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Bitcoins and Blockchain Technology Are Revolutionizing The Transfer Of Asset Ownership

ArmchairTechInvestorBitcoin, December 11, 2017, by Brad Peery,

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*Bitcoins were invented in 2008 by an unknown inventor. They are a unique creation that allows assets to be transferred securely, and anonymously, bypassing the need for the buyer and sell to verify the validity of the other party. Initially bitcoins were used to buy and sell commercial items. A seller of an item would set a price for the item he wished to sell. The buyer would purchase bitcoins. They can be purchased in a variety of ways. One of the most convenient would be to set up an account with a bitcoin vendor. Those bitcoins could be transferred to a vendor that accepts bitcoins as a payment source. The vendor doesn’t need to know the buyer. Bitcoins are bought anonymously, and the purchase transaction is completed seamlessly over the bitcoin network. An entity, called a miner, is used to complete the transaction, and miners are paid in bitcoins when they are successful in completing a transaction. The miners compete with each other to complete the transaction, and the miner that successfully completes the transaction is paid for its services.
*Swift, Information Paper, Distributed Ledgers, Smart Contracts, Business Standards and ISO 20022

**Another way to use bitcoins might be to set up what amounts to a bitcoin account with a bank. An example of such a situation is a company, ChromaWay, working with LHV Bank in Estonia. LHV Bank, which is the largest Estonian financial group, wanted a secure technology for implementing a Euro-based payment solution. In 2016, their Cuber project was launched. This ChromaWay app basically provides an alternative to cash. Instead of being dependent on bitcoin price fluctuations, users hold reclaimable tokens representing euros. Cuber becomes a new kind of open platform that takes advantage of blockchain innovation and bitcoin security, but eliminates bitcoin price fluctuations.
*Brad Peery, the author of this blog, is an Advisor to ChromaWay. ChromaWay is in the process of moving its headquarters from Sweden to the U.S.

Blockchain technology is much broader than just bitcoins. It provides robust security for any kind of cryptocurrency. It is a very powerful technology that can provide efficiencies and technological benefits that make it capable of performing complex operations. This is where the idea of smart contracts came in. Smart contracts allow complex transactions to occur without intermediary intervention. Smart contracts can create accounting transactions that result in distributed ledgers that reside on the blockchain network. They can reduce or eliminate the need for individual participants in a transaction to keep their own accounting ledgers.

Colored coins, which was developed by ChromaWay, can be use as a way to transfer assets over a blockchain network. Any kind of asset can be transferred. Examples are real estate properties, and stocks and bonds. Any type of asset that has commercial value can be transferred over a blockchain network.

There are other kinds of blockchain networks besides the bitcoin blockchain network. A company called Ethereum has its own blockchain network, and has a currency similar to bitcoins, called Ethers, which are similar to bitcoins, have their own value. Blockchain technology will become pervasive when the banks adopt them.

Bitcoin futures contracts are being offered. Bitcoin ETFs are being developed. And, the Fed is looking at ways to incorporate bitcoins into their operations, as a way of including a new currency that is not backed by an asset such as gold, or by a governmental body or bodies.

An issue for bitcoins is their volatility. They have gone from about $100 per bitcoin in 2016 to $16,000 per bitcoin in late 2017. The biggest issue with bitcoin fundamentally is that the transaction rate using miners occurs at about seven transactions per second and is not fast enough to serve such applications as bank credit card applications. In contrast, Visa’s peak is 47,000 transactions per second, and that is just one company.

ArmchairTechInvestor Opinion
Many of the largest banks are working to standardize blockchain networks. The elements of blockchain networks that make them useful include smart contracts that make complex transactions possible, and distributed ledgers. If these elements can be standardized, then a bank might have its own blockchain network that might interconnect seamlessly with another banks separate blockchain network, but each of these networks might be private to each of the banks. This can greatly simplify the user authentication process, as each bank can have its own process.

There are many other uses for blockchain networks that we plan to write about as the individual applications mature.

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