Cryptocurrencies are among the most exciting new technologies that have emerged over recent years; but they are also among the most uncertain. Are we at the beginning of a cryptocurrency revolution?
To understand the relevance of cryptocurrencies, we should first take a quick overview of exactly how they work. Currently, when we process financial transactions, we rely on a bank or credit card company to secure our payment; and in return they take a cut in the form of a transaction fee. Cryptocurrencies remove this third party and create a peer-peer network in the form of a decentralised, electronic cash system; the result of which is a cheaper and more secure way of transferring money.
The technology that underlies this system is known as the blockchain, or distributed ledger technology (DLT). Instead of an institution recording the data, the blockchain is the name of the ledger that records every transaction ever made. New transactions (blocks) are added in a linear chronological order and each computer that is connected to the network verifies the addition to the block chain.
This technology is based on the work of an anonymous programmer(s) called Satoshi Nakamoto in 2008, which led to the establishment of the world’s first and what remains to be the most popular cryptocurrency, 'Bitcoin'.
Bitcoin’s usage has been steadily growing since its establishment in 2009. In 2015, Bitcoin activity doubled to 100,000 transactions per day and it is now estimated that over 100,000 businesses accept the digital currency. These include well-known brands such as Amazon, Wordpress, Expedia, PayPal and Reddit. In 2013, Virgin Galactic also announced that it would accept Bitcoin payments from its customers.
We caught up with Peter Smith, CEO and co-founder of Blockchain – the world’s most widely used Bitcoin wallet and block explorer service. Blockchain provide software that makes the use of Bitcoin safer, easier and more secure. Established in 2011, Blockchain attracted over $30 million in capital from investors including Lightspeed Venture Partners, Wicklow Capital and Richard Branson and now has over six million users.
We asked Peter about the development of cryptocurrencies and whether he sees their growth continuing on the same trajectory; "Global transaction volume on our platform is doubling year-over-year, and our users are from 160 countries across the world. This kind of growth is a real indicator of need," he says.
One of the most important opportunities that has emerged from the development of cryptocurrencies concerns its capacity to empower the proportion of the world’s population that does not have access to financial services. All that is needed to transfer money via cryptocurrency is either a mobile phone or Internet connection. Peter explains, "Individuals throughout the world without means of otherwise holding and transferring funds have the ability to hold and transfer Bitcoin on our wallet platform." Insufficient access to credit is a major inhibiting factor to the development of poorer nations; as this technology develops the potential for positive change is enormous.
We also asked Peter about the capacity for Bitcoin and blockchain technology to create new industries; "In the long term, the value is that things are going to be able to be built directly on the Bitcoin protocol. We provide the platform that allows this in a peer-to-peer way." The decentralisation of finance through cryptocurrencies is ultimately part of a bigger picture of transformation of a variety of different sectors.
Whilst Bitcoin and blockchain technology have masses of potential, they are not without their problems.
One of the main concerns is the price volatility of Bitcoin. Bitcoin’s price and exchange trading volume has fluctuated significantly over recent years; from its dismal performance in 2014 to its bounce-back in 2015 as the world’s best performing currency. In a similar vein, there are concerns over its long-term investment potential; the last three quarters of 2015 saw a decline in the growth rate of Bitcoin’s venture capital investment.
The scalability of blockchain technology also represents a serious barrier to its long-term expansion. Criticism levelled by the MIT Technology Review, a research paper published by a team from leading universities and former-Bitcoin developer Mike Hearn, has emphasised problems of scaling and block size.
Currently, Bitcoin only allows a few transactions per second to take place, in comparison to the thousands accommodated by the world’s major payment networks. There is a looming question whether Bitcoin’s existing design will need a fundamental overhaul if it is to be scaled to support mass usage. In a recent Medium post, Peter highlighted some of the latest troubling indicators that show an increase in how long transactions are taking, despite a rise in average transaction fees.
Whilst there is a significant degree of uncertainty that surrounds the development of cryptocurrencies, their potential to disrupt is unprecedented. The decentralisation of financial transactions is part of a wider movement towards a fairer and more transparent way of doing business, which will ultimately transform our understanding of trade, ownership and trust. Businesses must ensure they innovate in order to keep up with the cryptocurrency revolution.