Bitcoin just hit new highs in price. It has been used by hackers as ransom payment to release stolen data. Ethereum is one of the leading ways to raise capitol for digital startups. Blockchain technology is helping people remember to take their medicine, and rewarding them for doing so on schedule. Estonia is creating its own national cryptocurrency. Smart contracts allow total strangers to utilize the same market, without ever meeting and transact with total trust in the product and payment.
You’ve probably heard of Bitcoin, cryptocurrency or blockchain, but many of you may not know what it means, but it is important. As cryptocurrencies grow in popularity, it becomes necessary to understand them as we move into a new economy. By reading this, you will learn more about what cryptocurrencies are, in laymen’s terms, and the implications they will have on economics and politics.
What does all this mean?
Blockchain technology is basically a ledger of records and transactions that is constantly growing in “blocks” that is secured using cryptography. It is often decentralized, especially in the world of cryptocurrency. Each bit of information is grouped into a certain size “block,” maybe 1 MB or 1 GB, then is added to the chain. Hence, the name blockchain.
Cryptocurrencies are digital money that use this technology to verify transactions. Each user has a wallet that has unique and random means of identification. In other words, it doesn’t require a name, address and email to take part, although some platforms might ask for this. These currencies are independent of governments, and often impervious to regulation due to their decentralized nature.
Smart contracts are a means of verifying a transaction. Both the customer and seller put a stake into a transaction through a smart contract software. Once the task is completed and the customer is satisfied, the seller receives their stake in the transaction back and payment, and the customer receives their stake as well. Then, both receive some sort of token verifying they completed the transaction to attest to their citizenship in the software. Uber uses technology like this. The driver isn’t paid until the ride is completed and both parties rate each other for future reference. The difference is, smart contracts can be done anonymously.
Crypto is just a short-handed term for cryptocurrencies. It will be used in the article interchangibly, but it is not specific to one currency, rather it encompasses all digital currencies utilizing blockchain technology.
The economic implications will be enormous. With money as the basis of an economy, changing the monetary system will alter the way an economy functions. The uprooting of monetary systems is not new. America has gone from every bank creating its own currencies, to a gold and silver standard, to the gold standard, to the fiat system currently in place. The one thing it has not had in over 200 years is a decentralized form of money.
The decentralization and digitization of money is what will upend the current system. Like early America, the decentralized currencies will be competing for “customers” or “users” which will provide them value. The value of the money will rely on what benefits they offer those who use the money. The difference is that now there will be an ability to verify the money. When this money system was tried last, the major problem was bank notes being issued in Maine were hard to spend in Georgia because they could not be proved to be real, but blockchain and smart contracts eliminate that risk.
Crypto will also grow the grey market. Instead of paying cash or with PayPal to buy an old couch off of a buddy, people can use crypto and not worry about the implications of the transaction. This will make it hard to centralize the economy as it allows strangers to transact the same as through Ebay or Craigslist, but without record of the transaction. The decentralization will allow people to transact freely in the grey market, and not worry because they will blend into the large amounts of data on the web.
As of now, governments all around the world use monetary systems to implement their policies. By leveraging the power of central banks, governments have been able to control economic levers that allow them to maintain power. Cryptocurrencies will reduce this power.
As discussed in the economics portion, the grey market will grow. This means that taxes will be harder to collect, just like it already is for people in cash businesses or who receive cash tips. The inability to attach transactions to certain identities will make it hard for government to know when money is changing hands and quantify incomes, thus making it nearly impossible to tax income. This has already been a challenge as governments have been unable to tax income and “capital gains” made through rising valuations of cryptocurrencies that are held on personal wallets.
Crypto will make it tougher for governments to regulate as well. As of now, the regulations are enforced through a monopoly on force and a control of the economy. By disrupting the economy and politics, crypto will make it hard to say what can be regulated. For instance, raw milk is illegal to sell in many places throughout the U.S., but with cash it is able to be sold. Crypto can replace cash in this instance in a plethora of transactions that have legal, but not moral, consequences.
There is a new economic revolution beginning. This one is not unlike the Industrial Revolution. People will be displaced. Change will come. The world will look completely different. There will be growing pains and problems along the way, but the world on the other end of the tunnel is much better. This will not bring a utopia or anything like that, but it will change the way people live for the better.
In other words: cryptocurrency and blockchain technology are as big as the wheel, steam engine and printing press. It will change the way the world works, from macro to micro, yearly to daily, politically to economically until it is nearly unrecognizable. However, it will put power back into the people’s hands to make decisions for themselves, without a government bureaucrat standing over their shoulder, and give people opportunity to create new solutions and new institutions.
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