Adapted and reproduced from Mark Closter, an undergrad studying at the University of Michigan.
I’m a student in the US studying computer science. I’ve been interested in blockchain technology for a few years now, and whilst I am not an expert, I consider myself to be quite well versed in the technology and its socioeconomic impacts. In this post, I’m going to share my sentiments on the future of blockchain – specifically, why I think it has massive potential for success.
I truly believe that blockchain will democratize value, in the same way that the internet democratized information. It is no doubt that today, much of the world revolves around the internet. It reshaped the way in which we communicate, search and collaborate, and its far-reaching implications significantly reduced the expenses associated with commerce. The internet is among the finest examples of human innovation.
Despite its positive impacts, it still has serious limitations for economic and business activity. TCP/IP, the internet’s basic communication protocol, has no intrinsic requirement for identity. Looking at the net strictly as a protocol, nobody really knows who users are, and you cannot readily determine the identity of anyone. IP addresses identify systems on a network, but beyond being a string of decimal numbers, they provide little information about who is actually behind a given system.
Limitations of Traditional Financial Institutions
For exchange of value, this presents a particularly insidious problem: how are we to transact with one another if we cannot establish trust? Historically, the solution has been to seek validation from third party intermediaries, such as governments or banks. Harmless as they may appear, a deeper look into these organizations will reveal that they are not all that innocuous.
With a tool as powerful as the internet, it should have been clear that powerful interests would usurp it for their own gain. Time after time, these intermediaries have demonstrated that the collection and sale of user data is a profitable business model, despite its questionable ethics.
Of course, this is not the only problem. Sadly, it appears as though the global financial system is stuck in paper-based limbo. Whilst other industries are moving forward in great strides, the banking industry, instead of working on innovative new solutions to economical issues, seems to be fixated on duct-taping new technology atop existing infrastructure. This results in slow, unsustainable systems. Contactless payments are a prime example — these kinds of transactions clear instantly but take days to settle. Anecdotally, it takes somewhere around 4 days for the money to actually be removed from my account using contactless.
But the deficiencies don’t stop there. Banks are exclusive, and they prevent a large proportion of the population from opening bank accounts simply because they do not view it as a profitable proposition. Banks also impose exorbitant transaction fees, particularly for remittances and international transactions, and chargebacks create a looming anxiety for credit fraud, where payments are mischievously reversed.
Do we need reminding that we’re living in the 21st century? In 2017, you’d expect transferring money be instantaneous and easy. For the uninitiated, it is sluggish and often expensive. However, a solution does exist. Blockchain technology is empowering a global, decentralized economic system which will change the way that businesses and people alike will exchange value and engage in the sharing economy.
A blockchain is a global, distributed ledger of information, which when applied to transactional data is referred to as a cryptocurrency. Many different cryptocurrencies exist, and they are already a rapidly growing market. The asset class has a market cap of over $100bn as of early August 2017 and shows no signs of slowing down. Day by day, cryptocurrency is growing in popularity and favor. I believe that digital currencies such as Bitcoin will, in the next 20 years, supersede fiat currencies and offer inclusive financial sovereignty.
What We Stand to Gain
I like to describe blockchain technology as the next generation of the internet. Blockchain offers far more than just digital currencies – implementations exist allowing for trustless accountability, digital identity, distributed file storage, reputation systems, and much more. However, for the sake of this post, we’re going to keep it simple and look at what the future of blockchain technology offers in the more traditional Bitcoin implementation.
For a start, payments are fast. Payments between banks are generally slow, since the bank keeps the money in ‘float’ for a few days since it cannot guarantee that the funds are readily available. Bitcoin transactions take roughly 10 minutes to confirm, and 60 minutes to be grounded in the blockchain to the point where it’s practically impossible to reverse them. For comparison, remittances through a bank take around 3-7 days.
In addition to this, the speed at which transactions are processed does not discriminate against geographical location. Banks almost always process remittances slowly and charge extortionate transaction fees for them. With Bitcoin, all transactions are treated as equal, whether you’re transferring money halfway across the world or transferring money to your neighbour.
Secondly, transaction fees are minimal. Debit transactions through a banking institution incur a fee. A Bitcoin transaction is extremely cheap, or if you want, gratis. Transaction fees in Bitcoin are discretionary. You can make them as little or as large as you want. Higher transaction fees mean faster payments, but ultimately they aren’t necessary.
Thirdly, there is no risk of chargebacks. Once Bitcoins are sent from one address to another, it is infeasible to reverse the transaction. Extremely powerful interests might be able to reverse transactions with a 51% attack, but rest assured, they would need to control over half of the entire network to do this. There is a financial deterrent; the money required to override the network is far greater than any possible reward that can be achieved. Besides, after around 6 block confirmations the transaction becomes extremely difficult to reverse even if an attacker controls a significant portion of the network.
Fourth, the entire system is trustless. There is no bank that you have to trust. There are, quite literally, no third party intermediaries. Like TCP/IP, there are no identity requirements either: you can tell the world as little or as much as you would like about your persona.
And finally, you actually own it. If you own some quantity of Bitcoin, nobody can take that away from you. A bank doesn’t own your account, and your money isn’t controlled by a state or government. Your money is completely in your control – do with it what you want.
The Future of Blockchain
Many people don’t understand cryptocurrency, let alone consider using it. The truth is, the technology behind these currencies is very powerful. As well as democratizing value, it creates a financial solution that is fast, inexpensive and inclusive. Beyond this, the technology has much more to offer: decentralized reputation systems, digital assets and immutable accountability logs are all made possible through the blockchain.
All of this combines to form quite an amazing thing. Cryptocurrencies offer true inclusivity; anyone, anywhere can exchange value and all they need is a computer/smartphone and an internet connection. It doesn’t matter who you are: you cannot be denied your financial sovereignty.
For those living in the financially stable countries, the value proposition of cryptocurrency is not always clear. Those living in more chaotic countries such as Venezuela or Belarus can appreciate the technology more because they have witnessed first-hand the devastating effects of corruption and hyperinflation. A currency that is distributed and is not tied to any particular government is a blessing to many of these people.
In some countries, the situation is very bad – residents of Nicaragua, for instance, use living pigs as a literal store of value. Apart from the obvious issues, such as how you cannot divide a pig or transfer it easily, biological organisms are subject to disease and are guaranteed to die of old age. Why do they settle for pigs? Only around 20% of the Nicaraguans have a formal bank account, and even fewer can borrow and keep savings. However, with around 90% of Nicaraguans having a mobile phone subscription, cryptocurrency offers viability to their predicament. Cryptocurrencies give those living in financially unstable or otherwise poor countries a store of value which is inclusive and libre. They could even use it to hedge against an economic crisis.
I believe the future of blockchain is very bright. Despite the negative press it has received over the past few years, acceptance is on the rise. I’m excited to see what the technology can do for us next.