The complexity while trading with fiat currencies draws the attention of large and small investors, businesses, and consumers, as it requires a mind-bending blend of skills. Visit bitiq.org to sign up, start trading, or use this virtual currency for regular purchases. Blockchain is a recent buzzword in the industry that has been on everybody’s lips lately, with news, rumours, and speculation around its practical application.
But what exactly are blockchain tokens? And what are their uses? For those living under a rock, cryptocurrencies such as Bitcoin are blockchain tokens that people can trade for other currencies or goods. Unlike bank account transactions that take days to complete or get lost in the abyss of high international exchange rates, cryptocurrencies can be transferred almost instantly using blockchain technology. Several blockchain tokens have been developed over the past decade.
Two groups of tokens:
Splitting it into two groups, you have non-financial blockchain tokens or utility tokens and financial ones such as Bitcoin, Ethereum and Ripple.
Utility tokens serve a purpose or perform an activity in the network. Famous examples include entertainment content such as Spotify or games like Fortnite, where nothing is bought with these tokens. Still, users contribute to their creators by purchasing extra stuff from in-game purchases.
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Financial blockchain token types fall into two main categories: cryptocurrencies (i.e. Bitcoin) and digital assets (i.e. Ripple). The first category is about transferring money with minimal fees (Bitcoin) and storing the value with limited exposure to risk (Ripple).
Digital assets are units designed to give holders an appreciation in a particular area of interest. Think of them as stocks, which can be traded and held for as long as the company continues to grow. Companies like Ripple also allow holders to invest in loans and venture capital investments, which can significantly impact the value.
While utility tokens promise a wide range of user benefits, this is far from the case for digital assets. With a volatile market, unpredictable returns and high exposure to risk, digital assets come with many risks.
Blockchain tokens: Pros and cons
For the most part, blockchain is a decentralized system that removes the need for a middleman. As a result, transactions are secure, fast and cheap, while all players in the network can assess access to information. In terms of risk management and compliance, there are many benefits of using blockchain tokens as an alternative financial asset. The distributed ledger technology guarantees transparency in transactions, and smart contracts allow for automatic payments, eliminating human error from processes such as contract execution or payment transfers. Blockchain also solves problems with transparency, trust and fraud prevention through DRM (decentralized record management).
Despite its benefits, blockchain has drawbacks that have kept it from being widely adopted. Despite the success of non-financial blockchain tokens, most businesses and investors are reluctant to adopt them as a financial alternative due to their fluctuations in value.
As a result, attaching an arbitrary value to blockchain tokens has become necessary. Until now, cryptocurrency values have been determined by supply and demand rather than any economic fundamentals.
Stablecoins such as Tether or TrueUSD were created as “digital dollars” pegged to existing fiat currencies like the US dollar to diminish price fluctuations and prevent volatility in global cryptocurrency markets.
Many other factors determine the value of digital tokens, such as network congestion and compliance issues.
Blockchain is not a single technology but a platform that people can use to run different applications. For example, banks are exploring blockchain to address payment and settlement processes, enable the delivery of securities and insurance products, track assets, validate contracts and trade assets like stocks.
Adoption of crypto tokens alongside blockchain:
In recent years, companies such as IBM (blockchain technology) and Santander (financial services) have developed their blockchain platforms to meet customer demand while helping improve their cost structure while transforming their business.
Despite blockchain’s growing popularity, many investors and tech enthusiasts remain sceptical of its long-term potential as a global innovation. In many ways, it reminds us of the Internet in the 90s. While it has changed our lives today, its full implementation and adoption are still years away.
Yet, blockchain is here to stay with various industries actively exploring its different strengths and weaknesses to ensure that users can develop the most suitable solutions to meet their needs in the upcoming years. While the technology is still in its early stages, many companies have already committed to using it for their products and activities, investing heavily in research and development to implement blockchain technology in ways that are both cost-efficient and suitable for various industries.
What are the next steps?
Banks need to start realizing that technology is here to stay. Blockchain can be applied broadly across all industries and has immense potential across many areas: payment processing, settlement of securities, trading, asset management, and compliance while helping reduce costs. Banks must work with developers to discover new ways in which blockchain can enhance their current business.