Technological progress
Understanding blockchain: From Bitcoin to the automated financial world
Understanding blockchain: From Bitcoin to the automated financial world
“Blockchain technology is revolutionising the financial system” is a bold claim that is often repeated. But what is the reality behind it? This article explains how the idea of a decentralised distributed ledger technology (DLT) has given rise to three specific applications: cryptocurrencies, stablecoins and deposit tokens.
Back in 2008, in the midst of the financial crisis, a digital currency emerged – independent of banks and governments. And although there is no centralised authority in the Bitcoin network, it has managed to establish itself as a cryptocurrency. Blockchain technology made it possible.
The blockchain: A shared ledger
In 2008, the development of a decentralised distributed ledger technology (DLT) faced a problem: digital money could be ‘copied’ and spent multiple times.
The solution was to link all transactions chronologically, so that their order can be easily verified. To prevent the chain from becoming too long, transactions are bundled into blocks. A cryptographic hash is used for ‘numbering’, calculated from the contents of the previous block – which acts like a digital fingerprint. If just one piece of information changes, this fingerprint changes – and the entire chain becomes inconsistent.
The blockchain is thus a shared, decentralised ledger in which all transactions are recorded transparently and in a way that prevents falsification.
Payments in seconds – anywhere in the world
Blockchain provides the technical foundation for verifying transactions in a decentralised manner and protecting them from manipulation – thereby enabling payments without the need for traditional financial intermediaries such as banks. Depending on how the blockchain is structured, this offers various potential advantages:
- Speed: Payments can be processed worldwide in seconds rather than days.
- Costs: Transactions often cost less than a standard bank transfer.
- Programmability: Payments can be linked to conditions and executed automatically (smart contracts).
- Transparency: Transactions are publicly viewable in anonymised form, which enhances the traceability of supply chains, for instance.
- Inflation protection: Some cryptocurrencies have a fixed upper limit. This means that – unlike with traditional currencies – new units cannot be created at will.
Bitcoin as a store of value
Although cryptocurrencies can offer advantages over ‘normal’ currencies thanks to the blockchain, they are rarely used for everyday transactions. The common example of two pizzas bought for 10,000 Bitcoin in 2010 illustrates why this is the case. At the time, these were worth just 41 US dollars; today, they would be worth around 800 million US dollars.
Bitcoin, the ‘digital gold’, is so valuable because its maximum supply is artificially limited. However, this scarcity also means that market fluctuations are not cushioned: the value of Bitcoin is extremely volatile. Last year, the value of Bitcoin against the Swiss franc fluctuated by around -30 percent to +30 percent.
Stablecoin: Crypto linked to national currencies
Stablecoins were developed to cushion the extreme volatility of cryptocurrencies. These are pegged to one or more reference values, such as national currencies or securities, and aim to reduce price fluctuations through stabilisation mechanisms.
Arguably the safest method is so-called fiat backing. Here, the stablecoin is pegged to a national currency, such as the US dollar, and backed by assets. For example, a CHF stablecoin corresponds to one franc. Figuratively speaking, a stablecoin is like a voucher that guarantees that a ‘real’ monetary value has been deposited against it.
Stablecoins as a means of payment
Currency-pegged stablecoins – in stark contrast to cryptocurrencies such as Bitcoin – offer only a modest return. Their main purpose lies in payment transactions.
Currently, stablecoins are predominantly used within the crypto ecosystem. In 99 percent of all transactions, they serve as the base currency for trading other cryptocurrencies. However, particularly in inflation-plagued countries, they are also used as an everyday means of payment. In Venezuela, for instance, the state-owned oil company, and, to some extent, private citizens pay using stablecoins.
For people and businesses in stable democracies, however, stablecoins still have a significant disadvantage compared to payments made with ‘normal’ money from a bank account: they are not backed by bank deposits. And the regulations intended to ensure their stability are not standardised internationally. In some cases, they are entirely lacking.
Deposit tokens: an efficient, cost-effective and modern financial infrastructure
The widespread lack of adoption of stablecoins in functioning economies shows that a hybrid model is needed: the security of the banking system combined with the flexibility of blockchain.
This is where ‘deposit tokens’ come in: they are designed to meet the need for secure, blockchain-based payments. This works partly because, unlike Bitcoin, there is an issuer behind them.
Smart contracts: a boost for the economy
Banks in Europe, the US and Switzerland are currently working on developing this deposit token infrastructure because they see enormous potential in it. On the one hand, deposit tokens ensure cyber security and transparency. And on the other, like stablecoins, they enable smart contracts – that is, digital contracts that are executed automatically as soon as predefined conditions are met.
Whether for insurance companies, SMEs or private individuals, payments could be processed around the clock in a matter of seconds, without administrative effort or transaction costs. This would result in a massive increase in efficiency. According to a study, 84 percent of companies are convinced that smart contracts can drive revenue growth.
The economic potential that deposit tokens can unlock is enormous – and implementation is already within reach. In 2025, a consortium of Swiss banks demonstrated that it is possible.
