Bitcoin/Cryptos an Evolution of Money

Since its introduction by the mysterious Satoshi Nakamoto, Bitcoin has changed the way that we look at money.  Though it is still not accepted as a standard currency for the majority of transactions in the traditional sense Bitcoin and other cryptos as well as various blockchain technologies have probably had the biggest impact on the financial world in the 11 years since its inception.

In just the past year we have seen the proposition, forward and backward movement of Facebook’s Libra, and the People’s Bank of China’s announcement that they would soon launch a sovereign digital yuan called the Digital Currency Electronic Payment (DCEP).  These two bold reveals, which bring the potential of a global digital currency ever closer, caused ripples across the global financial services sector.  This is in addition to the various ways the financial industry is starting to ramp up the successful use of blockchain technologies.  Financial Services are expected to spend $11.7 billion on distributed ledger technology in 2022 with Japan and Canada seeing the fastest growth.

So why has the financial world embraced this while the rest of the world remains either completely skeptical or at least very cautious?  The first to really see the benefit and take advantage of a safe, secure, and anonymous distributed payment system were unfortunately those on the dark web, most well-known, the members of the notorious Silk Road.  This early linkage has defiantly done damage to the reputation of the currency and all other cryptos that have followed it, yet its underlying benefits and weaknesses are still there. 

The three attributes that all cryptos have

  1. Trustless- nobody has to trust anyone else for the network to function. Before bitcoin currencies required a central authority that required trust to use it, that central authority is the central weakness that leads to the demise of the currency.  With cryptos, each part of the ecosystem validates what the other parts are telling it without the need for trust.
  2. Decentralized- Vitalik Buterin the Etherium founder explains it best in his post, “Blockchains are politically decentralized (no one controls them) and architecturally decentralized (no infrastructural central point of failure) but they are logically centralized (there is one commonly agreed state and the system behaves like a single computer).” Decentralization allows the block chain to be; fault tolerant because they rely on networks of separate components, attack resistant because they do not have vulnerable central points, and collusion resistant members cannot act in ways that benefit themselves at the expense of others.
  3. Immutable-Cannot be changed once done. It is highly improbable, difficult, or impossible to rewrite a cryptos history, only a key owner should be able to move funds, and all transaction should be recorded on the blockchain.

The three kinds of Cryptos

  1. Bitcoin-This is the granddaddy of every crypto that followed and was the first crypto to have all three of the attributes above.
  2. Altcoins- Many new block chains all very similar to Bitcoin with minor changes were created to date more than 5000, Etherium, NEO, and Litecoin are examples. They differ mostly in their algorithms, like PoS (Proof of Stake) rather than block discovery, what they do like Etherium’s smart contract which can automatically execute transactions when certain things happen, and how many coins are or will be produced in total or per year. 
  3. Tokens (for decentralized applications dApps)- with these you can tokenize real things, (diamonds GLitzkoin, gold PMGT, even medical supplies) and put them on a blockchain like ETH. You put an asset like your house into a smart contract (this is possible using a token that represents the ownership of the house). You set the price at 1000 ETH.  The smart contract’s condition is that IF someone sends 1000 ETH to the smart contract THEN that token is sent to that person’s address.  If someone wants to buy your house, they need to send the 1000ETH to the smart contract they will in turn receive the token (the ownership of your house) and the 1000 ETH is sent to you.  If less than 1000ETH is sent the ETH will be returned to the sender and your house stays in the smart contract.

The Future

Going forward cryptos will certainly have a place in the finance world.  It is hard to say what this role will exactly be.  Will a Chinese or American digital currency become the standard currency for international trade?  Will fiat currencies start to fade because of their inherent problem of inflation?  Will people start to consider the intrinsic value of cryptos worthy of consideration?  Only time will tell.

Disclaimer:  The author of this text, Robin Trehan, has an undergraduate degree in Economics, Masters in international business and finance, and MBA in electronic business. Trehan is Senior VP at Deltec International The views, thoughts, and opinions expressed in this text are solely the views of the author, and not necessarily reflecting the views of Deltec International Group, its subsidiaries, and/or employees.