The applications of bitcoin go way beyond its use as an alternate currency. This leads to the third, and most complex, area of interest to investors. That said, it may be the area that generates the best return on investment in the long term. I refer to this as investing in the "decentralized trust model" of bitcoin. This new system leverages peer-to-peer computing and cryptographic techniques to create a new model for transactions that is both elegant and extremely useful.
It turns out that the bitcoin block-chain (which is a decentralized general ledger of bitcoin transactions) can be used to represent any type of asset, including traditional currencies, stocks, deeds and titles. It can even be used for alternative investments, like baseball cards, or used to place gambling bets. Companies are now starting to emerge, taking advantage of this new phenomenon. Two of the earliest pioneers: Ethereum and Colored Coins. Both start-ups combine earlier work in "smart contracts" (computer protocol that verifies transactions) with bitcoin's decentralized computing model to create a new platform for decentralized smart contracts.
Colored Coins uses the currency itself to represent other types of assets, such as traditional currencies, stocks or gold, which can be stored inside the bitcoin block-chain. Colored Coins provides extensions to bitcoin for these new asset types to be bought and sold via the standard bitcoin system.
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Ethereum takes a slightly different approach and has developed its own bitcoin–like currency—called Ether—for representing the myriad digital assets that can be created. Ethereum describes itself as "a platform and a programming language that makes it possible for any developer to build and publish next-generation distributed applications."
Ethereum and Colored Coins can, in theory, be used to securitize and trade just about anything, including domain names, financial assets, contracts and even intellectual property. While Ethereum addresses the problem of the limited float of bitcoin in creating any number of assets, Colored Coins may be more attractive, as it uses the existing bitcoin system for executing asset trades. The innovation happening in this area is a boon for e-commerce, no matter who wins favor with clients.
Ripple, another payments protocol, has also been making waves in this area of decentralized financial transactions. The Ripple currency, known as XRP, can be used to represent any form of asset, such as dollars, pesos and even bitcoin itself. It then allows exchanges of these assets to take place and settle directly on the Internet. Recently, Ripple has been gaining some traction with initial bank partners as a means for bypassing traditional correspondent banks to facilitate real-time settlement of cross-border currency wires. While bitcoin purists prefer a world with no central banks, Ripple embraces such institutions, which could mean that it may get short-term traction.