Last year marked what might very well be the greatest single year for an asset class in history. Cryptocurrencies, which began the year with a combined market cap of $17.7 billion, gained nearly $600 billion by year's end, which was good enough for a better than 3,300% increase in value. Though there are numerous reasons digital currencies soared in 2017, the primary catalyst then, and now, is the emergence of blockchain technology.
Blockchain has more potential uses than you probably realize
In its simplest form, blockchain is the digital, distributed, and decentralized ledger often tethered to cryptocurrencies that's responsible for logging all transactions without the need for a financial intermediary. In other words, it allows people or businesses a completely new way to send funds without using traditional banks as the middlemen.
Blockchain made its presence known when bitcoin made its debut in 2009. As a currency-based application, blockchain was initially designed to fix a handful of flaws with the banking system, such as exorbitant transaction fees and lengthy processing and settlement times. It does so by removing banks from the equation -- thus eliminating a key transaction fee -- and validating transactions processed over blockchain networks 24 hours a day, seven days a week. Depending on the network, some blockchains can settle cross-border payments almost instantly, as compared to waiting up to five business days with the current banking system.
However, blockchain has continued to evolve far beyond its currency-only applications. For example, businesses are looking at how blockchain can improve supply chains. The transparent and unchanging nature of blockchain makes it perfect for tracking the shipment of goods in real time, as well as examining the performance of products during quality-control tests. Other ventures include the idea of using blockchain-based IDs to better help us control our digital identities, as well as blockchain as a means to securely store our medical records and further improve HIPAA privacy laws.
But some of the most intriguing blockchain ideas are the one's you've probably never considered, such as automotive companies that use blockchain technology in vehicles.
Blockchain technology in cars? Yeah, that's a thing.
On Feb. 22, high-performance sports car, sedan, and SUV manufacturer Porsche, a division of Volkswagen (NASDAQOTH:VLKAY), announced that it became the first car company in the world, in collaboration with German start-up XAIN, to successfully integrate and test blockchain in a car.
What is blockchain doing in a car? Porsche believes it could have a plethora of applications. For instance, locking and unlocking your vehicle, as well as opening doors, through an app could be done up to six times faster through blockchain, since data doesn't have to be processed through a server. In effect, the car actually becomes part of the blockchain, even in an offline scenario.
In addition, blockchain keys could be used to give access to third parties, such as valets or authorized mechanics. XAIN's use of Ethereum-based smart contracts -- protocols that verify, facilitate, or enforce the negotiation of a contract -- would set customizable but immutable rules that allow certain parties access to the vehicle at specific times or locations.
In-car blockchain could also be used to quickly and securely pay for parking or vehicle charging, as an example.
Looking ahead, Porsche believes it can use blockchain to improve the autonomous driving experience. The idea is that local data collected on user blockchains, which the user would have full control over sharing, could be shared securely with other vehicles, leading to learning effects that make the autonomous driving experience safer for all connected vehicles.
This blockchain battle is just getting started
Porsche isn't the only automaker to currently be tinkering with the use of blockchain technology.
Though it's the first to have tested blockchain in its vehicles, parent Volkswagen and IOTA are working together to utilize IOTA's blockchain to transform the entire sector. Let's not forget that Volkswagen is just over two years removed from a major diesel emissions scandal in the United States. Perhaps one of the best ways for the company to rebuild trust with American consumers is to implement the highly transparent and immutable blockchain technology, which could allow consumers access to quality control testing data for parts and/or vehicles. Volkswagen also plans to build on Porsche's early success by examining what blockchain can do for all of its future autonomous vehicles.
Meanwhile, cryptocurrency VeChain Thor (previously VeChain before its rebranding) confirmed a partnership with BMW (NASDAQOTH:BMWYY) on Feb. 26. Though the VeChain Foundation's YouTube presentation that announced its rebranding and partnership didn't go into great detail about what this partnership would entail, it's likely that BMW would benefit from supply chain efficiencies by implementing blockchain. Furthermore, with BMW also facing allegations of cheating on diesel-emission tests, blockchain could be the key to maintaining consumer trust.
A major unanswered question
Considering how much trust has been lost between automakers and consumers in recent years as a result of scandals and quality-based recalls, blockchain could go a long way toward putting these issues in the rearview mirror. There is, however, a major hurdle that blockchain has yet to overcome: large-scale use and acceptance.
As noted, Porsche successfully tested blockchain applications in its vehicles, while cryptocurrencies like Ripple, Ethereum, and Stellar have demonstrated how they can expedite the settlement of payments over their blockchain-based networks. What we haven't seen, though, are any brand-name businesses stepping forward to fully embrace blockchain as their primary remittance network, or their primary supply chain oversight app. The reason is simple: Blockchain hasn't shown that it can be successfully scaled without affecting performance. Thus we have a blockchain-based Catch-22. In essence, businesses won't fully embrace blockchain until it's demonstrated that it can be scaled, yet it can't prove this ability until businesses adopt the technology on a broader scale.
The big question we'll be asking in 2018, and possibly 2019, is whether we'll move beyond simple proof-of-concept testing and into real-world use of this technology. If we do move forward, blockchain could become a game-changer within the next three to five years. If not, it'll be another overhyped bubble that's likely to pop.
Sean Williams has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool has a disclosure policy.