The past year and change has truly been incredible for cryptocurrency investors. Whereas the stock market is the best creator of long-term wealth, with an average annual gain of 7%, inclusive of dividend reinvestment and adjusted for inflation, cryptocurrency gains ran circles around that average last year. According to data at CoinMarketCap.com, the combined market cap of cryptocurrencies soared more than 3,300%, with some of the largest digital currencies gaining in excess of 10,000%.
How on Earth are such incredible gains possible in such a short period? Look no further than blockchain technology.
The major advantages of blockchain
Think of blockchain as the infrastructure that virtual currencies are built on. It's the digital, distributed, and decentralized ledger responsible for logging all transactions, and doing so without the aid of a third party.
The rise of blockchain from the shadows is a result of perceived flaws with the current banking system. In particular, banks acting as middlemen during transactions, and pocketing fees in the process, are making transactions pricier for consumers and businesses. In addition, validating payments on current banking networks can take multiple days, especially if it's sent to another country. In the views of blockchain developers, this isn't acceptable.
Blockchain essentially aims to improve on three factors. First, since it's decentralized -- meaning there is no central server where transaction data is stored -- no single entity or hacker can gain control over a cryptocurrency. Second, by eliminating the middleman (i.e., the bank), there should be less in the way of transactions fees. And finally, proofing of transactions on blockchain can happen within seconds or minutes, helping to eliminate the slow crawl sometimes experienced by the current banking system.
These advantages suggest why blockchain is being targeted first and foremost at the financial services industry.
Did you miss this big blockchain announcement?
But truth be told, it has applications far beyond just currency. Logistics, retailers, healthcare, and energy companies are clamoring to test blockchain applications within their industries.
For example, blockchain's immutable records would be able to purge clumsy paper documents and make for transparent recordkeeping with regard to product tracking. A customer would clearly be able to see, from start to finish, where a product was, and potentially how it performed if it were tested. It's also an easier way for companies to more efficiently identify supply chain issues.
And this is just the beginning.
This past week at the World Economic Forum in Davos, Switzerland, a potentially game-changing blockchain development was announced that most folks probably aren't aware of. Using both blockchain and biometrics, professional services company Accenture (NYSE:ACN) is working with the Canadian and Dutch governments to pilot a digital identity project called the "Known Traveler Digital Identity initiative." In other words, Accenture is working with these governments to develop a blockchain- and biometrics-based ID.
As the project name implies, it would be primarily used as a tool to facilitate more efficient travel in the wake of stringent security measures that have made traveling quite the chore. Blockchain would come into play by creating a permission-based distributed ledger that would store a traveler's background information and note where the traveler has gone. The traveler could access this information to expedite the screening process, freeing up airport personnel and funds for other purposes. However, it's worth noting that the project is still undecided on whether personal data will be stored directly on the blockchain.
This isn't Accenture's first foray into blockchain ID, either. Last June, Accenture and Microsoft (NASDAQ:MSFT) announced the creation of the ID2020 blockchain solution to resolve the identity challenges that more than 1.1 billion people face around the world. The prototype takes Accenture's knowledge in developing blockchain and biometric systems and runs this blockchain on Microsoft Azure, the company's global-scale cloud platform. It should be noted that this project doesn't store any personal information directly on the blockchain, which could be a tip-off of what to expect in the newly announced Known Traveler Digital Identity initiative.
The one thing to know about blockchain
However, there's something else folks should know about this potentially game-changing technology known as blockchain: It's advancing at a snail's pace.
Though bitcoin did bring blockchain into the spotlight nearly a decade ago, it's taken that long just to get multinational businesses and government organizations to test this technology in demos and small-scale projects. While this in no way means blockchain won't be a success, it probably means the high hopes of cryptocurrency enthusiasts could be dashed, given that enterprises haven't accepted blockchain with open arms.
There are also security hurdles to be overcome. While blockchain does offer decentralization, that doesn't mean it's in any way hacker-proof. Just this past week, Japanese cryptocurrency exchange Coincheck announced the biggest cryptocurrency hack in history, with $534 million worth of NEM tokens stolen.
Put plainly, it's going to take time before blockchain has a chance to prove to businesses that it can provide the security and scale they're looking for in an immutable application.
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Sean Williams has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool recommends Accenture, but has no position in any cryptocurrencies mentioned. The Motley Fool has a disclosure policy.