Many people have been left wondering what the big deal is with so many high-level executives placing bets on the blockchain.
From banking to the creation of art and entertainment to data storage, the blockchain is upending almost every sector of the economy. Blockchain technology is now ingrained in the world's infrastructure, with only the early days of the internet (the late 1990s) to compare it to.
What is Blockchain Technology?
A database that keeps track of transactions called a blockchain. The majority of blockchains use a network of several computers connected globally for maintenance purposes while also being open, transparent, and public ledgers. The blockchain that is currently most widely used is the one that is the clearest and easiest to understand. Businesses like J.P. Morgan have started creating their own private blockchains to take benefit of the technology's security and scalability while eschewing its transparency and decentralized features.
Blockchain is a broad term in and of itself, and not all blockchains are decentralized. A system can function in a variety of ways, depending on the ecology, the economics, and the consensus processes (the way in which each blockchain will actually determine real transactions and handle them). Some blockchains are decentralized while others are not, and some look to be decentralized while actually not being so.
Bitcoin utilizes a Proof-of-Work consensus process and is completely decentralized. Bitcoin maintains transparency and reliability by logging transactions on a public ledger that is accessible to everyone. POW consensus systems operate by connecting computers all around the world. These computers collaborate in various groups (mining pools) round the clock, every day of the week, to try and answer more difficult math problems. The method is kept fair and equal for all participating groups as the issue becomes more complex with each iteration. Based on how much hash power or energy each member of the winning group provided, the group that creates the "block" or solution to the equation receives a portion of the bitcoin reward. Bitcoin has never been hacked or altered due to the POW method, and it most likely won't be.
Bitcoin, as a cryptocurrency store of value, is not intended to be used to purchase everyday items. The great thing about Bitcoin is how simple the economics are: reduce supply over time and the price should rise in lockstep. Bitcoin will remain a programmatically safe and secure holder of value, with the annual incoming bitcoin supply being halved every four years and only 21 million total coins ever created. Bitcoin is similar to digital gold in some ways.
Ethereum is the second-largest cryptocurrency and has recently gained popularity. Ethereum is nearly attempting to replace the internet. They are known as layer one applications because they create ground-level software that anyone can build on. They provide dApps (decentralized apps), domain names, NFTs and smart contracts, DeFi services such as lending and borrowing money, and even launch ERC-20 tokens, which are cryptocurrency tokens. These projects include the lending platform Aave, the data indexer The Graph, and the information aggregator Chainlink.
Ethereum currently uses a Proof-of-Work consensus mechanism, but they are in the process of transitioning to a Proof-of-Stake consensus. Their previous POW system functioned very similarly to Bitcoins. The new POS upgrade will use staked coins instead of energy to make decisions and validate transactions. This means that anyone can put their ETH tokens in a staking pool that pays a certain percentage of APY and vote on governance and other protocol decisions. Some argue that, while POS is more scalable than POW, it sacrifices some decentralization. Allowing those with the majority of the coin to have the most influence on decisions may exclude smaller retail investors and concentrate all power in the hands of a few.
DAOs, or Decentralized Autonomous Organizations, are a concept introduced by blockchains. These blockchain-based organizations use smart contracts to automate decision-making and give community members a vote and a voice in what is going on in the network. DAOs are a revolutionary idea with plenty of room for growth in the future. They are a new way to form a business structure.
Smart Contract Blockchains, Explained
Smart contracts are automated functions built on top of blockchains that are used to execute contracts or agreements once certain conditions are met. These simple programs can run on their own without the need for a third party or intermediary. Participants can be confident that this automated program will be fair and impartial, adhering to the original terms.
Assume two people want to make a deal because one of them is selling some documents. For fear of not receiving the product, the buyer is usually hesitant to send money directly to the seller. The seller is equally concerned that if they send the documents first, they will not receive the money. A smart contract would enable them to agree that once the program has collected the documents from the seller and the money from the buyer, everything will be released to its new rightful owner.
Smart contracts were a significant step forward in the industry's innovation, and they are bringing in some interesting and exciting use cases. Smart contracts have developed a secure and independent method of transacting over the internet that does not require trust on either end. Currently, they are primarily used for lending and borrowing money, as well as minting NFTs, but applications range from real estate to gaming and beyond.
Smart contracts have the potential to revolutionize business. These can be a corporation's best friend, from lowering transaction costs to keeping information secure digitally. Companies are already implementing disruptive technology to reduce overhead and increase overall efficiency.
Investing In Blockchain Companies
Before Investing in blockchain or cryptocurrency, beginners should be aware of a few industry-accepted rules.
Rule #1: DYOR
"Do Your Own Research." This is the most important rule because there is virtually no regulation or legal clarity regarding what is and isn't permitted. This means that some projects and businesses are nothing more than elaborate scams. There are plenty of bad actors duping investors in the cryptocurrency space because there are virtually no rules. Always do your own research and don't put your money into anything you don't completely understand, meaning you understand it well enough to explain it to an eight-year-old.
Rule #2: "Not your keys, not your coins”
This is a well-known phrase in the cryptocurrency community. This refers to whether your cryptocurrency is only accessible to you and, in many cases, whether it is stored on a hot or cold wallet. When you keep your coins in your Coinbase wallet, Coinbase also has access to them, which is similar to keeping money in a bank. Personal cold wallets are the ideal solution for cryptocurrency, which is known for being anti-bank. A cold wallet, like a Ledger, is a physical device that resembles a hard drive. Your wallet and cryptocurrency are technically still online (they can never be removed from the blockchain), while your password for accessing the wallet is displayed only once when you receive the device. The process goes offline, and without the seed phrase, access to a cold wallet is nearly impossible. Keeping coins in a centralized wallet increases the likelihood of falling victim to a scam.
Rule #3: Volatility is to be expected in any immature and highly liquid market.
The cryptocurrency market is dominated by Bitcoin, which means that when the price of Bitcoin rises or falls, the rest of the market quickly follows. When comparing the cryptocurrency market (worth less than one billion dollars today) to the global equity market (worth more than 100 TRILLION dollars), it quickly becomes clear why prices in younger, emerging markets are much less stable.
Rule #4: Do not rely on verification
This is similar to "DYOR," but it is more than worth repeating. People and businesses that look better than Google will only feed you what you want to hear. This is simply an unfortunate aspect of the industry in the absence of regulation. Never trust the information you're told or see; always double-check everything.
Rule #5: Define industry jargon
There is some strange language used in the cryptocurrency and blockchain space, and it's definitely worth getting educated a little before diving in and becoming overwhelmed. Understanding the terminology is critical to fully comprehending what is going on in the industry. Investopedia and YouTube are two excellent resources for this.
There are prominent centralized exchanges that provide cryptocurrency investments, as well as decentralized exchanges (DEXs). The more popular and typically easier route is to use centralized exchanges such as Coinbase or FTX. At any time, coins can be transferred from an exchange wallet to a private wallet.
One of the most effective ways to invest in cryptocurrency is to DCA (dollar cost average), which involves automating the purchase of a specific cryptocurrency and amount on a weekly, biweekly, or monthly basis. This enables people to ignore market volatility and invest consistently over time, compounding their money.
Blockchain Adoption is Happening!
In 2021, El Salvador's president, Nayib Bukele, signed legislation making Bitcoin legal tender. The Central African Republic recently followed suit, becoming the first African country to fully integrate the dominant cryptocurrency into its economy. These countries hope that Bitcoin will bring financial systems to their unbanked populations, restore faith in their economies, fuel growth, and increase citizenship and tourism.
Exxon, the oil and gas company, recently announced that it has also joined the Bitcoin party. Following a year-long trial period in which they used their excess emissions to mine the leading cryptocurrency, they intend to expand it to even more plants. Mining Bitcoin is an almost obvious option for some of the world's largest gas producers, such as Exxon. They continue to emit these gasses into the atmosphere, which has a negative impact on the environment. They can use this squandered gas to power Bitcoin mining rigs, converting the surplus into profits.
Depending on who and where you are, blockchain ETFs and crypto stocks have recently been released. The United States has yet to legalize a solid fund that includes spot price cryptocurrencies for retail investors, whereas accredited investors can invest in Grayscale funds. Riot Blockchain (Bitcoin mining company), Coinbase (crypto exchange), and Microstrategy are all publicly traded blockchain-related companies (holding a lot of Bitcoin). Because of the regulation implemented on public companies and required documents/public announcements by the United States SEC, these companies will likely ride the growth of the crypto market with less volatility while being much safer investments.
By the end of 2021, OpenSea, the leading NFT marketplace, had surpassed four billion dollars in monthly volume. Not bad for a marketplace not even a year old. With the art and community aspects, NFTs have brought even more people into the blockchain space, and have exploded in popularity since becoming popular in June of 2021. NFTs provide a plethora of use cases on top of the blockchain, many of which have already been tested by major corporations such as Budweiser, Visa, Coachella, and many more.
Over the past several years, participation has increased at well-attended conferences and events like Bitcoin Miami and NFT NYC. In comparison to last year, Bitcoin Miami saw a 5x increase in participants, and NFT NYC has kept extending the venues for its events. Since they are some of the biggest conferences that both newcomers and top CEOs often attend, these events pretty accurately reflect the level of industry growth and public usage.
Blockchain Is Innovative
Across the board, blockchain is upending all industries. In some ways, this technology is upending every single business model. This technology is opening doors for everyone, from the biggest banks in the world to local artists and young content creators.
Applications range from Microsoft transforming video game characters into NFTs to Walmart's supply chain. Future brand trust, loyalty, and recognition will be largely influenced by transparency, security, and ownership, and those who accept, implement, and develop their businesses around blockchain will succeed.
Blockchain will soon become the obvious solution to many issues we didn't even know we had, both in the business sector and in our personal lives, thanks to all the prospects for extra revenue sources and long-term growth.
Also published here.