The future of CryptoTechnology – A greater good or harm?

Cryptcurrencies and the blockchain technology powering them have received massive attention ever since Bitcoin appeared on the scene some ten years ago. What was once an underground, anti-institution movement has grown into an industry-defining technology that could easily change the way we do transactions.

It hasn’t been smooth sailing though, most especially for its flagship product, the Bitcoin. From rising to a dizzying height of $20,000 in December 2017, Bitcoin had shed off more than 80% of its value to trade at $3,689 at the beginning of 2019. Making a choice of whether or not to buy Bitcoin, therefore, requires more than an idea of what cryptocurrencies are. One needs to understand how they are mined and what value they, together with blockchain technology bring to the real economy.

Towards this end, some have argued that cryptocurrencies, like all assets, are still finding their true values. The swings, therefore, represent the actions of speculators still unsure of what value cryptocurrencies bring. However, there are those who think digital currencies are clever ideas at best, and a tool for charlatans and greedy folk at worst.

Crypto Skeptics

“The mother of all bubbles,” was what economist, Nouriel Roubini called bitcoin at the begining of 2018 after a massive collapse in value. Roubini would know all about bubbles, as he was one of the few people who predicted the 2008 crisis.

The anonymity that cryptocurrencies proffer on individuals makes them a haven for criminals. It was easy to exchange millions with digital currency in order to evade taxes. Cybercriminals have also been known to demand ransoms in bitcoins because it was impossible to trace them. For this very purpose, it would be easy to launder money in huge sums with ease.

A more charitable criticism of the digital currency came from Nobel prize-winning economist, Robert Shiller, who called bitcoin “a really clever idea.” He however feared it would not be a lasting feature in the world of finance. “We are over-emphasising bitcoin, we should expand it out to blockchain, which will have other applications,” he said at Davos in 2018. Bitcoin and its sister digital currencies have been criticised for being too volatile. To be classed as an alternative to money, it must be a reliable store of value. But the fluctuating nature of these currencies have caused investors to question their reputation to be used as such.

Professional traders have duly started dropping their interest in cryptocurrencies, it would seem. For bitcoin futures, daily transactional values dropped from $5,000 to a mere $160 as at the beginning of 2019.

The Blockchain Rational

Satoshi Nakamoto intended to create a currency that had no state backing. The idea was to create a currency that didn’t have the ‘stifling’ control of a state agnecy capable of dictating the value of that currency. It would be a world that was liberal. And so he (or they) decided to give all persons within the network oversight rights. All participants in a crypto can view and monitor transactions because all transactions are recorded on a public ledger which is maintained by a swarm of powerful computers that act as a peer-to-peer review system. When an indivdual uses up a coin for whatever transaction, the computers or nodes update the ownership of that coin so that it is visible to everybody. To that end, every node has the same exact copy of each transaction.

Satoshi aimed to build a decentralised system with no single line of failure. It was therefore impossible to forge a transaction or create counterfeit currencies. Legal access was also limited, meaning crypto would then create a bypass to traditional legal schemes. The ledger or log is what is called the blockchain, and this was the revolution that some saw.

Voting with Blockchain

How interesting that a “democratic” platform like blockchain could be useful in a democratic process. Blockchain’s impervious platform has been touted as a viable means for ensuring incident-free voting. By exchanging vote tokens to show which candidate they preferred, individuals will be able to cast votes that can’t be altered. Others have touted blockchain’s ability to encourage transfer voting where individuals transfer their voting rights to another for one reason or the other. It would also make it possible to vote more often and over a longer period than physical voting would allow. The future remains interesting.

Bolstering the Supply Chain with Blockchain

Because blockchain prevents the tampering of historical data, it would be easy to verify the source of any product that has been recorded on a public ledger. Gold from illegal mining activities can be easily tracked, as would cocoa produced by child labour.

From the moment a cocoa bean is bought from a seed supplier to when it’s filled into bags to be sent to Switzerland for chocolate, for example, blockchain technology makes it possible to track the journey of a batch of cocoa beans. The tracking continues through export back into Africa where, upon purchasing a bar of chocolate, a consumer would be able to tell where the seeds came from, how many airports it went through, and how many retail shops it went through. And so at any point in time, one can see every transaction that had taken place no matter how far in the past it happened. This could be vital in trade agreements that require evidence of origin in order to waive import duties. It could also help track blood diamonds, like De Beers did in 2018.

Blockchain in Traditional Finance

Blockchain is already being used by the Australian Securities Exchange. Rather than creating a decentralized platform where every transaction is opened to the public, only a select group of participants, mostly traders, have access to the ledger. This permission-based access seems a more likable application of blockchain technology especially among people in the banking fraternity. Truth is, banks earn most of their revenues from serving as middle men. Taking that out and introducing complete transparency makes it unappealing. However, the continuous verification of transactions would help banks and financial institutions stem incidents of fraud.

Rather ironical is the case of crypto tokens being used to transfer fiat money. In this instance, Ripple, a payment platform is using tokens in place of real money to transfer remittances faster and quicker across countries.

Other Possible Uses

Ethereum, a blockchain system that was developed around 2015 outdoored an open-source platform that allowed others to run decentralised and independent organisations. There is even the possibility of the internet being built entirely on blockchain, such that instead of personal data stored in data centres, Ethereum would make them available everywhere in the world. The blockchain, no doubt, would shield such information from government censorship and cybercrime.

In the world of entertainment, Blockchain has been touted as a viable means of addressing problems associated with music rights. Mycelia, for example, is creating a creative passport that stores a musician’s identification, musicography, and background, so that it is easy for consumers to purchase rights to her music. It is a sort of smart contract, which is a self-executing piece of code that sits exclusively and safely on blockchain tech. In a smart contract, an asset in the ledger automatically transfers ownership of another asset to another user once certain conditions are met. An event manager would therefore not need to contact a musician directly. The contract terminates itself once the conditions are met so that it can’t be recreated or impaired.

Is Blockchain Really Worth It?

Blockchain is a big deal, and it promises to change the way the world is run. Be it in the world of banking or international trade, it has promises that could improve accountability and manage fraud. However, there are inherent issues that challenge the overall adoption of the technology.

It’s a slow process

Blockchain is just too slow. Etherum, for example, processes only 15 transactions per second. Visa, on the other hand, does 2,000. This would make it unattractive as a means of exchange in everyday life activities, like paying for instant coffee. As the number of nodes add to the platform, the numerous entries and logs could make even blockchain used for worldwide industrial systems to choke and lag as the data increases in size.

It consumes too much energy

Also, blockchain consumes a lot of energy and spews a lot of carbon. The powerful computers used in mining the coins require a lot electric power. In Iceland, energy used in coin mining exceeded household energy use at a point in 2018. Iceland, of course, has the benefit of having very cheap energy due to its nearness to magma from volcanoes.

Mining a single bitcoin is said to require enough energy to power a household for one month, a report by Power Compare has said. As at the end of 2018, bitcoin mining was consuming more energy than 175 countries around the world. A single bitcoin required 94,000 KWh, which was more than the energy 66 countries used per capita.

Fear of the Unknown

While the scalability of blockchain is a positive thing, there are fears that the continuous growth of the technology poses unknown risks. Distributed Ledger Technology is a rather young system, and so there are potentially uncharted problems that can’t be estimated at the moment. What would be the effect if all of the trade between USA and China, amounting to trillions of dollars, is run on the blockchain technology? Not only is it unclear whether that would be feasible, the potential contagion in the event of a security breach is unfathomable. Anyone with access to a user’s secret key has limitless access to all the information and data within that system.

As more platforms rise to offer blockchain services, vendor-level risks will rise as well. Third-party blockchain app providers would have to integrate more robust security measures. And, as blockchain is more difficult to compromise, social engineering could eventually lead to massive security breaches that could erode all the gains made so far.

What the Future Holds

The future is mixed for cryptocurrencies, if not for blockchain. The latter has intrinsic value with applications across different sectors. But, there is still the possibility that cryptocurrencies will eventually earn the trust of more people due to the promise of transparency.

Despite its volatile nature, it can be said that fiat money is backed by human trust. Paper money doesn’t have intrinsic value, and the world of banking, evidenced by banking crises, is subject to greed, manipulation, and coercive government policies. Cryptocurrencies, on the other hand, cannot be forged or replicated easily. It is impossible for bankers to create dubious accounts and finance transactions that are simply nonexistent. The public ledger would expose such a move, providing for a system that can be trusted by all. It might take time to build that trust, but once that is earned, digital currencies could become more useful as a means of exchange.

Also, currency substitution could be another way of introducing crypto to the economy. Replacing a deflationary currency with a limited quantity of crypto puts a cap on the ability of governments to spend beyond their means. They would be forced to conform with monetary and fiscal policies for the betterment of all. It is therefore not a surprise that in Venezuela, Bitcoin transactions reached a record high in February of 2019. For a nation in the middle of what appeared a political crisis, cryptocurrencies offer the store of value that the local currency doesn’t.

The future also holds serious challenges for holders of tokens and secret keys. While private keys are almost impossible to guess, the computers that hold them are quite easy to manipulate. Endpoints could, thus, become the most vulnerable entry points for malware and other socially-engineered malicious codes. And once the keys are stolen, an entire network could be at the mercy of cybercriminals.

For the above reason, the adoption of blockchain technology would skew away from the decentralised, open system to one based on permissions. Similar to what is happening at the Australian Securities Exchange, blockchain would be used to improve service delivery without the public having the oversight potential that was the reason for its creation. Only a small list of persons would have access to the data and information being exchanged, and that list could be so small that it would include only the service providers and the government.

Rather than replace the very industry it fought against, crypto and its underlying blockchain could become the foundation of restricted access, segmented markets, and a strongly opaque financial system.