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Hi, Team! I’m excited to share the below post about blockchain tech and it’s big potential! If you’re like me and have been hearing about “cryptocurrencies” or “the blockchain” for a while but don’t completely understand what it’s all about – this post is for you!
The post comes to us from Alexander who blogs over at daytradingz.com | He started his blog in 2016, sharing his experiences in short-term investing as well as revealing insights about major vendors in this segment.
It’s obvious that Alexander has a great understanding of finance, our markets, and how fintech applies to them all. I’ll let Alexander drop some of his knowledge here! Take it away, Alexander:
In 2017, blockchain tech experienced a unique bull market, even if at the time there had been several course corrections
Basically, all the cryptocurrencies were worth more compared to the previous year. However, the new currencies are still far from the skyrocketing trends they experienced during last year’s period.
Despite the extreme volatility and plenty of opportunities for speculation, the crypto market is based on a technology that could survive the cryptocurrencies in the long run: the blockchain!
What is a blockchain?
A blockchain is a network of accounts, which allow transactions of any type of value. This value might be assets, licenses, order placements or something similar, such as virtual values, data, and any kind of rights.
The special feature about this is that all the transfers can be done cryptographically.
There is no need for a third party to handle these procedures based on trust. As soon as two parties agree on a transfer, it is completed in a matter of seconds. In the entire transaction process, there is no paralyzing bureaucracy involved.
The legality of this transaction is verified by other members of the network. Every transaction references all the previous transactions of the current data-chain. In its structure, a blockchain is built exactly as the name implies: a chain of data records, which can be described as “blocks”.
The idea behind this is that the manipulation of interventions can only take place between transactions, as every valid transaction changes its preconditions again. A blockchain that is frequented by a higher number of users, allows hackers only a tiny amount of time to enter, where they would have to spend an enormous amount of computing power. This would make quick access almost impossible.
There are different incentive systems to ensure the verification of transactions
Users who are able to provide the necessary computing power have to be found. In most cases, they are reimbursed through new issues or fees of the respective cryptocurrencies. The most common principles are the “proof of work” and the “proof of stake”.
What would be the potential for the stock market?
The potential of the blockchain technology for the stock market is obvious: The elimination of the huge number of bureaucratic intermediaries would allow even more efficient trading. This is a very interesting perspective, especially in times of high-frequency trading, which is already part of a computerized standard.
The possibility to transfer values almost in real time is an extremely interesting aspect regarding the digitalization of the stock market
Plenty of intermediate processes could be rationalized and also peripheral supply chains could be implemented through the blockchains, or the so-called “smart contracts.” This could be directly priced in again.
Smart contracts are self-executing contracts, for example when a payment is fully automated upon delivery.
Blockchain tech could definitely survive cryptocurrencies
While blockchains have the potential to be a huge revolution for bureaucracy, just as automation is for industry, the forecast for blockchain-based cryptocurrencies are not as positive in the medium or long-term.
The cryptocurrencies could become more of a burden when used for commerce in a bigger dimension. This is because of the extremely volatile and aggressively traded cryptocurrencies.
They can be considered more as a transfer currency, which will become obsolete as soon as investors learn to handle “real” money transactions via blockchains. In the long term, the native assets of the blockchains (as cryptocurrencies are nothing more than that) are rather an obstacle.
The first blockchain that proves to be technically resistant and robust enough to experience a wide-ranging adaption through heavyweights in the world of finance and economy, will have to be managed without cryptocurrencies.
Scaling problems are currently the biggest obstacle
As exciting and progressive the concept of blockchains might be, there is still always a problem, which currently prevents a large adaption: obvious scaling problems!
It is uncertain how long it will be possible to guarantee this fast data transfers within a blockchain. The bigger the networks grow, the bigger and faster the records to be handled grow. The computational effort increases analog to the users.
For now, there is no strong and reliable concept which could exclude this deficit permanently
It could be possible to greatly simplify the calculations, but how fast would this have an effect on the expenses of the security?
Bitcoin, for example, already uses several hours of computational efforts whereas in the past it needed only a few seconds. Not to mention the enormous amount of electricity consumption, as there are entire computing centers needed to verify the calculations.
You may assume that no hacker will be able to keep track of the transactions. But at least concerning Bitcoin’s “proof of work”, probably the most antiquated system, only those who are able to solve a calculation first are able to benefit.
As the entire world rushes to new calculations, a huge amount of energy is consumed and only the fastest can profit. Which leads to the question, when does the cost for electricity overweigh the value of new emissions, meaning that the incentive gets lost?
Conclusion – many questions are still open
The biggest dilemma might be when the blockchain can be significantly implemented – not “if.” Too auspicious is the promised reduction of bureaucracy. We are talking about a methodological approach that could reduce entire professions, and possibly make them superfluous.
But before everybody starts to retrain, there is some good news for those in the administrative sector. This development might not happen in the very near future. Too many technical questions are still not answered. Moreover, the old structures certainly will not be replaced by the new technology until all of these questions have been answered.
It seems like this wild west-style frontier is still evolving. What involvement have you had with blockchain? Or, what would you like to learn more about? If you’re someone who is knowledgeable about the subject, I’d love to get your opinions below in the comments!
Thanks for reading!