Portfolio Perspective –

Portfolio Perspective

February 17, 2022

Blockchain primer: Technology for real and digital economies

Key takeaways

  • As digital assets continue to gain investor attention, the foundational blockchain technology underpinning digital assets has become synonymous with cryptocurrencies. However, blockchain has multiple use cases for both the real economies of today and the digital economies of tomorrow beyond just the crypto applications.

  • Though cryptocurrencies could be considered blockchain “power users”, that understates the degree to which blockchain is increasingly being used in commercial use cases.

  • Blockchain’s potential benefits are varied and significant. While its adoption is still building and growing, the various applications (as listed below) may portend a future of transformational change in our daily lives, similar to the advent of the internet.  Some cryptocurrencies and digital assets may come and go, but the underlying technology of the blockchain is here to stay.

What is blockchain?

  • A blockchain is simply a database of information shared across a peer to peer decentralized network of connected computers,  the “data” is hashed and represented either as a value or a computer code. In other words, it is to digital assets what HTML is to the internet – the foundational technology upon which applications can be built.  Blockchain technology comes in many shapes and sizes but is not a singular “one-size-fits-all” technology solution.

  • At the core of any blockchain application is understanding the concept of a ledger. Put simply, a typical ledger records economic activity (transactions) between two or more trusted parties. Unlike current methods, blockchain allows applications to “decentralize” the recording of those financial transactions by removing the intermediary, instead preferring a solution, such as using an algorithm, that is not subject to manipulation or error.

  • The concept of decentralization is critical to understanding the underlying premise of blockchain not just for cryptocurrencies but also for real economy business applications. The intent of a decentralized ledger is to gain accuracy, speed and data integrity with a time-stamped auditable data base from a broad community of participants.

  • To date, one of the most notable uses of blockchain has been Bitcoin. It was launched on October 31, 2008, six weeks after Lehman Brothers went bankrupt during the height of the Great Financial Crisis that threatened the survival of the global banking system. Its proponents argued central banking systems, such as the Federal Reserve, contributed to financial instability in times of economic turbulence. Bitcoin was proposed as a decentralized alternative to central banks offering a peer-to-peer payment solution cutting out intermediaries. Thousands of cryptocurrencies have followed in Bitcoin’s footsteps since then. However, we expect there will be significant variability in the potential for long-term value, and many of them will not have viable use cases. 

Bottom line

Digital assets such as cryptocurrencies or smart contract tokens are built using blockchain technology. Digital asset platforms can be viewed as being similar to software companies, utilizing blockchain to provide digital solutions to everyday needs. Many large U.S. public companies already utilize blockchain technology to gain efficiencies, and many more are generating new revenue streams by developing internal capabilities to grow their businesses. This is occurring across all sectors of the economy.

We believe that blockchain technology represents a long runway for future transformational opportunities and potential disruptions for both the current and emerging digital economies.

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