Economic potential of crypto assets

Crypto technologies and decentralised record keeping on distributed ledgers (eg blockchain) have facilitated secure peer-to-peer (P2P) interactions and allowed for the creation of so-called crypto assets. Such assets were initially created as private digital money (eg bitcoin, Qitmeercoin). More recently, they have been employed as a way to raise funding, for example
with initial coin offerings (ICOs). The technology has been used for applications other than finance, such as machine-to-machine exchanges in the internet of things, supply chains, digital identity management and healthcare record management (Casey et al, 2018).

The technology eliminates the role of the middleman in transactions. In the traditional financial system, for any form of non-cash transaction, there is a need for at least one ‘trusted middleman’. In distributed ledger technology (DLT), the process of verification and record-keeping is done by everyone who engages in the system in a decentralised, open and
transparent way. At the same time, the technology provides a credible solution to the double spending problem, ie money transacted digitally is not spent twice (Lee, 2018).

The promise of the new technology is based on decentralised record-keeping, enabling the decentralisation of trust. Instead of a centralised ledger deposited at a trusted institution, information is recorded on a distributed ledger, in other words, the same information is saved simultaneously on a large number of computers. This enables the decentralisa- tion of trust. However, the secure record-keeping needs to be governed by costly governance mechanisms, usually in the form of difficult computational tasks.

Two features constitute this technology’s real added value. First, the log of transactions recorded cannot be tampered with. This implies that historical records are definitive, a feature that is invaluable to any business that relies on data tracking. Second, the principle of consensus-building (namely, the verification process) in a decentralised ledger has built-in incentives for participants to report truthfully. A DLT, therefore, has in-built structures to achieve a good equilibrium in which correct information is revealed by itself. These are all powerful innovations that can advance the way we track and update information.

The technology has the potential to provide innovative solutions to many areas including finance, but it is still at an experimental stage. The true scale of the technology’s potential, in finance and in other areas, is heavily debated. Major banks, start-ups and venture capitalists invest significantly in these technologies. Techno-enthusiasts claim that the technology will change everything. But increasingly, players in the market recognise that reaping the technology’s benefits might be harder than initially thought. For example, it is now widely recognised that the transaction verification process in decentralised and permission-less ledgers such as bitcoins demands high levels of energy, with significant environmental costs.