About the Blockchain Technology
How it works
Cryptocurrency, also known as “crypto” for short is a new form of digital currency. Although the idea of digital currency has been around since the creation of the internet, it wasn’t until 2008 that the first cryptocurrency appeared. Its name is Bitcoin. It remains a mystery as to who created Bitcoin, the only clue that we have is a name of a person or persons, Satoshi Nakamoto. Cryptocurrency is a means of exchange, such as dollars for goods would be. Crypto is intended to work as a peer to peer transaction.
By creating a peer to peer transaction you’re cutting out the middleman, which means that no financial institution is involved in the exchange of crypto from one party to the other. This is a significant difference with normal transactions, because whenever you purchase something with a credit card, you’re not initially making any payment for that item, but the bank; and the same happens when you use cash, because the country’s central bank is the one that issued those bills. With crypto, however, there is no bank. Printing money or minting coins doesn’t exist with crypto, as it is all done online. There is no need to rely on the government or a bank to regulate this currency because it is created, exchanged and controlled by its user. All currencies need some form of security to protect it from fraud. With traditional currency this is done by banks using ledgers to ensure that when you do go to swipe that credit card that you have the funds to back it. This will track the flow of your transactions. With cryptocurrency the same thing occurs, but with the difference that the flow of transactions is not kept in the bank but in something called a Blockchain, which is “a public registry that stores transactions in a network, and it’s replicated so that it’s very secure and hard to temper with.” (Warburg, 2016) Each cryptocurrency transaction is stored as a cryptographic record which essentially is an extremely complex mathematical encryption. Transactions are done with the use of a virtual address, so all interested parties can see if a potential buyer has enough money to pay for something, so that a seller can sell without uncertainty.
The biggest issue surrounding the crypto market revolves around the ICO, better known as the Initial Coin Offering. The ICO allows someone to startup their own crypto through crowdfunding. With the constant amount of cryptos coming out it has been hard to know from the start which ones were legit. Some cryptos are created to provide a quick scam. They would raise money from investors through crowdfunding only to run away with the money some time later.
There are many positive and negative issues with cryptocurrencies, so the advice nowadays is to proceed with caution with them. One of the points to consider is their volatility. Fluctuations in price between Bitcoin and the US dollar have been sometimes gradual and sometimes dramatic (BitocinPrice, n.d.), so despite being useful as a means of payment, Bitcoin still has its uncertainties. For example, investors who hold a lot of crypto can control the markets. Investors who do this are known as a ‘whale,’ who often act in a coordinated fashion to influence the price of crypto by either a mass selling of their holdings or a mass buying to cause speculation and a major fluctuation in crypto prices. When cryptocurrency prices fluctuate notoriously, there are many suspicions that indicate that these ‘whales’ are manipulating the markets.
Another of the points against the use of cryptos is their unwelcome link to criminal activities. During the 2017, for example, many attacks on computers that are collectively known as “ransomware” attacks used some kind of cryptocurrency to demand payment for the release of information. In short, unethical hackers sent a software to their victims that automatically encrypt most or all their personal information with a key the victim do not have access. Once the victim’s files were secured with the malware, paying a ransom to the attacker with Bitcoin or some other crypto was the only way for the victim to get the decryption key and recover his or her files. (Cuthbertson, 2017) Ransomware is only one of the unethical or illegal activities that are paid using crypto. As a matter of fact, there are others. “In the frontier days of cryptocurrency (…) criminals and tax-evaders were using Bitcoin to buy and sell illegal goods and services” (Roose, 2017)
Another major point against the use of crypto is the fact it is not regulated by any government or central authority. When you use a five-dollar bill in a shop, both the owner and the buyer know that those five dollars have legal value in all the United States, and that the amount of goods that can be sold or bought with those five dollars can be negotiated between the two parties involved in the transaction. A government and a central bank back that transaction, so both can use it knowing that the exchange is valid. With cryptos there are no institutions backing the transaction, leaving the parties with only a sensation of speculative value to carry out their exchange. While some governments are acknowledging cryptocurrencies as a security, they are still not accepted as money. A few countries even consider cryptos illegal.
Ironically, the fact that cryptos are not backed by any government is also one of its main features. It is no secret that many citizens around the world consider their governments corrupt, and they deem those who are in positions of power as people who are not as interested in the future of the country they swore to serve as to their own interests. Many countries can relate that “wages aren’t keeping pace with inflation,” (Roose, 2017) and that the dominant position of some companies within them leave the average person without much room to invest or grow. Cryptocurrencies allow that alternative means of payment they were either waiting or looking for, as a way to challenge the status quo.
There is another reason to consider cryptocurrencies an interesting contribution to society, and it is the technology, called blockchain, that makes it work. In short, what blockchain does is to create a ledger that records which user has sent or received what sum of crypto to another user. The ledger is replicated to several different web servers, and once the information has been updated, it is extremely hard to modify without having access to all the servers at the same time. This system has allowed a degree of certainty that can have uncountable positive business implications. As Bettina Warburg explains in her TED presentation, blockchain solves the problem of uncertainty in a way that previously required many intermediaries. For example, if company A wanted to buy a lot of products from company B, first company A wanted to make sure that company B really had the products they were trying to buy. This currently requires a series of documents that may range from a simple sworn statement to a more complex combination of documents such as a notary public statement that has been backed by the Association of Notary Publics of a said country that, in turn, has been back by the Ministry of Foreign Affairs of that same country. At the same time, before selling, company B would like to know if company A really has the money it says it has to pay for the products. This currently may require a letter of statement from company A’s bank and a series of other documents. Blockchain can potentially solve this problem by making available a secure and distributed worldwide database of products each company has, making intermediaries less necessary both to prove a company has the product it says it has, and to prove the other company has enough funds to buy them. Although that technology is still under research, it is foreseeable that in the future transactions will require less intermediaries than today thanks to both cryptocurrencies and blockchain technology.
In conclusion, despite the fact the future of crypto is still uncertain, the technology behind them is a good contribution for mankind and it is expected to stay. The blockchain technology may enhance economic transactions in the future, and it is a matter of time until we discover when and how it will be used.