The place where blockchain meets the real world
The main advantages of cryptocurrency in the absence of need to trust third parties, in the ability to rely on cryptography and be sure that all participants unconditionally comply with the rules.
Cryptocurrency is self-sufficient. Indeed, a money-like mechanism is built in into the blockchain. This mechanism fully provides network support and motivation for participants. As a result, the functioning of the blockchain is ensured. No obligations outside the network are needed. It is beautiful and really cool!
But our life is not limited to the network, since we live in the real world and not in virtual reality. Therefore, the massive use of new technology begins only when:
· The benefits that it actually brings to a large number of people are obvious
· A breakthrough application using the new technology appears.
In the world of finance, blockchain is already immensely useful in at least two areas: the money and securities.
The Bitcoin will become great new money, since it features limited supply, high liquidity, impossibility of confiscation, uncontrolled payments and low commissions.
Bitcoin as money is not yet relevant in developed countries. Indeed, the Bitcoin payment infrastructure and Bitcoin usability are still significantly inferior to the usability of major fiat currencies such as the USD and Euro. Therefore, in the developed world cryptocurrencies market is a playground of the most advanced users who believe in cryptocurrencies future dominance. Therefore, these investors put their money in the high risk assets that can multiply their value over time. Still, for the majority of the developed countries population, the use of Bitcoin as money and as a gold substitute is still peripheral.
At the same time, in developing countries such as Argentina, Turkey, Venezuela and Russia, the situation is completely different. The cryptocurrencies became a real salvation from the mediocrity of corrupt officials. In third world countries, Bitcoin has established itself as a viable alternative to fiat currencies issued by incompetent governments. Bitcoin and other cryptocurrencies has become a means of savings accumulation and preservation.
Another use of blockchain in finance is securities. The benefits that the blockchain brings are obvious here also. By tokenizing securities, issuers gain access to hundreds of millions of potential retail investors around the world. Retail investors, in turn, have the opportunity to invest small amounts in profitable and highly liquid assets. Previously, they did not have such a simple and reliable opportunity. In reality, a poor person from Argentina could not simply and quickly invest one thousand euros, for example, in the construction of commercial real estate in Germany.
Summarizing all the above, today the most vivid and certainly frequent use of the blockchain in finance is a censorship-free, unconstrained channel through which residents of developing countries and third world countries protect their savings. It can be performed by: buying cryptocurrencies and investing in reliable and liquid assets of developed countries. The latter today is even more valuable, cause the cryptocurrencies are still extremely volatile and cannot serve as “safe haven”. The highly liquid securities that are tied to the developed countries real assets are highly reliable. Including, the stablecoins secured by the developed countries currencies can be considered — very safe investment.
Still, no matter what we use the blockchain for (money, securities, control …) all this makes sense only when there is a kind of gateway connecting the blockchain with the real world. The blockchain itself may not require trust from the third party, but the gateway that links it to the real world requires trust on the part of those who use it to those who control it.
Let’s consider an example from a real world. When you give your money in the store, you are sure that you will receive the purchased goods in return. You are safe because your rights are guaranteed by law, guaranteed by the state. At the same time, the relevant laws and government guarantees regarding blockchain assets have just begun to emerge. There is always a place in the blockchain-real world- blockchain chain in which the laws of the blockchain no longer apply. As a result you again have to trust third parties at this place. This place may be your account on the cryptocurrency exchange. It can be a private blockchain in which your assets are stored. It can be any place where you provide access to your assets to someone else. This is what we call the “Trust Point”. This Trust Point is now the weakest link of the entire blockchain industry. The important point is that we do not talk about trust in the blockchain assets themselves. We talk about trust in the place where sale / purchase / exchange / storage operations are carried out on these blockchain assets.
Since we can’t do without the “Trust Point”, how can we maximize the trust in it? Here are some principals:
· Minimize contact time with the Trust Point. Ideally, the contact time should be equal to the transaction time. Your blockchain assets are 100% yours only when they are in a stable public blockchain and no one except you has a private key to them.
· In a case of long contact time (and preferably always): Do control that your assets in the “Trust Point” are properly insured.
· The “Trust Point” itself must legally fall under state regulation with transparent blockchain legislation and a judicial system with an ideal reputation.
Everything will fall into place only after the states protect the owner’s rights for cryptocurrencies, including the security tokens and all other sorts of tokens. It has to be done in the same way as the material and intellectual assets ownership rights are protected in the modern world. And this process has already begun. I am sure that soon enough we will see certification (not only de facto but also de jure) of some public blockchains at the state level.
Finally, to make it clear: all written above refers to trust in crypto assets transactions and not to trust in crypto assets themselves. And my next article is going to be about trust in crypto assets.