In 2017, virtual currencies simply couldn't be stopped. At the beginning of the year, the combined value of all digital currencies was a mere $17.7 billion. But by year's end, the aggregate market cap of cryptocurrencies had soared to $613 billion -- a gain of better than 3,300%. In other words, it was arguably the greatest year in history for a single asset class.
But, as many of you are probably aware by now, the wheels fell off the wagon just one week into 2018. After hitting an all-time market cap high of $835 billion, cryptocurrencies have plunged by as much as 72%, to $232 billion, in recent weeks.
Why the complete 180 on cryptocurrencies, you ask? Much of the blame probably lies with the emergence and waiting game associated with blockchain technology.
Blockchain has been cryptocurrencies' biggest boon...
Blockchain is, hands down, the biggest reason for the ascent of cryptocurrency valuations. Blockchain is the digital, distributed, and decentralized ledger that underlies virtual currencies and is responsible for the ability to move funds without a third-party provider (i.e., banks). It also allows for the transparent and immutable logging of data.
Or, in plainer English, blockchain has game-changing currency and non-currency applications.
On the currency front, blockchain looks to improve the speed and cost with which currency moves from one party to another. With traditional banking networks, it can take up to five business days to validate and settle a payment. But with blockchain, payments could be processed within a matter of seconds or minutes. Plus, with no bank to pilfer third-party fees for using their network, the belief is that transaction fees on crypto networks would save either businesses or consumers money.
As for non-currency transactions, the ability of blockchain to log and secure real-time data could come in handy. In particular, blockchain is being examined as a means to aid companies in monitoring their supply chains.
Along those same lines, blockchain could allow businesses to more quickly locate supply chain inefficiencies, as well as expedite the shipping process through the use of smart contracts. A smart contract is essentially a customizable protocol that could play a role in eliminating paper from supply chains. For instance, an approved smart contract could handle the reorder of a product once inventory reaches a certain level.
Throughout 2017, only the imagination of investors constrained what blockchain appeared capable of.
... And its biggest drag in 2018
However, 2018 has become the "prove it" year for cryptocurrencies.
One of the biggest issues with blockchain technology is what I refer to as the "proof-of-concept conundrum." In demos and small-scale testing, blockchain has had little trouble doing exactly what's expected of it. However, no enterprises have been willing to take the training wheels off of this technology and expose it to the real world. The reason? It's an unproven technology that hasn't yet shown its ability to scale. Yet, the only way blockchain can demonstrate this scale is if enterprises give it the opportunity. This Catch-22 creates a major headache for blockchain developers, and puts its near and intermediate future into limbo.
Cyberattacks have been another cause for concern. An analysis from Carbon Black found that $1.1 billion worth of digital currency had been stolen by hackers through the first five months and change since the year began. Nearly half of these stolen funds were Monero tokens, known as XMR. Monero, being a privacy coin, purposefully obfuscates the sender and receiver of funds, making a transaction anonymous. In this instance, it also makes it veritably impossible to retrieve hacked tokens.
Inconsistency has also plagued crypto networks. For instance, even though bitcoin is the world's most valuable virtual currency, the average transaction can take in excess of an hour to validate and completely settle. If we're talking about a cross-border transaction, then a one hour wait time could be a major improvement over current banking networks. But for domestic transactions that are settled considerably faster on traditional networks, blockchain inconsistency has put cryptocurrencies at a clear disadvantage.
Mastercard locks up a potentially game-changing patent
But one financial industry juggernaut may have a solution that bridges the gap between fiat currencies -- i.e., money that governments have declared as legal tender -- and cryptocurrencies, which are mostly unregulated.
As noted in the background section of the patent, blockchain currencies have "seen increased usage over traditional fiat currencies by consumers who value anonymity and security." However, the limitations of blockchain are also noted, with traditional payment networks having processing times measured in nanoseconds, whereas blockchain transactions can take a significant amount of time to verify. This inconsistency could persuade businesses and consumers to shy away from blockchain currencies.
The solution offered by Mastercard is a hybrid system that'll incorporate blockchain currencies, but allow them to be transacted on traditional payment channels. Why stick with traditional payment channels and not use blockchain? For starters, it's all about speed. Mastercard believes that using traditional channels would allow transactions involving cryptocurrency to be processed considerably faster than with blockchain.
More importantly, Mastercard has copious amounts of data on fraud and risk that it's evaluated on existing networks that would come in handy. As noted in the patent filing, "payment networks may be able to evaluate the likelihood of fraud and assess risk for blockchain transactions using existing fraud and risk algorithms and information that is available to payment networks, such as historical fiat and blockchain transaction data, credit bureau data, demographic information, etc., that is unavailable for use in blockchain networks."
To be clear, Mastercard hasn't unveiled any products as of yet that accomplish the objectives outlined by this patent. However, it does appear to be in the driver's seat to bridge the gap between fiat currencies and cryptocurrencies, should the latter continue to gain mainstream acceptance. That makes Mastercard a major player worth eyeing as the cryptocurrency space matures.