Last year was truly something special for cryptocurrency investors. According to data from CoinMarketCap.com, the aggregate value of all digital currencies soared from $17.7 billion to end the year at $613 billion -- a gain of more than 3,300%. Even though hundreds of new coins went public, this was predominantly an organic, investor-driven rally. And it's likely the single greatest year we'll ever witness for any asset class.
Blockchain has been at the heart of the crypto rally
At the heart of this rally is the emergence of blockchain technology. Think of blockchain as the infrastructure that underlies nearly all cryptocurrencies. It's the network that's responsible for processing and validating transactions without the need for a third party, as well as a means to transparently and immutably (i.e., in an unchanging manner) log data. Essentially, it's a new means to move currency from one party to another, as well as a way to store and interact with data.
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Why the sudden push toward blockchain? For the financial industry, the belief is that it'll lead to faster processing times, a more secure transaction, and lower fees. Whereas traditional banking networks can take up to five business days to validate a cross-border transaction, blockchain might be able to accomplish the same feat in a matter of seconds.
As for nonfinancial endeavors, blockchain could offer transparency to supply chains, provide immutable digital recordkeeping in emerging market regions where proving one's identity is a challenge, and help improve food safety standards, to name a few things.
But what does the future really hold for this burgeoning technology? This blunt, off-the-cuff look at blockchain should give you a pretty good idea.
Blockchain can be a game-changer
Truth be told, blockchain does have the opportunity to be a real game-changer. A number of demos and small-scale tests have successfully demonstrated what this new technology is really capable of.
With regard to finances, we're talking about moving money in (almost) real time. It's no secret why Ripple has had little issue signing up financial institutions to RippleNet and its fast-processing blockchain.
Meanwhile, blockchain can also help pinpoint inefficiencies within a supply chain almost instantly. Plus, with networks such as Ethereum, which offer customizable smart contracts, human pre-authorizations and written protocols can streamline supply chains and virtually eliminate the slowdown caused by paper. Yes, these sound like pie-in-the-sky opportunities, but in controlled testing, blockchain suggests they can be a reality.
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Blockchain is probably years away from making a difference
Unfortunately, the imaginations of investors are constrained by one reality: Real-world use is minimal, and it's likely to stay that way for the foreseeable future.
I've often described blockchain technology as suffering from the proof-of-concept conundrum. Despite successfully being tested in demos and small-scale projects, no large enterprises have been willing to take the training wheels off, so to speak, to see what this technology can do in the real world. Enterprises have no idea if it can scale without losing its fast processing speeds or security, which has kept them from deploying blockchain in a meaningful sense.
The issue here is that the only way blockchain can demonstrate its ability to scale is if businesses give it a chance. That's the Catch-22 -- and the big reason blockchain is unlikely to be a needle-mover for some time.
You're probably overestimating the reach of blockchain
Even if I'm wrong about it taking blockchain a few years to overcome its real-world-use hurdle, there's also the likelihood that Wall Street and investors have overestimated the reach of blockchain technology. In other words, not every sector or industry is going to benefit from this technology, meaning it won't have the same reach as traditional networks.
What's more, implementing blockchain could prove tricky for certain industries. Whereas financial service companies have found ways to easily integrate blockchain in small-scale testing, other industries would essentially have to start from scratch with their infrastructure if they were to use blockchain. That's a time-consuming and potentially costly consideration that could limit the use of this game-changing technology.
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Crypto tokens may not play much of a role (if any) in the future of blockchain
Lastly, don't count on blockchain acceptance to drive cryptocurrencies higher. Many industry giants, such as IBM (IBM +0.82%), are tinkering with the idea of developing blockchain to best suit their needs.
IBM has formed a joint venture with shipping giant A.P. Moller-Maersk to develop shipping-based blockchain solutions and is currently utilizing Stellar's Lumens token on its proprietary blockchain network in the South Pacific, which is servicing a dozen large financial institutions. It would not, however, be out of the question for IBM to develop its own native token, replacing Stellar's Lumens coin, which aids in the transmittance of currency from one point to another.
It's also possible a company like IBM or another tech giant could develop a U.S. dollar-tethered token specifically for a blockchain network. Such a move would keep businesses from being exposed to free-floating cryptocurrency, as well as bypass the nightmarish tax situation that can arise from paying capital gains on free-floating currency fluctuations.
In other words, while blockchain continues to be intriguing from a long-term perspective, today's cryptocurrencies could ultimately be left out in the cold.
