Calculated Thought: Don’t disregard cryptocurrencies

Columns November 29, 2017

Bitcoin’s rise in worth from pennies to thousands of dollars has analysts calling it a bubble, and maybe it is. The price behaviour of these digital tokens is interesting and is being chalked up mostly to speculative demand.

But, to echo my previous written sentiments, it’s the technology—specifically, the technology behind Ethereum’s blockchain and virtual machine—that’s most exciting. Many purchasers of cryptocurrency agree and are purchasing tokens to be a part of a community that believes in the technology and sees its value from a different perspective.

Here’s an all-too-simplistic refresher: blockchain technology promises a way to have a trustless, decentralized, immutable record of transactions that is distributed and updated in real time to all its users. The idea is that rather than, say, a bank as an intermediary, cryptographic code and a consensus of users can verify that one person has money, and the money can then be sent to that person. There is a whole mess of intricacies to go along with a blockchain system, but let’s keep it (relatively) simple.

Calculated Thought is a column dealing with student finances that is featured in every issue of Nexus.

Ethereum is a kind of base layer that can provide these trustless transactions, somewhat akin to the way internet protocols provide the online exchange of information we have today.

There are projects that build on top of Ethereum’s blockchain to create decentralized applications (DApps). Like the apps on your phone, this is software code that is meant to provide some sort of service to its users. But, in decentralization, there is no intermediary sucking up transaction fees or choosing who can transact.

A great example is Propy, a California-based start-up that has partnered with the Ukrainian government to facilitate international real-estate transactions. This DApp, built on the Ethereum blockchain, executed the first-ever real estate transaction through a “smart contract” on the blockchain in September. A smart contract written in computer code executed the exchange of money for an apartment and the deed to the property, while writing an immutable record onto Propy’s blockchain-based property registry.

This method of transacting eliminates all the paperwork and communication between lawyers, money-transfer services, escrow providers, and land-title registries, and offers one single source of code that all parties agree on to execute the transaction.

Where the digital currency ether, created by Ethereum, differs from bitcoin is that is wasn’t designed to be a currency, per se. Ether is known on the Ethereum network as “gas.” It fuels the computing power used by participants, or “nodes” on the network, and rewards them for solving these cryptographic puzzles (providing security) and for confirming consensus on the validity of the transaction. And that’s where value outside of speculation can be found. These digital tokens are the way you pay to play on this network. Already you can send massive sums of money, in less than a minute, for pennies’ worth of this gas.

If Ethereum becomes the Internet 3.0 it is being touted as, and the software we know today becomes DApps that can transact safer, faster, and cheaper, then shouldn’t these tokens have value?

I say yes. But, until a market is established, it’s anyone’s guess what that value should be.