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Bitcoin, blockchain, crypto…Dogecoin. Are these new forms of money? The next hot investment? Or, a fad that will be irrelevant in 5 years? Unless you’ve been living under a rock for the last few years, chances are you’ve heard of Blockchain, a new digital technology taking the world by storm. But what exactly is it?
What Is Blockchain?
A blockchain is a distributed ledger which no one individual owns or controls. In simple terms, this means recording information among many different computers in a way that makes it impossible to alter. A popular analogy is a Google Doc, which oddly enough is being used right now to write the words you’re reading. When a change is made to a Google Doc, it happens simultaneously in real time, to every person who has access to the doc. Nothing can be changed or altered without each person seeing the changes that have been made. This helps create a verifiable system which each person can trust.
Blockchain technology has the potential to disrupt many different industries that are outdated in the 21st century. Some examples of this include real estate, healthcare and even currency (Bitcoin).
Let’s start with currency. Blockchain is not the same thing as Bitcoin; blockchain is simply the underlying technology that Bitcoin runs on. This may seem a bit confusing, so let’s take a step back and go over what money is so we can paint the bigger picture.
How Do Money and Inflation Work?
What is money? Money is simply an exchange of value in a transaction. Hundreds, even thousands of years ago, the main way value was exchanged was through bartering, otherwise known as trading. For example, If I had a bag of rice and you had a bow-and-arrow, we could trade one for the other and there would be a clear exchange of value. However, what if you only needed half a bag of rice, would you then trade me half a bow-and-arrow? How would that work? Would you still trade a full bow-and-arrow even though you only wanted half a bag? That wouldn’t be a fair trade. We needed a better system.
Then came gold, which could be traded in exchange for goods and services. This worked for a while, but another problem formed: it was extremely inconvenient to carry around. Imagine going about your daily life lugging around gold bars. Not great.
Then came paper money backed by gold and then removal of the gold standard. Paper money solved the problem of carrying it around easily and making transactions, but other problems appeared: inflation (money losing value each year since more dollars are printed), time/fees, and human error. If you want to make a transaction with a large amount of money, chances are you use a debit/credit card, check, or if it’s a really large amount, a bank wire. It can take days for transactions to clear, you can get charged fees for simply accessing your own money, and on top of this there’s a chance a check gets lost in the mail or money is deposited into a wrong account…not to mention money can be counterfeit.
The Problem Cryptocurrency Solves
Enter crypto. At the heart of it, crypto is really the next iteration of value exchange that helps solve a lot of the problems of fiat currency. There are little to no fees for sending Bitcoin, there’s privacy from sender to receiver (no banking middlemen involved), it cannot be forged, and, lastly, there is a fixed supply of 21M coins, therefore solving the issue of inflation.
It may be hard to imagine as a citizen of the U.S., but many countries around the world, especially poor/developing ones, deal with runaway inflation (see Zimbabwe) and corrupt governments that can seize assets at a moment’s notice– including money and property– without any retribution. With blockchain, there’s immutable proof of ownership that cannot be changed. Think of it as an electronic contract. Additionally, people who may not have a bank account can still send money. Think of Bitcoin as essentially having a bank in your pocket. Due to these reasons, we may see poorer nations adopt Bitcoin at a faster rate than the developed world.
Although there is great potential behind blockchain technology and crypto, there are still some drawbacks that are being addressed. First, processing speeds still have a ways to go; Bitcoin is currently processing about seven transactions per second. To put this in perspective, Visa currently processes about 24,000 transactions per second (TPS).
Second, while financial privacy provided by Bitcoin is great, this may allow illegal activity to occur without much oversight. There will have to be regulation that addresses this.
Lastly, there are some cryptocurrencies out there now that are flat out scams. With little oversight, the current crypto environment can feel like the wild wild west at times. If you’re thinking of parking your money in crypto, make sure you do your research and invest in legitimate projects.
All in all, think of blockchain and crypto as the internet in the 1990s. There’s a lot of hype and a lot of potential, but it’s still evolving day-by-day.
Do you think more people should start using blockchain and cryptocurrency? Let us know down in the comments.
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This article originally published on GREY Journal.
