agent must also commit to contractual duties so that managerial behavior does not affect the principal; this is the bonding cost. Due to uncertainty, the interests of principals and agents are sometimes misaligned, adding to the third agency expenses known as residual losses. Residual losses are opportunity costs that occur when parties fail to perform a contract, despite the fact that the contract was optimally set up to protect both parties' interests.

What impact does blockchain make in minimizing these costs?

  • When we talk about Blockchain, the most common application is in financial transactions, which many businesses are attempting to exploit. You may have noticed the rise of a number of cryptocurrencies that allow you to transact in digital currency while also allowing you to exchange them for fiat currencies. There are many great digital currencies that are safe and secure to invest in with low transaction cost due to blockchain technology. Some popular digital currencies like Bitcoin, Ethereum, The Peoples Reserve, Cardano are something you might want to take a look into for investing next.
  • The two types of asset specificity in transaction costs: time specificity and user specificity, may be profoundly changed by blockchain's essential values—consensus mechanism and smart contract.
  • Blockchain can reduce transaction execution time even more with smart contracts, increasing transaction volume. Participants can freely access the network to transact with each other via the consensus mechanism in a fully decentralized market. An institution's trading partners are significantly less likely to be vertically integrated.
  • The blockchain digital ledger's transparency and traceability will dramatically lower the cost of certifying trading partners. Furthermore, blockchain's programmability promotes the flow of digital data. As a result, the amount of time it takes to collect the information needed for a transaction will be lowered.
  • Many concerns have arisen in the banking industry about the recoverability of bank loans. The usage of Blockchain technology could be a game changer, as all transactions will be recorded in a block from the time of disbursement through the time of use. The banks will be able to trace any diversion of loaned funds if the blocks of each transaction are generated.
  • All large-scale transactions and operations can be recorded on blockchain distributed ledgers, which are immutable and resistant to fraud. Furthermore, the decentralized character of transactions gives banks greater confidence in the security of their data.

The Blockchain-enabled technology improves payment security while lowering transaction costs. Many intermediaries are now involved in the payment transaction process, but with the rise of Blockchain-based platforms, we may expect to see the role of intermediaries reduced, saving transaction costs, processing fees, and time spent validating transactions. As a result, we can surely say that Blockchain will change the way people transact.

Related: The Blockchain Revolution May Not Be Televised, But It's Happening