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April 12, 2022Reading time: 5 min

Megatrend Blockchain

There is currently hardly any other topic about which investors have more divided opinions than cryptocurrencies. More and more investors view Bitcoin, Ethereum, and other “altcoins” as the future of money and the financial system, and thus see massive potential for future gains, despite the sometimes exorbitant increases that have already been registered.

By contrast, others are convinced that the now well over 10,000 different kinds of digital coins and tokens represent a giant speculative bubble. Analogies are often made with the bubble involving internet shares in 1999/2000 or the famous tulip mania in the Netherlands in the 17th century. So-called blockchain technology forms the backbone for almost all cryptocurrencies. While the discussion about the value, sense, and sustainability of cryptocurrencies will likely continue to rage for some time, there is broad agreement that – independently of this – blockchain itself has enormous economic potential. Because cryptocurrencies are just one of many ways that this ground-breaking technology can be applied.

What makes blockchain so special?

In extremely simple terms, blockchain is a distributed, fully automated database that is secured with encryption technologies. In contrast to centralised databases, such as those found in the computing centres of banks or credit card companies, a blockchain exists simultaneously on hundreds or even thousands of computers (so-called nodes). All new transactions and information are recorded

and stored in real time on the computers that are connected to the system. New entries are collected into blocks and become effective when an entire block is filled and validated by the majority of the participating computers. Ultimately, the blockchain is just the complete chain of these blocks, which contains all transactions or information that have ever been executed or captured. It is hardly possible to retroactively alter an entry. Either this does not occur at all or only in highly exceptional cases and can only happen if a majority of the participating nodes give their approval.

The resulting advantages and disadvantages are exceedingly far-reaching.

The resulting advantages and disadvantages are extremely wide ranging. It is extraordinarily difficult to effect manipulated transactions (e.g. to pay several times with the same cryptocoin) or to reverse transactions entries that have already been made, as this would require simultaneously hacking into the majority of the controlling computers. In combination with encryption technologies, this means that users can be confident that the entries cannot be manipulated, and are correct and final. In comparison to systems with human intervention, the automated processes reduce sources of error, shorten transaction times, and lower costs. One of the downsides of this, however, is that a transaction that has been incorrectly executed (e.g. transferring cryptocurrency to an incorrect recipient) also cannot be reversed in normal cases.

The high tamper-resistance of blockchain technology offers countless possibilities.

The relatively high barrier to manipulation offered by blockchain technology opens up a myriad of opportunities. The potential goes far beyond mere use as a means of payment and is actually much wider outside of this particular sphere of application. Using smart contracts, for example, it is possible to apply this technology to almost all assets (equities, real estate, currencies, bonds, etc.), programming it in such a manner that subsequent actions are taken completely automatically when a certain event occurs. In this manner, processes can be automated and designed in a generally fraud-proof, unalterable way, which in the past has required manual intervention, for example with the transfer of an asset upon successful payment or the return of an asset to the owner if payment was not effected. Sales of real estate could be executed without notarial certification and entered into the land register automatically.

Blockchain technologies harbour great potential for new technological solutions in a wide range of fields, extending far beyond cryptocurrencies, and thus offer attractive earnings opportunities for investors who put their money on the right trends and companies in a timely manner, consciously taking into consideration the related risks (e.g. capital losses). Blockchain applications open up new horizons as well as new risks for many enterprises which are affected directly or indirectly by these technological developments or are driving them forward. Therefore, constant monitoring and a good selection of investments by the fund management are absolutely necessary. Moreover, as a result of this the fund’s positioning can also change at any time. Naturally, the risks that are generally associated with equity investments also apply to firms active in the field of blockchain technology.

Another possible application would be counterfeit-proof entry tickets, which could not be sold on the black market. Another broad field of use could be tamper-proof certificates of origin or authenticity for all kinds of products, offering around-the-clock traceability and transparency for flows of goods and funds (e.g. for supply chain management, combating corruption). The scope of the possible applications is practically unlimited. It is also possible that the 3rd generation internet (Web 3.0) or censorship-proof information portals could be based to a large degree on blockchain technologies.

Of course, this technology also has its limitations. It is not free of the usual problems exhibited by all kinds of software (e.g. incorrect programming, for example of smart contracts) and it is also not always that easy to use. Similar to the “magic triangle of asset management” (liquidity, security, return), there is also a magic triangle

for blockchain, consisting of security, scalability and decentralisation. The more decentralised a blockchain is, the more secure it is, but this comes at the cost of speed and the number of transactions per unit of time. However, massive progress has already been made in this respect with innovative solutions in programming and hardware. Many applications also do not need for all of the components to be maximised at the same time and instead only need to feature high transaction bandwidth or especially good security, while speed may be a secondary consideration.

*) Explanations:

  • Cryptocurrencies or tokens are digital assets, which also function as a means of exchange.

  • A smart contract is a contract based on software, in which a wide range of contractual conditions can be entered.

  • NFT stands for non-fungible token. Non-fungible tokens do not have a specific value, but an individual value. If you exchange NFTs, you usually do not receive the same value that you pass on in the exchange. This is comparable to a painting, for example, which has its own individual value for each art lover.

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