There are so many questions around cryptocurrency. What is it? How does it work? Which ones are good or bad? What is blockchain? All of that can lead to brain overload, but I am here to help. Let’s start with blockchain. Chain CEO, Adam Ludwin, explains, “to me blockchain is two very different things. On the one hand – it’s a very simple technical answer – it’s a new type of data structure, just a way to store data. That’s one extreme, and that’s true. At the other extreme, in a much more conceptual sense, it is a new internet counterculture. It’s both of those things.”
Confused yet? So how does it relate to cryptocurrency? Ludwin goes on to say “the best way to understand cryptocurrency is that it’s a new asset class. Every other asset class doesn’t exist for its own self, it’s serving other forms of organization. Think of equities as an asset class, they support companies; think of government bonds, they support government borrowing; or real estate, [it supports] property owners. Cryptocurrencies are no different. They’re enabling some higher form of organization, and what that is, is basically decentralized software. Cryptocurrencies enable decentralized applications.”
Ludwin also explains how Bitcoin is actually different from other blockchain assets because it is three things simultaneously. Is this news to anyone else?
- Bitcoin Miners – these are people who provide the computing power to process financial transactions on behalf of a network. They aren’t doing this for fun, or the kindness of their heart. They are getting paid for it. Bitcoin mining takes up a lot of processing power, so it makes sense that they would need to be reimbursed for the resources they are using.
- Bitcoin Transfers – when you transfer Bitcoin (or even just a fraction of them) to other people, you incur fees. (Which can also take the form of fractions of Bitcoins). Blockchain payment products, like Stellar, are designed to only address transfer fees.
- Lastly, the thing that makes Bitcoin valuable is the “thing” you’re sending on the network.
Does this make cryptocurrency any more clear? I think there are two things that make this so confusing for people (or maybe it’s just me). The first is the technology. In essence, you are virtually mining for the coin, but it’s not all that tangible. Sure, you can see the numbers going up and down on your software or app, but you can’t really hold it in your hand. What is the second thing? Cryptocurrency isn’t controlled by anyone (for the most part). There aren’t any businesses or governments that are really controlling it. Sure, some are starting to regulate it, but that’s nothing.
Bitcoin has value because there’s a limited amount out there. So, if you want to compare it to something like gold, you can. Blockchain validates the existence of the Bitcoin and then verifies the owner of the coin. Cryptocurrency is the way of the future, so we should really try to understand it better.