Let's make one warning clear up front before we discuss this subject. We're not blockchain or cryptocurrency-focused financial analysts. So who are we to provide our opinions on this? We're addressing it from viewpoints that investigate some of the unforeseen effects of innovation—in this case, unintended repercussions of blockchain technology—rather than from a background in financial analysis.
User experience and technical communication, fields that study how to build user-friendly technology to properly express technical knowledge, are the backgrounds of Christopher.
The subjects of economics and public policy, which frequently look at technical innovation and its larger effects on society, are Terry's backgrounds.
Additionally, we've both spent a considerable amount of time working in finance. Naturally, the development of blockchain technology has caught our attention, particularly its unforeseen effects.
This introduction on blockchain's fundamentals and its unexpected repercussions, notably bitcoin speculation, is provided below. But first, let's talk about the invention that led to the creation of cryptocurrencies. What is blockchain technology, exactly?
What Is Blockchain Technology?
Networks of online databases known as "blockchains" are used to keep long-term records of data or transactional information. Digital ledgers—permanent records of transactions—exist on the blockchain.
Okay, so it's an online database used to keep digital ledgers as permanent records of transactions. What makes it different from the other online storage options we have? Consider immutability and decentralization, two characteristics that set blockchain apart from other forms of online data storage, in order to fully grasp how this technology functions.
Changing Transactions
The immutability of its transactions is one of the characteristics that distinguish blockchain technology. In other words, every transaction that has ever occurred on the blockchain is permanently recorded in the digital ledgers. They cannot be altered or withdrawn after being placed on the blockchain.
How can transactions on the blockchain become unchangeable? In a nutshell, blockchains distribute copies of digital ledgers to tens of thousands of computers (or network nodes).
As a result, several computers maintain copies of the same transactional data (as opposed to accessing the data stored on a centralized server). This brings up a further characteristic of blockchain that sets it apart.
Distributed Networks
Blockchains enable transactions by automatically sending copies of such transactions to computers all over the world, replacing the need for middlemen (such as a centralized organization, like a bank or major tech corporation, that manages a database, for example) (a decentralized network that copies data across multiple nodes).
These networks serve as examples of the decentralized nature of finance (or DeFi). For transactions to take place on blockchain, no bank or significant IT company is required. Instead, everything is stored on the blockchain in numerous versions that are sent to different computers all over the world. This makes it possible for people to conduct peer-to-peer transactions without the use of a middleman.
Additionally, every time a transaction is made, the blockchain and every copy of it are updated on all computers to reflect the most recent transaction that has occurred.
Consequences of Blockchain Technology That We Didn't Expect
It's interesting to note that some of the characteristics that make blockchain technology so special have also resulted in some unforeseen effects. Cryptocurrency speculation is one of these unexpected outcomes that is most obvious. Describe cryptocurrencies. Glad you inquired.
Payments with cryptocurrency, speculation
A cryptocurrency is a type of digital currency, as its name suggests. (In this context, the word "crypto" refers to cryptography.) As a result, the process of crypto mining, which validates and adds cryptocurrency transactions to the blockchain, produces cryptocurrencies. A cryptocurrency wallet, which serves as a digital bank account, may then be used to access the cryptocurrency.
You can utilize a cryptocurrency in at least two different ways once you have access to one:
Purchase products or services online with it.
Hold onto it in the hopes that its worth will rise.
The second of these two potential uses now seems to be more prevalent.
For instance, rather than valuing or paying for products or services, the majority of bitcoin transactions involve shifting coins from one holder to another. Because of this, the majority of individuals appear to be keeping them for currency speculation, which helps to explain cryptocurrencies, extremely volatile prices. Since they are uncontrolled currencies, maybe their volatility shouldn't come as a surprise.
Unwelcoming Access
Public and private keys, often known as a login and password, are required to access bitcoins on a blockchain. Passwords are difficult to remember in general, but blockchain private keys are particularly difficult to recollect. They consist of very complex symbol combinations that are hard to decipher. In contrast, the public keys are built for anonymity. They are hence pseudonyms that do not correspond to users' true identities.
These keys are not particularly user-friendly, despite the fact that they may appear like adequate security precautions. What occurs, for instance, if a person forgets or misplaces their keys? Those consumers are out of luck and won't be able to access the bitcoin they bought, which is unfortunate. Additionally, they have lost their money if they are unable to access their cryptocurrencies.
Unlawful Activity
Those who use these keys also poses legal dangers. What if, for instance, someone used bitcoins to support terrorist or criminal groups?
Numerous identity-verification procedures are followed by financial organizations, including Know-Your-Customer (KYC) standards. These rules and regulations stop criminals and terrorists from raising money for illicit operations. In contrast, there are no established regulations or procedures for cryptocurrencies to stop these risks.
Privacy Issues
With regard to cryptocurrencies, there are additional issues and dangers. Think about the concerns with internet privacy. Always keep in mind that blockchains enable decentralized networks to conduct irreversible transactions. Once more, they do this by sending copies of transactions (digital ledgers) to computers (network nodes) all across the world. These unchangeable transactions, including bitcoin transactions, may be seen by anybody on the blockchain directly without the need for a middleman.
On the one hand, the fact that immutable transactions are publicly viewable implies that no one has to be concerned about their bitcoin transactions being lost or destroyed. Digital ledgers, after all, are duplicated on innumerable computers. On the other side, because of the blockchain's immutability and public exposure, advertisers may have access to everything on it, including all of your past bitcoin transactions.
When you consider surveillance capitalism, which involves outside companies watching our online transactions to control what we view and buy on the internet without our knowledge or our agreement, cryptocurrencies may thus be a risky business technology. People's pseudonymous keys wouldn't be able to solve this issue. Users can still be tracked and controlled online by outside parties, even if they cannot be recognized.
Threats to Cybersecurity
Immutable transactions that are made public can present cybersecurity threats, particularly for bitcoin owners. For example, anybody, including hackers, may browse bitcoin transactions and check for flaws in the blockchain's design. Particularly, it's possible that the software that carries out orders to transmit and receive transactions automatically has bugs. These directives are referred to as smart contracts.
Unfortunately, the smart contracts that enable bitcoin transactions are equally irreversible as the immutable nature of cryptocurrency transactions. Smart contracts are unalterable and permanent, much like digital ledgers. They cannot, therefore, be improved upon or modified. So, if a smart contract has a programming flaw or vulnerability, hackers can take advantage of it. And they may very well use it as an opportunity to steal bitcoin from other individuals.
Ethereum, the blockchain technology behind the cryptocurrency Ether, did in fact experience it. A code flaw allowed hackers to escape with millions of dollars' worth of digital money. Given how easily exploitable smart contracts are to hackers, that wasn't the first hack on blockchain, and it most likely won't be the last.
Due to these factors, none of us has invested in cryptocurrencies over the long term. Its worth is still hypothetical as of now. Accessing it is likewise not very user-friendly. And there are legal concerns involved. There are also significant cybersecurity and internet privacy dangers.
We don't necessarily try to discourage people from purchasing and retaining cryptocurrencies when we highlight these unexpected implications of blockchain technology. Good luck if you engage in currency speculating.
But if you're not, bear in mind this lesson. You have good reason to be dubious about whether these virtual forms of money are a wise investment—at least while much of the hype is still sorting itself out. Although, cryptocurrency businesses are aggressively marketing to get more and more people to buy into their digital currencies every day.
Reference for Blockchain and Cryptocurrency Education
Here are some useful resources to learn more about blockchain technology and cryptocurrencies in addition to the information listed above.
Blockchain - Investopedia's Explanation
The Economist: A Beginner's Guide to Crypto
The World That Bitcoin Created: A Guide - Scientific American
The MIT Technology Review article The Dawn of New
Cryptocurrency's future: The Vanguard Group
What Is LinkedIn's Web3?
As a result, blockchain transactions are trustless, which means no one needs to place their trust in a central authority (acting as a third-party intermediary). However, the fact that blockchain users continue to place their confidence in anything is worth mentioning. They are essentially putting their faith in the code, or more precisely, the individuals who wrote it.
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