Cryptocurrency was introduced for the first time in the course of the Second World War as the need for secure communication grew. Since then, it has evolved in the digital era with mathematical theory elements and computer science to encrypt online money, information, and communication.
Yet, cryptocurrencies made their most important introduction from being an academic concept to a pragmatic tool in 2009, respectively when Bitcoin was created. Bitcoin accumulated a lot of attention in the following years, reaching its peak in 2013 when a Bitcoin unit was worth over $1000. Moreover, Bitcoin’s market value reached over $2 billion in late 2017 followed up by a 50% plunge after a short period of months as a result of constant debates. Hence, two questions remain unanswered: Will these ‘alternative’ currencies, in the long run, replace conventional currencies and become as ubiquitous as euros and dollars or are they just a big fuzz over nothing that will pass.
In order to address any fear you may have about cryptocurrencies, it is necessary to take a closer look at the technology behind every cryptocurrency – the blockchain!
The Evolution of Cryptocurrencies
While technology evolved and internet and e-commerce were invented, traders needed a way to accept money on the internet in a secure way. This need led to the introduction of cryptocurrencies. Despite the origins of digital currencies dating back to the 1980s, it was only in 2008 that a cryptography researcher known to the world as Satoshi Nakamoto invented Bitcoin.
However, not everyone was aware that the first attempt at cryptocurrencies was made in the late 1980s. The ideas started as many petrol stations in the remote areas were being robbed for cash in the middle of the night. To change this, truck drivers were recommended to use cards instead of cash at the petrol station, and in this way the stations were safer from the robbery. But even before this, in the early 80s, the American cryptographer David Chaum introduced the idea of digital cash in his research paper. Later on, he founded DigiCash Company and continued to further build his Internet money invention. Even though the idea was extraordinary and quite well commercialized, unfortunately, David Chaum and his company made some missteps and ended up in bankruptcy in 1998. It wasn’t until 2009, with the invention of Blockchain technology, that Bitcoin was ‘reinvented’.
Despite being the most widely used and accepted the digital currency, Bitcoin is not the only cryptocurrency, even though most cryptocurrencies follow its principles. When introduced, Bitcoin was so ahead of time and a skeptic idea that it didn’t have any competitor. But later, with the growth of Bitcoin, more cryptocurrencies were invented hoping to become as well-known and accepted. Cryptocurrencies have made a significant progress since the idea was first introduced. However, they have a long way to go until they are widely accepted and adopted by the general public.
The Benefits Of Cryptocurrency Usage
Over the past years, cryptocurrencies have been experiencing a rapid increase in value, which has attracted the attention of many investors, regulators, financial companies and the media itself. These currencies have been attractive with the following benefits:
Security: Unlike the traditional payment system where cash and credit cards are used for daily operations, cryptocurrencies cannot be counterfeited by the sender in the same way as charge-backs of credit cards. Additionally, the probability to steal your actual full cash wallet is higher than stealing your cryptocurrencies. Moreover, cryptocurrencies are designed in that way that it is almost impossible to hack them due to the strong cryptography involved in the Blockchain model.
Accessibility: With regular currencies, there are also restrictions. A minor cannot open a bank account without the permission of his/her parents or a guardian’s permission. Moreover, banks can charge you or close your account if your account balance drops below a certain amount. However, these barriers are non-existent with cryptocurrencies as they provide software’s that can be downloaded for free by everyone.
Global Recognition: Individuals, who travel frequently or conduct business abroad, are quite familiar with the fact that their transactions are affected by the currency exchange rates. Having cryptocurrencies as a means of payment saves time and money which would otherwise be spent on transactions or exchange rate fees as it is universally recognized at a certain value.
Anonymity: While paying with a credit card for a product or service, you hand your personal information to an unknown person. Cryptocurrencies are regarded as anonymous in the sense that you send and receive currency via an address that is made up only of numbers and characters. Thus, it is very difficult to trace the address of a person in a real-world identity.
Will Cryptocurrencies ever be the standard currency?
Although cryptocurrencies and the blockchain technology itself present advantages that have stimulated their growth, there are several challenges which question the potential of cryptocurrencies to become mainstream currencies.
Volatility: Investing in cryptocurrencies presents a substantial risk due to the volatility of prices. Numerous experts have been very skeptical about investments in these currencies as they believe there is not enough information but rather speculations. As the currency prices are unregulated, people are constantly lured by the high currency price, which drives the prices even higher. Alternatively, this might lead to a bubble creation which will eventually burst and cause substantial losses.
Regulations: Cryptocurrency transactions are decentralized by nature, meaning there is no regulatory body such as banks or governmental institution that controls them. This means that there is no safety mechanism that protects the users from fraud.
Legality: Due to a lack of governmental control, cryptocurrencies are prone to be used by criminals who use them to their advantage. Also, being anonymous and unable to trace, it becomes even more difficult for governmental authorities to trace their illicit activities.
A medium of exchange: One of the most important roles of currencies is to be accepted as a medium of exchange. Traditional currencies have no value themselves, but the fact that the public at large accepts them as a medium of exchange to buy goods and services makes them valuable. When comparing cryptocurrencies with the traditional currencies, the latter seems to have a higher advantage. Why? In every economy, governments issue taxes in order to fund their spending. As such, people will always seek for traditional currencies in order to pay for these taxes, unless the government accepts payment in the form of cryptocurrencies. However, governments are unlikely to take this step as they prefer taxes to be issued in the same currency as their liabilities and towards something they can control. So, does this make it difficult (if not impossible) for cryptocurrencies to be used for the majority of transactions in the economy?
Blockchain The Technology Behind Cryptocurrency
At least once, everyone must have asked themselves “How can I be sure that cryptocurrency is not a fraud?” In order to address any fear you may have about cryptocurrencies, it is necessary to take a closer look at the technology behind every cryptocurrency – the Blockchain!
“Blockchain” is probably a term that you have heard a lot lately. The Blockchain model and cryptocurrencies were originally designed together, thus it is impossible to separate these two concepts. Blockchain contains the list of every piece of data that has been sent through the network, as well as every single transaction and account. Moreover, it uses a peer-to-peer network of computers to validate transactions without a third-party involvement.
In simple words, Blockchain is a list of records called blocks, as the name implies, that grow continuously and are linked and secured by using cryptography. By design, Blockchain allows digital information to be distributed but not copied.
Below are some of the key advantages associated with implementing Blockchain technology:
1. Resilience: Blockchain technology is resilient as it doesn’t have any central point of failure. Due to the encryption and chain nature of the blocks, records of historical transactions won’t be affected despite any potential damage to the data.
2. Security: One of the main characteristics of the Blockchain is safety as the cryptographic nature of Blockchain transactions makes the network more secure. Also, as previously mentioned, Blockchain allows digital information to be distributed but not copied which prevents any user from changing the transactions.
3. Disintermediation: As Blockchain uses a peer-to-peer network of computers to validate transactions, it doesn’t allow any interception from a third party.
4. Lower costs: Blockchain networks can reduce transaction costs as result of eliminating or reducing the reliance on intermediaries and associated costs. It can also be used by banks to reduce governance and audit costs and to provide better products with faster time.
As a decentralized ledger which keeps records of transactions that occur between peer-to-peer networks, the Blockchain technology has the potential to be applied in various useful ways beyond Bitcoin and Cryptocurrency. This important technological invention enables the transferring of assets across the internet without the help of a centralized third party. PwC gives us a more detailed insight on Blockchain’s prospective advantage and its potential application in the near future:
Financial services: Cheaper and faster settlements in the financial industry resulting in cost reduction by billions as well as transparency improvement.
Automotive: Consumers might also manage the fractional ownership in autonomous cars by using the Blockchain technology.
Voting: By using the Blockchain code, people can vote through their smartphones, PCs, and tables, which would result in immediate verifiable results.
Healthcare: The encrypted health information of patients can be shared with multiple providers without the threat of privacy breaches.
Nowadays, Blockchain technology is becoming more and more efficient, transparent and cost-effective for transactions. Chances are that Blockchain will go beyond Bitcoin and finance and will be applicable to various industries and areas.
Blockchain: A simple explanation
In order to better understand how Blockchain functions, Ivey Business School has portrayed its function with an analogy that compares Blockchains with the construction of a skyscraper. To start the construction, you need to start putting blocks on top of each other from the floor. Each of these blocks is linked with the previous block and contains its reference part. The reference part is similar to the DNA that the child inhibits from his/her parents. That means each block contains the DNA of the previous block.
Now, let us assume that this skyscraper is the largest in the world and it can be seen by everyone. The blocks of the skyscraper are true and verifiable because everyone can see them. If we would want to change the position of a block in the skyscraper, we would have to change the memory of everyone who has confirmed that the block in the skyscraper exists and also change the other blocks that contain the “DNA” of the block that is being changed. Thus, the information of the blockchain is considered unchangeable.
Further, let’s assume that each of the blocks is an information box which has transactions written in the form of code inside. Once enough transactions are created within the block, a new block is created and added to the blockchain. The process of connecting these blocks is done with computer power which requires that a complex mathematical problem is solved in order to guess the combination from a large pool of combinations. Whoever solves the mathematical problem first and connects the block, is rewarded with a cryptocurrency (Ivey Business School)
The Future of Cryptocurrencies and The Blockchain Model
Some of the most common limitations that cryptocurrencies have such as one’s financial assets can be wiped out online by a computer crash, or that a hacker may attack a virtual vault, can be overcome through the continual technology advancement. What will be even more challenging to avoid is one of the most elementary paradoxes of cryptocurrencies – the more popularity they gain, the more regulation and government inspection they will attract.
Also, even though the number of companies and important businesses that accept cryptocurrencies has increased, they are still a small minority. In order for cryptocurrencies to become omnipotent in the financial market, they have to first become widely accepted by consumers. As a result of their relative complexity compared to the usual currencies that consumers are used to, they are likely to push away most consumers (apart from the ones that are technologically accustomed).
Hence, a cryptocurrency that aims to be prominent in the financial system has to fulfill widely differing criteria. Firstly, it would have to have the right amount of mathematical complexity that is needed to avoid the hacker attacks but also is easy enough to understand for consumers. Secondly, it has to be decentralized but also have the suitable consumer protection. Lastly, it would have to maintain user anonymity without risking tax evasion, money laundering, and other suspicious illegal activities.
Considering the difficulty of the abovementioned criteria, is it possible that most cryptocurrencies could have the features in a few years’ time that combat with the disadvantages that cryptocurrencies have to face? Bitcoin is an example of a cryptocurrency which is gaining a tremendous attention and large approval from many stakeholders – perhaps foreshadowing a not so distant future.