Everything You Need To Know About Blockchain Technology
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In a few decades, blockchain technology may rank as high as the steam engine and the internet when measuring its impact on society.
But few people are aware of what blockchain is or how it can affect the world. Given the potential impact, it’s important to understand it in the simplest terms, including what it is, how it functions, and why you might want to use it.
It’s also important to consider if investing in blockchain is a good fit for you.
Before you can do that, though, you need to understand the ins and outs of blockchain technology.
Understanding The Invention Of Blockchain Through a History of Accounting
To understand blockchain technology, let’s review its history, including how this modern technology depends on revolutions in accounting.
Defining blockchain technology
“Blockchain technology” is often understood as “Distributed Ledger Technology” (DLT). In plain English, that means that a ledger is distributed (or can be accessed) among many different people and/or institutions.
In other words, the ledger isn’t kept in one place but distributed across the world to many different places. Furthermore, the contents of the ledger are the same wherever it’s kept, with the internet allowing for that synchronization.
To understand why distributed ledgers are so powerful, let’s take a step back and look specifically at what a ledger is.
A brief history of accounting
In the most fundamental way, ledgers keep track of units of accounts. Finances are one unit of account that can be tracked on a ledger. Another unit of account would be the number of wine bottles, tomatoes, and pounds of wheat and cheese your Italian restaurant keeps in inventory.
Simply put: ledgers allow for accounting. Accounting, in turn, allows you to do things like create a budget or keep track of transactions. The practice of accounting, which is thousands of years old, started very simply, with an abacus or papyrus scrolls to keep track of transactions.
With these, you could track that Alice still owed you two chickens or that you still had to pay Bob four bushels of wheat. Over time, such ledgers assumed greater and greater complexity. The invention of a ledger and accounting allowed for the transition from a barter economy to a more complex one.
But these simple forms of accounting also came with a downside: if someone erased the record of the four bushels of wheat that were owed to you, there would be no way to prove what happened. Additionally, with the simplest forms of accounting, it’s very easy to make mistakes. Maybe the person doing the bookkeeping had bad handwriting and the “7” looked like a “1.”
Sorry, you’ve just lost six cows.
In essence, the person who controls the ledger has power over the possessions on that ledger. Your angry uncle could wipe away many of your possessions in a few seconds, and you’d have no legal recourse.
Over time, with more long-distance trade emerging after the Middle Ages, a new system emerged to minimize these errors. That system is called “double-entry accounting.”
The double-entry accounting depends on the formula “Assets = Equity + Liability.” The seven cows would be entered in two separate instances. Both sides of the equation should match in the bottom line so that the probability of errors is minimized.
Although accounting fraud, like someone intentionally changing the books, still isn’t fixed through double-entry accounting, a distributed ledger can help as long as everyone keeps the same state of the ledger.
The main benefit of blockchain
Blockchain offers a solution to the problem of changing the books because of two properties:
- The ledger is cryptographically ensured to be unchangeable under certain conditions. Contrary to the previous methods of accounting, it’s impossible to “cook the books” or commit outright fraud because the mathematics of cryptography doesn’t allow for it.
- The account kept on the ledger can be checked for validity by everyone who uses the blockchain. In the past, the books of a company or government wouldn’t be visible in real-time by anyone who requested insight. Blockchain is considered “triple-entry” accounting because the ledger is distributed and kept among many different individuals.
Hence, the biggest promise of blockchain is that it increases fairness because the ledger, as well as all changes and rules, are fully transparent.
Understanding Blockchain Technology
Blockchain technologies are often called “digital assets” or “cryptocurrencies.” Digital assets may be the best name because blockchains are frequently used for non-monetary purposes as well.
Cryptography makes it very hard to tamper with the blockchain. If you own five coins of a certain digital asset or have five contracts registered on a blockchain, the mathematics ensures the coins or contracts remain valid and under your control.
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Additionally, blockchain technology allows multiple people to interact with the ledger, changing it under certain rules while also allowing for validation of changes others have made.
Let’s use Bitcoin as an example of blockchain technology in action.
A look at Bitcoin
Bitcoin is the most well-known use of blockchain technology. It’s a cryptocurrency, a method of transferring value between two individuals.
Bitcoin first emerged in 2009, right after the financial crisis. The cryptocurrency was marketed as a means for making transactions to another person without any intermediary.
The Bitcoin network is maintained in a decentralized manner through cryptography. Over time, thousands of computers keep the Bitcoin ledger alive. That ledger is updated every ten minutes, meaning that new transactions are registered on the ledger six times per hour. A computer that’s keeping track of a full ledger of the Bitcoin blockchain is called a “node.”
The more nodes there are, the more decentralized the blockchain will be. Today, thousands of Bitcoin nodes exist all over the planet. If ten of these nodes in a certain country are shut down, the ledger remains alive.
Additionally, in the case of Bitcoin, nodes are rewarded with new Bitcoins for keeping track of the ledger. Specifically, every ten minutes, a new “block” is found.
Related: Should I Buy Bitcoin?
What are blocks?
Blocks are fundamental to the word “blockchain.” But what specifically is a “block”?
A block is a certain state of the ledger. A simplified example is that the first block may register that Alice has 15 Bitcoin while Bob has 10. Alice may then send 5 Bitcoin to Bob, leading to an updated state of the ledger in the second block. The second block then registers that Alice has 10 Bitcoin and Bob 15.
And because each block represents a certain state of the ledger, that shows the accounting at that exact moment in time.
What’s a chain?
All of these blocks are connected in a “chain.” Block one is connected to block two and so on.
The magic of connecting all the blocks in a chain is that previous states of the ledger remain traceable over time. Even though Bitcoin has been around for more than a decade, it’s still possible for you to look up transactions from previous years, like 2013 for example. And because the Bitcoin ledger is public, everyone can keep track of all the transactions that were made.
But with this connected information readily and publicly available, some people wonder if blockchain is safe.
Are blockchains secure?
Overall, blockchains are secure. Since the blockchain is protected by cryptography, high-quality blockchains ensure that the ledger remains secure over time. If someone could interfere in the blockchain, by reversing transactions or altering the ledger, there would be a huge problem.
In that case, we’d return to the risk that existed with double-entry accounting. Cryptography thus ensures that triple-entry accounting works as it should. Let’s visit Alice and Bob again to see this in action.
Since Bob helped Alice set up a blog to make extra income, Alice transferred 5 Bitcoins to Bob. If Bob checked the number of Bitcoins on his address and saw his balance was zero, he’d have a problem. Fortunately, the chances of transactions being reversed are nearly 0% with Bitcoin, although there have been some issues with less secure blockchains.
Public and private keys
On any blockchain, you’ll have both a public and a private key. These work similar to bank accounts.
A bank account has an account number and a Personal Identification Number (PIN). Your bank account number can be publicly known, but your PIN should always be kept private. With blockchain, your public key is akin to your account number.
The private key for blockchains has the same function as a PIN for your bank account. If you have any assets located on a blockchain, such as Bitcoins, the private key allows you to spend them.
And if you lose your private key, you can lose all your money.
To transfer Bitcoin, you’ll use your private key to send Bitcoin to the other person. You can do this as long as you have the public key, also known as an address, from the other person.
Storing Your Cryptocurrency
Most people keep their cryptocurrency in a digital wallet, but there are a couple of different options.
A wallet for cryptocurrencies is similar to a regular wallet you may hold in your purse or back pocket. But just like the money in your normal wallet can get stolen, the same is true for cryptocurrencies stored in an online wallet.
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Hardware wallets: safely storing digital assets
Due to the risk of hackers stealing digital assets that are stored on exchanges, it’s smart to store your possessions on a hardware wallet.
A hardware wallet connects with your USB but never discloses your private key through the internet. The benefit of that private key never being visible is that the money on the hardware wallet can’t be hacked. You can transfer money from the public keys on the wallet to another address using the buttons on that wallet.
If you ever invest a substantial amount of money into digital assets, it’s essential that you get a hardware wallet.
If you buy a cryptocurrency, you almost always do so at an “exchange.” An exchange is a company that sells and stores cryptocurrencies to consumers online. The main downside to storing your cryptocurrency at an exchange is that you may lose all your money if the exchange is hacked.
Different Types of Blockchains
Bitcoin isn’t the only cryptocurrency around. There are more than 2,000 digital assets today. Let’s look at some differences in blockchains and how such differences create unique products.
Permissioned versus permissionless
Many blockchain projects are created in such a way that nobody could prevent you from using them, at least in theory.
Such blockchains are described as “permissionless.” In permissionless blockchains, nobody in the system can prevent you from making a transaction or setting up a contract on the blockchain.
Bitcoin is an example of a permissionless blockchain because if you hold a Bitcoin and are connected to the network, no one can prevent you from sending that Bitcoin to another address.
Blockchains created by the legacy banking system are examples of the permissioned instance. Take JPM coin for example. JPM coin is created by JP Morgan and is used between institutions; regular customers aren’t able to join. Libra, the cryptocurrency proposed by Facebook, will also be permissioned in its early stages.
Keep in mind that most blockchain projects are permissionless only “in theory.” If you pay a transaction fee, you can exchange some of your dollars and join the Bitcoin network. But if your bank prevents you from buying Bitcoins in the first place, you’re prevented from using that blockchain.
This is an example of blocking an on-ramp. In this case, you can still be prevented from interacting with permissionless blockchains.
Historically, most digital assets have strived to be permissionless. Bitcoin was created as a monetary system whereby no one could censor the way you spent your money. The explicit goal of the creators of Bitcoin was to remove the middleman in the financial system — the banks.
In theory, Bitcoin was created to increase freedom around the world. In practice, that story is still open-ended because a few people own a substantial share of all Bitcoin available.
Centralization versus decentralization
Many blockchain projects strive towards decentralization. Decentralization means that no single individual or group of individuals controls the network. True decentralization, however, is difficult to achieve.
For instance, about 70% of the computing power that supports the Bitcoin network is currently located in China. Three to five big Chinese companies control that computing power, so in practice, the decentralization of Bitcoin is under threat.
Even though Bitcoin was originally intended to be a decentralized blockchain, the people controlling the computing power in China have disproportionate power over the network.
Centralized blockchains, on the contrary, are controlled by a single individual, group of individuals, or an institution. JPM coin, for example, likely runs on a server system at JP Morgan, and its control is completely centralized.
Most often, digital assets aim to be decentralized because such systems are difficult to shut down. As an analogy, despite decades of trying to shut down illegal downloading of intellectual property like movies and computer games through Torrent, governments haven’t been successful. Decentralization works for creating long-term antifragile systems.
There’s a strong relationship between centralization and permissioned blockchains on the one hand, and decentralization and permissionless blockchains on the other hand.
The more centralized a network is, the greater the risk that you need someone’s permission to set up a contract or make a transaction. The more decentralized the network is, the greater the likelihood that the blockchain is permissionless.
Anonymous versus traceable
With 95%+ cryptocurrencies available, anyone can look up previous transactions that have been made on the ledger. For example, it’s still possible to review the biggest Bitcoin transaction ever made, 500,000 BTC in 2015.
But if you trace all Bitcoin transactions made in history, then governments can, too. In fact, Bitcoin is a governments’ wish come true because every single flow of money is traceable. That traceability doesn’t exist with cash, for example.
Hence, if you use Bitcoin — or other blockchains that are publicly visible — for illicit activities, government institutions will be able to find you.
For that reason, other digital assets exist where individual transactions can’t be tracked or traced. Monero and Zcash are two examples of such projects. These digital assets are called “privacy coins,” and there’s no way to track transactions, which in turn grants anonymity.
The goal of such digital assets is to promote privacy, mostly from the government.
From a philosophical perspective, arguments can be given in favor as well as against such currencies. In repressive regimes with hyperinflation, privacy coins allow you to buy bread for your children and store your wealth. However, it’s also very likely that privacy coins are used for illicit activities such as dealing in drugs online.
In general, governments don’t like the public owning these privacy coins. If you’re considering it, make sure to check their legal status before buying. If the coins are legal, but you’d like to protect your privacy while making such purchases, consider completing the transaction while connected to a virtual private network like one available through NordVPN (for a few dollars a month you can surf the internet anonymously through next-gen encrypted data privacy).
Mining versus pre-mined cryptocurrencies
The earliest cryptocurrencies emerging on the market were “mined.” This means that you had to use electronic equipment, such as the CPU in your computer, to solve mathematical problems.
If your computer is the first to solve such a problem, you’re rewarded by getting some cryptocurrency. For instance, many people used their laptops to mine Bitcoin in the early days.
The Bitcoin protocol is set up in such a way that around every ten minutes a new block is found by cracking a mathematical puzzle. If the puzzles are solved too quickly, like every seven minutes, the difficulty goes up. When puzzles are solved slowly, the difficulty goes down. Over time, the system autocorrects.
Mining has the advantage that lots of computing power is used to find a new block — making the currency inherently scarce. These mathematical puzzles (called “hashes”) have become so complex that it now costs thousands of dollars to mine one single Bitcoin.
Not all cryptocurrencies are mined, though. Almost all digital assets developed today are pre-mined. Pre-mined means that a certain number of coins are created “out of thin air” while the integrity of the ledger is protected by cryptography.
Cryptography should still ensure that the quantity of a digital asset, such as a certain coin, remains finite.
Immutability and security
Almost all digital assets are created in such a way that their ledger should be immutable. Immutable means, among other things, that changes made to the ledger can’t be reversed.
Why does immutability matter?
Imagine that Alice and Bob have a contract on the blockchain. If Bob mows the lawn for Alice, “X” amount of currency is immediately transferred to Bob. Let’s say that the contract is deleted from the blockchain, and Bob has mowed the lawn. In that case, Bob isn’t paid out.
In case of mowing the lawn, the losses aren’t that catastrophic. But if your college degrees are listed on the blockchain, or the deed showing you own your house, the consequences can be devastating.
For every blockchain project in the space, it’s essential to think about the problems of immutability and security. Many blockchain projects, even those with a top-50 market capitalization, have had issues in the past.
For instance, Zcash had a bug that allowed for infinite counterfeiting of money. Ethereum Classic, a mineable cryptocurrency that allows for contracts, had transactions rolled back because a group of individuals accumulated more than 50% of the mining power for some time.
Immutability is an essential quality of blockchains. The Bitcoin network is valued over $150 billion today, and one main reason for that valuation is that people are confident their money is stored securely.
Issues Facing Blockchain
In addition to problems like security and privacy, there are a few other issues facing blockchain technologies.
Even though top blockchain projects function reasonably well today, Bitcoin alone is used by about 25 million people. The problem with Bitcoin lies in the fact that it only allows for seven transactions per second. There’s no way Bitcoin can scale to accommodate all 8 billion people on the planet, which means that most digital assets aren’t ready to be used on a worldwide (or even nationwide) scale.
And while engineers and computer scientists are working to ensure that Bitcoin allows for more transactions per second, the protocol probably can’t cover the entire world.
In the long-term, blockchain technologies still have to develop to allow for greater scalability. The reason for not having reached that level of scalability yet is that increasing scalability usually leads to less decentralization of the network.
Many blockchain companies want to keep the decentralized and permissionless nature of the blockchain while increasing scalability over time. It’s therefore reasonable to assume that the best blockchain projects have yet to be developed.
Another issue is “interoperability,” or the ability of two blockchains to communicate with each other.
Today, it’s possible to send money from a Bank of America account to a Wells Fargo account. In blockchain, it’s not yet possible to convert your Bitcoins into another digital asset on another blockchain.
To create a functioning blockchain ecosystem, it will be necessary to make blockchains interoperable in the long-run.
The biggest contender to make different blockchains and other systems interoperable today is the Interledger protocol created, but not controlled, by Ripple. Interledger not only allows you to trade digital assets on the blockchain, but also other asset classes such as real estate or commodities.
In time, you will almost certainly also be able to exchange money from your bank account directly with a blockchain.
Governance of blockchains is important because in the long run, if blockchains begin to play an important role in your life, you want to be able to govern its effects. In other words, if blockchains become big, they need to be governed like local or national governments. But doing so isn’t easy.
Newer blockchain projects such as Cardano have identified these later problems and aim at engineering the blockchain in such a way that scalability, interoperability, and governance become possible.
Advantages and Disadvantages of Blockchain Technology
Different blockchains all have their unique benefits and downsides. Just like there isn’t one internet company that meets all customer needs, one blockchain won’t meet all the requirements consumers may have.
Bitcoin, because it is so slow today, can act as a perfect store of value but is no longer a great means for making everyday purchases. Bitcoin can also not manage any contracts in its current form, although such functions might be added in the future.
The blockchain technology, taken by itself, also has advantages and disadvantages.
When considering using or investing in blockchain, it’s important to take into account some of the disadvantages.
- Cost of maintenance. Because blockchains are per definition distributed, the cost of maintaining a blockchain is greater than an old-fashioned centralized system. Hence, not everything needs to be put on a blockchain. The assignments you did in college probably don’t need to be stored forever, but your grades might. For the former, the server at your university is good enough.
- High individual risk and responsibility. It’s very easy to lose access to all your possessions if you no longer control your private key. For that reason alone, digital assets can’t be used by a worldwide population because most people cannot or are unwilling to take 100% responsibility for their own financial future. One mistake, such as throwing away the hard drive of your computer, and a large portion of your wealth can be wiped out.
- Creates lots of data and is slow. Blockchains are very data-intensive. Every new block creates new data that is transferred across all participants in the network. A centralized server that stores non-essential information just once is far quicker for many applications and goals.
- Potential privacy issues. Your privacy might be infringed upon with blockchains. For instance, if a government only issues its currency on the blockchain and outlaws all cash transactions as legal payment methods, each and every transaction you make becomes trackable. Repressive regimes may use blockchains to their advantage in that way.
Despite the potential problems with blockchain technology, there are a number of advantages:
- The ledger is fully transparent. Everyone can look up which transactions or changes have occurred. In theory, you know everything that’s happening on the blockchain at any given time.
- Transparency of rules. The rules of changing the ledger or making a transaction are known by everyone using the blockchain. Cryptography ensures that these rules are followed at all times, so cheating isn’t possible.
- Cheaper services. You can store your wealth for a cheap price in Bitcoin, for example, or make inexpensive cross-border payments with XRP. If you’re transferring $1,000 from the Middle East to your family in Thailand, transaction fees might make up 5-10% of the money you’re trying to send. With XRP, you can transfer that value for less than a hundredth of a penny.
- Quicker services. If I want to transfer $1,000 from a Dutch bank account to one in the USA, that process might take a couple of days. With cryptocurrency, that process might take 1-4 seconds.
- Democratic ideals. In theory, the entire world is able to participate in blockchain projects. It’s very likely that a blockchain project, instead of the legacy banking system, is finally able to deliver banking services to billions of people living in poor countries.
Of course, different digital assets all have their own unique advantages and disadvantages. And because blockchain is an emerging technology, it’s very likely that these advantages and disadvantages can change over time.
How Blockchains are Maintained: Different Consensus Algorithms
Consensus algorithms are methods by which participants of a blockchain agree on what updates of the ledger are valid and which are not. There are several different consensus algorithms to be aware of.
Proof of work
The mining of cryptocurrencies encapsulates a “proof of work” algorithm. If you’re mining a cryptocurrency, you put in a certain amount of work to find a new block. Bitcoin is the most important cryptocurrency that currently uses proof of work.
The advantage of proof of work is that it’s incredibly secure. Only brute calculating power of electronics allows you to find a new block. The disadvantage is that if the proof of work blockchain doesn’t have much calculating power behind it, and it’s easier for people to attack the chain.
In fact, several lower-ranking proof of work cryptocurrencies have been attacked because they didn’t have sufficient computing power behind them.
Proof of stake
Proof of stake entails that you’re reinvesting your stake (current holdings) in a digital asset in order to maintain the network. As a reward of that staking, you’ll earn new digital assets over time.
In other words, if you’ve got 100 coins, staking ensures that you’ll grow that number of coins over time. Proof of stake frequently has annual returns of 2-10%. Cryptography ensures that staking is done in such a way that the network is supported and that the returns are reasonably fair.
Probability calculations are used to calculate the effects of staking, just as in gambling. However, unlike gambling, the returns on proof of stake assets function more like a savings account — with steady returns.
The advantage of proof of stake is that you don’t expend valuable energy in mining. Without mining, it becomes much easier to use a higher number of transactions per second. The main disadvantage is that proof of stake might not be as secure in all cases.
The cryptocurrencies XRP and XLM (initially created by the Ripple and Stellar companies, respectively, or their associates) use “Consensus” as their consensus algorithm.
Both cryptocurrencies use servers spread throughout the world as validators for transactions. The goal of these validators is to agree which transactions are legitimate and which aren’t. Once a transaction is agreed upon, it’s registered on the ledger and immutable forever.
The advantage is that you end up with 100 servers spread throughout the world validating transactions and creating new blocks. Consensus is therefore still decentralized because no one individual at one location controls the network. The benefit is also that no energy is spent on a mining process.
More and more newer blockchains use a variation of the consensus algorithm because it’s cheaper and quicker.
Why Use Blockchain?
Many people still have a difficult time imagining how blockchain will be used in the future. But that was true in 1995 when the internet was just beginning to take off.
Deloitte, one of the biggest accounting organizations on the planet, assumes that 10% of the world’s GDP will be stored on the blockchain in 2025. More conservative estimates claim that the digital asset market will be $10-15 trillion in about 10 years. Wildly optimistic scenarios go as high as $80 trillion in 2030.
Keep in mind that the 40-fold return on your investments is in no way guaranteed. Most blockchain companies out there will still fail, and you can lose all your money. Some winners, however, can still grow 100-fold.
Central banks have lowered interest rates to unprecedented lows during the last decade. As a result, some traditional means of storing and building wealth such as saving accounts and government bonds no longer yield high returns on investment.
There’s no certainty whether Bitcoin will actually succeed as a store of value long-term. Nonetheless, Bitcoin is currently being used as a store of value today.
If you’re living in the developing world, you might not be aware of how big the cross-border payment industry really is. Right now, that cross-border payment industry is built on infrastructure that emerged in the 1970s. It’s slow, expensive, and unreliable.
Just like it might take your mail a week to cross the ocean, the same is still true for cross-border payments today. And yet, the process is being disrupted by cryptocurrencies such as XRP. XRP is created, but not controlled, by the Ripple company.
Cross border payments hit $18.5 trillion dollars in 2018 for just business-to-business payments. Additional trillions of dollars wound up in so-called “nostro/vostro accounts,” pre-funded bank accounts that allow for cross-border payments.
The nostro-vostro accounts are a form of pre-funding. The reason you’re paying 5-10% on international payments is because banks and money transfer companies now have to pre-fund the currencies on both sides.
The goal of cryptocurrencies is to allow cross-border payments to be as quick and cheap as sending an email. Another goal is also to help close the prohibitively expensive nostro/vostro accounts so the price of international payments can come down.
Accounting, finance, and audits
Remember the Enron scandal in the early 2000s?
Through “creative bookkeeping,” Enron had built an investor’s wildest dream. Revenues looked astounding while losses were kept off the books. Eventually, reality caught on, and stockholders saw the value of their possessions evaporate.
Fortunately, with blockchain technology it becomes easy to double check the accounting practices of companies or governments by third parties. Not only can every single transaction be traced to its origin, but assets of companies could also be “tokenized,” or represented on the blockchain.
If such processes sound complicated, imagine that the entire business practice, including every financial flow, can be tracked by a blockchain. Doing so reduces the risk of fraud and increases investor confidence.
Additionally, companies and governments can also allow third parties access to their blockchain so that audits become much easier. And because the history of every single change in the blockchain is stored, auditing companies will have an easier time keeping track of flows of money or even goods.
Tokenization is the process of verifying that you really own certain types of property. Stocks and real estate such as your house could be tokenized on the blockchain in the future.
The advantage of that process is not only that ownership would be verifiable, but also that it’s possible to sell part of your property or lend against it.
Let’s say you’ve fully paid off your student debt, own a house, and want to change careers. For that change, let’s assume that you need to follow a two-year master’s degree program. In that case, you might want to sell 20% of your home, paying the person who now owns part of your home some rent to finance your studies.
In the future, it may be possible to tokenize many assets to make such scenarios possible with blockchain.
Crowdfunding and ICOs
The year 2017 was notorious because of the number of “ICOs,” or “Initial Coin Offerings,” that were held on top blockchains such as Ethereum.
ICOs are new cryptocurrencies sold to investors. The benefit of performing such ICOs on a blockchain is that only a limited amount of coins are issued. So much hype existed around blockchain that fraudsters could offer worthless projects and end up with $50 million valuations.
Much of the legal framework around ICOs was questionable in 2017. Most government and supranational institutions are developing legal frameworks to manage this use of blockchain.
That way, in the future, all kinds of projects can be crowdfunded on the blockchain. As a consequence, you can then track ownership and what happens with the funds.
Regulating the stock market
In time, entire stock markets may transfer to the blockchain. Even though stock markets have been around for almost 400 years, some parts of that market are still riddled with criminal activity.
Fraud and other illicit activities are easier to spot when market processes are made more transparent through blockchain. With blockchain, criminal activity may no longer pay off, similar to how security cameras lower the risk of robbery if you own a liquor store.
Although speculative, it’s not unthinkable that certain legal processes might be performed on blockchains 5 or 10 years from now.
For example, your marital status or degrees may be stored on a blockchain so everyone can easily verify that you’re married or have a degree. This is particularly useful if you’re an employer looking to hire someone.
Verifying an applicant’s claims about his or her past is time-consuming. If the information about a person’s past is easily accessible and verifiably correct, it’s much less risky to hire someone.
Land ownership is another example of how blockchains can facilitate legal processes. In many developing countries, for example, land ownership isn’t centrally registered with governments. Blockchains can alter that state of affairs.
Contracts can easily be managed on blockchains, and some already are. One example is the high number of gambling apps that are currently being used on different cryptocurrencies.
The benefit of such apps, particularly in the case of gambling, is that you can engage in the activity almost anonymously. Another advantage is that you may be able to verify your odds mathematically rather than visiting Las Vegas and losing most of your money.
Of course, contracts can be used for many other purposes. These purposes include payment for freelance jobs to crowdfunding to cross-border payments.
Supply chain and logistics
The fake fashion industry is worth more than $400 billion per year. Food fraud costs another $10-15 billion per year. And yet customers are more demanding than ever for the products they buy and demand that the end-product is both high-quality and ethically-sourced. But it’s difficult to know if that’s actually happening.
Fortunately, entire production processes are now tracked by blockchains.
That means that eggs that are produced on a conventional chicken farm or an organic counterpart can now be registered as such. These eggs can then be tracked during their entire production and supply chain.
Everything from the temperature of the eggs during the transport or their freshness can then be viewed by consumers, by scanning the QR code in the supermarket. You can get all kinds of details of how the product was sourced and processed.
This example isn’t speculative because the VeChain blockchain is already active in this area today. With VeChain, for instance, you can already double-check whether a bottle of wine you buy is real or counterfeit.
By 2025, the organized logistics market is poised to reach $50 trillion per year. The role of digital assets in this process cannot be overstated due to the advantage of an immutable ledger. Digital assets can make logistics and supply chain more transparent, secure, and efficient.
There are a few areas in which your identity may be partially visible on a blockchain. It’s logical that parts of that identity are stored anonymously and accessed only under certain conditions.
The degrees you’ve earned may be a prime example of a part of identity that’s advantageous to store on a blockchain. And even though it’s assumed that you have a stable identity that’s registered by a government in the developed world, the same isn’t true in the developing world.
Many people in the developing world have identities that are plainly incorrect. For example, your passport may say you’re from Syria even though you were born in Iraq. In a case like this, it might become impossible to actually build a life in Iraq. Having an identity secured by a blockchain means that you have a new and accurate foundation from which to start or build your life.
Storing an identity on the blockchain may also be advantageous for a world that’s becoming more globalist.
Storing important data
In the future, it’s likely that not all data will be stored in the blockchain. That’s because blockchains are already slow with keeping track of transactions, and transactions require very little data to be processed.
Data requires far more storage capacity, and blockchains aren’t the first storage vehicle that comes to mind.
However, in some very specific cases, such as maximizing transparency, blockchains may shine. If you’re a whistleblower, you may want to store evidence on a decentralized blockchain so that the evidence remains safe.
Micropayments may play a bigger role in your life in the future. It’s already possible to get paid for being exposed to advertisements with things like “Basic Attention Token.”
Another example is the ability to read paid online content without a subscription. For every page you read, the author may simply receive a hundredth of a cent. Social media platforms are another example where micropayments might be used, where you would pay a tiny fee for using it.
When blockchains become scalable, new online subscription models may emerge. The benefit for you is that you may no longer need to suffer through ads while using a program, app, or social media.
Industry and the internet of things
The Internet of Things (IoT) market is projected to be $500 billion in size, and that’s just the beginning.
That IoT market is centered around the idea that billions and eventually trillions of machines are connected to the internet. Robots, vending machines, cars, and your in-home appliances may all be connected with an IoT system.
Alternatively, you may use a part of a factory for a couple of hours and have robots produce a product you’re selling online. That process would be paid for on a per-use basis once again. IoT is poised to make many aspects of economies of the developed world much more efficient.
Governance and politics
Blockchains may solve one of the biggest problems in politics today: voter fraud. Voting is, in fact, already carried out on blockchains today.
The benefits of voting on a blockchain is that you could verify whether your vote really came through for the right candidate.
Another benefit is that once your identity is verified on the blockchain, one person can cast one vote. Voting on the blockchain also makes it easier to analyze the data afterwards.
Who Will Use Blockchain Technology?
In a few years, it’s likely everyone will use blockchain, even though you may not immediately notice it.
Many people aren’t aware that protocols like TCP/IP help the internet function, simply because they work so effortlessly. The same is true for the technical details of WiFi.
Blockchain technology is complicated and not user-friendly, not unlike the internet in 1995. However, thanks to rapid and vast improvements, in 2020, anyone can use the internet. The same holds for blockchain: the bad user experience will fade away over time.
In fact, companies have a direct incentive to make user experiences great because doing so opens them up to a much bigger market. Apple’s smartphone revolution brought billions of people into the sphere and was mostly based on user-friendliness. And it’s not just technology that’s going to be disrupted by blockchain.
Almost all industries are going to be affected.
Patient data might be stored on the blockchain in healthcare, for example, so your new doctor will already have your medical records. Finance will be transformed because better stores of value and cross-border payment options are available. Governance and politics can be transformed in that votes and the choices of your representatives can be stored on the blockchain.
The transformation that blockchain will bring rivals that of the internet.
The Legal Status of Cryptocurrencies and Blockchain
One of the reasons why institutional investors are still wary of investing in blockchain and cryptocurrencies is their uncertain legal status.
There may be regulations sooner rather than later. Now that tech players such as Facebook have entered the space, regulators have a much bigger incentive to implement cryptocurrency regulation.
Of course, such regulations differ depending on where you’re living.
In the Netherlands, digital assets are simply part of your wealth just as Euros are. There’s no taxation on individual transactions. However, in the U.S.. you have to pay a capital gains tax whenever you sell any of your digital assets.
Not only is the legal framework for digital assets different in 150+ countries, the legislation may also differ depending on where you’re living.
For that reason, it’s impossible to give one-size-fits-all recommendations. However, you should consider some general guidelines for purchasing digital assets.
Guidelines For Buying, Holding, And Selling Digital Assets
Regardless of where you currently live, consider following the common-sense guidelines and your own logic when buying and selling digital assets.
- Always pay taxes on your digital assets. Whether you need to pay a wealth tax, capital gains tax, or income tax (due to staking, for example), make sure to spend a few hours researching your fiscal obligations. Many people have had problems with taxes owed on digital assets. Some time ago, for example, the IRS sent out 10,000 letters to cryptocurrency users warning them of their taxes owed. It was unclear what the penalties were, but users were cautioned to take the notices seriously.
- Always assume that governments and other institutions are aware of your digital asset purchases. Today it’s possible to buy digital assets at so-called “Decentralized Exchanges” (DEX). The goal of a DEX is to allow for the purchase of digital assets without having to verify your identity. But even if you’re surfing anonymously on the internet and buying your digital assets on a DEX, there’s still a trace. For instance, you may be asked questions about the $5,000 withdrawn from your bank account. Purchases almost always leave a trace, and blockchain transactions are completely trackable. For that reason, it’s smart to assume that your government always finds out about any purchase you’ve made. Even though you can spend certain coins anonymously, you still might have to prove that you spent the money ethically and legally.
- It’s strongly recommended to purchase digital assets through well-known industry players. In the US, Coinbase, Kraken, and Gemini are the most well-known companies that come to mind. Not only have these exchanges gone the extra mile in ensuring that they comply with regulations, but you also register your identity with that company so that the government knows what you’re buying. While it might sound strange to give up your identity voluntarily, doing so may save you a lot of hassle down the road when regulations finally come into place.
- Don’t use your digital assets for any illicit activities. Again, it’s safe to assume that you can and will be tracked, so be careful about what you buy and where you spend your money. Governments are on their guard right now in terms of regulating digital assets, and digital assets are already under a magnifying glass. Before you buy or use digital assets, do thorough research into their legal status in your country. Use common sense, and don’t do anything illegal.
What Else You Need to Know About Investing in Blockchain
Investing in digital assets is hot, and many have made millions off of blockchain technology. Those numbers are only half the story, though.
Not everyone is getting rich by buying cryptocurrency
The value of several digital assets skyrocketed in 2017. For example, Ripple’s XRP rose 36,000% in one year, while another cryptocurrency called “NEM” rose by almost 30,000%.
These stories of easy money don’t do justice to the risk involved with investing in cryptocurrencies. To gain a hundred-fold increase in value, you must be willing to risk all your money.
In fact, many of the cryptocurrencies that peaked in the 2017 bubble are still down more than 90%, and they might never move up again. You would only have gained 30,000% (or more) if you entered the market very early and sold at the top.
Entering early and selling at the top isn’t possible for most people. In fact, most investors entering the market in 2017 bought at an already high price. These investors now show 70-90% losses on their portfolio.
Always do your own research
People also massively underestimate how much research they have to do before they can invest properly into digital assets.
It’s not enough to research a single coin and conclude that it’s going to be the “next Bitcoin.” What’s needed instead is a general overview of the market in which you learn which coins solve a market problem the best.
Let’s say you invest in a digital asset that’s aimed at improving cross-border payments. In that case, in order to make a winning investment, you not only need to know why that coin is the best solution to that use in that case, but you also need to know why that specific coin is better than any of its competitors.
Instead of looking at a single digital asset and deciding it looks good, you need to understand an entire market and all of its players to know whether an investment is good or not. Additionally, you need to know whether the investment is currently undervalued or not.
Investing in overvalued projects will cost you a lot of money, and most people invest in digital assets that have already made incredible gains. This is a huge mistake. Instead, identify an asset that has lost most of its value and is currently undervalued. In fact, the approach of investing in undervalued assets is the main way in which Warren Buffet has gotten rich over the years.
Day trading cryptocurrencies
Around 90% of traders lose money. The reason for that is that it’s really hard to time the market.
In the short term, thousands of variables influence whether a stock goes up or down. Tools aimed at helping you trade assets, such as technical analysis, are probably pseudoscience. The only reason technical analysis may work is because many people think it works and trade accordingly.
As such, technical analysis becomes a self-fulfilling prophecy.
The Future of Blockchain
Nobody knows for certain what the future of blockchain holds. The best you can do is look at the current market and try to project a couple of years into the future.
For example, central banks have already shown interest in developing their own cryptocurrencies, so an opportunity may exist there. Institutional investors are also entering the space for the first time. Bakkt and Fidelity Crypto Company are examples of such institutional investors. In the long haul, more institutions will follow suit simply because the space is too profitable to ignore.
With saving accounts and government bond yields decreasing more than ever before, institutions are looking for investment opportunities with higher yields to achieve their yearly returns on investment.
The future is bright but unpredictable for digital assets. Nonetheless, it’s very likely that blockchain will play a major role in your life in 10 years.
Don’t Ignore Blockchain Technology
It’s hard to overestimate the role blockchain technology will play in the future. And yet, very few people understand the technicalities of the technology to a sufficient degree that they should be willing to put their money on the line for profit.
If you’ve done your research, are only investing money you can afford to lose, and remember to pay your taxes on your profits, then it’s a smart idea to invest some of your money for the potential of a return.
Remember, though, that investing in blockchain is more like gambling in a casino if you haven’t done your research. For most people, paying off high-interest debt and building up some “rainy-day” savings is more important.
But be on the lookout. The world is about to change.