Cryptocurrency and blockchain 101
To understand cryptocurrency’s challenges, it’s important first to have a grasp on how it works. In its simplest form, cryptocurrency is digital money. Specifically, it’s entries in a database that no one can change without fulfilling specific conditions—just like regular currency. But unlike dollars or euros, cryptocurrency is not backed by the government or banks. Instead, it’s created and managed by a network of computers belonging to no one entity. And its database is a digital ledger called blockchain.
Blockchain works by merging ancient technology with the cutting edge. While ledgers may be older than writing for human communication, blockchain has been around for only a little over 10 years. Blockchain combines asymmetrical cryptography, hash functions, digital signatures, timestamped blocks and more to control the creation of money and verify the transfer of funds.
Blockchain is a communications protocol based on a consensus that’s secure and anonymous. Once something happens on blockchain, it’s there forever. The creator of this technology claims it solves the Byzantine Generals Problem. Applied correctly, blockchain could be used to secure the entire Internet.
So why are we doubting the validity of cryptocurrency again? Unfortunately, the very process that allows cryptocurrency to be decentralized has also involuntarily led to some of its difficulties. We’re talking, of course, about cryptomining.
Crypto vs. US dollar
In order to become successful enough to dethrone the US dollar, cryptocurrency must become a medium of exchange, unit of account and store of value. These are the three essential elements of money. To be a medium of exchange, a currency needs to be an intermediary token of a certain value that can be traded for goods or services. A unit of account is a stable measure that can be used to calculate cost, prices, profits and performance. And a store of value is a durable asset that has stable demand and saved purchasing power.
It will be difficult for cryptocurrency to achieve these statuses in the foreseeable future, never mind displace the US dollar. The dollar has been around for so long as a stable currency that it’s not only the world’s reserve currency—other countries fall back on it for risk management—but countries in Africa, Central America and Asia have replaced their own volatile currencies with the dollar instead. The belief system holding up the US dollar is strong, and trust in it remains high.
Cryptocurrency will not replace the US dollar today because there’s too much risk, which can be summed up by one person accumulating over $220 million in Bitcoin, but being unable to access it because he forgot the password to his digital wallet. But forgotten passwords and lost hardware are just two of the concerns investors and governments have with crypto.
Lack of trust is another challenge for crypto. It suffers from weak Know Your Client (KYC). Bitcoin exchanges that are high-risk may be criminal or even terrorist in nature. By its nature, cryptocurrency allows for total anonymity, making it difficult to attribute to cybercriminals, such as RaaS organizations demanding ransom payments in Bitcoin.
Finally, cryptocurrency suffers from slow transactional speed in relation to the US dollar. Bitcoin processes only 12 transactions per second today compared to Visa, for example, which can run up to 70,000 transactions. But there’s plenty of space for growth. It took 15-20 years for congress to pass laws that understood and managed credit cards after they were introduced in the 1950s. Fintech companies are already making improvements in the speed and efficiency of crypto.
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