Will We Be Using Bitcoin To Buy Our Morning Coffee?
What is blockchain and cryptocurrency, and what does it have to do with buying a cup of coffee? Blockchain is an incorruptible digital ledger of transactions that can be programmed to record financial transactions, as well as almost any transaction of value. Some think it will do for money what the internet did for information by making it faster, cheaper and more pervasive.
One blockchain example is called cryptocurrency, the best known of which goes by the name of bitcoin. Cryptocurrency is a digital currency in which encryption techniques are used to regulate the generation of units of currency, and verify the transfer of funds. Unlike traditional currencies, cryptocurrency operates independently of a central bank. But why have cryptocurrencies emerged, and rapidly escalated in value?
A little less than twelve years ago innovators discovered how to make data secure on the internet. Blockchains, including the one that runs the crytocurrency bitcoin, use digital currency to incentivize hosts around the world to keep copies of a single ledger, tracking debits and assets in any given currency. Nodes (an individual computer that is connected to the network) connect to one another and constantly check the accuracy of the ledger. If, for example, one or many nodes become corrupted, then the rest of the network disconnects them. This is how we are able to have a large network that connects people from one point to another to a single ledger that’s trustworthy. The end users, the people who hold accounts on the ledgers, use private keys to access their entries and therefore can send money anywhere in the world.
The bitcoin network currently holds about $40 billion in financial assets. It has been around for about 8 years and, even though it’s connected to the internet, the underlying infrastructure that protects that $40 billion has never been breached. Many claim that it is as safe as any bank ledger, and it’s safer than most credit card networks. Consider this:
- Ripple is building a free, open source and neutral web protocol that will be a blockchain alternative to the ACH system that banks currently use to transfer funds.
- It is estimated that banks can save up to $20 billion worldwide each year if they use blockchain instead of ACH to conduct their internal transfers.
- Other entities are working to connect non-cash assets to blockchains, such as stocks, houses, cars, art, music, and yes even a cup of coffee.
- Because there is total security on the blockchain, this new form of establishing ownership could replace the paper and personnel-heavy system which is currently in place.
- Blockchain payment systems allow other things to work on a very fine scale, with very small payments. Blockchain currencies are very cheap to send; transactions cost about 1/10th of 1%.
- Blockchain transactions are not just cheap, they can be sent at any size and very fast. This is important for the Internet of Things (IoT).
- Blockchain ledgers can be automated in various ways, leading to what are known as “smart contracts.”
- Cryptocurrency, backed by blockchain networks, and managed using smart contracts that are also distributed, creates large and small efficiencies.
Once money is this fast, granular and flexible, it can be connected to the economy in all sorts of interesting ways, offering greater economies of scale, better accessibility and lower transaction fees. Is cryptocurrency here to stay? Clearly it is more pervasive than ever, though it will likely become subject to greater scrutiny and regulation if it continues its current momentum. Though it may be a while before Starbucks accepts bitcoin, history has shown the fastest and cheapest technology typically wins. That said, unlike traditional currency, cryptocurrencies can have dramatic changes in value, even as much as 25% in one week. For most, it’s currently a highly speculative and ultra-high risk investment.
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