Cryptocurrency: What is it good for? (A lot, actually.)
The technology makes some useful things possible for the first time.
The technology makes some useful things possible for the first time.
Cryptocurrencies get a ton of buzz these days, even so, the real use cases of these new technologies are often glossed over. Most cryptocurrency discussion unfortunately leaves the reader with too much breathless hype or knee-jerk condemnation and not enough measured analysis. It is not surprising, then, that some people may walk away with the impression that cryptocurrency is little more than a new iteration of the dot com bubble, without any real value add. Some will say, “There is nothing that can done with cryptocurrency that cannot be done with sovereign currency that is meritorious and helpful to society.”
This is unfortunate, because cryptocurrency technologies have a wide range of use cases that extend far beyond the cloistered circles of Silicon Valley and Wall Street. What’s more, cryptocurrencies’ technological innovations allow a much broader range of unique applications that traditional sovereign currencies could never provide.
At its core, a cryptocurrency allows any individual to transfer value directly to a recipient anywhere in the world, without needing to rely on a trusted third party in the middle to facilitate the exchange. This seemingly simple function introduces possibilities for a great variety of solutions and improvements in areas of payments, law, security, business processes, and much more.
Here are just a few of the meritorious cryptocurrency applications that will be quite helpful to society—that is, if we allow them to grow.
Let’s start with the simplest use case. We may take it for granted that we can make payments online, but this state of affairs is neither evenly distributed nor always guaranteed. For one, not everyone has access to a bank account or credit card with which they can engage in online commerce. Furthermore, our current system, which relies on third parties to facilitate exchange, is only as good as the trust that we can place in them. Such providers could conceivably go offline due to technical or cybersecurity difficulties, or governments could push them to prevent certain transactions, or they could mismanage or improperly direct user funds. Whatever the hypothetical, the point is that customers must place considerable trust in the third party to be a responsible and faithful steward of those funds, assuming that individuals have access to those services in the first place.Cryptocurrencies remove the need to rely on this trusted third party to make a transaction. In effect, a cryptocurrency replaces a third party like Bank of America or PayPal with the network itself, which is managed by a distributed web of computers all across the world. This means that Alice can make a payment online directly to Bob whenever and wherever she wants, without needing to introduce another party which may be cumbersome or expensive. This also means that people without access to banking services can now take part in digital commerce.
This kind of direct digital exchange is not possible with traditional sovereign currencies. To make a direct exchange with sovereign currencies, individuals will need to meet in person to transact, which can be inconvenient or dangerous. To make a digital payment, they will need to rely on a trusted third party, which can be expensive or unavailable. There is no way to combine direct exchange and digital exchange using a traditional sovereign currency, which is why cryptocurrencies are so unique and value-generating.
Cryptocurrencies are useful beyond their application as a medium of exchange. By eliminating the need to rely on a third party for the issuance and transfer of value, cryptocurrencies empower users to take control of their finances. Transfers can only be made when a user cryptographically approves a specific transaction—an action known as “signing with a private key.” This means that the user who holds the private key, and only that user, can control where and when their money is spent.
This use case is crucial in environments where citizens cannot trust that institutions will be responsible stewards of their hard-earned money. Consider the tragic case of a country like Venezuela, where individuals’ property and savings can be confiscated by authorities through law or inflation. Many Venezuelans are unfortunately unable to access traditional forms of exit such as emigration or stealthily accruing more stable sovereign currencies. With cryptocurrency, more Venezuelans have an alternative: They can opt to purchase or mine a secure store of value that cannot be confiscated or inflated away by their government because they alone control their private keys. (Indeed, cryptocurrencies are especially popular in Venezuela for precisely this reason.)
There is a use for this property for people living in more responsibly-managed monetary systems as well. As cybersecurity incidents continue to affect more and greater financial institutions, more people will find their personal information vulnerable to hostile actors. After all, in order to engage with the traditional system of personal finance, we must give over considerable information to banks which are their tied to our credit and debit card numbers. Cryptocurrencies require no such personal information in order to engage in online commerce, and users do not need to trust that financial institutions and their vendors will be able to thwart all of the many daily attacks on their systems.
Removing the middleman can also do more than just remove a threat point; it can also reduce the cost to send a transaction. By allowing people to send value directly to another person, cryptocurrencies may prove to be an affordable alternative to other forms of transfer. This means that transactions that may have not made economic sense due to the fees imposed by third parties in the past may now be feasible, which unlocks a range of possibilities.
One of these is microtransactions, which is just what it sounds like: the ability to make tiny transfers of only a few cents (and perhaps fractions of a cent) at a time. When you walk by a gumball machine and decide you want a little treat, it takes very little effort to just whip out a quarter and receive your desired confection. But when you want to purchase the digital equivalent of a gumball online—say, a single news article, or wifi coverage to check an email for a few minutes, or an in-game upgrade—things quickly become not worth the hassle. You would likely have to create an account with the service and would need to have access to some kind of credit card and link it to the service. And because the fees to actually undertake a 25 cent transaction will be greater than the transaction itself, you won’t have the option to buy just one item, say, but instead have to pony up for a month’s worth of access. This kind of arrangement is obviously just not worth it, so there are a lot of transactions that aren’t happening because the existing payments system can’t facilitate them.
Cryptocurrencies can, for the first time, make microtransactions for many services economically feasible. Let’s say that someone wants to view a paywalled article online, but does not want to purchase a full subscription to that outlet. That person could send a microtransaction to the newspaper’s cryptocurrency wallet, which would automatically unlock the article to the payer. The reader benefits by only paying for the content they want, and the newspaper benefits because expanded price discrimination can lead to greater overall engagement. Additionally, microtransactions present an alternative to the advertising model of monetizing content on the web and all the attendant privacy-encroaching tracking its brings with it.
Metering is a special kind of microtransaction. Rather than a per unit price, metered microtransactions allow users to purchase access to a service for an unspecified amount of time. Wifi access provides a good example. Right now, if people want to purchase public Wifi access, they have to purchase a set unit of time for a set price, regardless of whether they only need to send a quick email or check on some data for work. This can be costly and obnoxious to the user, but there is no easy way to meter microtransactions using traditional credit and debit cards for the reasons mentioned above. Cryptocurrency provides a solution for low-to-no fee metering to access these kinds of club goods.
People who say that cryptocurrency can’t do anything that ‘sovereign currency’ can do probably don’t understand that cryptocurrencies aren’t just a kind of money; they are a kind of programmable money. While our examples so far have focused on simple currency storage and transfers between parties, cryptocurrencies also include a scripting capabilities that allow for more complex transactions to occur. These kinds of transactions are known as “smart contracts,” and they work because all of the elements of the exchange to take place are entirely digitized.
For example, let’s say that Alice would like to gift her granddaughter, Erin, with a sum of money upon her 18th birthday. Today, Alice’s option is basically to hire a lawyer to create a trust that will hold the funds and disburse them on the appointed date. Being a technologically-savvy grandmother, however, Alice knows that she can simply program a smart contract to do the same thing without having to employ an intermediary. Alice creates a cryptocurrency wallet for herself and another for her granddaughter Erin. Alice sends the equivalent of $10,000 to her wallet and programs a smart contract. The contract is set up so that on the day of Erin’s birthday—let’s say January 3, 2027—the contract will automatically move the funds from Alice’s wallet directly to Erin’s, where she will have complete control of those funds. Once Alice sets the transaction in motion, she no longer has access to the funds, just as if she had created a trust.
And that is just the simplest example. Smart contracts can be deployed any time that a set of digital promises can be enforced by a protocol through which the parties to the promises operate. There are a wide range of hypothetical and currently-used applications in the fields of finance, law, identity and registration, rentals, and even supply chain management.
However, smart contracts are not a kind of magic wand. It is crucial that the parties to a smart contract are absolutely certain that their code will function the way that they intend, and will not be susceptible to attack. There have been high-profile smart contract failures, resulting in millions of dollars in losses. With that caveat in mind, it is likely that routine and simple smart contracts—like the illustration with Alice and Erin above—will be ironed out relatively quickly, and more experience will improve the quality and range of smart contracts available.
The examples above show just a few of the ways that cryptocurrency offers a great expanse of currency-based applications that traditional sovereign currencies simply cannot. But one of the really neat things about cryptocurrencies is that they and the open blockchain networks that underpin them have uses that primarily have little to do with “money” at all.
Our previous examples illustrated how blockchain tokens which represent money can be directly transferred in different kinds of ways. But those tokens don’t necessarily need to only represent a currency. After all, at the end of the day, it’s all just zeros and ones on a computer. So a blockchain token can hypothetically represent anything that can be digitized. And because blockchains are censorship-resistant, any entry added to a blockchain can be thought of as an immutable record online. This virtual immutability, however, is only present in open networks with a cryptocurrency or scarce token component.
Consider this timely story from China: A pseudonymous blogger recently reported that a major pharmaceutical company had been manufacturing and selling unsafe vaccines. Although the story went viral on social media, government censors went about removing any posts about it online. How could the blogger make sure that his posts would not be blotted out? He put it on a an open blockchain network, in this case Ethereum. By sending a small transaction worth a few pennies of ether to their wallet, the blogger was able to attach his exposé to the metadata of the transaction, thus immortalizing the report’s existence on the internet.
This kind of application is especially crucial in situations where the public must know of some kind of high-level corruption. But there are a number of blockchain efforts to record data for commercial and legal applications as well. Some people envision a title registration service that is entirely- or mostly- blockchain-based, which would cut down on the need for costly administration and title insurance. Others are working on projects to offer Dropbox-like services, where a blockchain would store users’ files.
A cursory review of just a handful of the most high-profile applications of cryptocurrency technologies reveals that these innovations can yield benefits that traditional sovereign currencies never could. It is never a bad thing to wait to get involved with a new technology until you feel that you really understand it—especially when that technology can also be a kind of financial investment. The great thing about cryptocurrencies is that they are entirely voluntary: If a person feels uncomfortable using them, they are in no way obligated to get involved.
There are a lot of very good reasons that cryptocurrency enthusiasts spend so much time improving and building out new infrastructure to bring these innovations to more and more people. And while there are certainly illicit uses of cryptocurrency, that is par for the course for new technologies: from automobiles to the Internet. The solution to that is not to throw out the baby with the bath water. A policy environment that preserves for tinkerers and innovators the greatest possible space to develop new and better applications of cryptocurrency technologies will ensure that society gets the most value possible.