Although currency is just one of several possible uses for blockchain technology, it is the most popular. Similarly, although bitcoin is only one of many currencies sold through the blockchain, it is certainly the most famous currency.
Many recent initiatives have focused on the broader possibilities of blockchain technology, but it is rarely possible to find any general discussion of blockchain without reference to Bitcoins, or at least currencies that support blockchain. Since currency applications dominate discussions about blockchain and represent the most mature and well-known applications, they have a great influence on the development of blockchain technologies in a broader sense.
How do they work?
Bitcoin was launched by Satoshi Nakamoto (a pseudonym) by the mysterious and elusive publisher of an article that describes how cryptography combined with a distributed state book can be used to implement digital currency without a central authority to verify the authenticity of payments.
Traditionally, people can exchange money with strangers because they both trust a third party, usually this relates to the validity of banknotes or intermediaries, such as a bank or currency exchange.
The Nakamoto system does not have a hard currency and intermediaries, but creates a reliable system thanks to the innovative use of cryptography and peer-to-peer networks. When one user sends Bitcoin to another, transaction data (such as the address of the sender and recipient, as well as the amount of funds transferred) are transferred to the Bitcoin network so that the transaction can be confirmed by all network participants.
After the transaction has been approved by the network, it is packaged into a “block” of transactions and added to the ever-growing list of blocks that form the blockchain book through the “mining” process.
This list is hosted by peers online. Bitcoin also has the ability to generate and add new bitcoins to the system that have characteristics from the implementation of individual functions that they may have implemented in their own blockchain, this provides an inexpensive, easily accessible and stable infrastructure, making it an excellent sandbox for exploring ideas. Other blockchain-based currencies have been created for wider use.
Ethereum is a blockchain created based on the results of Vitaliy Buterin’s campaign and crowdfunding. It includes a currency (ether called “fuel”), as well as a code that can be used to implement a wide range of non-financial functions.
Potential Impact and Developments
In 2014, the conclusion of the European Banking Authority noted a number of risks associated with the blockchain currency. This conclusion also rejects their immediate advantages – speed, security and low cost – as insignificant in the EU, where traditional transfers are already carried out relatively quickly, safely and cheaply.
For many users, the real advantages of blockchain-based currencies are not only a slight saving in time and money, but also in functionality and value that are not found in traditional currencies.
These include the widely publicized “problems” of Bitcoin (such as a huge jump in its value and use in illegal markets), which may have attracted many new users.
Simply put, if in Europe there were no significant advantages from the use of blockchain-based currencies, then in Europe they would not bring significant benefits. However, the use of blockchain-based currencies continues to grow, despite a serious security breach that has become a test of the ideological foundations of Ethereum.
These currencies are already at the forefront of blockchain development, which could lead to major techno-social upheavals.
If they realize their potential, they could initiate a decentralization process, as a result of which institutions that traditionally manage finances, including governments and banks, become less influential.
On the other hand, these same governments and banks are currently leading blockchain research and development in accordance with their own goals. These blockchains may be less decentralized and transparent than others.
However, perhaps the greatest influence of currencies based on the blockchain will be provided by other areas, in addition to the financial system.
Bitcoin et al provides a broad user base, fertile space for experimentation and the “fuel” to push new ideas forward.
Even if Bitcoin does not revolutionize the financial system, it may open the way for other implementations that can bring serious benefits, such as supply chains and public services. Although discussion of a wide range of blockchain applications has now become commonplace, currencies such as bitcoin have dominated most media in recent years and have attracted politicians’ attention to blockchain, which may affect technology development.
In other words, frequent references to fluctuations in the value of bitcoins and their use in black markets can distract the relevant participants and the public from a more productive discussion about the wide range of opportunities and problems that this technology actually creates.
Preliminary policy making
Blockchain currency presents many legal and regulatory issues, including consumer protection mechanisms, enforcement methods, and opportunities to engage in illegal activities, such as tax evasion and the sale of illegal goods.
They also provide citizens with a number of potential benefits, including lower costs, increased security, and a more accessible and innovative financial system.
These and other issues were recognized in a recent proposal adopted by the European Parliament, which also emphasized the wider potential of blockchain technology “far beyond the financial sector” and called for a proportional approach to regulating and developing relevant capacity and experience at the EU level.