Do Emerging Blockchain-based Currencies Change the Game?
In a recent article, we explored how the emergence of digital currencies is nothing weird; there is no ‘shock of the new’ – ledger-based currencies are an ancient concept. In this article I would like to go a step further and make the case that in many ways, digital currencies are an improvement on the current monetary system that underpins our economy.
Traditional currencies are a master class in opaqueness. To participate in an economy, corporations and individuals have one choice of currency and must adhere to the local currencies rules and regulation. The rules under which the currency operates are often complex, and can be changed at any time and without warning to suit the needs of governments or influential interested parties. Currencies are closed by definition, and controlled by governments, their treasury and the force of law. Given the critical role of our currency systems and the importance of trust in the exchange of monetary value, does it make sense for a currency to be so vulnerable to political whim?
Free at Last – Bitcoin’s Evolutionary Strength
The foundational rationale for Bitcoin, the first superstar digital currency of the modern era, was freedom: a currency free from political interference and pandering to special interest groups. No individual nor organization has overall control. The currency live or dies on the merits of its code base and ability of its developers to withstand potential attacks. Bitcoin has hard coded rules on its operations, with these rules publicly available so anybody can check them; if you don’t like the rules, you don’t need to play.
There are no guarantees. Bitcoin has, of course, been the subject of many attacks and scandals, but it is the ability to fix and maintain trust in the currency that counts. One of the most famous issues with Bitcoin came with the Mt. Gox affair over two years ago. A technical glitch in the Bitcoin wallet (a shared centralized service not fundamental to the decentralized currency itself) allowed the underlying blockchain to be flooded with fake or disputed transactions. At the time, Mt. Gox was the leading Bitcoin exchange and the default exchange for the majority of business users. The wallet glitch and subsequent flood of fraudulent transactions caused Mt. Gox to cease operations and later to stop business altogether as the investigation proceeded into their questionable accounting practices and lax security controls.
The issue was quickly patched by the Bitcoin developer community, with a full source code update following a few days later, but all too late for Mt. Gox. Bitcoin is the first global open-source digital currency and inevitably some teething problems will occur. Bitcoin continues to be updated and builds-in ever improving mechanisms to prevent fraud and denial of service attacks that adapt as the market develops. The most important thing is that the problems are fixed quickly so that trust in the currency is regained. The open-source nature of digital currencies is actually their strength – their very transparency is their savior.
Growing Family of Digital Currencies
Bitcoin may be the household name in the digital currency business, but there are many others that have emerged to offer alternatives based on the open-source blockchain model. A fundamental difference from conventional currencies is that instead of having a closed group of special interests deciding on how a currency operates, for the first time we have the smartest people in the room administering and resolving issues, all the while enhancing and improving operations; a global community of developers, well meaning and bright, with a membership open to anyone with even basic skills. The result is a more resilient, nimble currency that is more responsive to what ever comes along – good or bad.
Bitcoin is the mother of all cryptocurrencies and many of the upcoming and startup cryptocurrencies are revolving around Bitcoin itself. Dash (formerly Darkcoin and XCoin) is an open source peer-to-peer cryptocurrency that offers instant and private transactions. Dash focuses primarily on anonymity, which has led some to accuse it of encouraging use by criminals. But Dash is expected to slowly branch out which is likely to cause the value to sky-rocket. Supply and demand is important. There are only about $6,500,000 coins available – not enough coins to meet demand.
Ripple is not strictly a currency. It is in fact a shared, public database, or ledger, that allows for payments, exchanges and remittance in a distributed process. Ripple tries its best to keep it free of charge for any sort of exchange or trade, and has been successful in attracting big banks to their system with professionalism and high quality development being their cornerstone.
Inspired by and technically almost identical to Bitcoin, Litecoin creation and transfer is based on an open source protocol and is not managed by any central authority. Litecoin has been around for a long time and has been successful at keeping a healthy value. Its long-term success is attributed professionalism, quantitative flow and fundamental trust, it is now third in terms of market capitalization to Bitcoin and Ethereum.
Finally, the second most prevalent player after Bitcoin is Ethereum, a public blockchain platform that executes peer-to-peer contracts using a cryptocurrency called ether. Many other emerging cryptocurrencies are using Ethereum’s system to run other cryptocurrencies. Ethereum is attracting many new investors, banks, politicians and consumers – this could be the future mainstream cryptocurrency.
A Global Currency Future
Self-repair and a fundamental transparency of operations is as powerful evolutionary advantage, and digital currencies are loaded with both. Established currencies linked to dominions or nation states have underpinned the march toward a global economy. But are we approaching a time for truly global currencies that are unrestricted by such archaic notions as domestic politics?
As markets become borderless, maybe it is time for currencies to follow suit. With an open source basis, emerging digital currencies are ideally placed to facilitate secure international transactions through trusted and transparent processes. Will digital currencies really offer global businesses an improved alternative to traditional currencies?
What do you think?