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By James H. Lee
The view is always better from the edge. In this new column for Delaware Business Now, I’ll cover new technologies and investments for growth. As a professional futurist, I keep my finger on the pulse of change. My background as a financial analyst helps me distinguish between hype and opportunity.
T.In his month, I would like to cover an emerging technology with a huge generation gap … cryptocurrency. I have never seen anything before create such excitement for young traders while generating complete confusion among seasoned investors.
When Bitcoin was introduced to the world in 2009, it was built on a completely new technology known as blockchain.
A blockchain is simply a distributed public history of transactions. Each new transaction adds another link to the chain. These transactions are stored anonymously on thousands of computers. It is a safe network, because to get into it and change the records, you have to hack all the nodes at the same time, provided you can even find them. New bitcoins were released to “miners” for their new transaction verification services as they appeared on the blockchain. As the system grew in complexity, more bitcoins were gradually introduced into circulation. In this way, the blockchain has paid for its maintenance.
There are at least four discoveries that have occurred here:
Innovation n. 1: the introduction of a completely new form of money
Cryptocurrencies are a computational store of value. Instead of being backed by gold or a government’s tax authority, cryptocurrencies are only as useful as their software code. They have the advantage (or disadvantage) of being almost completely unregulated. As such, cryptography can also be transferred much faster than conventional money. Since the amount of currency introduced into the system is predetermined via algorithm, some have limited supply and may be able to hold value over time. Others may quickly become obsolete.
Innovation n. 2: The same technology used to track the movement of Bitcoin could be used as a secure means to monitor the change in ownership of any other asset, physical or digital
This means that the property chain for nothing could be tracked using blockchain technology as a way to resist hacking and counterfeiting.
Joi Ito of MIT Media Lab says, “My impression is that Blockchain will be about banking, legal and accounting as the Internet was for media, commerce and advertising. It will reduce costs, disintermediate many levels of activity and reduce friction. As we know, one person’s attrition is another person’s income. “
Some of the potential applications include:
- Global transfers and payments (banks)
- Securities trading regulations (investments)
- Registration of real estate transactions (ownership)
- Crowdfunding and microfinance
- Management of medical records (hospitals, insurance)
- Shipping and logistics (production)
- Identity verification (cyber security)
- Digital rights management (media)
Bitcoin was the first cryptocurrency to achieve great success. However, it also has some real limitations.
There are constraints on the number of bitcoin transactions that can be made per second. The platform also consumes significant amounts of computing power for maintenance. As more transactions are added to the blockchain, the amount of energy required to keep records will increase.
Ethereum is a competing cryptocurrency designed from the ground up to offset the limits of Bitcoin. While Bitcoin’s focus is on currency, Ethereum’s focus is on building a sustainable blockchain platform that could eventually be used as a decentralized global computer.
Perhaps most importantly, Ethereum paved the way for….
Innovation n. 3: smart contracts
Think about what can happen with self-executing legal agreements written as software. In this way, legal contracts could be self-monitored, with payments made automatically when certain conditions are met. Smart contracts work even better when you consider 5G and the emerging Internet of Things.
Something fascinating is happening at the intersection of finance, law and software programming. Imagine anything that can happen with programmable money that can follow instructions using Boolean logic (if / and / or / then). This brings us to the most recent game change for cryptocurrency …
Innovation n. 4: decentralized finance (DeFi)
The first killer app for cryptocurrency was able to send money around the world in seconds versus twenty-four hours for a bank transfer. Fast, cheap, no intermediary required. This creates a financial world without borders or regulations.
As the ecosystem evolves, smart contracts built on Ethereum are able to perform many other functions previously controlled by banks. But unlike banks, DeFi apps are open source. Anyone can create DeFi apps, and anyone can use them, no matter where they live. Now you can trade currencies (via the Uniswap app), borrow and lend (Compound), create futures contracts (Synthetix), run a forecast market (Augur), or raise funds for startups by posting an initial coin offering ( ICO).
Some stablecoins built on the Ethereum network (such as Tether and USD Coin) live in both worlds: they have their value pegged to the US dollar, but are compatible with DeFi apps and can be easily transferred between digital wallets.
Summary
The US financial industry is ripe for revolution. The commissions are too high and the agreements are too slow. About 80% of all transactions are still processed in COBOL, a programming language that dates back to the days of cardboard punch cards.
It’s time for a serious update.
Is Ethereum the next big thing in digital finance? Possibly. There are other smart contract platforms worth looking at too, including Cardano, EOS, Stellar, Tezos, Hyperledger, Chainlink, and Waves. It could be a wild ride and a whole new way of doing things by 2030.
James H. Lee, CFA, CMT, CFP, APF, is the founder of StratFI, Wilmington.
Disclosure: The information contained herein is for educational purposes only and should not be construed as a recommendation to buy or sell securities or investment advice. The titles listed here are for illustrative purposes only and are not intended as a recommendation. The author may personally hold positions in the titles mentioned.
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