Cryptocurrency made headlines for what seemed like months on end last year as Bitcoin’s value soared to previously unheard of heights. Thousands rushed to purchase cryptocurrency in the hopes of being able to become overnight millionaires, as many who already owned the currency did.
You may have heard all the buzzwords floating around about “blockchain” and “mining”, but not quite known what it meant. Consider this a beginner’s guide to blockchain and cryptocurrency that will leave you more informed about the background and future of blockchain technology.
Firstly, it’s essential to understand the technology that supports cryptocurrency: blockchain. The term “blockchain” refers to the two main parts at the core of this technology, transactions or “blocks” that are added to a ledger or “chain”. All in all, it is merely a digital public ledger that permanently records transactional information in a way that can never be altered. What makes this system so secure is that the ledger is shared and viewable by the whole network of computers involved. Each transaction created relies on a consensus algorithm, meaning that all computers in the network agree after a transaction is approved through cryptographic problem-solving. No singular person owns the data, and everyone confirms everything that happens. This makes the transactions extremely secure, as everyone has copies. A hacker would need to simultaneously hack millions of ledgers at the same time to make a change to over 51% of the existing copies in the network to make a change, which is theoretically near impossible. Without hacking 51% of the ledgers, the changes made will not match the majority and will be corrected by the software. Although the transactions are all recorded, they are anonymous and can only be identified by hashes, which are unique codes.
Cryptocurrency is a way of using blockchain technology, although not all cryptocurrencies use blockchain. The digitized ledger style is perfect for currency because it allows you to trade tokens (units of cryptocurrency) and also securely records the transactions. The peer to peer style of the blockchain also removes the need for middlemen, such as banks, and makes the process of transactions more efficient. For fear of becoming redundant in a digital age, some banks have started to release their own cryptocurrencies. Governments also have a hard time with regulation due to the anonymized central ledger style. And some countries have entirely banned the purchase and dealing of cryptocurrency because it is exceptionally easy to conceal black market payments or illegal transactions.
Regular cash is printed off by the government of each country, the equivalent process for the cryptocurrencies is “mining”. Mining is a way of verifying the transactions and is accomplished through cryptography in the form of challenging math problems. The solving of the cryptographic problems is a way of maintaining the blockchain and rewards the first miner that can crack the cryptographic code to authenticate the transaction. With limited quantity currencies such as Bitcoin, mining becomes more and more difficult as we near the quantity limit. With global competition, mining is not something that you can do at home with your laptop, crypto mining takes exceptional electricity, hardware and internet expenses.
The value, like regular cash, only is valid within the network itself. Canadian dollar bills are of little use in New Zealand but have a comparable and exchangeable value with the New Zealand dollar. The value is affected by socio-economic factors, so is the value of cryptocurrency. The value is just based on human perceptions. Transactions don’t take an entire bitcoin each, like real currency it can be divided and moved in smaller portions. Ownership of the currency signified through keys, that will provide the ability to encrypt and decrypt data. The private keys for cryptocurrency are best kept in specialized cold storage wallets as pen and paper have proven to result in many people losing access forever to the currency.
There are thousands of different cryptocurrencies with more being created at a rapid rate, and the main point of differentiation is the transaction speed and perceived value. The first and most famous of which is Bitcoin, which I will delve into shortly.
Other applications of blockchain:
Blockchain technology is not only a stable platform for currency but can also be applied to many different aspects of life and business. In the future, personal IDs such as passports, drivers licenses or even education qualifications could be made reliable by blockchain. The encryption provided by digital technology will allow the information to be secured and unchangeable. Smart contracts can make use of the ledger to ensure things like insurance details are kept private but still able to be managed and provide proof of transactions to both parties. This tamper-proof advantage can be applied to the real estate industry, legal cases and healthcare. Blockchain also removes a lot of our reliance on cloud server technology, as storing in the ledger is safer. Supply-chain management is also possible, as the blocks are recorded with timestamps, you can locate anything from livestock to parcels in real-time. Loyalty cards for coffee shops could also become paperless and less prone to fraud. In the entertainment industry, royalty payments can be fixed and ensured. Transactions like streaming will all be recorded and the creator of the content can be paid accordingly. Blockchain could prevent widespread food contamination as the movement of products across areas could be recorded and tracked down more quickly than our current search methods. Wills and inheritance can be anchored by this technology to avoid dispute. Anything that is owned or needs to be managed can be verified and kept secured by block chain.
It is important to note a difficulty with blockchain. Although the technology itself is secure, the keys that are given to the owner can be stolen. This has happened when keys are stored in cloud servers or even when kept on a person’s personal laptop.
The first cryptocurrency and perhaps the most well-known one today is Bitcoin. The creator, who uses the name “Satoshi Nakamoto”, released Bitcoin as open-source software in 2009. Before this, they had described the peer-to-peer system in a published paper. They then continued to work on the cryptocurrency until 2010, at which time they handed over it over to Gavin Andresen, an American software developer. To this day, the Bitcoin creator’s identity is not publicly known, and there has been a lot of speculation over their identity and nationality. People have found clues in the code to claim that he lives in a Commonwealth country due to his British English and reference to a London newspaper headline in the text of the first block ever mined. He also notably used the phrase “bloody hard” in source code comments. Although they claim to be a 1975 born male living in Japan, this has not been confirmed and has been disputed. The time that Bitcoin came into existence coincides with the financial crisis and the creator and subsequent developers wanted to eliminate the middlemen and put safe transactions back in control of the users. The unit “Satoshis” is used to describe a smaller until of bitcoin, like cents to a dollar, with 100 million Satoshis being equivalent to a single Bitcoin.
In March of 2010, a Bitcoin was valued at $0.003 USD, which is shocking compared to the all-time highest value of on the 17th of December 2017, when it was valued at $19,783.06 USD. Another thing to note about Bitcoin is its limited quantity style. There can only be 21 million and not anymore can be created after that and transactions will start costing cryptocurrency in order to incentivize and pay miners who authenticate transactions. 85% of the finite supply has already been mined at the rate of 1800 Bitcoin a day. The payout for miners per block solved is halved at certain checkpoints. The first-ever “genesis” block paid out at 50 Bitcoin to Satoshi, and now it is 12.5 Bitcoin. In circulation, however, the quantity is a lot less, as owners lose their keys or pass away, their bitcoin will remain forever unused and unrecoverable. The element of scarcity with this cryptocurrency serves to add to its value.
Facebook has plans for a cryptocurrency called Libra and plans to launch it in 2020. It is currently in development and will be monitored by one of Facebook’s subsidiaries. Like tokens at an arcade, you will cash in your own currency to attain Libra that can then be spent within the network with anonymity and with minimal transaction fees.
Currently, there is a lot of speculation surrounding the nature of Libra. There are claims that it may be classified as a different asset class to cryptocurrency as it is not decentralized enough. It will not involve authentication via mining and instead will be processed by the Libra Association that governs it until it can find a way to do it without it. Despite their slow progress on designing significant parts of the software required, they have plans for digital wallets and boldly have also released a white paper detailing their goals in the project. Although its centralized approach to cryptocurrency is being questioned, this would allow it to be integrated into Facebook and Instagram (which is owned by Facebook) more seamlessly and quickly. The user interfaces associated would be much more intuitive would not require the level of digital fluency to understand and use at a proficient level.
Facebook’s reaction to the increasingly popular trend of cryptocurrencies is expected as they too deal with money transfers and payments, putting some of their services in direct competition. For a company that profits greatly off of advertising on its own platform, having spending data would be extremely powerful.
A more novel use of blockchain is a game on Ethereum. Ethereum has a cryptocurrency called ether, but the technology is also being used to run a novel idea: CryptoKitties.
Although they capped the release of the kitties at 50000, each of which has their own DNA. However, there are more than that amount in the game now as you can breed them to create new combinations of cats with billions of possibilities. The ledger style of blockchain records all the transactions of the CryptoKitties. The highest value kitty ever sold in the game was equivalent to spending $140,000 USD. It can be likened to digital art in that the value is in the scarcity, and there can be no replication or fraudulent replicas.
Aaron McDonald is a 20 year tech industry veteran who is the Co-Founder and CEO of Centrality, a venture studio that’s creating an ecosystem of applications on blockchain technology. On July 24, Aaron spoke at the M2 Success Summit to give insight into the world of blockchain and how we can take advantage of this emerging technology.
What is the take home? What are the first steps that we can do? How important is it to really know what’s under the hood?
Different people in your organisation would have to have a different level of understanding. But I think the most important thing to take away is that shared infrastructure view. How can we create cooperatives which share infrastructure where there isn’t an owner of that infrastructure and we can innovate freely with applications?
The second thing is we can now create new kinds of business models which don’t rely on these central parties to be in control to create valuable economies. That’s going to fundamentally change the way business can be done in the future. And you think about it, as a consumer, if I have the choice to use an application where the corporation gets all the benefit, or the community gets all the benefit – which one am I going to choose? That’s where consumers are going to want to go.
And that third thing is privacy. This privacy economy is coming, it’s going to be a juggernaut. If you’re not building stuff that puts the consumer privacy first, and puts them in control of their data, you’re going to be out of business.
You talk about big business in America and New Zealand is following. Give us some examples of how many big businesses are actually investing in this tech.
More than 60 percent of Fortune 500 companies are making active investments in this space or are actively building technology in this space. At least 80 percent of the top financial institutions of the world are building in this space. We are working with a number of them. I think one of the biggest holders of patents in this space is the Bank of America.
They might be talking about it in negative terms, to try and protect their dominant positions right now, but they are all actively building and investing in this technology behind the scenes. Don’t listen to what people say, look at what they do.
When are we going to be able to see some of the things you’re working on in the real world?
Sylo’s an active beta now, it’s the fastest growing decentralised app in the world. You can download Sylo from the App Store. And we’re about to turn that beta switch off soon, so we’re be pushing it hard.
A lot of that is around a messaging app, right? If you simplify it, a lot of these apps are a blockchain version of Whatsapp.
The key difference is it works just like Whatsapp, except we don’t need someone running a data centre to do things like back your contacts up or store the relationship between you and your friends, or exchange keys for encryption, those kinds of things.
For all the toe dippers out there who want to get in and do some research, is Centrality the place to start? What would you encourage everyone here if they wanted to get a blockchain element into their business?
Check out our website, there are some cool blogs on there about how the technology works and the types of industries it’s been used in. We’re working with 30 different ventures in our portfolio around the world, so we’re across every type of industry. I’d encourage everyone to watch the documentaries on Netflix, Banking On Bitcoin or The Trust Machine. Those are two very good places to start to get a basic understanding of how this all works and what the change might be in the future.