From White Paper to Financial Innovation
Image Credit - Bitrefill
The biggest catalyst for the birth of today’s cryptocurrencies came from a 9-page white paper published by Satoshi Nakamoto, a pseudonym name for an anonymous person or group, in October 2008. This document ultimately lead to the creation of the world’s leading digital token, bitcoin, by explaining in detail the critical concept that digital currency (‘value’) can be transferred electronically, both accurately and securely, between two parties (peer-to-peer) without intermediaries.
The view of currency and the financial system has forever changed to one that is digital, available globally, free of 3rd-party interference, and transparent. Despite the high volatility of digital currency markets, and its lack of everyday use as a true currency, bitcoin (and other crypto) is still a revolutionary store of value that is expected to have long-term, ongoing impact in the world’s financial systems.
In the Aftermath of the Financial Crisis
Ten years ago, the world’s economies were reeling from the Financial Crisis. Banks and other institutions had participated in high-risk activities that had misled investors, mortgage holders, and government agencies. The general public had lost trust in the leadership at these companies, and regulators implemented strict guidelines to avoid future economic damage.
In this backdrop of distrust in financial institutions, lack of proper government oversight and prevention, many welcomed alternative solutions to the status quo of monetary policy. The theory of an independent digital currency called bitcoin was welcomed as a revolutionary model in the future of finance, as it sought to eliminate third-party intervention which had increased transaction expenses and left controls in the hands of executives and central bank authorities.
Learnings from Previous Attempts at ‘Electronic Currency’
Earlier attempts in digital currency were developed in the 90s, starting with “Ecash” (from a company called DigiCash), followed by others like “Hashcash” (developed by Adam Back). These earlier attempts had limited success in addressing some common currency issues such as:
double spending (e.g. verifying when currency was already used);
splitting currency into smaller denominations;
identity security (keeping the owner anonymous); or
avoiding a governing platform or entity being involved in the settlement of every transaction (and charging a fee).
Ultimately, merchants (and their lack of participation) were a key component in adoption of these early currency alternatives, and without their full support, customers had no use for electronic cash — using traditional credit cards instead.
Why Bitcoin was Different
In order to avoid a third-party intermediary and the other listed issues, bitcoin relied on blockchain technology (an innovative digital, decentralized public ledger of transactions) in which each user plays the part of trusted authority and record keeper. Each transaction contains a unique cryptographic hash key (encrypted user code) composed of keys from a recipient, sender, and transfer amount. Once all the transaction details are submitted, the record gets sent to the network for confirmation.
In this network, miners have the responsibility of transaction confirmation by providing solutions to a cryptographic puzzle. Transactions that are accepted are then sent throughout the network as a connecting point and additional entry. “Proof of work” determines how these entries are clustered in blocks, which are then linked together in a chain. These posted records cannot be altered or cancelled (creating independent trust and control), and the miner who solved the puzzle gets paid in bitcoin for their involvement.
Despite the inherent security of the blockchain platform that helps avoid fraudulent entries or tampering of records (which would require changing each previous transaction that took place), there is still a vulnerability mentioned in the document. The 51% rule: As long as the network maintains a 51% consensus of fairness, meaning that over half of the nodes on the network are not colluding to post fraudulent transactions, each entry will continue to be valid and secure. However, the incentive for ‘miners’ to be paid with new bitcoin for their work would likely prevent this from happening as the value of their own previously gained holdings would be greatly diluted or lost.
Since the launch and continuous growth of Bitcoin around the world, other cryptoassets have been created as a means of exchange, startup investment (through ICOs), and holding assets. As the current era of cryptocurrency expands its global awareness through popular exchanges such as Coinbase, Robinhood, and Kraken, there is still much development to wait and see when it comes to long-term impact and future growth.
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