With the amount of press and public hype on cryptocurrencies, many still question the true value of these digital assets and the technology behind them. There are claims on both sides of the fence — the evangelists believe they are here to disrupt finance and technology as we know it, and the nay-sayers believe they aren’t worth the hype.
I don’t claim to be an expert on this topic, in fact I’ve only just begun to understand how they work systematically and socially. However, I know that by writing about them I’m guaranteed to learn more through research and engagement with the crypto community.
It’s true that cryptocurrencies are extremely volatile, but what does that mean for the technology underneath? It’s a question we’ll be asking as this hype continues. There are now thousands of alternative digital currencies being traded, but they owe it all to the one crypto that rules them all (for now): Bitcoin. It’s the reason most people have heard of cryptocurrencies in the first place, even if they don’t understand its value or the underlying technology that makes it work.
If you were to dive head first into the world of crypto, it would take a while to fully comprehend the scale at which the technology is growing and changing. However, once you assume a basic understanding of how it works and why its important, you realize the potential.
Essentially, cryptocurrencies (Bitcoin being the first) are digital monies sent through distributed, peer-to-peer networks. There are no governing bodies, no stakeholders and no institutional middlemen. The use cases include transfer of financial instruments like bonds, loans and more, but also include a plethora of other transactional or contractual use cases we’ve yet to see. You can send cryptos to anyone, at any time, anywhere in the world.
Both parties sending or receiving the transactions remain anonymous through cryptographic algorithms (hence cryptocurrency). In addition, you can buy and sell these digital tokens through online wallets and exchanges.
So far, we’re facing a dilemma with this tech, one that may hinder its ability to make an impact. This dilemma is the classic “chicken and egg” problem: If cryptocurrencies are going to be used in real-world, everyday situations (like buying a car or even a cup of coffee), who will accept them? The problem is that people won’t use them day-to-day if no merchant accepts them, and vice versa. Merchants won’t accept cryptos unless they know many of their customers are using it to buy goods and services.
Another dilemma we’re seeing is the large amount of speculation driving the prices of Bitcoin, and others following its lead, up and down at volatile rates. Experts claim that the crypto world is experiencing the largest economic bubble in modern financial history, larger than the dot-com bubble. Some evangelists agree, others not so much. The fact of the matter is that there are thousands of people speculating on the prices, allowing them to rise, and them dumping them onto the market, causing prices to crash. Sometimes this happens within seconds. Not only does it cause concern as to its bubbly nature, but it makes those investing in it, as well as those using it for goods and services, to question its true value to society.
The value of cryptocurrencies doesn’t lie in the tokens themselves; they don’t hold intrinsic value. It lies hidden underneath them.
Speculation aside, Bitcoin and its innovative yet hidden technology, coined the Blockchain, is positioned to disrupt all sorts of industries. The blockchain is the system that allows these cryptos to be sent and received. In Lamen’s terms, it works like this: Every transaction or transfer of data on the blockchain is recorded by all the nodes in the system. Nodes are computers, everything from laptops to massive server farms, running the distributed ledger (essentially a software package). The nodes verify the transactions by building consensus. They solve cryptographic algorithms in order to deem transactions true, and reference each other to move on to the next transaction.
The distributed ledger that holds all these transactions is both irreversible and anonymous. The nodes are incentivized to verify the ledger by solving extremely hard quantitative problems and receiving bitcoins, or other tokens depending on the blockchain, for their work.
This is called “Proof of Work”, which is what Bitcoin operates under. However, there are many other ways of verifying the ledgers including “Proof of Space”, “Proof of Stake”, etc. As more transactions flow through the ledgers, more miners become attracted to the incentives, causing the algorithms to become harder to solve. (There is way more to this technology that I still am yet to understand.)
What is really interesting is how the blockchain can change how we do business. In a world of institutions and middlemen, the blockchain represents a break from the status quo. A self-serving, face-less distributed computer network that doesn’t involve any bank whatsoever — It’s a force to be reckoned with.
Why is the blockchain so useful you might ask?
First, it allows the nearly two billion unbanked access to financial services, allowing them to send and receive money quickly and without large fees for international transfers. Many of the unbanked in the world don’t have the means to get to banks, or access to credit for numerous reasons. Millions of people have to travel miles to reach their local bank, so we see that sending digital money through phones and computers make sense.
Second, the blockchain isn’t controlled by stakeholders like a public company is. It uses open-source technology, written and designed by unpaid contributors to keep the system running (though there are exceptions). With no authority to claim ownership, there are no political agendas to follow and the rate innovation can remain high.
This had led to new alternative cryptos other than Bitcoin, which are “forked” from its code (or newly written). The alternative cryptocurrencies hope to correct some of Bitcoin’s flaws while also serving needs for specific industries (IOTA blockchain for the Internet of Things, Ripple for enterprise), and building more security features. With no central authority, opportunities for innovation remain endless.
Lastly, the blockchain (referring to the technology in general) loses the inefficiencies of centralized systems and cuts costs for users while doing so. When someone swipes their credit card to buy groceries, it sometimes takes up to seven parties to confirm the transaction. Over the few days it takes to process the transactions, the money flows from consumer to merchant to intermediaries like credit processors and financial institutions like Visa, and also the consumer’s bank.
All those hands grab a percentage of the transaction! Through this process, we can understand the need for a decentralized, peer-to-peer network that is cheaper and faster.
Ultimately, time will tell if cryptocurrencies and their underlying technology can upend the powerful, and sometimes unstable, financial institutions. The huge blow of the 2008 financial crisis showed the world how easily people lose trust in our banks and the security of the fractional reserve banking system. Perhaps a new system, one that’s decentralized from authority, more efficient and cheaper, and more accessible to those less fortunate, is the way onward.
For now, the true value will come from the use of this technology, not the speculation. Be weary of the “pump and dump” and get-rich-quick schemes plaguing the industry. Perhaps in the near future this heavily debated and controversial technology will help make the world a little safer and better for future generations.
Thanks for reading. Stay tuned for more.