Amidst a wrath of uncertainty and volatility within cryptocurrency markets, the underlying technology fueling a new age of finance has never been stronger.
Did you know that approximately one in six Australians now own cryptocurrency? That would equate to 3 or 4 people in one of your tutorials. However, whilst most people may be familiar with the ‘Dogecoin’ or ‘Bitcoin’, what most people are unaware of is the true technology behind cryptocurrency; Blockchain.
Cryptocurrency is one of the most volatile and risky asset classes statistically and its large bear and bull markets make society question its plausibility and genuineness in times of large pullback, as in June 2021. However, what has only been growing throughout this period is the Blockchain technology itself.
What is Blockchain?
In essence, Blockchain acts as a decentralised ledger.
Imagine it as if everyone had a notebook, and for any transaction between two people, everyone’s notebook is updated, making it basically impossible for someone to go and change millions of people’s notebooks. Thus, these notebooks or ledgers allow for decentralisation. As the ledger contains blocks (which create the chain, after multiple transactions), these blocks can literally track the transactions of anything with value, for example copyrights, digital art, houses, or this article for example if someone wanted to buy it. Thus, allowing for the scope of its use to be nearly endless.
Why is it important?
All facets of life rely on information. Information that is now mainly transferred electronically and via the internet.
Blockchain allows for increased trust, security, and speed with information, as their digital signatures are identified, validated, and stored, removing the need for third parties. Allowing for applications where such intermediaries traditionally existed.
A groundbreaking example of the application of Blockchain involves smart contracts, which as you can imagine, take out the middle person. As the contract is shared across participants, intermediaries are now out of the picture, reducing the transaction costs and increasing their security, as each Blockchain transaction is encrypted, making them very difficult to hack. To hack one block, one must alter the entire the chain.
Similar application can be applied to the finance industry, as the loss of the middle person can be exercised in cases of peer-to-peer transfers, such as remittance, which has historically been costly and slow (up to a few days).
“DeFi [Decentralised Finance] is revolutionary,” Medcraft says. “It is the next frontier, definitely.”
Blockchain has the realm to expand more greatly than ever imagined. DeFi, or Decentralised Finance, acts as an extension of the Blockchain technology with its applications within finance itself. Protocols acting in areas such as lending, insurance and derivatives, allow customers to borrow cryptocurrency, earn interest and hedge their positions. In a report by the Australian Financial Review, Leader of the OECD (Organisation for Economic Co-operation and Development) Greg Medcraft, bluntly eluded that DeFi is “cutting edge at the moment” however we are likely to be years away from an “internet based financial system.” Nonetheless, with the emergence of digital currencies, identities, and tokens, DeFi is able to increasingly expand and take effect.
However, with increased decentralisation and emergence of new technology, comes grey areas and the need for regulation. As no matter what exists in our society, nothing itself is bigger than the rule of law and must be regulated to ensure fairness and equity prevail.
How will this be adopted? And what this could mean for the economy
Just like the adoption of the internet, telephones and electric cars, adoption of Blockchain technology will be slow. However, according to PWC’s Global Blockchain Survey of 600 top executives, 86% of businesses are at least in the research phase of Blockchain adoption, with 66% and 15% respectively developing and having live Blockchain application within their business.
At the moment, it is possible that within the next 5 years, Blockchain will act as a way for businesses to decrease costs, due to its speed and reduction of third parties. Whilst this may be far from wide-spread use and adoption on many levels, such government fiscal stimulus in this area and technology itself could be what Australia needs.
From a macroeconomic perspective, adoption, and implementation via the government through stimulus could be beneficial to society in many ways. Immediately, the upfront stimulus would act as cyclical spending, adding to aggregate demand and economic growth in the short-term, and could also provide for jobs in order to fulfil the stimulus, likely engineers and scientists alike. Thereafter, in the long-term, creation of such technology will act to increase productivity and ultimately decrease average costs within businesses. As a result, making businesses more internationally competitive and able to compete in international markets and hence create economics of large-scale production. Consequently, allowing firms to do business more easily and make trade more accessible.
Why should it matter to me?
To the retail investor, Blockchain presently is most frequently used for crypto-currency purchases, sales and transfers, with multiple networks offering remittance services, loans, smart contracts and NFT marketplaces through their services.
However, The future of blockchain can extend well beyond its current usage, to a digitised finance environment that will become a foundation of decentralisation in a world of increasingly centralised world.