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Berentsen and Schär
3 OUTLOOK
As with any fundamental innovation, the true potential of blockchain technology will
become apparent only many years, or possibly decades, after it becomes generally adopted.
Forecasting the areas in which blockchain technology will be used to the greatest effect is there-
fore not possible. We nevertheless would like to mention a few areas where blockchain tech-
nology serves as an infrastructure platform that facilitates a variety of promising applications.
3.1 Cryptoassets
The most apparent application is Bitcoin as an asset. It is likely that cryptoassets such as
Bitcoin will emerge as their own asset class and thus have the potential to develop into an
interesting investment and diversification instrument. Bitcoin itself could over time assume
a similar role as gold. Moreover, the potential for trading securities on a public blockchain is
large. So-called colored coins can be traded on the Bitcoin (or similar) Blockchain and used
in smart contracts, as described below.
3.2 Colored Coins
A colored coin is a promise of payment that is linked to a Bitcoin transaction. This promise
is possible because the communication protocol of the Bitcoin network allows additional
information to be tied to a transaction. For example, promises for the delivery of an ounce
of gold or a dividend payment can be added to a Bitcoin transaction and represented on the
Bitcoin Blockchain. Any of these promises are of course subject to issuer risks and require
some extent of trust. This is in sharp contrast to native cryptoassets such as Bitcoin units.
3.3 Smart Contracts
Smart contracts are self-executing contracts. 8 They can be used to stipulate that a Bitcoin
payment will be executed only when a certain condition is met. The Ethereum network is cur-
rently the leader in the field of smart contracts. Similar to Bitcoin, it is based on blockchain
technology and provides a native cryptoasset, called Ether. In contrast to Bitcoin, Ethereum
provides a more flexible scripting language and is able to track contractual states. Potential
applications include but are not limited to e-voting systems, identity management and decen-
tralized organization, and various forms of fundraising (e.g., initial coin offerings).
3.4 Data Integrity
Another application for public blockchains is the potential to monitor data files. We have
already shown how fingerprints of block candidates play an important role in the Bitcoin
network. The same technology can be used to produce fingerprints for all kinds of data files
and then store them in a blockchain. The entry of a fingerprint into a blockchain ensures that
any manipulation attempt will become apparent because any change to the data file will lead
to a completely different hash value. Because it is very difficult to change a blockchain retro-
actively, a fingerprint can serve as proof that a specific data file existed at a specific point in
time and ensures the integrity of the data.
Federal Reserve Bank of St. Louis REVIEW
First Quarter 2018
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