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Juan Villaverde is an econometric and mathematician dedicated to the analysis of cryptocurrencies since 2012. He directs the Weiss Ratings team of analysts and programmers who created Weiss's cryptocurrency ratings.
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Large companies have accumulated huge treasury chests of customer data. They stored the data in a central location. And they have connected their huge centralized databases to the Internet.
In retrospect, he was not very intelligent.
Despite the best firewalls that anyone could erect, they actually exposed their precious data to anyone on the Web – four billion users and counting.
You are probably well aware of this now. But for many years, most people had no idea how vulnerable their private data was.
Even in the boardrooms, they did not know it. Or, more likely, they did not want to know.
They were trapped between a rock and a difficult place – between the fastest and widespread diffusion of technology of all time (the Internet) and the abject failure to secure it (from cyberattacks).
Result: Only with the five most known hacks to date – on Yahoo, Hold Security, Marriott, Adult Friend Finder and Equifax – over 5.2 billion customer records have been compromised.
A large number? To hell with it!
5.2 billion is 16 times the population of the United States. It is almost twice the population of China and India combined. And unless something is done to solve the problem in a fundamental and radical way, it can only get worse, much worse.
Blockchain must be part of the solution
Blockchain or, more generally, Distributed Ledger Technology (DLT), is an indispensable piece of the puzzle to get out of this mess.
Why is it so safe? The main reason is an important paradigm shift on the way data is stored: instead of being centralized in one location or under the control of a central authority, data is dispersed in countless positions without a single entity holding all the keys.
This is one of the reasons why so many Fortune 500 companies are already crowded into the blockchain. And that's why the trend is set to accelerate in 2019.
Indirectly, this is good news for cryptocurrencies. It will spur a new large capital inflow for blockchain research. It will attract tens of thousands of developers. It will cryptography on the map like never before.
But beyond this broad impact …
The blockchain solutions sought by most companies have little to do with the public, the open cryptocurrencies traded on the exchanges.
To understand why, follow me together as I step through some simple steps …
Step 1. Do not confuse blockchain with cryptocurrencies.
What is the difference? Simple …
Blockchain is the technology. Cryptocurrencies were only the first application of this technology.
And now, as the industry evolves, companies and other institutions are likely to create new applications that have little or nothing to do with cryptocurrencies.
They will apply the technology to strengthen the security of their mass databases.
They will use technology to destroy and transform the world of insurance, land ownership, supply management, even voting.
Some of these new applications will include a cryptocurrency. But many will not.
Attention: At this time, cryptographically focused media eagerly report any news about companies jumping in blockchain, but often fails to adequately reveal that many of these efforts could have little impact on encrypted exchanges on the stock exchange.
Adding to the confusion, when companies immerse themselves in the blockchain, they sometimes launch their own cryptocurrency tokens for no apparent reason other than the PR effect. Like the red ribbon on a gift … or, if the application is fundamentally imperfect, like lipstick on a pig.
Step 2. Make sure you understand the basic concepts.
A distributed accounting it is a database shared by a group of people who accept the rules that regulate their use.
Rules that are 100% unambiguous, totally transparent and … absolutely strict!
If you follow the rules, you can add new information to the database. If you break the rules, you are expelled – quickly and permanently.
Rules are called "rules of consent". The addition of new information to the database is called "writing in the ledger".
A blockchain – data blocks linked together in a chain or chains – was the first type of distributed ledger used in cryptocurrencies. But it's not the only kind.
Decentralization it's the key. At this time, all societies and nations are centralized to a certain extent. Furthermore, they are hierarchical. Unless most of the participants obey leadership, the organization sinks into disarray, even into chaos.
What is so innovative in distributed registers is that they are decentralized. There is no hierarchical leadership. And it works.
In theory, at least, all the participants are equal. No person controls the ledger. No specific part is able to unilaterally force one's will on the other participants.
Trustlessness is another important concept: let's say that the distributed ledger is "without trust". In other words, participants do not need to trust an authority – let alone one another. As long as two individuals or entities adhere to the rules, they do not even need to know each other to build a report on the ledger.
Cryptocurrencies they are the most popular blockchain application we know today. In fact, the first successful distributed register and the first successful cryptocurrency share the same origin: Bitcoin.
But then again: a cryptocurrency is not blockchain technology. It's just a technology application: a digital asset registered in the shared database, the distributed ledger.
Digital resources are not new. The dollars in your bank account are also digital assets. So most of the stocks and bonds. In fact, 92% of the currency that exists today is digital.
What makes cryptocurrencies different from all other digital resources is that there is no central authority or a government-based legal system to enforce the rules.
Step 3. Recognize that the digital world makes everything easy to copy and steal.
This brings us back to where we started: as soon as you create something of value in digital format on the Web, you can allow someone to download, steal, copy, share and copy again.
How to throw down a Picasso with a simple mouse click. Not only can you make a copy, you can create an absolutely identical in every imaginable way. Immediately!
You see, databases and digital resources are, in their essence, nothing but computer files. And you can replicate them with two simple commands: copy and paste.
All that is digital is vulnerable in this sense. The text you are reading now, for example. Just highlight this paragraph, press Ctrl-C (copy) and Ctrl-V (paste). Soon! You have an identical copy.
This helps explain why billions of customer records have been breached. And that's why the distributed registers are so revolutionary, so urgently needed. It is the only existing technology that can prevent illegal copying.
It is also the only technology that can help distinguish between real and original digital assets and fake copies.
But until distributed master books were invented, the only way to separate originals from counterfeits was to entrust this task to a central authority: finance ministries, treasury departments, central banks. They and only they had – and still have – the last word about which digital money or good is real and which is false.
Step 4. Do not forget when and why Bitcoin was invented.
It was in the wake of the 2008 debt crisis. The entire financial world as we know it was crumbling around us. And much of the blame fell on the shoulders of the central authorities who abused their powers.
The problem: governments and central banks have been given much more authority than simply validating real money and protecting against counterfeiting. They also have the power to control or influence how much money there is and who gets the most shares.
Worse, they had the power to abuse their authority – print money in unlimited quantities … manage perpetual budget deficits … devalue our sweaty currency … promote an environment that encourages extreme risk taking. .. and create dangerous speculative bubbles.
Who has enough power to control that kind of central authority? At this moment, nobody.
That's why Bitcoin was invented. It is not controlled by any authority. Nor can it be confiscated by any government.
Every time a Bitcoin transaction is sent, tens of thousands of independent validators are asked to check if that money is real. If the answer is "yes", the transaction is approved. Otherwise, it is rejected. Regardless of where a sender and a recipient are in the world, it takes only about one hour to confirm a Bitcoin payment. (And in the cryptic world, it's slow!)
Compare it with equivalent transactions in the banking system. With most international transfers, it can take two to three business days to send money from bank A to bank B. Try sending money to a remote country in Asia from the west and you might look a week or two before the payment is canceled. This is because the centralized version of digital money requires a long chain of intermediaries, each of which controls the central authority of their currency before a payment can be confirmed.
Blockchain is much more efficient. Removes virtually all intermediaries from the process, leaving only three parts: the sender, the recipient and the blockchain itself. Alternative forms of books distributed masters are even faster than Bitcoin. And in the years to come, we are forced to see these alternatives grow by leaps and bounds.
Step 5. Take a long and clear look at the future.
When you do, you'll see incredible things:
Industries of all kinds will be interrupted, almost all today.
This upheaval will be much wider than the world of money and finance. It could also have an impact on almost every aspect of our life.
Blockchain and other types of distributed Ledger technology will revolutionize society in ways that we do not yet fully understand.
But remember: Blockchain is the technology. Cryptocurrency is just a way to apply this technology. So, many of the innovations will not have a direct impact on cryptocurrencies.
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