Will Blockchain Change the World?

Historically, the stock market has been the most effective source of wealth creation. In the course of its history, equities yielded an average return of 7% per annum, including reinvested dividends, while taking into account inflation. For the average long-term investor, this equates to a doubling of value about once a decade. Then crypto-currencies arrived and reversed this traditional source of wealth creation. At the beginning of 2017, the combined value of all digital currencies was only $ 17.7 billion. However, not long ago, the combined market capitalization of nearly 1400 crypto-currencies that could be invested amounted to nearly $ 836 billion. This increase in value above 4,500% is something that the stock market would take several decades to complete.  Yet, to tell the truth, most people do not understand the basics of cryptocurrency, nor the blockchain technology that underlies them. In this post I will give an overview of blockchain technology.

What is blockchain technology?

Blockchain is a large decentralized digital book that records transactions. Whenever someone buys digital coins in a decentralized market, sells coins, transfers them or buys a good or service with cryptocurrency, a registry records this transaction, often encrypted, to protect it from cybercriminals. These transactions are also recorded and processed without trusted third parties.

Why was the blockchain invented?

This revolution in cryptocurrency and blockchain stems from the shortcomings of the traditional banking system. For example, when transferring money to foreign markets, a payment may be delayed for several days while the bank verifies it. Many would argue that financial institutions should not block payments and cross-border funds for such a long period. Banks are also almost always used as intermediaries for foreign currency transactions, thus taking their part in the process. Blockchain developers want to be able to process payments without the need for this intermediary.

What are its main advantages over current networks?

So, what does blockchain technology bring to the table, unlike today’s payment networks? For starters, and as stated, it is decentralized. This is an elegant way of saying that there is no central hub where transaction data is stored. Instead, servers and hard drives around the world contain fragments of these blocks of data. This is done for two purposes. 

• First, it ensures that no party can get control of a cryptocurrency and a blockchain. In addition, it prevents cybercriminals from keeping a digital currency “hostage” if they have access to transaction data.
• Second, removing the middle of the equation and working around the traditional banking system should allow lower transaction costs. What is uncertain is whether lower fees would mean cheaper fees for the consumer, or simply higher profits for companies using blockchain technology.

• Third, and perhaps most importantly, the blockchain offers the ability to process transactions much more quickly. While banks are often closed on weekends and operate at usual business hours, blockchain transaction validation takes place 24 hours a day, seven days a week. Some blockchain developers have suggested that their networks can validate transactions on a blockchain in a few seconds, or even instantly. This would be a clear improvement over the current waiting time for cross-border payments.

What are the disadvantages?

However, the blockchain is not perfect and has obvious disadvantages. The adoption of technology is an obvious obstacle. To deploy the blockchain, financial institutions should essentially abandon their current networks and start from scratch. Attempting to integrate existing payment networks into the blockchain could be extremely difficult – to the point that some companies do not even bother to try to do so. It is not yet clear, with the exception of bitcoin (CCY: BTC-USD), the world’s most popular cryptocurrency, if a chain of blocks other than bitcoin could survive, it was scaled to deal with many transactions.

Blockchain can also, depending on the circumstances, rely heavily on energy and therefore be expensive. When verifying transactions, it is possible that a lot of electricity is used. This is the case with bitcoin, which is why so few cryptocurrency miners find that the validation of transactions on the bitcoin blockchain is interesting (and profitable).

The differentiation of blockchain networks is also a concern. At present, there are nearly 1,400 cryptocurrencies and many have their own version of blockchain technology. It is difficult to know who will be at the top of the list or who has the preferred blockchain tech. What is advantageous now could quickly become a disadvantage.

How are blockchain transactions validated?

The processing of transactions on the blockchain also poses the following problem: do not spend the same piece of cryptocurrency twice. This is where transaction validation comes in. Transactions on the blockchain are validated in two main ways: proof of work (PoW) and proof of participation (PoS). Bitcoin works on the PoW model. What is happening with PoW is that cryptocurrency miners compete to solve complex mathematical equations resulting from encryption protecting transactions on a blockchain network. The first minor to solve these equations and validate a block of transactions receives what is called a “reward”. For bitcoin, a reward is paid as a digital bitcoin fraction. The other main validation method is PoS. Rather than using a ton of electricity at a competition to solve equations, the PoS method offers virtual coin owners the opportunity to validate transactions deterministically. In even simpler terms, the more coins you have in a virtual currency that operates on the pay-per-view model, the more likely you are to select blocks and add them to the blockchain. It should be noted that while the PoW method offers block rewards in the form of virtual coins, the PoS model rewards its stakeholders with the transaction fees paid. 

Is blockchain private or public?

One of the main aspects of blockchain technology is the possibility for a developer or a company to customize it. This means that a blockchain can be completely open to the public and allow anyone to join. It can also be totally private, with only certain people authorized to access the data, or authorized to send and receive payments. Bitcoin is an example of an open-source public blockchain that allows everyone to join it, whereas a private blockchain would suit a client corporation perfectly.

Are blockchain transactions anonymous?

Despite popular belief, most blockchain transactions are not  private or anonymous. Although we do not need to provide login when we buy or sell cryptocurrencies,  parsing a chain of blocks can often be linked to an individual sender or to a receipt of funds. A small class of digital currencies called “confidentiality coins” aims to make transactions based on block strings impossible to find. To do this, they reinforce the protocols designed to mask the identity of the sender and recipient of the funds, as well as the dollar amount sent. Yes, this level of privacy has been accused of being a haven for the criminal community. However, most coin and privacy blockchain developers also suggest that it is a tiny part of their community and that almost all members are identifiable and legal customers.

Does the blockchain have applications beyond the financial sector?

So far, you’ve probably noticed that we’ve been discussing the application of blockchain as a way to improve the financial services sector, however,  it could actually serve many industries far beyond the financial sector.
For example, Ethereum (CCY: ETH-USD), which has a market capitalization of nearly $ 116 billion and is the second largest cryptocurrency behind Bitcoin, currently has 200 organizations testing a version of its blockchain technology. Yes, traditional banks are testing the Ethereum blockchain, but technology and energy companies are as well. Integrated oil and gas giant BP (NYSE: BP) is considering using a version of Ethereum’s blockchain to help it negotiate energy futures. If these transactions were to be settled more quickly, BP could probably improve its margin. Blockchain may also offer the option of replacing the state identifiers we have in our portfolios, or perhaps helping technology companies such as Cisco Systems (NASDAQ: CSCO) manage their Internet of Things network. Currently, Cisco is working on its own blockchain technology, which identifies different connected devices, monitors the activity of these devices, and determines the reliability of these devices. It has the potential to continually “learn” and evaluate which devices are reliable and whether they should be added to a network. So yes, the blockchain is more than just sending money.

Is blockchain viable on a larger scale?

Finally, you are probably wondering how the blockchain is viable. The honest answer is “nobody knows.” In fact, blockchain has been around for almost a decade thanks to bitcoin, but it is just starting to attract a lot of attention. Most companies that test blockchain technology do so with very limited capacity (demos or small-scale projects). No one is absolutely sure that blockchain can handle scaling, as many developers have suggested.
The partnership between Ripple (CCY: XRP-USD) and banking giants American Express (NYSE: AXP) and Banco Santander (NYSE: SAN) is perhaps one of the best concrete examples of blockchain in action. It was announced in mid-November that American Express users would be able to send non-card payments to UK accounts. Santander on AmEx’s international FX payment network and have these transactions processed through the Ripple blockchain. The attraction of this partnership lies in the immediate settlement of cross-border payments by Ripple, as well as in the expectation of minimal transaction fees.

Can blockchain really become  mainstream? This question remains unanswered for now, at least you better understand what the craze is all about.

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