[Part I] Current State of Blockchain and Cryptocurrencies

Blockchain and Cryptocurrency – undoubtedly two of the most hyped words in 2017 – are often used interdependently in the same context. One might easily oversee a crucial fact: Blockchain is an actual technology while cryptocurrencies are merely one of the core applications of that technology. Some of the largest multinational companies in the world and even governments are adopting Blockchain technology in countless thinkable applications – the list of Blockchain-based projects and innovations is still growing exponentially. At the same time, the total market capitalization of cryptocurrencies toppled USD 800bn in early January 2018 with compared to over USD 15bn the year before. Such leap represented an incredible bull run outperforming every other asset in the financial market during this time span.

Blockchain, “an incorruptible digital ledger of economic transactions that can be programmed to record not only financial transactions but virtually everything of value”, was invented in the same streak as Bitcoin by a person or a group of people going by the pseudonym of Satoshi Nakamoto in 2008. With Bitcoin, Satoshi intended to build a decentralized peer-to-peer electronic cash payment system. Requested transactions in such system are broadcasted to a network of peers’ computers (nodes) and verified by the community based on the validity of the transaction. Once verified, a new block is added permanently to the existing Blockchain, the updated chain is then distributed to the network nodes and the transaction is completed. This ingenious process makes fraud unlikely – possibly even impossible –, increases transparency and, in many cases, reduces costs due to decentralized infrastructure.

The Blockchain-based approach to store and transact financial data quickly departed from its original sole purpose, Bitcoin, and found its way into a vast number of industries, transacting any information. Companies have successfully managed to leverage Blockchain technology to innovate within their business realm mostly on a product and process level. Among many others, possible business applications include supply chain management and tracking (e.g., DHL, UPS, Nestle), accounting (e.g., Deloitte), quality assurance (e.g., Walmart) and voting (e.g., CH Zug’s government). Given the immense dynamics of “everything Blockchain”, both traditional and emerging businesses are developing and implementing new applications on a daily basis.

One of the highest-profile cases of a Blockchain-based start-up today is DFINITY. Being valued at roughly USD 3.5bn after its ICO (initial coin offering), the company promises to offer a “better Ethereum” in form of a “a decentralized cloud and computing resource [with] vastly improved performance and, ultimately, unlimited capacity. Business applications running on this computer will be unstoppable and won’t need to involve complex components such as databases, backup and restore systems or Amazon Web Services […].” A paradigm shift? That remains to be seen once the business is actually operational and running throughout 2018.

Cryptocurrencies (cryptos) are digital currencies, represented by 1 private and 1 public piece of code rather than coins and bills. They operate independently of central banks. As opposed to traditional fiat currencies, cryptos are not limited to specific geographical regions. For instance, Bitcoin [market cap USD 125bn; market dominance 45%] as the most prominent cryptocurrency today, is a truly global currency traded on all continents and most countries in the world on web-based exchanges. Besides Bitcoin there are more than 1500 other cryptocurrencies in circulation^[3]. Each currency is characterized by its own distinct benefits and use cases.

Similar to Blockchain as a whole, the benefits of cryptos can be explored to innovate along products and processes. American Express adopted Ripple as cross-border payment Blockchain infrastructure to reduce costs drastically; XRP (Ripple’s cryptocurrency) “will come into play” as means to speeding up payments later down the line. On top of that, cryptos can be used by established companies to generate new revenue sources. CEO of American GPU designer Nvidia even claimed that cryptocurrency mining will be a core business for its company.

Most recently, messaging platform Telegram raised roughly USD 1,7bn while launching its own token. This instance perfectly describes how ICOs have become a new medium for many companies to raise money but also to foster their ecosystems. A currency for 200m global Telegram users for every activity on the Telegram platform – an excellent way to draw users and developers closer to the platform. Facebook is also looking into launching its own currency. If Facebook was to launch its coin, 2bn users would have access to the currency – possibly making it an instant competitor to the USD in terms of adoption.

To conclude, Blockchain and its core application, cryptocurrency, have become a game changer in many industries as well as for governments. Its benefits are mostly being leveraged by established companies and start-ups to radically innovate processes and products rather than to re-position themselves. Promising projects such as Ethereum and DFINITY are still in their infancy – their broader adoption might lead to a global paradigm shift in business applications. The outlook for Blockchain’s future is bright. Cryptocurrencies, on the other hand, may face regulation in the mid- to long-term having unpredictable consequences. The key question to be asked is: have cryptocurrencies as a global phenomenon already become too big to be stopped by regulators?

Author:

Manuel Ehmann