Crypto in the Real World
07 January 2024
To understand the impact of cryptocurrency in the real world, it's crucial to delve into its origins. Back in 1998, Nick Szabo conceptualized "bit gold," a decentralized currency that mirrored gold's universality. While never implemented, bit gold laid the groundwork for Bitcoin. However, Szabo encountered the double spending problem—a hurdle where determining valid transactions lacked an authority's oversight.
This predicament led to the birth of Bitcoin and Blockchain. But before diving into that, let's ponder the 'Why'. There are 2 Why questions: Why decentralization and Why non-state controlled monetary instruments?
Why Decentralization Matters
Creating a digital currency with a centralized keeper is fairly simple, and achievable through a classical database. But why opt for decentralization? One primary reason involves removing middlemen, notably for efficiency and trust issues. Trust, a subjective factor, influences this decision. Can a decentralized system outperform a perfectly centralized one in terms of efficiency—cost, speed, and scalability?
From a technical standpoint, centralized systems excel. However, Bitcoin disrupted this norm by introducing a trustless, permissionless system using blockchain as a database and proof-of-work to curb double-spending. It emerged as the world's inaugural decentralized, trustless, and permissionless monetary system.
What attributes define a trustless system? Consider a centralized monetary system, akin to your bank account. The trust exists within a threshold between you and your bank. In an ideal setup, middlemen, if always held accountable at a higher cost than potential gains, wouldn't necessitate removal. The financial crisis of 2008 highlighted this flaw, with few, if any, bad actors facing penalties exceeding their gains. These bad actors knowingly exploited the system to their advantage.
Bitcoin aims to eliminate incentives for malpractice. Miners uphold the system's integrity because the cost outweighs potential gains, enabling the storage of considerable value securely within Bitcoin. Blockchain's role as an accounting system justifies its application for storing significant value, especially close to the trust threshold—relevant for cross-border transactions.
Understanding Blockchain's Influence on Traditional Business Models
Web3 projects align with Bitcoin's principles, striving for trustlessness, permissionlessness, and decentralization to eliminate middlemen. Any Web3 project not centered around this notion might not warrant blockchain integration. The real synergy arises when token-based models combine with blockchain architecture.
Two Use Cases Showcase Blockchain's Impact:
- Supply Chain Management:
- Example: TradeMark East Africa collaborates with IOTA, employing the Tangle (IOTA's decentralized ledger) to streamline trade processes across East Africa, aiming to reduce costs, delays, and improve transparency.
- Impact: Blockchain potentially disrupts traditional paper-based trade models by offering security, efficiency, and cost-effectiveness.
- Decentralized Physical Infrastructure:
- Example: Filecoin's decentralized storage, exemplified by the Internet Archive, secures digital content more effectively than centralized servers, enhancing security and resilience.
- Impact: Filecoin's model challenges traditional data storage by offering enhanced security, efficiency, and reduced costs.
By leveraging blockchain, these applications demonstrate tangible benefits over traditional models, showcasing their potential across diverse sectors.
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