Do you know what “blockchain” is? If not, then you have something in common with most other people. The “blockchain” is a relatively new neologism from the digital world. It is currently attracting a lot of attention in specialist and investor circles. This is because it could bring about a further upheaval in the course of the digital revolution.
For the time being, however, the blockchain principle can boast only a few successful practical applications. The best known is the Internet currency Bitcoin. The blockchain is a distributed database on the network. The integrity of a data record – in the sense of protection against subsequent manipulation – is ensured by storing the checksum of a preceding data record in each subsequent one. The blockchain is extended by every “serious” data transfer. If, on the other hand, a computer is manipulated, the other “chain members” do not confirm the correctness. This principle means that manipulated data transfers can be practically ruled out.
Potential threat to intermediaries
This security opens up options for numerous applications where data security plays a particularly important role. This is especially – but not only – the case in connection with payment transactions. The blockchain principle could also prove extremely helpful when exchanging sensitive personal information such as health data, when exchanging official information or documents, or in connection with bookings, orders, etc.
However, this would probably not be without repercussions. This is because broad applications could make the function of many intermediaries superfluous. An intermediary is something like an intermediary that brings supply and demand together in non-perfect markets. A classic example of intermediaries is banks, which mediate in the supply and demand of money and ensure that loan and investment requests are met. However, intermediaries are not only found in the financial sector. Typical Internet inventions such as the accommodation brokerage portal Airbnb are also among them.The best-known blockchain application is the Internet currency Bitcoin.
The spread of the blockchain principle could therefore not only challenge the business model of many traditional intermediaries, but also mean an upheaval for the e-commerce world – possibly as dramatic as the establishment of the Internet itself. Some already see this development as an extraordinary investment opportunity with lavish return prospects. At the moment, however, this is more fantasy than reality. But this does not prevent the topic from being discussed intensively in interested circles and triggering plenty of speculation.
Some of it is reminiscent of “bubbles.” Blockchain is undoubtedly an interesting technology that can open up many opportunities. However, it will be some time before it gets to that point. And whether the effects are really as dramatic as feared or hoped for remains to be seen.
Blockchain, the new wonder weapon
Almost unknown a good ten years ago, blockchain is now a common term and, after the invention of the Internet, possibly stands for the next digital revolution. The world of finance could also be gripped by it. Asset manager Michael Reuss has already given it some thought. “Token” is his magic word.
Blockchain technology experienced its baptism of fire with the cryptocurrency Bitcoin. The concept for the virtual money was first described in 2008 and put into practice in early 2009. Since then, Bitcoins have undergone spectacular development. Their operating principle is based on blockchains – interlinked and encrypted blocks of data that are stored decentrally on computers involved in transactions.
What tokens are all about
As a result, the cryptocurrency does not require banks or payment service providers and is still secure, moreover, inexpensive and very fast. There are now said to be more than 4,000 cryptocurrencies. Most are based on blockchain technology and can be traded on btc exchanges like Binance. If you don`t have an account yet, you can use a Binance promo code to sign up. If you are new to trading, a BTC robot can also help.
Asset manager Michael Reuss also sees one of the great blockchain prospects in its application as a “value”. The term “token” is of central importance here.
What tokens are good for
Both are familiar from the real world – for example, as a token for going to the canteen or as a token in gambling. In fact, they are private substitute money that can be used for a specific purpose. Three types of tokens can be distinguished, which at the same time characterize the range of applications:
Payment tokens: their intended use is payment as in cryptocurrencies. Here, tokens have their own blockchain that records the transaction history – i.e. “account balances”;
Utility tokens: are a type of digital voucher that provides exclusive access to certain platforms or platform areas. Special offers, services or applications with “added value” can then be used there;
Security tokens: represent perhaps the most exciting development. These are a type of virtual security built on a blockchain infrastructure. Stocks, bonds or certificates alike can be designed as tokens – assuming regulatory approval.
- Security tokens can be brought directly to investors and worldwide.
- The advantage from the issuer’s perspective is: securitization in certificate form is eliminated, as are the costs and regulatory obligations of going public.
- This opens up new opportunities for capital market financing, especially for small and medium-sized enterprises.
Blockchain in the financial industry
A term is currently haunting the financial world that almost sounds like a magic magic word – blockchain. The “blockchain” – as it is translated in German – could revolutionize financial transactions and make them as secure as they are cost-effective. For the financial industry, this is an opportunity, but also a challenge, because it calls traditional services into question.
The first practical application of the blockchain principle is the cryptocurrency Bitcoin. It does without a central authority that verifies the correctness of transactions. Instead, verification is carried out decentrally by the network of Bitcoin participants themselves – and without the need to check their identity. The system is virtually forgery-proof and impervious to manipulation – a crucial prerequisite for conducting transactions over the network.
But how does blockchain work in the first place? It’s not that easy to explain in a way that’s easy to understand. When two users on the network agree on a transaction, a related record is created in the form of a data block. This block is not stored centrally, but is stored decentrally on the computers of the network participants. There, it is checked whether the data block matches the information stored from previous transactions. Only when the computers confirm this does verification take place and the transaction can take place. The corresponding data block is added to the data records of the previous transactions, thus creating the blockchain.
This makes it immediately clear why manipulation is so difficult. It is not enough to manipulate one computer. The other computers in the network would immediately recognize the forgery because the data block does not match the blockchain. The transaction could then not take place. Only if all computers in the network were manipulated in the same way would a forgery work. However, this is hardly conceivable due to decentralization and anonymity. The “blockchain” – as it is translated in German – could revolutionize financial transactions and make them as secure as they are cost-effective.
The use of blockchains need not be limited to pure payment transactions. In principle, it can be used for any type of transaction – including securities transactions, car purchases, hotel and flight bookings and much more. At the same time, this makes the potential threat clear. Because the blockchain principle tends to make intermediaries who check and ensure the correctness of transactions superfluous. However, this calls into question an important function of banks and many other service providers such as intermediary portals. On the other hand, blockchain could make many processes simpler and help save costs.
For the financial industry, it will be a matter of whether it can harness the innovative principle for itself before others do. Otherwise, there is a risk of a further loss of functionality, which would call the traditional business model of financial institutions even more into question.
