We believe there are three key challenges that blockchain will need to overcome.įirst, achieving critical mass. If bitcoin began to function more like gold on the world stage, those valuations could converge. To put it in context, the bitcoin in circulation today is worth around $125 million while the value of all gold ever mined is worth around $7.9 trillion. It could potentially play a similar role to the one gold has historically, as a hedge against uncertainty. Particularly in countries that have histories of financial instability, bitcoin could prove to be an attractive alternative to local currencies. If the mutually agreed upon conditions of the transacting parties are met, the smart contract will execute automatically with transparency and no reversibility, reducing transaction costs.Īlthough it is still unclear whether bitcoin will become a lasting piece of the financial firmament or is just a passing fad, it does provide the three key functions of a currency-it works as a store of value, a mechanism of transaction and a unit of account. In addition, blockchain has new capabilities such as the ability to deploy “smart contracts,” self-executing contracts that are written into the computer code. While blockchain technology can be adopted by existing financial institutions, it has the potential to enable a new set of payment rails that circumvents the existing financial establishment while, for example, allowing merchants to bypass elevated credit card processing fees. This can potentially eliminate not only the back-office costs associated with clearing, but also costs associated with putting up margin until a transaction closes. Parties can move almost immediately from execution to settlement, collapsing the time required for settlement from days to minutes. Titles to everything from property to securities to cryptocurrency can be written into blockchain, allowing parties to verify ownership without needing a financial intermediary to facilitate the transaction. As a result, blockchain has the potential to cut out the financial middleman. The key innovations of blockchain have been to use cryptography, proof of work and tokens (e.g., cryptocurrencies) as incentives for participants to perform the work to ensure the data’s integrity.īlockchain’s shared ledger eliminates the need for intermediaries to establish trust and authenticate identity between two untrusted parties who want to transact. Because the data is public, care must be taken to ensure its integrity. As the prices of cryptocurrencies fluctuated wildly over the last year, bitcoin and blockchain-the underlying technology that powers it-captured the popular imagination.īlockchain is a distributed-ledger technology that employs cryptography to ensure the integrity of the data it stores, with control of the data distributed among all parties using it.
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