Blockchain and Cryptocurrency
Blockchain Technology Blockchain technology is a very deep rabbit hole so an overview of the basics is more practical here. The basic premise begins with a problem. This is the problem of centralized systems. Related to the internet, money, and communications particularly, there are many problems that have arisen from having single corporations or governments in control of large swaths of these fields. This is seen with censorship, inflation, hacks, disruptions, and more.
Enter blockchain technology. Beginning with Bitcoin but expanding on previous principles of electronic cash and peer-to-peer networks, blockchain technology decentralizes the systems in question. Instead of a single corporation running a platform, it is ran through the decision making and work of hundreds or thousands of participants. Instead of a currency being controlled by a government or consortium of governments, money can be similarly controlled and maintained by those that use it, with set immutable rules for its attributes. When a system has its workings split between so many parties, it becomes resilient to attack. There are now thousands of hacks that would need to occur to even have a chance of breaking into the system, contrasted to a centralized system with only one or a few attack vectors required.
The way this functions behind the scenes is related to having a public ledger. With Bitcoin as our example (there are many varying implementations of blockchain technology with their own unique features) every transaction is posted publicly. This is stored on all the connected computers on the network (nodes). They now all have a record of what has occurred on the network. If one party attempts to falsely claim something happened (they should have 1 million bitcoins in their wallet), this is easily shown in conflict with the other records and is dismissed. Transactions are not posted individually but rather in groups, or “blocks”. Once a block of transactions is posted, the next block gets posted with a connection to the previous and a full record of all the previous blocks. This creates a chain of blocks, or “blockchain”. The more blocks that get added, the harder it would be to alter a former block. This is because they are all linked and so to alter one would require one to alter every other block posted after the one in question.
The system is run by “miners”. These are individuals and companies who choose to purchase specific computer equipment and use this, along with the corresponding energy required to run it, to provide the processing power of the network. As blocks are produced, processed, validated, and posted, new bitcoin are “minted”. This is the only way new bitcoin can be created and there is a limit to how many will ultimately be created. These miners all compete for the right to mine the next block and thus get the reward of that block. A complex algorithm is sent out to all miners who then use their computing equipment to solve this problem. This is the “work” referenced in the type of blockchain Bitcoin is, “Proof of Work”. It also adds more security. Since the process is costly and not guaranteed, those who participate are shown to be legitimate participants. Once the first miner solves the algorithm and is given the right to mine the next block, they again use their equipment to process all the transactions and post them to the network while the other miners get to work on the next competition. Before the block is validated however, the other miners must agree that the final block is correct and confirm that it should be posted. When it does post, the block is cryotographically connected to the previous block and every node updates their copy of the public ledger, the blockchain. This is a common analogy of bitcoin being “digital gold”. There are miners who use special equipment and work to extract the raw material to be used in the marketplace, a material with a limited supply and slow extraction rate. It is done by many companies, in various jurisdictions and countries, and no one has any control over how much gold there is or will be.
Since blockchain technology is not controlled by any single entity, there is no way to directly stop it, change it, or censor it. It also removes the need for using a third party to transact between individuals. The blockchain network itself becomes the third party. One participant can send money or a message directly to another without going through a bank, card company, social media platform, etc. No company can dictate what is and isn’t allowed because there are no permissions involved. It is by its very nature permission-less. No government can print more of the currency, causing inflation. They can’t change the monetary of the currency. They can’t dictate who can and can’t use the currency. Blockchain technology provides the framework for a vast array of applications that all benefit from these inherent perks of the system.
Cryptocurrencies and Platforms
Cryptocurrencies are currencies built with blockchain technology. Platforms are just that- platforms built using blockchain technology as their foundation. It is not necessary to rehash the perks but basically, they are secure, censorship resistant, immutable, and available to anyone. There are a great many different options when it comes to cryptocurrencies and platforms. Each project has its own balance of attributes, its own methods, and its own goals. Some are Proof of Work, some Proof of Stake. Some have a fixed supply of coins and others don’t. Some are focused on privacy, some speed, some cost, and others security.
For cryptocurrencies, while they are all built using blockchain technology, they all have different functions and use the technology differently. Privacy coins mask aspects of a transaction so that the transaction remains private. This enables fungibility, where each coin is interchangeable with another, and single coins cannot be tainted by previous use. Monero, Zcash, and PIVX are examples of this.
Some cryptocurrencies are focused on being fast and cheap. Stellar, Bitcoin Cash, and Litecoin are good examples. This enables the to be used in a similar way as the fiat money most of us use on a regular basis. A merchant can’t sit around for 5 minutes waiting on a block to get processed and posted before getting to the next customer. In order to be used in everyday commerce, the currency need to be processed nearly instantly and at a minimal cost. Many coins now are roughly the same speed as the Visa or Mastercard networks with only a fraction of the cost.
There are other cryptocurrencies that focus on security and stability. This would be the camp of Bitcoin. It is slow to change, slow to transact, can have fairly high fees, etc. but it is extremely secure and stable (in its function, not necessarily its price in fiat). Theoretically, it is deflationary, meaning it becomes more valuable over time due to the limited supply and growth in demand.
Platforms use blockchain technology to enable even more functionality than just a currency. They can house many different currencies, decentralized apps, smart contracts, and more. Ethereum, Cardano, Polkadot, and Cosmos are good examples of blockchain platforms. Smart contracts are a key feature that essentially provide the ability to create a contract or transaction that can be executed automatically given the coded criteria with all the perks of using blockchain technology. Another key concept is tokenization. This involves creating representations of things on a given blockchain platform. This could be the title to a car, a bar of gold, an ID, or a cryptocurrency of another platform. NFTs (Non Fungible Tokens) are another popular use case where a token or coin is intentionally non- fungible so that it is always unique and can represent a unique piece of art, an item in a video game, an ID, or any number of other options. The use cases of these platforms are nearly limitless.
Blockchain technology began as a way to give more power and control to the individual. It was a fairly libertarian endeavor. The goal was to withdraw reliance on the system, both corporate and governmental, and instead be able to use a system that had no centralized entity in control. It was to enable the ability to transact and interact directly, even between individuals that don’t know one another, and be able to trust that the transaction will occur as intended and without interruption or falsification.
On the opposite side of the spectrum, blockchain technology is also being used by mega corporations and governments to create the ultimate control grids. Imagine if a government could know every single transaction a citizen made, throughout their entire life. If a “good government” were in control of this technology, it could just be used to gain efficiencies and effectiveness but historically, there is no record of a long term “good government” that didn’t fall into tyranny and corruption. Now expand these capabilities to not just money but communication, internet access, access to physical spaces, medical records, and more. Essentially, the government then has full access to one’s entire life. Since they control the blockchain, they can then cut access to anything they want or change any information they like. This is all because governments and corporations are developing centralized blockchains, not decentralized. Centralized blockchains lead to tyranny while decentralized blockchains are freedom.
For those interested in getting involved in the space, namely in acquiring some cryptocurrencies, tokens, or other assets, there are a few options and considerations. First, do you want a record of the purchase? If yes, then using a popular exchange like Coinbase, Gemini, Kraken, KuCoin, Binance, or others will be the easiest rout. They generally have optionality to use a credit or debit card, wire transfer, or directly connect a bank account. Another option is to use a Bitcoin ATM. These are located throughout most regions and provide a way to use a card or cash to purchase from an ATM-like machine. You will need to have a wallet to send the funds to once purchased and the fees are typically higher. There are connection sites like localbitcoin and localmonero that offer direct connections between buyers and sellers online. This comes with its own risks but allows the possibility of leaving very little trace of your purchase. The ideal format if you do not want a record of the transaction tied to you is to buy directly, in-person. This gives all the perks with little drawback, provided you trust the individual or at least set up some safeguards.
Getting a digital wallet is necessary so long as you won’t be storing your coins on an exchange. These wallets come with a “private key” that is a password of sorts that is the only way to access the wallet. DO NOT SHARE OR LOOSE THIS INFORMATION. It is the only access and therefore a loss means a loss of everything in the wallet. It is often advised to write down the private key (typically a passphrase) and store it in multiple very safe locations. Storing it digitally comes with the risk of hacks and being careless with physical storage has similar drawbacks. The most common digital wallets are multi-coin wallets meaning that they can store a variety of coins in them, not just a single cryptocurrency. Exodus and Trust Wallet are two very popular options. Once you have your wallet, you can have coins sent to you directly or transfer therm from an exchange, where control has been outsourced to the platform, to your own wallet, where you have full and sole control.
Why would one care about records? It is typically an issue of taxes or ideology. Some believe that digital assets are their property and are therefore out of the jurisdiction of any government or corporation. They want to hold their property privately and therefore, avoid having a traceable record of it. Many countries have tax policies that have financial implications for owning cryptocurrencies. In some jurisdictions, every transaction done using cryptocurrency, even just exchanging one for another, is a taxable event. Even if one uses a public exchange to purchase their coins, on record, there are strategies for trying to still achieve the ideological goals of an individual. Some will purchase a privacy coin that then masks anything done after the purchase. Some will purchase stable coins (pegged to fiat), transfer them out and possibly convert to a privacy coin, then use them as they please. Then if they need to bring coins back into the exchange and trade back to fiat, they first convert whatever they have back to stable coins and transfer these to the exchange. This way, so far as the exchange is concerned, you purchased stable coins then sold stable coins, with no price difference and no snooping on your personal and private actions.