Tell Me Like I'm 5: Cryptocurrencies
Cryptocurrency 101 via Technical.ly Philly
Technical.ly Philly interviewed me recently to answer the following questions:
What is cryptocurrency?
Why does cryptocurrency as we currently know it matter as a technology of the future?
Cryptocurrency is a monetary, digital asset that can be exchanged for value, similar to a US Dollar, protected by cryptography and is powered by computational servers around the world. Cryptocurrency can be accessed by any person using a digital tool (mobile device, tablet, laptop, browser) and any person with a digital node (server) who can power a cryptocurrency to keep it running. It is the first decentralized (no single owner), pseudo anonymous (no named owner) currency to be exchanged for services and goods in human history.
Cryptocurrency is the internet's currency, just as the US Dollar is native and responsible as the trust system of exchange for business across the world, crypto is the same for the web. If you believe that technology and the internet play a vital role in our future you may believe the internet's monetary system should play a big part in our world moving forward too. Cryptocurrency has created a universal way for people to exchange value no matter what their geographic, socioeconomic, demographic or ideological border is. If you run a node, or a crypto mining network and you have an account tied to a digital, distributed ledger (list of information/names), you can exchange cryptocurrency (value) with anyone via the digital world.
If you look at the technology industry, technology plays in unregulated spaces and has more room for growth than our physical world. When you come to think of it, a lot of our physical world has been founded, conquered, regulated, etc. Google has mapped out and identified a lot of the spaces of land for us to be creative in and creating new things in the world can be relatively costly. Governments have identified this same land and have taken ownership of most of it. In the digital world, we have infinite possibilities to create art, virtual worlds, intellectual property and recreating physical properties in the form of digital twins. Thanks to revolutions in software, we can create realities that would not have been possible in real life.
However it is hard for technology to change regulated spaces. Take for example what Uber has done for ride-sharing and AirBnb’s long road to change for lodging. Technology platforms have had to create their own solutions, push through barriers, to then have the physical world adjust to it’s norms and then become regulated. Cryptocurrency is a digital frontier that as initiated around Halloween 2008 and the currency launched in January 2009. Now that a lot of the physical frontiers in our world have mostly been discovered, regulated or authorized; explorers are gravitated to cryptocurrency and blockchain based systems to create a new currency, laws, governance, free of interference and regulation. In the technical world.
Cryptocurrency is sovereign resistant, they’re designed to be completely decentralized, you don’t need the power of the state to enforce the value of cryptocurrency. And it allows for trustless transactions between humans without some king or authority or government or corporation having to be the validator of a transaction. It's able to distribute wealth creation, wealth storage, and wealth protection from the state. That’s what cryptocurrencies really enable.
The best-known cryptocurrency is Bitcoin, and Bitcoin is the digital gold standard or the new Swiss bank count, all rolled into one. You can divide up shares of Bitcoin to as many people as possible, where gold has a physical value or limit of who and how many people can have access to it. E.g. I cannot split a physical penny into fractions. Bitcoin is somewhat programmable, so you can automate access, distribution (give .000000000001 of a Bitcoin to someone) and what services Bitcoin can go to.
What’s difficult about it is it’s not really private, although there are parts of it that are private, it’s not completely private and it’s untrusted. It’s only from 2009, so people don’t know if it’ll be around forever. Every year Bitcoin and cryptocurrency survives and goes through one of the various challenges facing it, the currency becomes more valuable as people entrust more of their time, computational power and native fiat currencies into it.
The bigger question is how may DeFi (Decentralized Finance) have a role in its maturation with everyday businesses and how Central Bank Digital Currencies (CBDC’s) will effect the adoption of crypto-like payment systems for federal governments.
If you hold or trade with a federally issued stablecoin, a peg to the dollar may someday be broken, an old problem with pegged exchange rates that economist Milton Friedman often warned about. The more stablecoins and other crypto assets become adopted by every day people, the more they will attract regulatory rules. That will limit many of their advantages over the traditional bank sector. The U.S. government for example will not want a currency in circulation that isn’t managed by the Federal Reserve.
The banking industry may create a similar electronic reserve currency (CBDC) that you could transfer your electronically-based dollars within the accounting system of the central bank, and achieve a non-intermediated transfer without resorting to crypto. It will be interesting to see what medium of exchange wins adoption moving forward.
More details on that in a later post…