What is a Cryptocurrency – is it Money 2.0?
If you think about it, the money in your bank account or available on your credit card is just digital. It's created in the ledgers that the banks hold. Actual cash is only about 1-3% of the money in the world's financial system. That's Money ver. 1.0.
Cryptocurrency is similar – it's totally digital. You can't have a fistful of bitcoins in your pocket, you have to acquire and spend them digitally. We are comfortable digital transactions, with Netflix film downloads or Spotify tunes, to the extent that going out and buying DVD feels old fashioned.
Bitcoin – the first Cryptocurrency
However, when bitcoin was invented in 2009 by the mysterious Satoshi Nakamoto, it started a revolution. There are two strands to this technological leap forward, and they need to be understood together. All major currencies are backed by countries: the dollar, the pound, the rouble, the yen and the EU's Euro. Although there are small-scale “local currencies” hardly anybody thought that a geeky cryptography pastime could create a real currency that would have global transaction value. They were wrong.
Bitcoin is different because instead of being created by a bank and backed by trust in a state, it is “mined” digitally by computer and backed by encryption. Clearly, its astonishing rise from being a few cents per bitcoin to nearly $6K in 8 years is a phenomenon. This couldn't have happened without people seeing value in the currency, whether to trade or buy and hold as an investment.
The Underlying Technology – the Blockchain
The second, and to my mind more important technology, is the Blockchain. This is a peer-to-peer, open-source public ledger. Unlike centralized ledgers, such as the ones held by banks, this has some huge advantages, including much lower transaction fees, which suggests that it will be strongly disruptive of the 400-year-old centralized banking system. “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” Satoshi Nakamoto, 2009 bitcoin white paper.
Besides the public ledger, blockchain technology is revolutionary for several additional reasons:
It is impossible to shut down.
It prevents double spending.
It cannot be hacked.
It does all of this without needing a central authority.
Its potential applications are numerous: from empowering musicians to allowing the unbanked in developing countries to receive funds and set up businesses. Major companies like IBM and Walmart are exploring how they can utilize blockchain technology to improve their efficiency.
New technologies take time to become accepted. Cryptocurrencies and the blockchain are at an early stage. Think back over the extraordinary waves of technologies that we have seen over the past 20 or 30 years. Simple email revolutionized business. Mobile phones used to be the size of bricks, with limited functionality, but now not only are replacing computers but can do things like guide you to a restaurant table and order in a city you've never been before.
Currently alt-currencies are somewhere around the innovators/early adopters segment of the marketplace. So there is a big opportunity there.
David Siegel, a blockchain entrepreneur, believes that this will be the “biggest transformation in the marketplace since the internet.”
There are a few other aspects of cryptocurrencies to be touched on. Firstly, there are a lot of them now, nearly 1200, on the marketplace. Bitcoin and Etherium are the two biggest. Etherium is a “second generation” alt-coin which added some important new functionalities to the basic idea: it can have built-in apps or “smart contracts” which would work automatically to perform some function. It's a bit like Android or IoS – it empowers others to build apps for it. For example, a registry of real-estate assets. Currently, these are administered by the central or local government. Building this into a blockchain, with a digital app (or DAPP) which updated automatically when an asset is transferred would save a lot of money and time and provide an open access to check on who owns the land. Which is a considerable advance on many systems today, which are not bureaucratic and often inaccessible?
Alt-coins or “tokens” as they are now generally called, are launched at ICOs or “Initial Coin Offerings”, which puts them in the marketplace. As the authorities have not really got their heads round alt-coins, these are unregulated, so can be risky but also have high rewards. Using Etherium as a basis, companies can issue their own alt-coins, or tokens, for a variety of purposes.
Unfortunately, some of the early teething problems of bitcoin have made headlines: for example the bitcoin exchange Mt. Gox collapsed, due to extremely bad management. Yes, Silk Road was a way to buy drugs and contraband, but it was minuscule compared to the scale of drug dealing globally. Most businesses who now accept bitcoin, are regular transactors, like Overstock, Wordpress, Microsoft, and Subway. Criminals mainly use cash, but nobody is really suggesting we should ban dollars to stop them being misused.
The Future for Cryptocurrencies
Bitcoin is Money 2.0. It is free from the flaws of central-bank state generated currency, which has ruled for thousands of years. It will be both liberating, and disruptive, in exactly the same way technologies like the internet, email, e-commerce, P2P have been. There will be winners and losers, but it is looking like it will be a step forward for huge numbers of people and businesses, making the barriers to entry to set up all sorts of new opportunities much lower.
“At their core, cryptocurrencies are built around the principle of a universal, inviolable ledger, one that is made fully public and is constantly being verified by these high-powered computers, each essentially acting independently of the others.”
― Paul Vigna, The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order
Ali H. Askar, CTO - ThalerTech.io