Cryptocurrencies and blockchain technology have gained significant attention in recent years. Whilst many have viewed it as a get rich quick scheme, there are a number of real world uses that are developing which are likely to improve and foster innovation in many industries. To understand both concepts it is useful to understand the basics of each:
Blockchain Technology
Definition - A blockchain is a decentralised and distributed digital ledger technology that records transactions across multiple computers (nodes) in a secure and transparent manner. Say that again - So it is the equivalent of a book keeping recording, detailing every time money is paid into a kitty and out (but electronic). The most important concept to understand is the decentralised nature of blockchain.
What is Decentralisation? - Unlike traditional centralised systems, a blockchain operates on a network of computers, making it resistant to single points of failure and censorship. For example the traditional banking system is a centralised system which whilst works well today, has many flaws.
So what are some of the benefits of a decentralised system like Blockchain:
1) Increased Security: Reduces the risk of a single point of failure and hacking, which makes it highly secure and tamper resistant.
2) Transparency and Trust: Data recorded on a blockchain is transparent and can be audited by authorised parties. This makes it difficult for bad actors to commit fraud.
3) Efficiency and Speed: Blockchain can streamline processes by eliminating paperwork and manual reconciliation. This is one of the biggest benefits that can revolutionise areas like the financial industry.
4) Cost Savings: Because of its decentralised nature, it can eliminate intermediaries which reduces the need for manual processes and can lead to cost savings.
Cryptocurrency:
Definition: Cryptocurrency is a type of digital or virtual currency that uses cryptography for security. It operates independently of traditional banking systems and central authorities. Or simply put it is a value of money but in a digital format.
Types of cryptocurrency - There are lots of different types of cryptocurrencies each with its unique features and use cases. Examples include Bitcoin (BTC) Ethereum (ETH), XRP (XRP), and Litecoin (LTC). There are also stable coins which are pegged to a reserve asset like the US Dollar.
Benefits
Decentralisation - since cryptocurrencies are transferred and operated on blockchain technology, the use of cryptocurrencies bring all the benefits of decentralisation as explained above. A great example is the movement of money - Today if you want to move money from the UK to Australia this would typically be done via a bank. Because of the centralised nature of banks, your money would typically pass through a number of banks to reach its final destination. This makes the movement of money slow, expensive (since each bank takes their cut) and prone to errors because of the complicated route it takes. With cryptocurrency, moving money from the UK to Australia can be as quick as sending an email or WhatsApp message. This is because it uses new technology which does not require it to go through lots of middle men to process. And since there are less middlemen involved, the costs are much lower and the money is less likely to go missing.
Accessibility - cryptocurrencies are accessible to anyone with an internet connection, providing financial services to individuals who lack access to traditional banking systems. There are many individuals in the world who have access to the internet but not to a bank account. Unfortunately this is often those individuals in less developed countries. E.g. a family member in the UK may want to send money to a relative in Africa. However if the relative does not have a bank account, money cannot be received.
This example of moving money from A to B can be applied to many other forms of asset movement which can be slow, expensive and cumbersome using current old outdated technology. Many industries are looking at how they can adopt cryptocurrency including trade finance, banking and eCommerce, insurance, real estate, artist royalties and more. The adoption of cryptocurrency in all these industries will improve the end of experience for all - just imagine how quick it could be to buy and sell your house using such technology without the need to go through intermediaries like agents, brokers, banks and lawyers. Dreamy...
Challenges and risks:
Regulatory catch-up - Often innovation in new technology outpaces how a government or existing centralised systems manage how to regulate it to keep individuals safe. This is no different to cryptocurrency, and whilst many would like to adopt the technology, without proper regulation and laws this makes it difficult to implement. Until regulation and laws become clear, many applications of cryptocurrency will take time.
Bad actors - as with any new technology, cryptocurrency has been tainted with bad actors that mean some perceive it to be only for get rich quick schemes, fraudulent use, Ponzi schemes and used for drug and human exploits. Whilst all of this has some degree of truth, this is also no different to how the internet was first used or how streaming sites can be exploited. However with better regulation and rules to govern it, the ability for bad actors to use cryptocurrency will reduce.
Volatility - The cryptocurrency markets are extremely volatile (albeit not so much any more) which again can be a worry for many individuals and businesses. However as the use of it increases and other cryptocurrencies like stable coins grow in popularity and use, this volatility will be more akin to smaller fluctuations as seen in normal sovereignty currencies like USD and EUR.
Many believe blockchain technology and cryptocurrencies will revolutionise many industries and provide benefits for all. In fact many financial companies are already using it without you knowing but hopefully you are reaping the benefits that it delivers. It is certainly not IF...but when will these new technologies really come to the masses. However before engaging in cryptocurrency transactions or blockchain projects, it's essential to research and understand the specific cryptocurrency or blockchain network you're dealing with and consider the associated risks and legal implications.
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