The first and most popular cryptocurrency, bitcoin, was launched more than a decade ago. Yet for all the unrelenting hoopla, relatively few know much about cryptocurrencies or blockchain, the technology on which they are built.
Despite the evangelization and rising profile of some investors, a 2021 survey by Pew Research Center found that only 16% of Americans said they had ever invested in cryptocurrencies. That widened to 31% between the ages of 18 and 29 and 43% of men in that age range.
If you are not in those percentages, you may view these coins skeptically and may have avoided trying to understand the jargon or technology.
But as cryptocurrencies and related technologies find their way into politics, intertwine with the broader economy, and impact the environment, everyone could use an idea of what they are, how they work, and their dangers and potential. .
I WANT TO SOUND SMART. IS IT “BLOCKCHAIN” OR “THE BLOCKCHAIN?”
It depends on the use. “Blockchain technology” is acceptable to refer to the computer code that records cryptocurrency transactions (and can be used for other things – stay with us). On its own, just call it a blockchain, although there are actually several (don’t worry, we’ll explain it below).
WHAT IS THE RELATIONSHIP BETWEEN CRYPTOCURRENCIES AND THE BLOCKCHAIN?
Blockchains record cryptocurrency transactions in encrypted digital records that live on servers around the world. Some blockchains allow developers to incorporate applications and program contracts.
Also keep in mind: different cryptocurrencies are based on different blockchains. Bitcoin is based on the bitcoin block chain; ether is built on top of the ethereum blockchain. There are now some cryptocurrencies or tokens that are essentially built on top of other cryptocurrencies, but at the most basic level, all cryptocurrencies refer to a blockchain.
Blockchains can also be used to record other types of information, such as ownership records or the origins of a food.
MY HEAD HURTS. IS THERE A SIMPLE WAY TO THINK ABOUT THIS?
Fundamentally, cryptocurrencies are digital money. The blockchain is a database to record transactions of said digital money. This digital money is not backed by any government or institution.
HOW ARE CRYPTOCURRENCIES MADE?
Different cryptocurrencies have different digital architectures (code), so how they work varies. As an example, let’s use bitcoin, which is “mined.”
In the physical world, this is how mining works: a specialized computer processor is powered by electricity and produces a staggering amount of noise and heat. In the digital world, that processor competes to solve a mathematical puzzle. The computer that solves the puzzle first wins newly minted bitcoins. This design is part of the open source code created by the anonymous entity that launched bitcoin in 2009.
Mining has another purpose: while the puzzle is being solved, the most recent bitcoin transactions (the sending and receiving of the coin) are recorded on the blockchain. The design of the system encourages participants to spend resources (in this case, money and electricity) to help keep track of who owns which bitcoins.
Those with the most computing power are most likely to win, so the design favors well-resourced groups who can put together lots of these specialized computers and power them as cheaply as possible.
As a kind of check, the system is also designed to increase the difficulty of solving the math puzzle as more computers compete to do it. At the same time, the number of bitcoins earned by successful miners automatically decreases at predetermined intervals. Together, that means entities that got into mining pretty early got more bitcoins for less resources.
I THINK I REALLY HAVE THAT. NOW WHAT IS THIS DECENTRALIZATION?
An additional feature of the blockchain design is that the recording of transactions takes place on many computers that together form a global network. These computers, or nodes, constantly check with each other to confirm the accuracy of their records. Replication of these records across the network is part of what prevents an incorrect or false transaction from being recorded.
Taken together, the open source and decentralized nature of the blockchain means that no one and no institution can control it. But actors like governments and large corporations can still limit access in certain circumstances. China banned cryptocurrency trading in September 2021 due to concerns that they could weaken control over the financial system and were facilitating crime. More recently, a major cryptocurrency exchange, Binance, stopped processing purchases made with certain Russian-issued credit cards due to its invasion of Ukraine.
WOW! SO HOW SECURE IS THE BLOCKCHAIN?
Cryptocurrency fans find it quite difficult to hack, that’s part of its appeal. Once again, it depends on the platform you are talking about.
The bitcoin blockchain has not been compromised to date, but the second largest blockchain and cryptocurrency, ethereum, faced a major crisis in 2016 stemming from a software vulnerability. While the ethereum blockchain itself was not hacked, some $50 million worth of ether was stolen.
Many cryptocurrency-related services and technologies have been hacked or simply exploited by their designers to trick and steal participants.
Cryptocurrency exchanges, where people can exchange crypto for traditional currencies, have been compromised multiple times, with digital bank robbers wiping out accounts. Memorably, in 2018, the CEO of a cryptocurrency exchange died without transmitting a crucial access code, effectively locking out millions of dollars worth of cryptocurrency customers.
Consumers have few options for recovery, whether they are the victim of a scam or security breach or have simply forgotten their digital wallet password. There is no password reset or insurance in the pre-programmed decentralized system.
In short, the investments are backed by few protections. US prosecutors go after outright criminal behavior like false advertising or theft, but if the value of a new cryptocurrency token plummets and isn’t recovered, that money is lost. Even the value of bitcoin, which some proponents call “digital gold,” is extremely volatile.
One final thought: cryptocurrencies remain the preferred payment for criminals. Illegal drugs or other prohibited goods are often exchanged for cryptocurrencies, which can be transferred over distances more easily than cash and can be more difficult for prosecutors to trace. But for most cryptocurrencies, keeping track of who owns what is publicly visible forces criminals to get smarter to effectively launder cryptocurrency obtained through theft, scams, or ransomware attacks.
WHERE DOES THE “VALUE” OF CRYPTOCURRENCIES COME FROM?
This age old question: who decides how much a dollar is worth? – gets even more complicated with cryptocurrencies. Unlike traditional currencies, no government, central bank, or physical asset backs cryptocurrencies.
Their values are based on people’s faith in them, as determined by the market. The backers hope that more and more people will want a digital currency that is relatively free from government oversight, and that as people invest resources in cryptocurrencies, its value will rise over time.
Also, unlike traditional currencies, some cryptocurrencies function both as an investment and as a possible unit of exchange. Some buy it in the hope that they can eventually sell it for a profit. Others could use a fraction of a bitcoin to, say, get a firecracker pork burrito at Taco Beyondo in New Hampshire.
WHAT ABOUT THE ENVIRONMENTAL IMPACTS?
Cryptocurrency mining consumes a large amount of energy. A peer-reviewed study calculated that as of November 2018, bitcoin’s annual electricity consumption was 45.8 terawatt hours, comparable to Hong Kong’s net electricity consumption in 2019, according to the Hong Kong Energy Information Administration. USA
That doesn’t even take into account the energy consumed by other cryptocurrencies. And bitcoin’s energy consumption has increased annually: The Bitcoin Mining Council estimated that the cryptocurrency consumed 220 terawatt hours of energy in 2021.
When judging the environmental impacts of cryptocurrencies, it is important to consider the source of electricity. Miners want electricity at the lowest cost, which sometimes leads them to polluting energy sources like coal. Other times, they can find the cheapest power from renewable sources like hydroelectric dams. It really comes down to location. Those variables make it difficult to calculate the exact energy consumption and environmental impacts of cryptocurrencies.
Environmental impacts also include the energy used to cool computer processors, which get hot as they work, as well as the electronic waste produced when miners upgrade their equipment and discard older models or broken drives.
WHAT IS A NON-FUNGLEABLE… A NON-FUNGLEABLE… WHAT IS AN NFT?
For everyone’s sake, let’s be brief. Non-fungible tokens are basically any digital item, like an image or video, that has been recorded on the blockchain to show who owns it.