This is part 2 of an introductory series of Blockchain and Bitcoin, the purpose here is to explain some of the high level concepts about the crypto and blockchain technology. Here are the Part 1 and Part 3.
Blockchain technology is a revolutionary innovation in record-keeping. The Bitcoin blockchain maintains a perfect record of the number of bitcoins each user has. The system keeps track of all transactions and updates each user’s balance in a database that is similar to an Excel spreadsheet. It cannot be cheated or altered. The banks that were once trusted to keep track of how much money each person has are now able to be replaced with an open value exchange system.
Although it may not sound like much, an “innovation in recordkeeping” is essential to almost everything we do as a society. Blockchain technology can then be used to transform society’s functioning. Blockchains can be used to keep track of financial transactions, title to real property, stock ownership, and any other value. These assets can be transacted over the blockchain, just like bitcoin. It is a shared global ledger that everyone can access, but not one person, corporation, or government.
Ethereum first introduced the idea of a Blockchain Platform in 2013. Other platforms like EOS and Cardano will be developing alternatives over the years. These platforms enable developers to create applications that use blockchain technology and facilitate value exchange. Blockchain platform applications are a viable alternative to traditional banking systems. They can revolutionize every aspect of property and finance, and open up new markets and industries that were not possible before.
The Ethereum network has a crypto asset called Ether. Ethereum is the second most valuable crypto asset, after bitcoin.
Ether is the same as gasoline for fueling your car. It can also be used to fuel applications that are built on Ethereum. This is why ether is often referred to more as a crypto-commodity than a cryptocurrency.
A special type of computer program is called a smart contract. Ethereum applications are built using this type of computer program. Smart contracts can be programmed to move money or value when certain conditions have been met. This can have huge implications for finance and all other aspects.
Smart contracts enable business logic to be written around digital asset exchange, which allows people to enter into financial agreements via blockchain networks. Transparent computer code can replace intermediaries that are required to execute traditional agreements. Once certain conditions have been met, the code executes the terms of the deal.
Smart contracts in real life
An insurance policy is a piece of paper that contains an agreement between an insurance company and the policyholder. Smart contracts can automatically execute the terms of an agreement without the need for intermediaries when that paper record is digitalized and placed on the Ethereum blockchain. Let’s look at AXA, the French insurance giant. This pilot program will help you understand how smart contracts can revolutionize modern finance.
AXA also offers “flight delay insurance.” A policy of $5 will pay $100 for any delay in the flight if it is more than two hours. A customer can file a claim if the flight is delayed for more than 2 hours. The company will then manually process the claim and AXA’s bank will issue the payment. This process can take several weeks, if not months. Smart contracts can automate the entire process and issue payments in real time.
An Ethereum smart contract that says, “IF a flight is delayed by two hours, THEN pay $100 (in Ether to policyholder”)” can be created and deployed. A public database that tracks flight times is linked with the smart contract. The smart contract will be activated if the database shows that the flight arrives two hours late. In this case, the $100 payment will be issued over the blockchain. The insurance company and their bank do not have to file a claim.
This can be used to make a global economy highly efficient by applying it to a variety of financial agreements.
Tokenization of everything
The paper contract in our insurance example has been “tokenized” on the Ethereum blockchain. The policyholder is given a digital token that represents the contract, which they can store in a digital wallet. As a financial agreement can also be “tokenized”, property, data, and any other value can be as well.
The ownership of many real-world assets is similar to having a paper record. A piece of paper is given to you by the dealer when you purchase a car. A deed is a piece that you receive when you purchase a house. A crypto-token is a digital record that represents ownership of an asset. It’s stored on a blockchain, which is a distributed global database with thousands of computers.
Instead of keeping the title to the car in your glove box and the title for your home in a file cabinet, you can store them on a blockchain. You can access them through a digital wallet. This allows you to keep track of all the assets in one place. New and exciting avenues of collaboration are possible when tokenized assets are combined with smart contracts on public Blockchain platforms.
Exchanging assets in a world with paper-based records is costly. Once all our assets are “tokenized”, it becomes possible to create new digital marketplaces. Tokenized assets and smart contracts can unlock global value.
What would happen if a Mumbai resident tried to sell 5% off their Mumbai home to someone in New York? The transaction would be impossible because of the cost of the brokers and lawyers required (8 middlemen are involved with the average US real estate transaction). This is because the sale of such property is not cost-effective.
This type of transaction is possible if the same person in Mumbai tokenized his home. It is possible to create a smart contract that replaces the majority of the middlemen. For example, if someone in New York sends 5 Ethereum, THEN they can transfer asset tokens. This global platform for value trading records the sale to the blockchain. The New York real estate investor has access to a new market, while the Mumbai homeowner gets income that they can reinvest.
This is because smart contracts and tokenized assets enable value exchange without the need for traditional intermediaries. Blockchain platforms remove the barriers that were present in a paper-based world, opening up new possibilities. Blockchain platforms can be used worldwide, so physical borders are no longer relevant and collaboration opportunities can be opened.
Under construction: The Internet of Value…
Blockchain platforms can be used to tokenize financial contracts and real estate. This new technology has the potential to transform global commerce. We couldn’t have predicted the rise of platforms like Uber or Airbnb, but it is difficult to predict the future of blockchain platforms.
However, it is important to remember that the new internet for value trading is still in development. Applications built on Ethereum are currently difficult to use and cannot support the same amount of traffic as the iPhone app. To make real-world assets move from paper-based to blockchain, exchanges must trade them. Rules and regulations are needed to ensure clarity in these new types of markets.
Some solutions can scale Ethereum considerably and regulators are working quickly to keep up with this rapidly changing technology. Alternative approaches are being developed by Dfinity, Cardano, EOS, and Cardano, as well as other platforms such as Cardano. We are moving towards a world where value flows as freely and information is less restricted. That’s something we should be excited about.