Ever since the financial industry crashed in 2008, distrust and resentment towards banks, multinational companies, and government institutions have been rising across the globe. These establishments are seen by many as incredibly powerful and even, to some extent, corrupt. The reason for their ever-growing influence over many industries is the result of a lack of a better option than using their services for trade. But what if there was a way to cut out these middlemen and create a new system in which they weren’t necessary? What if, instead of having to rely on multinational banks or companies as trade intermediates, one could use a system which had trust built into it and would provide the same services but more efficiently and at a cheaper cost? What if there was a way to disrupt these extremely powerful industries? Well, now there is, and it’s in the form of a system called the Blockchain.
The main application of blockchain in today’s society is for cryptocurrencies – the most well-known of these being Bitcoin (BTC) and Ethereum (ETH). In 2008, right after Wall Street crashed and public trust for the American Federal Reserve was at an all-time low, a mysterious document called the white paper was released. It was written by an anonymous person, or group of people, who called themselves Satoshi Nakamoto, and in it the ideas for a new financial system which was to be built on the blockchain were discussed.
So, what is the blockchain and how does it work?
In simple terms, blockchain is a continuously updated record of who holds what. This record is called a ledger, and it is open to everyone and can be viewed by anyone who wishes to do so. This means that anyone can see when an asset or a service is transferred onto blockchain. It uses cryptography – a very advanced mathematical equation – to guarantee security. It operates through a decentralized peer-to-peer system, which works through millions of computers all across the world rather than through one central authority. These computers that allow blockchain to function are called miners, and they do so through competing to solve difficult mathematical problems related to how the transactions should be put together. The solutions to these problems, which are called blocks, hold 10 minutes’ worth of transactions in them, and when the computers have figured out how to put them together, the problem is solved and a block is created. This block is thereafter put into a chain together with all the other blocks that have ever been created, hence the name. To incentivise people to use their computers as miners, whenever a new block is created, the miners are rewarded using cryptocurrency. For a transaction to go through, it must be verified by the network of miners, so if a block has been tampered with, it is rejected by the rest of the system. Due to this and the fact that all the blocks are connected, to alter the blockchain, one would need to alter all the blocks that have ever been created (which, depending on the blockchain, can be more than 100,000 blocks), not to mention every computer which has ever played a part in creating a block, keeping mind that these are all using the highest level of cryptography. Simply put: it’s practically impossible to hack.
As mentioned, Bitcoin was the first system as well as the first cryptocurrency to ever use the blockchain. So what are some of its features, and what are the reasons behind the massive interest it is generating from both investors and individuals? Bitcoin is a currency unlike any other, not only because it is solely virtual but also because it isn’t regulated through a Central Bank (and in turn the government), but rather through the blockchain (in other words, by the users of it). As previously explained, Bitcoin and other cryptocurrencies are created through the miners putting together transactions and creating blocks, guaranteeing a constant creation of new Bitcoin. Therefore, the more Bitcoin traded, the more blocks will be created by the miners and the more of it will be produced. Furthermore, it is very similar to gold in the sense that there is a limited supply of it – 21 million BTC. However, Bitcoin can be divided into smaller and smaller units to facilitate the needs of the Economy.
To trade Bitcoin, one must create a wallet – an address which only you have access to. Through this wallet and the advanced cryptography used in the system, the user is ensured that the Bitcoin they send reach the intended person and that the money they are expecting to obtain reaches them as well.
So, what is it that is so exciting about these different technologies, and why is there so much media coverage about Bitcoin, cryptocurrencies, and the blockchain?
Well, when it comes to Bitcoin, many people are looking to it as it provides a new form of currency which is decentralised and regulated by its users rather than through a centralised, powerful bank. This aspect is key, as it builds trust into the system and ensures that people have the right to control their own money, which they don’t when using a centralised currency. Nevertheless, being decentralised has its downsides: Bitcoin is currently facing scaling issues regarding how many transactions can be made on its blockchain per second. Nevertheless, the virtual currency is gaining momentum and is at time of writing worth 9000 (meaning 1 BTC = 9000), which is incredible considering that it was only valued at 3000 in September 2017. However, one could say that it’s hit somewhat of a rough patch seeing as it was valued 16400 in December 2017. It needs to be said that the cryptocurrency market is rather unstable and is prone to huge short-term price changes, with price changes of thousands of euros being commonplace.
Moreover, Bitcoin is easy to join. Setting up a wallet is simple and only takes a few days (depending on which website you use) and trading is quite straightforward, with it generally taking less than an hour to send Bitcoin across the world. Bitcoin can also be used as a trustworthy alternative as a store of value for people living in crisis countries, such as Venezuela, which is affected by hyperinflation and where people cannot rely on the national currency nor the Central Bank. In spite of what you may think due to how much coverage it receives, Bitcoin isn’t the only cryptocurrency out there. In fact, there are over 1,000 of them, with the largest being Bitcoin, Ethereum, Ripple and Litecoin. They all have different attributes and uses, but they use the same technology (blockchain) as the basis for their currencies.
While cryptocurrencies are an exciting technology which undoubtedly will have a large effect on the financial industry and our global society in the coming decades, its uses and applications are far more limited than its underlying system: the blockchain. As Don Tapscott, a Canadian business executive who is one of the people at the forefront in the industry, explained in his TED talk, our current internet is the internet of information, in which copies of originals are shared (for example when sending a PowerPoint or uploading a video to YouTube). However, this doesn’t work well with assets: one cannot send a copy of 10 and still have that same 10 as an original (something called the double-spend problem). The inability to solve this issue through the internet of information is what has been keeping us reliant on middlemen such as banks to transfer money and other assets. These intermediaries’ services are expensive to use and, since they are centralised, they are prone to hacks and other attacks. Moreover, looking at banks, transactions are only possible if the individuals have enough money to create a bank account, which already restricts a huge part of the global population from taking part in the financial system as they may not have the money to do so. Other than being slow and taking large percentages of the transferred money, they also capture our data, which can undermine our privacy. Furthermore, as we are reliant on them to transfer value, they don’t have to face any heavy repercussions if they don’t treat their customers fairly. As Tapscott put it, these intermediaries have appropriated the largesse of the digital age asymmetrically, essentially meaning that they have been able to profit and benefit from the internet of information while others haven’t due to the institutions in place – something he claims can be seen through growing social inequalities.
So, what can we do so that we all can reap the benefits of the internet? How can we transfer value in other ways than through these influential institutions? This is where the blockchain comes in. As previously mentioned, the blockchain cannot only be used to transfer value in the form of money. Anything of value can be transacted securely on it, whether that be music, art, or shares. It ensures fair compensation for creators of intellectual property because the system can prove that they are the creators of it, and it cuts out the middle men. This means that e.g. music artists will be able to receive all or most of the money from the music they sell on the system, instead of big label companies taking sometimes more than 90% of their revenue. Because the blockchain is auditable and holds a truth which is verified by its network, it cannot be manipulated in favor of any group or individual who claims to own an asset or product which they don’t. In other words, it holds an immutable truth. For example, if someone claims something of yours, the system is able to prove that you are the rightful owner of that possession or asset and no one would be able to say otherwise, because the blockchain is incorruptible. That’s the beauty of it. This would, for example, enable people in poorer nations or dictatorships to have the security of knowing that neither the state nor powerful companies can illegally seize their land or any other valuable belonging of theirs as they have proof that it is theirs.
So why should you care about all this? Although there is no telling what blockchain technology and cryptocurrencies hold for us in the future, it is a new system in which power and wealth creation is democratised and is more accessible for the global population, without excluding minorities. It holds vast promises and is likely to have a big, if not a bigger impact on our lives than the internet did (in fact, some are comparing Blockchain’s position today to the internet’s position in 1993 when it was becoming adapted by more and more people). However, as we know, in the early 90’s no one would have predicted such advanced and powerful systems as Google, Amazon, or Alibaba to come about using only the internet. In the same way, we have very little clue of how the blockchain will turn out and what it will be used for, but in the coming years we will undoubtedly be seeing immense innovation and new ideas within this field which may be as impactful as the internet of information.
We don’t know what applications the blockchain has, or what effects cryptocurrencies will have on our economies or day-to-day lives. We are still in the “Wild West” of this technological breakthrough and we do not yet know what lies ahead of us. What we do know, however, is that things are changing in a similar way they did in the 90s, and that it will hopefully, once again, be for the better.
Credits to Vidae Önnerfors for the help!
Thomas Humphreys, 7EN