The blockchain – a cornerstone of tomorrow’s economy

The blockchain – a cornerstone of tomorrow’s economy

20 March 2018, 1 commentReading time: 9 minutes

One of the most hotly discussed trend topics at the moment is the blockchain, but what exactly is this promising technology, which areas stand to profit from it, and how can investors benefit?

There is a lot of excitement surrounding blockchain technology. Though it is still too soon to say precisely what role it will play for the economy and for society as a whole, it seems clear that it will result in fundamental changes to the systems used in both. Let us focus on the central questions. What does this technology have to offer? How is it currently being employed in practice? Where might its development be heading? How far advanced is it at present? We attempt to answer this latter question by drawing a comparison with the Internet as it is today. Last but not least, we present the Solactive Blockchain Technology Performance Index and demonstrate how you can invest in the blockchain theme.

The birth of blockchain technology

A blog entry posted in February 2009 by a certain Satoshi Nakamoto caused a big stir. This mysterious individual had outlined his idea of an independent means of payment several months earlier in the now legendary white paper «Bitcoin: A Peer-to-Peer Electronic Cash System». It marked the birth not only of the cryptocurrency Bitcoin, but also of blockchain technology – or at least one of its first practical applications. According to the Frankfurt School Blockchain Center Working Paper «Blockchain Technology: from Hype to Reality», London-based think tank Z/Yen was experimenting with «mutual distributed ledgers», a precursor of today’s blockchain, more than two decades ago, in 1995. Nevertheless, Bitcoin is one of the key milestones in the development of blockchain technology. The Blockchain Center in Frankfurt cites the Ethereum blockchain, launched in 2015, as another. This made it possible for the first time to execute automated transactions in the form of «smart contracts».

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Blockchain-Scoring-Model


Blockchain – the universal transaction ledger

Transactions, contracts and the ways they are recorded are vital elements of our economic system, but they have not really kept up with the digital transformation. The blockchain – an open, distributed ledger that records and stores transactions securely, permanently and efficiently – now promises to solve this problem. It is a database that digitally documents and authenticates transactions between two parties, be they companies or individuals, creating a permanent record of them. This guarantees that digitally recorded transactions took place as documented and that the records cannot be altered after the fact. Z_punkt’s white paper «The Internet of Value» describes the blockchain as a universal ledger for transactions of all kinds, a technology that is available everywhere and designed to ensure absolute transparency in transactions by strictly adhering to rules-based procedures.

The most widely known example is almost certainly Bitcoin, which stores all its transactions (money transfers) in an unalterable form without the need for supervision or complex verification processes. Intermediaries such as banks are thus superfluous. It is worth noting here that, while Bitcoin is used to transfer money, blockchain technology is by no means limited to financial transactions. In fact, the object of the transactions is immaterial.

A new step in the evolution of the Web: the Internet of value

UTo get a feel for how far advanced blockchain technology is at the moment, we can draw a comparison with the familiar technology of the Internet, especially since many experts see the blockchain as the next step in the evolution of the World Wide Web. Don Tapscott, co-author of «The Blockchain Revolution», told mercury-processing.com, «The first generation of the digital revolution brought us the Internet of information. The second generation – driven by blockchain technology – is bringing us the Internet of value...» The Blockchain Center also sees the Internet as «a digital medium for information (the Internet of information) and the blockchain as a medium for value (the Internet of value).»

Experts believe that the blockchain is as important as the Internet was and still is. When the Internet (of information) first emerged, it fundamentally changed the way data are distributed and consumed. Blockchain technology could do the same for the way transactions (of any kind) between two or more parties are conducted. But where does it stand compared with the first wave of the Internet?

Parallels with the development of the Internet

The Blockchain Center in Frankfurt makes the Internet comparison in terms of the development of the Transmission Control Protocol/Internet Protocol (TCP/IP) for ARPAnet. This first application, basically an e-mail system, was presented in 1972. The Harvard Business School picks up on the same example in its article «The Truth About Blockchain». It sees clear parallels between the development of the blockchain and TCP/IP. The original e-mail system, for instance, made it possible for the first time to transmit messages bilaterally, whereas Bitcoin, the first application of blockchain technology, enabled bilateral financial transactions. The experts in Frankfurt and Harvard agree that TCP/IP (the Internet of information) unleashed a new economic value system by drastically reducing the cost of communication. Similarly, blockchain technology (the Internet of value) has the potential to reduce transaction costs dramatically. If this technology for decentralized transaction recording becomes commonplace, say the Harvard experts, it could radically change our economy. If we are to believe the claims from Germany and the US, blockchain technology is currently as advanced as the Internet of information was prior to 1980. However, opinions differ on this. The Harvard view is that it has huge potential and could influence companies and their profitability to a great extent, but the timing is highly uncertain. Z_punkt notes an important point in this respect: before blockchain technology can play a central role in the digital transformation of the economy and society as a whole, a «culture of dealing with the blockchain...» must arise.

Experience gained in the development of the Internet could help here, and the Internet itself could also provide support as regards disseminating information and raising awareness of the technology so that it can become established more quickly.

«We’re currently at the same point with blockchain as we were with ARPAnet in 1969, seeing the first evidence of its effectiveness and the first small-scale pilot projects[…]»

Amber Baldet

Blockchain Program Lead at J.P. Morgan (quoted in the FSBC Paper «Blockchain Technology: from Hype to Reality»)


Possible future uses of blockchain technology

What does the future have in store? There is certainly no shortage of ideas as to how the blockchain could be used. However, if it is eventually to serve as a completely digital means of recording economic interactions between individuals and/or companies, information on the contracts, payments and parties involved must be available to all parties in completely digital form. The Z_punkt white paper outlines possible stages of development in ascending order of their impact on our everyday lives are affected.

The first (and perhaps most obvious) of these is the financial blockchain, with applications such as cashless payment and peer-to-peer models for settling transactions without an intermediary. The aim is to increase efficiency and simplify processes through enhanced transparency.

The second development stage is the contractual blockchain, which verifies the terms and conditions attached to the provision of specific services and thus serves as an automated trust platform for ensuring compliance with contracts.

Then comes the biographical blockchain. This third development stage would have the greatest impact on our everyday lives, but experts believe that it is still a long way off. It would keep a record of everything we do digitally: the blockchain knows what you did last summer, so to speak. Fitness-tracker armbands represent the first step in this direction.

Smart contracts – automated fulfilment

Let us now get back to reality. Smart contracts are seen as a promising area of blockchain development. They are designed to reduce bureaucratic complexity and costs. Blockchain pioneer and Ethereum founder Vitalik Buterin, for example, dreams of computer programs that work using smart contracts «[…] like self-driving taxis that are registered to themselves and finance their own maintenance from their income» (Z_punkt white paper).

So what exactly are smart contracts? They are contractual rules in the form of program code that follows conditional logic, i.e. patterns of the type «if A, then B». When certain conditions are met, a predetermined contractual clause automatically takes effect. There seems no limit to the possible uses, from settling a sale or rental contract to elections or even totally new kinds of corporate organization.

The experts at the Blockchain Center in Frankfurt say that smart contracts would be ideal for bringing the benefits of the blockchain to Internet of Things (IoT) applications. Machines do not just communicate with each other, they execute «contracts» among themselves, and blockchain technology could be used to automate these. One interesting example from the Blockchain Center’s working paper is the Brooklyn Microgrid project, a peer-to-peer energy market that allows homeowners to sell excess energy from solar panels to their neighbours. While this is nothing new in itself, the innovative part is that the sale is automated using smart contracts, reducing costs and enabling the market to function independently of the energy conglomerates.

IBM and Maersk optimizing supply chain management

Another real-world use case is the cooperation between Danish shipping firm Maersk and US software group IBM on a blockchain system to optimize cargo tracking. Maersk says this was motivated by the fact that some 30 different organizations and over 200 interactions are involved in every shipment from East Africa to Europe, creating a lot of paperwork and costing a lot of money. The idea is for blockchain-based cargo tracking to produce an unalterable data set recording transactions throughout the entire supply chain that can be shared with all the companies involved in real time. Every firm in the supply chain can thus see all the necessary details of every individual transaction as part of a single information flow. In addition to cost and efficiency effects, Maersk was also concerned with data security (FSBC paper «Blockchain Technology: from Hype to Reality»). It was among the biggest victims of the «NotPetya» cyberattack in 2017, which, according to the Financial Times, led to losses estimated at USD 250-300 million.

The potential of blockchain technology in figures

Investors might assume that the potential of blockchain technology (the Internet of value) is comparable to that of the Internet of information back in the early days. If Deutsche Bank and Accenture are to be believed, around 10% of global gross domestic product will be stored in blockchains by 2027 – just under ten years from now.

In «Practical Blockchain: A Gartner Trend Insight Report», the consulting firm Gartner estimates that the «business value-add» due to blockchain technology in 2017 was USD 4 billion. This, it claims, will have risen to USD 176 billion by 2025 and as much as USD 3,100 billion by 2030, which equates to an estimated compound annual growth rate of about 67%.

The index – an efficient way to invest in blockchain companies

Blockchain technology is still in its infancy, so we expect to see a lot of changes. This will make it all the more important to employ a dynamic investment concept. With this in mind, the Solactive Blockchain Technology Performance Index ensures that the theme is always replicated in a diversified, transparent and strictly rules-based manner (see Index Guidelines on solactive.com).

The index comprises up to 20 companies from a variety of blockchain technology subsectors: blockchain-specific firms, hardware and software platforms and companies in promising industries with the greatest potential to add value, namely financial services, healthcare, mobility/transport, energy, media and commerce.

Indexconcept of the Solactive Blockchain Technology Performance-Index

Figure 2 illustrates the index concept and its key selection criteria. The most important considerations are an affinity for blockchain technology and meeting strict requirements in terms of financials. The first is covered by a blockchain scoring model (Figure 1). The most financially sound companies are then considered for the index. The index is calculated and adjusted twice a year by Solactive AG. The certificate on the blockchain theme index provides straightforward access to an investment that participates at all times in the performance of companies that stand to profit from blockchain technology both now and in the future.

Why investing at an early stage can pay off

Let us recap: a tracker certificate on the Solactive Blockchain Technology Performance Index could represent an attractive opportunity for investors who are convinced that blockchain technology – like the Internet before it – will become mainstream. It must be remembered that the technology is still at a relatively early stage in its development. A direct comparison with the Internet suggests that the blockchain might need as much as ten more years to establish itself as a mainstream technology. Nevertheless, it has the power to change the economy fundamentally. Positioning yourself early enough could pay off – the early bird catches the worm, after all. Maintaining a long-term investment horizon also makes sense in this case.


19/06/2019 19:10:55

 

1 Comment

Urs Dupont

20. March 2018 at 9:46

Das grosse Problem ist, dass die meisten Leute - teilweise bewusst und zur Irreführung - nicht unterscheiden zwischen der guten (aber sehr aufwändigen und Energie konsumierenden) Technolgie "Blockchain" und den heutigen Scheinwährungen wie Bitcoin & Co., die nur heisse Luft verkaufen und als Währung völlig untauglich sind, da sie Hyperinflationen / -deflationen pro Tag haben, die grösser als die schlimmsten realen Schrottwährungen pro Jahr sind (logisch wenn etwas nur zum Spekulieren dient und nicht reguliert ist). Der einzige Zweck heutiger Kryptowährungen ist die Umverteilung von kleinen zu grossen Spekulanten, die Geldwäscherei und der Transfer von kriminellen Geldern :-(.

 

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