Cryptocurrencies have become a new investment trend. Everybody is trying to get a piece of the action, including investors, companies and the individuals. At a high level, the blockchain technology underlying cryptocurrencies enables parties to create a permanent, transparent record of transactions and processes, all in a decentralized manner. As with every technology out there, there are two benefits and two problems you should be aware of when considering an investment:
Benefit #1: Consensus Protocol and Ledger
One of the biggest benefits of the blockchain is that it provides members who do not trust each other with a neutral mechanism, while helping to avoid the problem of “double spend”. As a consequence, all public records of all transactions are added to a ledger as a block. This also prevents the validation of fraudulent transactions, which is one of the most significant problems for new payment technologies.
Benefit #2: Smart Contracts and Rewards
Just as the structure of block chain prevents the validation of fraudulent transactions, it also prevents the system from failing. There are pieces of code in every node of the network, meaning applications can be developed in a very secure way. Moreover, in order to maintain competing interests and consent, the system is also based on rewards and incentives: it releases coins as individuals and businesses provide the server infrastructure that allows the network to run, something called “mining”.
Problem #1: Environmental Impact and Power Cost
However, block chain mining requires a lot of energy in order to function. In places such as Iceland, energy has become a great source of concern. The country has become one of the world’s prime locations for cryptocurrency mining and there is a risk they might run out of power. Moreover, due to its decentralization, tracking transactions is complicated and requires vast computer server capacity and electricity. Most miners require access to trustworthy and affordable power to be sustainable.
Problem #2: Slow Performance
Verification of transactions through “mining” also takes place in a slow manner: it takes on average 10 minutes to generate a block of transactions, and several studies have concluded that the networks can only operate at seven transactions per second (TPS), which is many less than are processed over MasterCard, Visa, PayPal, etc.
Despite the problems, cryptocurrencies offer a number of benefits, including being a very secure way to make transactions, and being more direct than other networks. While we do not fundamentally distrust the existing financial system, with its central and commercial banks, we do believe that competition is at the centre of job creation and innovation.
Anything that can keep the incumbents on their toes is thus a welcome development, and we expect to see not only increasing value from cryptocurrencies in and of themselves, but many consumer-friendly innovations coming out of big banks and even central banks over the years ahead.
