BLOCKCHAINS – Your Starter Guide to Understanding the Potential They Present…

In early 2009, an incredible gift was handed to the world… That gift was the Bitcoin Blockchain with its associated cryptocurrency, Bitcoin (BTC). The technology was revolutionary. It sparked a wave of mining operators who validate transactions, developers, projects and businesses that aimed to harness the power of blockchain and the value proposition it represented. Since then, the Bitcoin network has expanded exponentially. But it’s not alone, other variations of blockchain technology have also grown since then to solve unique problems within finance and society at large. Let’s break it down into some major sectors so it’s easy to digest and may assist you on your blockchain and investing journey.

1. STORE OF VALUE

What is meant by “Store of Value”? Simply put, the blood, sweat, and tears you put into creating value such as wages, investment profits, or selling intellectual property which are stored in such a way that the value is protected for you to deploy sometime in the future. You can rest easy knowing that, over time, your efforts haven’t been eroded by a hidden tax called inflation or by the debasement of fiat currency. Currencies like the U.S. Dollar, Australian Dollar, Great British Pound, and pretty much any other fiat currency you can think of, continue to get printed into oblivion to cover ever-increasing debt loads and obligations. For over 5,000 years, gold has served as an excellent store of value, but with the digital age upon us, a new asset is stepping up to be considered as a long-term store of value as it hedges against inflation and debasement with its limited supply and increasing network adaption; Bitcoin.

It's acknowledged, that, as a relatively new asset class, the cryptocurrency market can see significant swings measured in fiat currency unit terms. This is the first new asset class since Bond Markets were created by the Bank of England in 1694! Perhaps, an interesting way to look at evidence showing how Bitcoin has maintained its purchasing power over its 15 years of existence is to not look at its "highs" but at its lows. Let's start in 2012, measured in USD.

• 2012 - $4
• 2013 - $13
• 2014 - $306
• 2015 - $190
• 2016 - $360
• 2017 - $779
• 2018 - $3,237
• 2019 - $3,399
• 2020 -$4,970 (COVID-19)
• 2021 – $29,374
• 2022 - $15,787
• 2023 - $16,625
• 2024 - $39,507 (presently this year)

Allowing for the anomaly that was COVID-19, and the massive injection of government stimulus that immediately followed into 2021, there is evidence of a trend showing higher lows. As a store of value, BTC should be a definite consideration. Its deep liquidity, financial adaption and growing institutional exposure place this cryptocurrency asset in a league of its own as a potential store of long-term, inflation-hedging value.

2. SMART CONTRACTS

As blockchains evolved, certain “programmability” and “automation” were able to be built into the code of new blockchain projects. In basic terms, this allowed the code to be the layer of trust, rather than having to trust multiple entities to do something. Think of it in terms of removing the need for a physical middleman; the code is the middleman. The code can’t be bribed or influenced and has the final say as to whether a transaction succeeds or fails.

For example, if we used a trade of soybeans from a farmer in the USA to a manufacturer in China. The USA and Chinese participants might not necessarily trust each other, but with Smart Contracts it doesn't matter. As per the conditions laid out in the smart contract, it might be a case that once the soybeans or verified and loaded on the boat, the Chinese manufacturer automatically has 1/3 of their U.S. Dollars they hold for trade sent from their U.S. bank account to the farmer. It may also be the case that payments and fees are also automatically paid to other parties such as U.S. and Chinese customs agencies. Once the boat crosses halfway across the Pacific Ocean via Satellite Navigation data, another 1/3 payment is made.

As the ship arrives and the soybeans clear Chinese customs, the remainder of the funds are settled instantly, payment recorded and participants notified, all through trustless smart contracts and blockchain technology. This information is recorded on the blockchain for all to see and remains immutable, meaning it can’t be changed or tampered with. A term you may hear in relation this type of trade or transaction where there is no need for participants to trust each other is “atomic swap”. Think of the efficiencies of removing middleman processes, paperwork getting lost, invoices taking 30 days or more to settle, multiple payments needing to be sent to recipients; the confidence that if one participant fails in their obligations, that the trade doesn’t go ahead; no one “runs off with all the lollies” without putting up payment! The code decides… the code is the unbiased umpire.

Leaders in the smart contract space include projects such as Ethereum (ETH), Solana (SOL), and Cardano (ADA). Ethereum has a smart contract-producing mechanism called the Ethereum Virtual Machine (EVM) which has been widely tested and adapted by many financial institutions and other blockchain projects as part of their technology solution stack. These projects are worth further research and consideration in the field of smart contract solutions and adaption.

3. TOKENISATION 

With Ethereum being a market leader in the smart contract space, it is well positioned to tackle new opportunities in the field of tokenisation of Real World Assets (RWA’s) where programmability meets immutability and confirmation of ownership. To understand what tokenisation means to the financial world and society, let’s break it up into two (2) main lines of thought.

a) Tokenisation as a Proof of Ownership

As summarised by Cryptopedia, “In the blockchain ecosystem, tokens are assets that allow information and value to be transferred, stored, and verified efficiently and securely. These crypto tokens can take many forms and can be programmed with unique characteristics that expand their use cases. Security tokens, utility tokens, and cryptocurrencies have massive implications for a wide array of sectors in terms of increasing liquidity, improving transaction efficiency, and enhancing transparency and provability to assets." https://www.gemini.com/cryptopedia/what-is-tokenization-definition-crypto-token

Tokens can represent tangible things like art, real estate, assets on a blockchain network or commodities like gold and silver. (More on this to come) However, they can also represent intangible assets like ownership, voting and licencing rights. An example of Real World Assets (RWA's) being tokenised into a digital form is the AUS (Gold Standard) and AGS (Silver Standard) tokens offered by Ainslie Bullion/Ainslie Crypto. Physical precious metal is safely secured in a vault, with its weight broken up digitally into grams of metal on the Ethereum Blockchain. As highlighted above, this allows efficiency, transparency, transactional speed and value transfer not restricted by geographical location, proof of reserves and ownership.

b) Tokenisation as Fractional Ownership

An example of tokenisation as fractional ownership would be with a piece of fine art. Imagine a $200 million Vincent Van Gogh masterpiece being offered up for sale. The artwork could be digitally tokenised via a smart contract project into thousands of “ownership tokens” held by the individual in their own custody in their own digital wallet. As mentioned before, the smart contract proves ownership of the receiving wallet. The fact that a $200 million price tag could be split into 100,000 ownership tokens (for example), means that for $2000 a regular member of the public could own a piece of a Van Gogh and have investment exposure to fine art appreciation.

Incredible opportunities await as platforms tap into tokenising everything. Think art, fine wines, all types of collectables, classic cars, expensive stocks, hotels, and housing / commercial real estate. When researching, this is commonly referred to as “unlocking trapped liquidity or value”, meaning what is illiquid and would normally take a long time to sell and or have a limited number of buyers, would suddenly become liquid value to tokenise, and potentially be quickly sold to many potential smaller investors. From this, one could easily imagine a strong secondary market of on-selling, buying or trading with royalties paid to the original owner of the property or artwork. There are already strong projects and blockchains testing tokenising varying assets. Some of these include Ethereum, Stellar, XRPL, Solana, XinFin, and are worth deeper research. 

4. PAYMENTS

Payments possibly represent one of the largest value propositions for blockchain technology. Presently, cross-border payments represent over US$150 trillion value each year moved between countries. This is expected to grow to US$250 trillion by 2027. Risks with the present legacy correspondent banking messaging and payment system are numerous. 6% fees, managing business bank accounts overseas, having counterparty risk to governments within those countries debasing the funds you hold for payments, error rates within the present SWIFT system of around 9% and sometimes days, if not weeks (if sending between exotic countries with no direct banking relationships) waiting for a payment to arrive have plagued the cross border payment industry to the tune of US$2 billion a year.

Totally unacceptable in today’s digital era with instant payments and value transfer available using blockchain technology.

Understand that payments come from many different participants. From peer-to-peer to SME businesses, large corporations, governments and Central Banks. The pool of participants is as varied as it is vast. Payments are crucial to every point of the business trail. Lastly, I'll leave you with The Depository Trust and Clearing Corporation (DTCC) which settles the trading of stocks etc. In more than 20 locations around the world, they specialise in post-trade settlement. In 2023, they settled US$2.5 quadrillion dollars of trades! Add that to cross-border volumes and credit card volumes! That volume is currently T +2 days to deliver settle trades. It's going to T +1 day imminently. What volumes could they achieve with instant settlement using blockchain technology? (DTCC blockchain testing - Project Ion)

Another type of payment industry would be major credit card companies such as Visa and Mastercard. These companies have been more nimble in their adaption of blockchain technology, with both at one point in a bidding war over a blockchain tech facilitating company called Earthport in 2019 (a known Ripple (XRP) partner). Also acquired by Visa was Currencycloud in 2021 which reports to help small to medium-sized enterprises (SMEs) to move money across borders. These types of acquisitions and deeper partnerships are great points to start your own research to establish what "new financial rails" are being laid down to improve speed, cost, security and transparency. Two (2) projects to put on your radar regarding blockchain payment solutions would be Ripple using the XRP Ledger (XRP) and Stellar (XLM).

5. DATA

“Data is the new currency”… I'm sure we've all heard that phrase before; but it's true. Whether it be preserving your own personal data or companies sourcing data to operate their businesses, data needs to be secure, in certain circumstances easily accessible, timely, accurate and decentralised.

According to an article by IBM, on a personal level, “Your data is sensitive and crucial, and blockchain can significantly change how you view your critical information. By creating a record that can’t be altered and is encrypted end-to-end, the blockchain helps prevent fraud and unauthorised activity. You can address privacy issues on the blockchain by anonymising personal data and by using permissions to prevent access. A network of computers, rather than a single server, stores information, making it difficult for hackers to view data.”

https://www.ibm.com/topics/benefits-of-blockchain

A significant number of data breaches have occurred recently within Australia, leaking citizens' private data onto the web. This could cost millions if not billions of dollars in fraudulent usage of unauthorised data. Blockchain, distributed ledger technology and smart contracts could greatly enhance security regarding personal data protection.

Data price feeds are crucial to businesses operating and adjusting in real-time. As such, it has to be accessible 24/7/365, timely, uncorrupted, trusted, and ideally sourced in a decentralised manner. For instance, businesses such as the NY Stock Exchange, Australian Securities Exchange (ASX), bullion dealers such as Ainslie or the Chicago Mercantile Exchange (CME that organises the trading of futures and options rely on quality data to operate.

Blockchain projects are meeting this opportunity head-on. After all, blockchain technology has decentralised data recording, security and immutability at its core. One such project is Chainlink (LINK) which is showing legitimate signs of adaption by businesses in need of decentralised and secure data feeds. From the Chainlink website:

“Chainlink Data Feeds provide a secure, reliable, and decentralised source of off-chain data to power unique smart contract use cases for DeFi and beyond… Chainlink Data Feeds are powered by networks of independent, highly reputable, and geographically distributed node operators to help ensure high reliability… Data is sourced from multiple premium, authenticated APIs that are aggregated into a validated answer, removing any single point of failure.”

https://chain.link/data-feeds

In summary, we’ve broadly discussed the power of blockchain technology and how it relates to five (5) areas of significant market opportunities where blockchain solutions are colliding with existing problems. We’ve also given examples of leading blockchain projects worthy of further research and consideration as part of your blockchain journey towards personal understanding and participation.

About Ainslie Crypto:

Considering securing your cryptocurrency trading, purchasing, or exchanging strategies? Join us here or connect with Ainslie Crypto's team at 1800 296 865 or via [email protected]. We offer dedicated, personalised 'human to human' assistance to ensure the seamless, secure integration of cryptocurrency into your portfolio, whether for personal investment, business strategy, or your Self-Managed Super Fund (SMSF). Ainslie has been a trusted dealer and custody provider for Gold 1.0 for 50 years and has brought the same service to Gold 2.0, Bitcoin, since 2017.

In an era where traditional banking systems impose increasing limitations, Ainslie Crypto offers a forward-thinking payment solution with the Australian Digital Dollar (AUDD) platform. Developed by Novatti, AUDD allows you to navigate beyond the constraints of conventional financial systems, offering stability, security, and ease in your crypto transactions. 

Unchain yourself on-chain.

Want to swap directly between bullion and crypto? Ainslie seamlessly provides swaps between these two hard assets.

At Ainslie, our commitment extends beyond just transactions. We specialise in providing secure digital wealth protection. Our robust crypto custody services are backed by rigorous, real-time internal audits, ensuring your investments are not only secure but also managed with the highest standard of care and expertise. You can always see your own segregated wallet address and balance, value and trade history. Trust Ainslie Crypto to be your partner in navigating the dynamic world of digital assets, where we blend human insight with advanced technology to deliver a service that stands apart in the industry.