Three Things to Know About Cryptocurrency
Cryptocurrency is digital money. It only exists in digital space. The first cryptocurrency, Bitcoin, is also the most well-known and successful, despite its mysterious story of invention by the pseudonymous Satoshi Nakamoto in 2009, in the midst of a worldwide recession. Nakamoto invented blockchain technology, a way to keep track of Bitcoin spending via distributed ledger on a network of millions of computers, without any central authority.
1. Blockchain Technology Underlies All Cryptocurrencies
Trust is the basis for every exchange, and trust is also at the core of the blockchain. But instead of trust in governments or banks, people who use blockchain to trade cryptocurrency put their faith in cryptography for security, “proof of work” schemes for verification and the logic of automated transactional accounting done in a transparent, distributed way for trust. Blockchain allows secure exchanges to take place, both large and small, without the need for a trusted mediator, such as a bank. Author Kevin Werbach describes it as a system of “trustless trust” in his The Blockchain and the New Architecture of Trust.
Imagine you have digital money in your digital wallet equivalent to a $20 bill. The blockchain keeps a record of the transactions that bill is involved in, even as the people involved in those transactions may choose to stay anonymous. In this way, traders are sure that that specific unit of money – like a specific $20 bill – is not replicated or counterfeited. A number of such transactions make up a “block,” and a blockchain is the growing record of these blocks of data linked by code. Coding protocols and cryptography make this accounting secure, but the fact that a copy of the transactions record is held on all the computers in a network, and the math has to add up the same for all of them for the block to be added to the blockchain gives the technology its robust security and generates trust in the system. Other digital currencies, most notably ethereum, build on the strengths of Bitcoin while improving on blockchain protocols and making their systems more flexible.
Move Over, Bitcoin. Ether Is the Digital Currency of the Moment.The New York Times
Investors buying ether are placing a bet that people will want to use the ethereum network’s computing capabilities and will need to use the currency to do so.Nathaniel Popper
2. Despite Stops and Starts, Cryptocurrency Markets Are Maturing
Cryptocurrencies initially appealed to criminals conducting illegal transactions. For years Bitcoin was most famously associated with the nefarious illegal online drug marketplace Silk Road, where all transactions were anonymous and untraceable because they used Bitcoin. Bitcoin and other alternative currencies have had their share of dramatic peaks and valleys.
When Bitcoin first came online, there wasn’t much anyone could use it for. Now you can buy a Tesla, and online payment platforms PayPal and Venmo also accept Bitcoin. Coinbase is a cryptocurrency exchange, and its recent successful IPO is testament to the confidence investors have that cryptocurrencies are here to stay.
But the blockchain technology used by cryptocurrencies can be adopted for uses besides financial transactions. Kevin Werbach argues for its use in managing supply chains in Why Blockchain Isn’t a Revolution. In this way, all parties can keep one set of verifiable records for transactions without there necessarily being trust between them.
3. Not Everyone Agrees “Trustless Trust” is a Solid Foundation for Economic Exchange
Author Bruce Schneier in There’s No Good Reason to Trust Blockchain Technology argues that the trust crypto traders put in technology is blind and unmerited. In case of disaster or unforeseen circumstance, there is no entity to provide the “full faith and credit” that governments provide to back up their currencies and insure bank accounts. He points out that the cryptocurrency markets are in the hands of a relatively few number of people, which poses its own security threat.
What blockchain does is shift some of the trust in people and institutions to trust in technology.Bruce Schneier
Instead of a currency, experts at a World Economic Forum panel recommend you instead consider cryptocurrencies as an asset class, but vulnerable to all the risks of other speculative investments.
While digital currency may cause some disruption in the venture capital sector, so far there is no easy way to use it to buy everyday items or pay the rent. Currently, it takes 10 minutes for the Bitcoin network to process transactions, for instance, which leaves it dead in the water against traditional currencies for ordinary purchases. But the competition is heating up, and there are many actors in the sector determined to develop the killer app that will revolutionize crypto, so don’t count it out yet.