The New Frontier with Bitcoin & Cryptocurrencies
Blockchain allows efficient tracking of resources and transactions in a more transparent way, while Cryptocurrencies complement the ecosystem by offering people a means to transact without any intermediaries.
Before the advent of Bitcoin (BTC) and cryptocurrencies in the financial market, the global economy relied on Fiat currencies such as US dollars for transactions, investments, and other forms of value exchange. It was not until the Great Depression that people realized that government-controlled fiat currencies were no longer as reliable as initially thought. In March 2020, US legislators passed a bill to save the US economy by printing more US dollars into the federal reserve.
The trust in government-controlled fiat currencies has also eroded in developing nations such as Zimbabwe and Venezuela, where hyperinflations occurred due to heavy money-printing and deficit spending in the hope of salvaging their dying economies.
Bitcoin, the first digital money (popularly referred to as Cryptocurrency) ever created to shift the power from centralized authorities such as governments and private organizations back to the people, is revolutionizing the concept of money. In response to the 2008 financial crash, an anonymous figure or entity called Satoshi Nakamoto published the Bitcoin paper in 2009, which has since given renewed hope to the people. The intro, as seen during the 2008 Great Depression, has prompted the people to devise an alternative plan in the case fiat currencies fail in the future.
Growing Use of Bitcoin and Other Cryptos
In countries like Zimbabwe, there is a growing interest in using Bitcoin and other cryptocurrencies over their national fiat currency. Some economists believe that cryptocurrencies will likely disrupt the African continent with the new form of money. Since Bitcoin and other cryptocurrencies are not bounded by geography and government regulations, they are likely to emerge as the new go-to currency for various transaction needs in the country and later influence the rest of the continent to follow suit. Most importantly, Bitcoin and other cryptocurrencies are less volatile when compared with their national currency. Users in Africa have also used Bitcoin mixers, a crypto mixing service, to protect themselves from revealing their transaction data to prying eyes. That is because when Zimbabwe’s inflation skyrocketed in 2015, the government was forced to print 100 trillion dollar notes, kicking off the irreversible hyperinflation of the local economy.
In recent years, more governments and private organizations have learned about the benefits of blockchain technology. They are coming up with projects that could replace traditional commerce and financial systems in the following years. For instance, China aims to create the world’s first national Cryptocurrency, driven by the risks involved by having contact with infected notes and a population with heavy reliance on digital payments. Another reason is that the national Cryptocurrency will allow a level of traceability that would be inconceivable with physical cash. In addition, compliance solutions such as blockchain analysis would enable the collection of personal information by organizations such as the government to facilitate tracking illicit activities.
The Disruptive Blockchain
Disruptive technology has brought about a suite of innovative solutions, such as mixing services and a platform that allows any two parties to digitally transact using an immutable, constant update, distributed ledger. In the case of Bitcoin, no single authority is relied upon to oversee the network since the updates were performed by a globally distributed group of miners who verify Bitcoin transactions (blocks were mined for every successful verification) and get rewarded with Bitcoins. After the 2020’s Bitcoin halving event, every mined block will be rewarded with 6.25 Bitcoins every 10 minutes, half of what miners received before the halving event.
Since Blockchain removes intermediaries like the financial institution, this has implicated traditional intermediaries such as auditors and lawyers, making third-party services obsolete in the future. For instance, businesses using third-party payment processors like Visa or Paypal are charged up to 5 percent for every transaction. Likewise, remittance firms like Western Union and Moneygram were utilized largely for the unbanked populations, charging over 10 percent for every transaction that requires up to a week to successfully process the payment. Unless these intermediaries adopt Blockchain for their businesses, these entities may resemble the eventual demise of travel agents in the ’90s. Combining Blockchain could certainly reduce infrastructure costs while enhancing transparency, traceability, and security.
Other potential use cases of Blockchain could be feasible in logistics, healthcare, and even retail sectors. Although Blockchain seems to be on track to disrupt the traditional global systems, certain flaws require further improvements.
Existing Flaws of Blockchain
The cost of blockchain mining, an essential process to keep the Blockchain operational, was regularly covered by mainstream news outlets. For instance, Bitcoin uses the widely-used Proof-of-Work (PoW) consensus algorithm to ensure that miners are rewarded for processing all transactions on the Bitcoin network. The downside of operating the mining hardware is the high power consumption required to mine Bitcoins. It has been estimated that global Bitcoin mining consumes about 42 terawatt-hours, similar to the annual consumption of countries like Hong Kong or New Zealand. Luckily, other consensus algorithms, such as Proof-of-Stake (PoS), could resolve the power consumption issue. However, implementing them on Bitcoin, Ethereum, and other prominent blockchains requires a consensus of the respective mining community, who will address different issues and challenges regarding the change in the mining consensus of, say, Bitcoin.
In the event of a likelihood where mining syndicates were formed and perform a 51% attack, the entire Bitcoin system may be prone to hacks and other malicious consequences. Another point to note is the scalability of the Blockchain, which needs to be addressed as the adoption of Bitcoin and other cryptocurrencies grow. Bitcoin can currently only process roughly seven transactions per second (fps), which is way less efficient than traditional intermediaries such as Visa, which could process more than 50,000 tps.
Mitigating Privacy Concerns
In response to the growing attention to Blockchain, Bitcoin, and other cryptocurrencies, countries that support the novel technology have introduced strong regulatory measures such as restricting trading in cryptocurrencies to counteract various money laundering and criminal activities involving Bitcoin and other cryptocurrencies through exchanges and bitcoin mixers. The infamous Silk Road case has gained regulators’ attention, further affirming their beliefs in coming up with the right regulatory approach to blockchain technology, Bitcoin, and other cryptocurrencies.
Revolutionizing Privacy in the Digital Age
As distributed ledgers like Bitcoin’s have the potential to enhance economic efficiency, defend against fraudulent activity and improve data quality and governance, increasing regulations by governments and private organizations could pose certain privacy issues for users of Bitcoin and other cryptocurrencies which do not intend to go against the law, but are prone to having their personal information exposed to unwanted parties. Numerous privacy-related tools are created to protect users’ privacy and anonymity to address such concerns.
The United Nations have recognized privacy as fundamental human rights, especially in this digital age. Fortunately, there are various privacy measures an individual can undertake, such as using VPNs or Bitcoin mixers to obfuscate the transactions and break the links between the sending and receiving bitcoin addresses through the bitcoin mixing processes. Such services are growing in prominence as government bodies strengthen their control over regulating cryptocurrency transactions.
Shifting the control back to the People
While transactions of many cryptocurrencies such as Bitcoins are not anonymous and are publicly viewable on the Blockchain, useful privacy tools such as a Bitcoin mixer will also mitigate the risk of unnecessary data leaks of one’s personal information, transaction activity, and even basic liberty as a citizen of the modern world. Governments and other private organizations may gradually regulate the emerging new ecosystem of Blockchain and Cryptocurrency. Still, the next decade will see greater control of personal information, transaction records, and eradication of intermediaries, ushering in a new era of mankind in the digital age.