Cryptocurrency for the future? Problems and possibilities
The world is entering what futurists call a tipping point, as blockchain cryptocurrencies change how we do business.
By 2023, research suggests, it’s not unrealistic to predict we could be living in a fully cashless society – but fully digitised transactions are difficult for most of us to grasp.
Digital currencies operate at low costs without third-party intermediaries. It’s a paradigm shifting idea that that could cause traditional banking controls to not exist. Few are able to imagine a world without traditional banking systems, where companies are able to control who has access – and who sees what.
The most well-known cryptocurrency is Bitcoin. It’s the first digital currency to achieve worldwide adoption, after its introduction in 2009. Bitcoin today sits in over 42 million users’ virtual blockchain wallets.
Bitcoin was not a new idea – like other innovations it builds on learnings of those who came before. Before Bitcoin, cryptocurrencies were being developed in full force from the as early as the 1970s when the internet was becoming a reality, and when fear about online surveillance and privacy was starting to emerge.
As cryptocurrency innovations are taking place at a faster pace than previously considered feasible, let’s pause and pay homage to some of the key challenges solved along the way with emerging cryptocurrency options, with a look at the key challenges and thinkers who have played a part in this development.
Cryptocurrencies – before their time
1989 – David Chaum, proposed an alternative to the electronic transactions that operated in many retail stores at that time. Setting the stage for digital currency, his proposal included now common crypto concepts like blind signatures and using public key cryptography to enable anonymity. These methods are now regularly used to prevent third parties from accessing personal information through online transactions.
Years later, Chaum attempted to commercialise his ideas under the DigiCash label. In 1994 he created a product where users were able to carry out their first electronic cash transactions over the internet. DigiCash struggled to become profitable – and Chaum filed for bankruptcy in 1998. Chaum recognised that the problem was that e-commerce was not yet fully integrated with the internet. In a 1999 interview, he stated, “It was hard to get enough merchants to accept it, so that you could get enough consumers to use it, or vice versa”.
De-identifying and de-centralising electronic cash
1998 – Wei Dai proposed B Money, a mechanism that allowed transactions to be monitored while ensuring server networks are trustworthy.
A subset of network servers – aka participants – were used to keep track of how much money is owed by each account. As a way of protecting the integrity of the system each server would deposit a certain amount of money into a special account that could be used for fines for proof of misconduct, or even rewards for successful transactions. Participants would verify when transactions were received and processed by a randomly selected subset of the servers.
Issues of intent
2002 – Adam Back proposed Hashcash a cryptocurrency that he hoped would solve the widespread distribution of spam email or denial of service attacks.
His ‘proof of work’ concept required the sender to spend a small amount of time solving a text based encoding puzzle before sending the email out, thereby weeding out those with frivolous or malicious intent.
Networks of trust
2005 – Nick Szabo proposed Bit Gold, another decentralised digital currency. Szabo’s motivation was to address his main gripe: that traditional financial systems require a strong trust basis, thereby enabling problems like fraud and theft.
Using a proof of work style consensus, cryptographic puzzles attached to the public key are sent via a peer-to-peer network. This design secures groups of transactions by calling on network users to agree with previous puzzle solutions before being able to solve new ones. It set the bar for a model of cryptocurrency with increased security, that operates on more than mutual trust. One of the limitations of this model is that it fails to protect against network vulnerabilities though, especially attacks where one party controls nodes to manipulate the network (known as Sybil attacks).
2008 – Satoshi Nakamoto, the given alias of an untraceable individual or group, proposed Bitcoin. Bitcoin promised lower transaction fees while being operated by a decentralised authority.
Importantly, Bitcoin solved the double spending problem associated with cryptocurrencies: the risk that a single token is used multiple times for purchasing. It does this by using blockchain – a ledger that records and keeps track of network transactions. Time-stamped transactions are recorded chronologically, as each block of accepted transactions is generated, with the participating computer servers responsible for the system’s integrity. The strength of this is that if someone wanted to double spend Bitcoin, they’d have to trace back through all transactions made after their transaction – a technique known in the crypto sphere as “computationally impossible”.
Despite some initial teething problems, Bitcoin is today the world’s largest cryptocurrency by market cap. It ranks highly on popularity and has triggered the launch of hundreds of subsequent digital currencies.
Cypherpunks – challenging the status quo
Rather than aiming to empowering just the technically-skilled, the cryptography innovators were motivated by using cryptography to empower individuals in the internet age by building open source systems and defending public privacy. Many of them belonged to the Cypherpunk movement, a crypto-activist group officially formed in 1992.
Whether or not cryptocurrencies are an inevitable part of our social and financial future will depend on the choices we make as citizens, consumers and business people.
If cryptocurrencies were to become the new norm, we’d have to think about what a modernised payment system might look like, and this will require careful consideration. Doubtless the cryptocurrencies will have to deal with pushback from businesses, financial regulators and governments who don’t see it as fitting with their model. There are big questions questions at hand. Could we protect groups who are currently unprepared? What would the commercial banking system look like? How best to protect against the significant threats of money laundering?
Thirty years on from the beginnings of Bitcoin, a robust system of what this might look like is still being established.
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