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How Companies Bypass the Public Financial Markets for Funding via the Blockchain

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How Companies Bypass the Public Financial Markets for Funding via the Blockchain

One of the terms frequently bandied about in the world’s many business journals, finance magazines and high tech periodicals is the “blockchain.” Its recent popularity is not due to its freshness—the blockchain was first mentioned in Bitcoin’s seminal 2008 whitepaper—but rather to the many companies, creatives and programmers that have finally figured out how to use it to propel their brainchildren forward.

From incorruptible voting systems and communications networks to cryptocurrencies and smart contracts, much of today’s cutting-edge technology utilizes the blockchain as a foundation. Many people and businesses agree that it will spur a revolution rivaling the internet.

While it began with businesses built around the very function of blockchain itself, new ventures have taken the technology in unique directions, and their success has spawned an entirely new cryptocurrency industry. Cryptocurrencies like Bitcoin are still the most popular, but nuances in how the blockchain is used, and what it can be used for, have the potential to disrupt markets far and wide.

An excellent example of this notion is the upcoming release of LAToken – a cryptocurrency that allows those with illiquid resources, like a house or work of art, to sell fractional stakes of these assets to an open marketplace. The idea is that investors can profit from the improving state of the real estate or art markets, reflected in the price of LAT, while enabling the house’s owner to raise cash from the assets they own and enjoy them all the same.

This method of decentralized funding gives people the ability to avoid financial institutions like banks, and unlock the value in their assets immediately. Those who can get ahead of the blockchain adoption curve have a significant opportunity at hand. To grasp it, one must begin with a basic understanding of the blockchain itself.

What is the Blockchain?

Originally conceived as the groundwork for Bitcoin, the blockchain can be described best as a digital public ledger, recording all transactions taking place within the system. Unlike most information on the web, this ledger is not available from a single source, such as a server. The blockchain is instead distributed, supported, and constantly updated by an enormous network of peers, each hosting its latest iteration simultaneously on their own individual computers, or nodes. 
 
Think of the blockchain as a Alphabet Inc (NASDAQ: GOOGL) Google Doc with millions of entries, shared among many people and updated in real-time amongst them all.
 
When one goes to use a blockchain application, the network sends their request to a network node, which will use its computational power to validate and relay it to the appropriate party. A transaction can be a cryptocurrency trade, a digital certificate, a contract, or any other piece of data that can be digitized. Validated transactions receive their own entry, represented as a string of letter and numbers, and are combined into groups called “blocks,”a chain of which makes up the entire ledger. Thus, we have the term “blockchain.”
 
There are two properties of blockchain that make it perfect for conducting transactions and building ideas into infrastructure. The first is transparency. Blocks are the digital timestamps of their transactions, authors, functions and other important details. The block and the data it holds are easily accessible and verifiable – providing irrefutable proof of each transaction’s existence to the public. 
 
The second property that makes blockchain a great solution is its incorruptibility. Making changes to any unit of data already on the chain requires at least 51% of the entire network’s computational power – a feat that is impossible in theory, and so far, in practice as well. Reinforcing this idea is modern cryptography, which guards the veracity of the chain and administers numerical order to its entries. What results is essentially the combination of a middleman and a notary.
 
Many business applications already take advantage of blockchain as a platform for both innovation and function. Cryptocurrencies are some of the most popular, and each use the blockchain in a different manner. For instance, while Bitcoin and Litecoin are largely similar, their differences lie in algorithmic variances like smaller or larger block sizes, which alter their efficacy as a payment processing system.
 
Cryptocoins like LAToken and Golem take a more creative approach. LAToken uses the blockchain network as a way for people to leverage the value of their illiquid assets into cash, while Golem seeks to build a peer-to-peer internet hosted exclusively on blockchain. There are many others as well.
 

Cryptocurrencies Taking Off Thanks to the Blockchain

Bitcoin and other cryptocurrencies that run on blockchain technology, such as Litecoin, Ethereum, and Dogecoin use the chain’s verification capabilities and power requirements to create digital value, which can be traded or spent at will. But how can these “coins” be worth anything without a way for one to demonstrate their ownership? The answer is in the “wallet” – an application for each cryptocurrency that assigns a user their own private signature, or key.

To send and receive coins, both parties must sign the transaction with their randomly-generated private key, mathematically proving that the coins are coming from, and going to, the correct place. These coins can then be stored in an online exchange. A safer method of storage is the “hardware wallet”, which is an offline storage technique involving a long string of keywords that grant their holder exclusive access.

For Bitcoin and cryptocurrencies at large, the network’s peers are called “miners.” Miners running the Bitcoin blockchain use their computer’s graphics processors and central power units to verify, process, and relay transactions on the chain. Their incentive for this is the miniscule amount of the chain’s cryptocurrency that they receive for each processed transaction: Bitcoin, for example. All Bitcoins currently in existence were mined at some point in the past.

As early as 5 years ago, mining a single block would reward the relevant node with multiple Bitcoins, but as the chain grows and more miners join in, every node earns exponentially less for the same amount of work. This is important for Bitcoin’s value relevant to fiat currencies. The algorithm providing the basis for the Bitcoin blockchain sets a maximum of 21 million Bitcoins that can be mined in total, and it is largely this notion of scarcity, as well as the longevity of the network itself, that give Bitcoin and other cryptocurrencies their intrinsic value.

IPOs Being Overtaken by ICOs?

ICO is an abbreviation of the phrase, “initial coin offering.” This play on words is designed to draw similarities with the well-known IPO, or “initial public offering” of company stock when its ticker symbol is first listed on a public exchange like the New York Stock Exchange or NASDAQ. 
 
Using this example, stockholders can fund the newly-listed company’s future growth endeavors with cash, in exchange for equity in the company that may increase in value later. With an ICO, this tradeoff takes a new shape. Coinholders with liquid, established cryptocurrencies like Ethereum, for example, can use them to buy equivalent amounts of a future coin, which may increase in value as the company performs well (or as more invest).
 
Going back to the earlier example of LAToken, the company is issuing 1,000,000,000 tokens, of which 20% of the issue will be offered to the public.  All the proceeds raised will go towards financing the company’s operations, with the tokens readily available to be bought and sold in the secondary market.  Instead of relying upon established institutions and underwriters like investment banks, LAToken is bypassing traditional funding markets to lower financing fees and take advantage of the opportunity to raise funds directly from the broader public.
 

Innovation Ahead

Decentralization is the crux of the next era, which will surely contend with the Industrial Revolution in terms of magnitude and disruption. The blockchain has revealed exactly how it can happen, yet the technology is still in its early stages. As it gains momentum, those with proper understanding and foresight stand to gain immensely. The budding ICO market has already helped countless new ventures get off the ground, and made early investors wealthy in the process – but there is a long way yet to go, and no one can predict exactly how it will shape our future.
 
Photo credit: public domain

Posted-In: Bitcoin Blockchain marketacrossCryptocurrency Fintech

 

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