top of page

THE FUTURE OF TRANSACTIONS

Updated: Dec 5, 2023


Blockchain

By Colin Read


WHAT IS A BLOCKCHAIN?

Think of a blockchain as a large Excel workbook that adds a new sheet of recent transactions a number of times each hour. Each new sheet contains a code to the previous block and all the most recent transactions or records. A program then assigns the new set of records its own code to be inserted in the next sheet of transactions. These codes change dramatically for even a minute tampering of a block, which allows any tampering of previous blocks to be easily detected and prevented. It is this generation of the codes for which specialized machines (called miners) compete to obtain generous rewards.


You can’t watch a Super Bowl or open a major newspaper or magazine without being bombarded with messages that tell you the “Future Favors the Bold.” Really?


It is hard to separate hype from fact in the wild and wooly world of cryptocurrency. But, let’s try.

The blockchain that is at the root of cryptocurrency is a natural evolution of the way we have recorded transactions for millennia. Instead of books held at our local accountant’s office, with the county or at our bank, records of transactions can be immortalized on the Cloud.


I know — the first of your concerns is whether that paycheck, that title to your house, that record of sales taxes paid, or that airplane ticket, medical record or bank loan is somehow modified and manipulated if held primarily in the Cloud. That is the problem the blockchain solves.


Let’s instead say that a highly reputable company came forward and offered to record all that data permanently and in one place, instead of myriad places, from the county, to the DMV, to the hospital, or our airlines. Let’s also add that this reputable company will guarantee that our records cannot be subsequently modified without our permission. In other words, perhaps they could insure that would never happen.


If we were comfortable with that company’s service, and if confidentiality is equally guaranteed, that service would definitely be worth something, especially if it offered pathways for us to see our private information whenever we wished, but would not let others see it without our permission.


All these things can be done in the blockchain. A blockchain is simply one big spreadsheet that links records from one moment to the next so that nobody can come along and try to retroactively change the records, just as someone can’t easily rewrite the deeds to our homes held by the county.


The way the blockchain does this is technically interesting, but it is actually deceptively simple as well. This blockchain is a powerful tool that can also allow us to negotiate loans, act as a checking or savings account, trade stocks, buy tickets or other electronic tokens representing something else, and many other transactions only our imagination can contain.


This is a nice innovation. I would imagine that if one single company could do all that for us, it might be worth $50 billion or $100 billion, the size of a very large bank, perhaps. It could maintain those services at almost no cost since you already own the smartphone, computer or tablet that is half the connection to the Cloud. Gone are bank branches, ticket agencies, stock exchanges, and some county clerks.


These efficiency gains will be displacing, but of course every innovation is as well, but the industry will also spur innovation.


Will these innovations change our lives and make the world far more efficient? No. The blockchain is evolutionary, not revolutionary.


That does not stop cryptocurrency fans from making every effort to try to profit from the digital currencies necessary to transact in this way. But, the two trillion-dollar market capitalization of this industry is one huge asset bubble. Maybe fortune favors the bold, but maybe so do Ponzi schemes.

The industry begs reputability. Too often a few people hoping to profit from sky high cryptocurrencies which they hope will go sky higher try to entice the ignorant into the scheme.

When one mentions the inefficiencies of one notorious cryptocurrency, Bitcoin, these crypto bros quickly pivot to the benefits above. The problem is that we can have all the benefits without any of the hype or the huge energy consumption that is an unavoidable problem with Bitcoin.


One of two ways the problems of a volatile crypto market will be solved is a Central Bank Digital Coin that is administered and sponsored safely by the same entity that ensures our dollar maintains its value — the Federal Reserve. Indeed, they are in the works to develop this option for us to transact more directly, without cash, credit cards or even bank accounts. By having the Fed control the currency, we won’t have to worry about wildly fluctuating prices of crypto. When I pay the mortgage, I want to know the value of my currency did not drop 40% last week.


The other problem to solve really only applies to Bitcoin because all but a handful of cryptocurrencies have migrated into a very efficient way to safely perform the blockchain function. In fact, with the second largest coin, Ether, moving to something called Proof-of-Stake to protect transactions, Bitcoin will represent approaching 99% of all inefficiencies in cryptocurrency — inefficiencies that we all ultimately pay. In fact, the average Bitcoin transaction (and only Bitcoin) costs about $440 in electricity costs and other transaction costs, compared to $0.44 for a debit transaction. In fact, the unnecessarily wasteful electricity consumption to “mine” Bitcoin is approaching that of a top twenty country.


Don’t tell that to a Bitcoin miner, though. They make enormous profits from these high transaction costs. But, be rest assured that the values they extol in digital currencies and the efficiency of the blockchain will be realized more readily, speedily and efficiently using Ether, Dogecoin or a myriad other coin. Cryptocurrencies are here to stay, even if Bitcoin will survive only as a last refuge for those who want to go on that wild ride.


Watch for this fascinating industry that will “evolutionize” how we transact. But be careful before you buy into the hype and buy the coins others need you to purchase to preserve and enhance their investments. You will someday, probably soon, be able to transact as easily on your smartphone at very low cost and little hassle, in even more ways than we can with cash. All the details of your transaction will be permanent and easy for you to view any time. There is no boldness necessary for that future, and there is no future in the world of cryptocurrency hype and mining, not here and not anywhere.


Dr. Colin Read is a professor of economics and finance at SUNY Plattsburgh’s School of Business & Economics. You can read his weekly blogs on the economy at www.everybodysbusiness.online

2 views0 comments

Recent Posts

See All

Comments


bottom of page