Cryptocurrency and Blockchains - by Paul

Introduction

What is Cryptocurrency.

Cryptocurrency is a way to trade currency and other assets digitally, independent of any third-party entity, such as a government or bank (Royal & Voigt 2021). These transactions take place on a decentralised ledger system called the blockchain. The first cryptocurrency was Bitcoin, and it remains a leading digital currency, along with Ethereum, XRP, and others. Additionally, cryptocurrencies are frequently used to facilitate grey and black-market transactions, so many countries view them with distrust or outright animosity (Martucci 2021).

What is Blockchain.

Voight (2021) describes a cryptocurrency’s blockchain as the master public ledger that records and stores all prior transactions and activity, validating ownership of all units of the currency at any given point in time. Voight (2021) also goes onto how it works by explaining a blockchain has a finite length which contains a finite number of transactions, that increases over time. Identical copies of the blockchain are stored in every node of the cryptocurrency’s software network which is the network of decentralized server farms, run by computer-savvy individuals or groups of individuals known as miners, that continually record and authenticate cryptocurrency transactions. A cryptocurrency transaction technically isn’t finalized until it’s added to the blockchain, which usually occurs within minutes. Once the transaction is finalized, it’s usually irreversible.

Unlike traditional payment processors, such as PayPal and credit cards, most cryptocurrencies have no built-in refund or chargeback functions, although some newer cryptocurrencies have rudimentary refund features (Martucci 2021). During the lag time between the transaction’s initiation and finalization, the units aren’t available for use by either party. Instead, they’re held in a sort of escrow. The blockchain thus prevents double-spending, or the manipulation of cryptocurrency code to allow the same currency units to be duplicated and sent to multiple recipients.

State of the Technology

As of April, according to Martucci (2021), there are over 10,000 different types of cryptocurrencies. These different types of cryptocurrencies generally fall into one of two categories:

• Coins, which can include Bitcoin and altcoins (non-Bitcoin cryptocurrencies)
• Tokens

Tokens vs. Coins

Encrypted coins and tokens can fall under the heading of crypto, and generally they can be listed into two sorts of cryptocurrency: alternative cryptocurrency coins (Altcoins) or tokens (Martucci 2021).

Altcoins usually refer to any coins that are not Bitcoins. Bitcoin is a popular digital currency that’s produced by computational solutions to complicated math problems. It works separately from a central bank or state entity (i.e., government-backed Treasury).  Some altcoins that exist for example are Peercoin, Litecoin, Dogecoin, Auroracoin and Namecoin.

Though most altcoins are built upon the same basic framework as Bitcoin, many of them claim to be better versions of Bitcoin. Each system can differ from the next, as they’re created to serve various purposes and applications, and identified in different ways.  Some coins don’t work with the same open-source protocol that Bitcoin does, however for example, the following list of cryptocurrencies have created their own separate systems and protocols: Ethereum, Ripple, Omni, NNXT, Waves and Counterparty. All these cryptocurrencies are also each self-supporting too.

Unlike altcoins however tokens are created and given out through an Initial Coin Offering, or ICO, very much like a stock offering. They can be represented as value tokens (Bitcoins), security tokens (to protect your account) or utility tokens (designated for specific uses).

They are not so much meant to be used as money as they are used to describe a function. Like American dollars, they represent value, but they are not in themselves of value. Tokens are a type of encryption, specifically referring to the long lines of numbers and letters representing the crypto used in a transaction, such as a money transfer or bill payment. In short, tokens cover several meanings. For instance, both Bitcoin and Ether (from Ethereum) are considered crypto tokens.

What is the likely impact?

Throughout the past decade or so, there has been an increase in the popularity of cryptocurrency. Cryptocurrencies revolutionise the way we store money, pay for goods and services, and do business. Additionally, there are other ways that cryptocurrency can make our economy and society a better place i.e., making transactions more private and efficient. According to Tore (2021) the idea of implementing a digital currency into our society is innovating our society with incredible efficiency and would never of had the opportunity to make international cashless transactions so not just will the economy benefit from this but also the social constructs of our society.

There are also negative contributions to consider with cryptocurrencies and one attribute that stands out is the environmental impact. From a sustainability perspective many professionals recognise that these coins are on decentralised network therefore they require much more resources including energy to operate, therefore how sustainable can they be (Goncalves 2021). Although cryptocurrencies only take up a minor portion in comparison to the banking systems, if left to grow, DigiEconomist founder Alex De Vries says, “he’s never seen anything as inefficient as Bitcoin” (Cuen 2021). The demand for expansion on coin miners and the equipment they use will end up costing the environment a lot of energy as according to Statista (2021), 1 Bitcoin transaction could consume as much as several hundreds of thousands of VISA transactions, seen in Figure 1.

Overall whilst cryptocurrencies are very exciting and well worth the investment purely to connect society and innovate our trading systems; we must consider the development in the use of energy and the resources required in mining of the data.

Figure 1: Bitcoin average energy consumption by Statista 2021

How will this affect you?

I am personally investing in a token called Shiba Inu (2021). The Shiba Inu market is very volatile as it is still in its infancy. 1 Shiba Inu token is valued at approximately $0.00001152000000007373. It is estimated by the year 2025 that the value of Shiba Inu will reach $1 value per unit. As with all Bitcoins and Tokens, this is only a forecasted estimate as the buying and selling of tokens and coins dictates the market price. I have been investing in Shiba Inu for approximately 1 month and my initial $100 investment has gone up to a high of $105.64 down to a low of $89.67; it appears that the more people buy the Tokens, the more the value increases and if people sell their tokens the value decreases. My $100 investment gave me 8,680,555.555 Shiba Tokens so if this increases to $1.00 in value I will be set for life.

As with all types of market investments, you must be comfortable with losing your investment in the case of a market crash. You must only ever invest what you are willing to lose.

References:

AU Essays 2020, The Impacts of Crytocurrency on our Society and Economy, AU Essays, viewed 12th July 2021

Cuen, L 2021, The debate about cryptocurrency and energy consumption, Tech Crunch, viewed 12th July 2021

Martucci, B 2021, What Is Cryptocurrency – How It Works, History & Bitcoin Alternatives, Money Crashers, viewed 13th July 2021

Royal, J & Voight, K 2021, What Is Cryptocurrency? Here’s What You Should Know, nerdwallet, viewed 13th July 2021

Shiba Inu 2021, Shiba Token, Shiba Inu, viewed 14th July 2021,

Statista 2021, Bitcoin average energy consumption per transaction compared to that of VISA as of July 13, 2021, Statista, viewed 13th July 2021

Tore, O 2021, How Society will Benefit from Bitcoin, ftn news, viewed 13th July 2021

Voight, K 2021, What Is Blockchain and How Does It Work?, nerdwallet, viewed 13th July 2021,