The digital-currency revolution took center stage in 2017, with the aggregate cryptocurrency market cap soaring by nearly $600 billion. In percentage terms, the better than 3,300% increase in value for cryptocurrencies was likely the greatest single-year performance in history for any asset class, and there's a decent chance it may never be duplicated again.
What is blockchain, and why was it developed?
At the heart of this rally was the emergence of blockchain technology. For those of you unfamiliar with blockchain, it's the digital, distributed, and decentralized ledger that underlies most cryptocurrencies and is responsible for processing transactions and/or recording data without the need for a financial intermediary. In even plainer English, it's a brand-new way to transfer money without traditional banking networks and a new means of storing data in a transparent, yet unchanging, manner. This last point is worth noting since blockchain has just as many (if not more) applications in the non-currency setting as it does within the financial industry.
Blockchain was developed because of perceived flaws in the existing banking networks. In particular, transaction processing times, especially in cross-border remittances, could take up to five business days to validate and settle. Additionally, banks acting as third parties during transactions and collecting fees for doing nothing other than allowing transactions to take place on their networks didn't sit well with developers.
Blockchain technology aims to resolve some of these key deficiencies by bringing three solutions to the table. First, blockchain is decentralized, which simply means that data is stored on computers all over the globe rather than in a centralized location. This safety feature ensures that no single entity, including cybercriminals, can gain control of a network.
Secondly, blockchain simplifies transactions and makes them about the sender and receiver of funds. By processing transactions on blockchain networks, the bank and its transaction fee is removed from the equation. This has the potential to lower overall transaction fees.
Lastly, blockchain-based transactions offer the ability to validate and settle in real time, even in instances where funds are moving across borders. This speed of validation and settlement is what truly makes blockchain attractive.
Facebook is exploring potential uses for blockchain
Blockchain has been creating a lot of buzz for years, and now it appears that even social-media giant Facebook (NASDAQ:FB), which recently hit 2.2 billion monthly active users, can't resist its allure. As reported last Tuesday, May 8, Facebook is forming a new team of executives that will be headed by David Marcus, the head of Facebook's Messenger platform and the former CEO of PayPal, to explore how blockchain can be leveraged across the social-media giant's platform. Joining Marcus, according to online publication Recode, will be a number of important Instagram executives, including VP of Engineering James Everingham and VP of Product Kevin Weil.
Marcus is an intriguing choice to head Facebook's blockchain team for two particular reasons. To begin with, having run PayPal, Marcus is intricately familiar with the payments arena. Since blockchain is expected to make its most immediate impact on the financial-services industry, Marcus' appointment to lead this initiative could signal the most logical use of blockchain technology within Facebook's platform -- as a payment facilitator within Messenger. Sending funds over Messenger and having them processed and recorded via blockchain could expedite the settlement of these payments and ensure that there's a transparent and immutable log of these transactions.
Secondly, Recode points out that Marcus has a somewhat vested interest in cryptocurrencies, which are what really brought blockchain into the forefront. In December, Marcus joined the board of directors for popular cryptocurrency exchange Coinbase. This increases the likelihood that Facebook will examine, and perhaps even mirror, what virtual currencies are doing with blockchain technology.
Beyond using blockchain for payments, Facebook potentially might consider using this new technology as a means to securely store data. After all, blockchain is unchanging, meaning it could allow Facebook to store user data without fear of that data being compromised. That's sort of important if you've been paying attention to the whole consumer-data scandal the company has been dealing with.
Don't get too excited
While some cryptocurrency enthusiasts are bound to hail Facebook's announcement as game changing, I'm here to remind you to keep a level head. In reality, Facebook's foray into blockchain may not produce any meaningful progress anytime soon.
The biggest issue with blockchain is what I often refer to as the proof-of-concept conundrum. Over the past couple of years, there have been numerous pilot and small-scale projects where blockchain technology has shone. However, the training wheels haven't exactly been taken off of blockchain when it comes to real-world transactions. Businesses are unwilling to commit to blockchain until it demonstrates its ability to scale -- yet it can't demonstrate this scalability until businesses take a chance on the technology.
Even in instances where blockchain has attempted to be scaled, it hasn't always gone as planned. Shortly after cryptocurrency IOTA unleashed the beta version of its Data Marketplace, its network became bogged down by users to the point where transactions were taking days to process. This conundrum likely would keep Facebook from implementing blockchain on a large scale.
The other factor that can't be ignored here is Facebook's distaste for cryptocurrencies. Even though blockchain can work independently of virtual currencies, they're often perceived to be tied at the hip.
In late January, Facebook announced a change in its advertising policy that banned, among other things, advertisements concerning initial coin offerings, cryptocurrencies, and crypto trading. Facebook's product-management director Rob Leathern said at the time, "We've created a new policy that prohibits ads that promote financial products and services that are frequently associated with misleading or deceptive promotional practices, such as binary options, initial coin offerings and cryptocurrency." In other words, there's virtually no chance that Facebook's blockchain team has any desire to create its own cryptocurrency.
Long story short, this announcement seems like much ado about nothing. While Facebook is offering crumbs of hope to the crypto community by examining how blockchain could be eventually incorporated into its platform, any chance of meaningful change seems to be years off. Until the proof-of-concept conundrum is tackled and big businesses make the effort to unleash it in the real world, blockchain remains nothing more than a pet project for the enterprise world.
Sean Williams has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool owns shares of and recommends Facebook and PayPal Holdings, but has no position in any cryptocurrencies mentioned. The Motley Fool has a disclosure policy.