Wednesday, January 3, 2018

The Enormous Potential of Blockchain and Cryptocurrencies!

The Future of Blockchain and Cryptocurrencies Explained 
Dr. David Krause, Marquette University
January 2018

Image result for images duke campbell harvey
Campbell Harvey
In his Innovation and Cryptoventures class at Duke University, Campbell Harvey states, “Blockchain is a distributed ledger that provides proof of ownership and allows for the efficient, secure exchange of ownership. It is called blockchain because transactions are grouped together in blocks. Each block is cryptographically linked to the previous block. A public blockchain is transparent and distributed and anyone can put it on their computer. It requires no trust; however, you cannot change any entry in the blockchain. It is immutable.”

Avie Tevanian, tech-industry legend, recently was interviewed about blockchain and cryptocurrencies by Barron’s, “Many people say, ‘I don’t know about bitcoin, but I believe in blockchain.’ That’s a cop-out because most people still can’t explain blockchain. They don’t really believe in bitcoin, but want to say something positive about it. Yes, blockchain is a distributed public ledger, but what we’re really talking about is strong cryptography based on mathematics that is being used to create the distributed ledger of bitcoin transactions. Bitcoins don’t exist in a material way. Nothing is actually mined, computers are being paid in bitcoin for adding transactions to this distributed ledger.”

Tevanian continues, “So this is one of the world’s biggest collaborative math projects. But is it creating something of value?  We know that only 21 million bitcoins will be created. They have a value somewhere between zero and a very large number. Some people say bitcoin has no value; you can’t do anything with it. In fact, there are technical reasons why it doesn’t make sense to use bitcoin to pay for small transactions. But bitcoin makes sense as an asset for people who want to store a value of something that can be traded for something else in the future.”

Image result for images Avie Tevanian
Avie Tevanian
Continuing the Barron's interview, he said, “Say you don’t trust the banks or you’re worried about a natural disaster and want to have some cash available. Some people put cash in a mattress, or a safe. Or you can put it in something attributed to you that shows you have something of value that you can use in the future. The simple comparison is to gold, and it’s not a bad one. Gold is a store of value. Similarly, people can convert currencies or energy into bitcoin. This is what bitcoin miners are doing: using energy for mining, and being paid in bitcoin for their work. You can keep bitcoin safely from others, and transfer it without being easily tracked. These features can be put to use for nefarious but also good purposes. In due time—I don’t know if it is five years, or 10, or 20—bitcoin’s value will be extremely high.”

The interview continued, "You are assuming that people will come around to recognizing that the bitcoin database can be a store of value?  Tevanian responded, “Yes. They aren’t going to figure out the math, but they will figure out that the doomsday scenarios don’t make sense. Under one scenario, the government bans it. That can’t happen, although the government can tax and regulate it. But that only slows it down, allowing other countries to take better advantage of it. China has tried to clamp down on bitcoin by not allowing people to buy it, but China has the biggest bitcoin-mining operations in the world. If you want to buy bitcoin in China and can’t use your bank account to do it, you can buy energy and convert that to bitcoin.”

He further stated with Barron's, “Blockchain technology is separable from bitcoin. It has other uses that are just starting to take off. Blockchain could be used to record real estate titles, for instance. The information is public; it is securely encrypted, and you would have a permanent ledger of all real estate records. But it is probably too early to invest in blockchain.”

Bianco Research’s economist, Jim Bianco, recently posted on his blog, “The following is a simple explanation of the blockchain which we have heard and like. Right now anything put on the internet is a “copy.” That includes this post. Anyone can copy and paste an exact replica of it. This destroys intellectual property. The blockchain allows files to remain original without the option of being copied, but can be transferred when permission is granted via a distributed ledger and a private key (aka “the blockchain”). A cryptocurrency is just a different type of property that is unique to its owner and cannot be copied. Again, it can be distributed to other parties via the blockchain.”

Bianco suggests viewing the 2016 Ted Talk “How the blockchain is changing money and business” by Don Tapscott to better understand the basics of blockchain and the potential impact on the financial industry. 

He continues with an example of how the blockchain/bitcoin can save newspapers. “To explain in more detail, consider the following example. You write an article. You offer the first 50 words as a teaser. To read more, enter your private key and for some nominal fee of a few cents you can access the rest. There is no registration, no monthly fee, no passwords. It can be as effortless as reading it for free. In this example the author gets paid and is protected. The person that bought that copy cannot copy and paste it and send it to others via email. What they can do is “transfer” it to someone else. But then it is gone from their computer.”

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Jim Bianco
Bianco wrote, “Currently, microtransactions like this are too expensive because the standard credit card swipe fee is 30 cents plus 2% of the transaction. The hope of a cryptocurrency is the fee for transaction payments is essentially zero. This happens because there is no intermediary (like a bank or credit card company) standing in the middle demanding payment.  This is what the internet is missing – a way to instantly and safely send a few pennies to someone without being charged an exorbitant fee.”

He continued, “Why will you happily pay 3 cents (or 5 or 10) to read an article? Think of all the monthly charges you pay for intellectual property. Start with video (cable, Netflix), then go to newsletters/newspapers (WSJ, NYT) and end with sites you pay for access (i.e., ESPN). If you are like many, you are overpaying, probably in excess of $300 or $400/month. The blockchain can help solve this by allowing sites to piecemeal out their intellectual property.”

According to Bianco, “This can also benefit content providers. When their work goes viral, they will get tens of thousands, or hundreds of thousands to pay them 3 cents. Netflix can allow users to stream video for 1 cent a minute. So when everyone says Netflix’s “Stranger Things” is really good, you don’t have to worry about setting up an account and password and entering a credit card. Just click your private key and in 2 seconds you start watching for 1 penny a minute. If you don’t like it after 25 minutes, turn it off and you’re out a whole quarter! By making things more efficient, users (like us) pay less and content providers (like Netflix and The NY Times) get a lot more. It restores the value of intellectual property and stops pirating.”

He concludes, “That is just one example of why cryptocurrencies/blockchain have so much potential. It can make transactions so much smoother and cheaper. This could fundamentally rewrite many business models, especially banking and financial services.”