The 2022 Super Bowl was dubbed the Crypto Bowl even before the game was played due to the publicity blitz of cryptocurrency companies unleashed during the annual TV show. The ads, featuring a host of celebrities and gadgets, aimed to convince viewers that cryptocurrencies are the wave of the future.
Tackling FOMO – i.e. the fear of missing out – is a classic technique of advertisers and scammers, so you would be forgiven for being wary of the cryptocurrency hype. But the story is more complicated than the latest speculation craze.
Here are six stories from our archives to help you understand how cryptocurrencies work and an overview of how blockchain is setting the stage for a future in which technology, rather than institutions, secures ownership and fosters trust.
1. Digital currency
The first question posed by cryptocurrencies is how digital bit strings that are not simply placeholders for national currencies or precious metals can be real money. Who says who owns which virtual coins, and who determines what the currency is worth? The answer is no one and everyone.
“A bitcoin is as proprietary as dollars when deposited in a bank. Skipping the step of fungible physical currencies, bitcoins exist by virtue of their representations in a ledger in cyberspace,” writes David Koepsell of the University at Buffalo.
“What bitcoin owners own is debt, just like those who own money in banks own debts that are recorded in bits. They do not own the items that comprise the information representing this debt, nor the information itself, they own the social object – the money – that these items represent.
2. Under the Hood: Blockchain Explained
The technology that makes cryptocurrencies possible is the blockchain, a distributed digital ledger. In short, it is a form of record keeping in which each record is spread across many computers and encrypted in a way that prevents tampering. Anyone can see a record, but no one can edit it.
“The bitcoin blockchain contains a record of every transaction in the system since its birth. This feature helps prevent account holders from reversing transactions, even if their identity remains anonymous. Once in the ledger, a transaction is undeniable,” write Ari Juels and Ittay Eyal.
“Blockchains can be enhanced to support not only transactions, but also pieces of code called smart contracts,” they write. “A smart contract can be thought of as playing the role of a trusted third party: whatever task it is programmed to do, it will perform it faithfully.”
This capability opens up a wide range of possibilities for organizing life in the digital realm. As appealing as the Super Bowl ads seemed to make cryptocurrencies, the broader uses of blockchain are arguably more important.
3. Beyond Money, Part 1: Financial Services
Transferring money from party A to party B is just a simple type of financial transaction. Blockchain can be used for all kinds of financial services, including loans, derivatives, and insurance. This capability is called decentralized finance, or DeFi.
In traditional financial services, everything depends on a financial institution, writes Kevin Werbach. “DeFi reverses this arrangement by redesigning financial services as decentralized software applications that operate without ever taking custody of user funds.”
There are also downsides to DeFi. “Even very mature and highly regulated traditional financial markets experience shocks and crashes due to hidden risks, as the world saw in 2008, when the global economy nearly collapsed from a dark corner. of Wall St. DeFi makes it easier than ever to create hidden interconnects that have the potential to explode dramatically,” he writes.
4. Beyond Money, Part 2: Art
Things get interesting when you create a unique token on a blockchain and attach the token to a digital file – anything from a photo to an audio recording. The result is a file that can be uniquely identified, regardless of the number of copies, and ownership of the file can be verified. These are non-fungible tokens, or NFTs, and they make it easier for artists to earn money from digital works – and provide another vehicle for financial speculation.
“NFTs are frequently used to sell a wide range of virtual collectibles, including virtual NBA trading cards, music, digital images, music videos, and even virtual real estate in Decentraland, a virtual world “, writes Dragan Boscovic of Arizona State University.
“The NFT market is likely to grow further as any digital information can easily be ‘transformed’ into an NFT, a very efficient way to manage and secure digital assets.”
5. Beyond Money, Part 3: Organizations
In addition to mediating financial transactions, smart contracts can be used to create and manage organizations. Decentralized Autonomous Organizations, or DAOs, use contracts to empower participants to influence decisions and automate organizational functions, writes Sean Stein Smith.
“In most, if not all, instances of for-profit DAOs—or even DAOs organized for a specific purpose, such as attempting to purchase an original copy of the U.S. Constitution—money or valued property that is contributed to the organization is exchanged for governance tokens. Tokens essentially represent a fractional form of collective ownership,” he writes.
6. Beyond Money, Part 4: The Metaverse
You could think of the metaverse as the mother of all distributed autonomous organizations. The metaverse is a concept defining an interconnected set of virtual environments that could be a future iteration of the Internet. Blockchain is what will make interconnection possible.
“As people move between virtual worlds – say Decentraland virtual environments to Microsoft – they will want to bring their stuff with them. If two virtual worlds are interoperable, blockchain will authenticate proof of ownership of your digital assets in both virtual worlds,” write Rabindra Ratan and Dar Meshi of Michigan State University.
Blockchain could even manage the behavior of people in the metaverse by allowing reputation scores to be assigned to inhabitants. “If you act like a toxic troll spreading misinformation, you risk damaging your reputation and having your sphere of influence reduced by the system. This could influence people to behave well in the metaverse,” they write. .
Eric Smalley, Science + Technology Editor, The Conversation
This article is republished from The Conversation under a Creative Commons license. Read the original article.