Battling the Myths Around Blockchain and Cryptocurrency

The birth and rise of the cryptocurrency market over the last decade has been one of the most significant shifts for money since the abolishment of the gold standard nearly a century ago. It has shattered the existing and traditional notions of money and forced us to rethink how traditional money and financial systems work. It has also brought up new and ongoing discourses around digital security, as it is an integral part of the technology. In spite of that, many among us are still quite familiar with the intricacies of the technology.

Market leaders and governments — from JPMorgan Chase to the entire country of Japan — unanimously agree that cryptocurrencies and blockchain hold tremendous potential in 2019. Unlike other emerging technologies like Artificial Intelligence, however, cryptocurrency’s many benefits have not been abstracted and disseminated to the masses over the past several decades, making the system slightly more formidable to those unaware of it,” says James Giancotti, the CEO of Alluva, a token reward-based web app.

For widespread adoption of tokens to become a reality, it is imperative that we first address these teething issues,” he concluded.

Considering how the usage of crypto is picking pace with time, it is crucial that we talk about its inner workings and how it can potentially disrupt the world of traditional finance. To that end, we shall take a look at the many myths and misconceptions around cryptocurrencies in this article.

To begin, let us look at the intricate relationship between the Bitcoin — the first and biggest cryptocurrency — and blockchain technology. Among other things, we will also look at coins and tokens and what they mean in the context of cryptocurrencies.

Myth 1: Cryptocurrency transactions you make are anonymous

If you look at the white paper of Bitcoin, you will notice that it refers to this project as “A Peer-to-Peer Electronic Cash System“. However, an important distinction that many forget to realize is that it is far from being as anonymous or untraceable as cash.

The last few years have seen cryptography experts and law enforcement agencies linking individuals with the transactions they make. Anyone can see the data of a transaction on a blockchain, making Bitcoin and other cryptocurrencies quite transparent. While this is certainly beneficial for accountability, it is less than ideal for the handful of individuals that are looking for an anonymous payment solution. Companies such as Chainalysis now provide blockchain analysis as a service to exchanges, government agencies, and other financial institutions.

However, individuals who prioritize anonymity over other factors such as the popularity of a cryptocurrency have moved to other coins such as Zcash and Monero. These tokens were developed with privacy and relative anonymity as the primary considerations.

Even though traceability has curtailed privacy for some, it has also opened up doors to new use cases and applications. Currently, retail giants such as Walmart are testing supply chain projects that leverage this aspect of the underlying blockchain technology. Even Apple is known to be exploring blockchain to responsibly source minerals from African countries.

We can now provide evidence of the products full journey from mine to factory to customer, and we can also verify the authenticity of the metals in the product. This gives a greater degree of confidence for end consumers who are now becoming more aware of purchasing sustainably and ensuring they are not buying items that are contributing to malevolent practices such as child labour or slavery,” says Sukhi Jutla, an award-winning entrepreneur and blockchain author.

Myth 2: Cryptocurrencies are used for illegal trade

In the distant past, the claim that cryptocurrency was being used to facilitate a large number of transactions on dark web marketplaces did hold some merit. However, most crypto transactions that take place today are not linked with any illegal activity whatsoever. A Chanalysis report concluded illegal transactions accounted for only one percent of all Bitcoin transactions in 2018.

We see a growth in the absolute value of darknet market activity in the last decade as well as a decrease in the percent of that activity as it relates to total cryptocurrency activity,” said Hannah Curtis, Senior Product Manager at Chainalysis.

Not long after American authorities shut down several illegal marketplaces, including the infamous Silk Road, criminals stopped viewing the cryptocurrency as a safe haven, adding to the overall reputation of Bitcoin. Besides, there are companies that specialize in tracing the path of money on the Bitcoin network, including Chainalysis which has assisted in some high-profile criminal investigations as well.

There’s another factor that plays out here — banknotes and traditional cash come with a high level of untraceability, and have been enabling illicit trading activities to a much greater degree.  Even though Bitcoin and other cryptocurrencies have the potential to be used illicit transactions, its real-world use for these applications is quickly diminishing.

Myth 3: Tokens and coins are the same thing

Bitcoin was designed to replace traditional fiat currencies. Its launch in 2009 has seen the emergence of several competitors like Monero and Litecoin. Apart from a few differences, most cryptos work on a similar model with the involvement of a blockchain network that record transactions.

Simultaneously, blockchain has found a wide variety of non-financial use cases and applications of late. Platforms such as EOS and Ethereum have let developers create unique tokens that do not have their own individual blockchain networks. This has resulted in blockchain’s adoption in several industries — with some even using tokens as a replacement for loyalty points at retail establishments.

Deloitte, a market research firm, revealed that a token-based reward program could go on to reduce costs and improve transaction speeds along with the customer experience. “Blockchain is becoming increasingly popular in the real estate industry. There are already several buildings in both the US and Europe that were successfully tokenized and sold to investors. The opportunity to fraction real estate assets allows decreasing the minimum investment size and diversifying portfolios. More and more established real estate professionals and those looking to purchase properties are getting involved, which indicates increasing demand on the market,” says Viktor Viktorov, CEO and co-founder of REINNO.

Blockchain-based tokens can also find significant usage in the insurance industry to automate a large portion of the insurance claim process — an otherwise cumbersome and opaque process.

Myth 4: Blockchain is Bitcoin

While many individuals consider blockchain and Bitcoin to be the same thing, that is far from accurate.

The first blockchain was conceptualized roughly 18 years before Bitcoin was introduced to the world. Stuart Haber and W. Stornetta published a research paper in 1991, titled ‘How to timestamp a digital document’. In the paper, they explained how a ‘chain’ – which is secured cryptographically – could be used to store timestamps in a tamper-proof manner. They published another paper a year later, where they talked about the usage of Merkle trees to improve the original concept, its efficiency, and reliability.

However, the first practical usage of blockchain technology only emerged after the release of Bitcoin in 2009. Satoshi Nakamoto, the pseudonymous creator of the cryptocurrency, took into account the several proposals that were brought forward in the 1992 paper, including the Merkle trees, cryptographic hash functions, and digital signatures. He also developed the “proof of work” consensus mechanism, which ensured that Bitcoin transactions would be permanent while being decentralized at the same time. And with this, the modern blockchain first emerged.

Notably, when Satoshi Nakamoto published the Bitcoin white paper, he referred to the technology as a ‘block chain’. Over time, the term ‘blockchain’ grew in usage and popularity.

Myth 5: Blockchains can only find application in cryptocurrencies

There are several private and public organizations that have started to use blockchain by integrating them in various processes and industries, including healthcare, energy, banking, and trade.

Simultaneously, Decentralized Applications (DApps) that rely on an underlying blockchain have grown in popularity after Ethereum released in 2015 with its smart contract technology.

Smart contracts allow computers to identify and verify a contract without putting any trusted third-part to work, which then saves time and money on the settlement front of digital and physical assets. Smart contracts are highly transparent and secure since all transactions are securely logged to the underlying blockchain and cannot be modified or reversed in the future. 

The usage of blockchain outside the payment sphere was largely unexplored before the launch of Ethereum. Now that the technology has picked up pace, token-based applications like CryptoKitties have seen transactions amounting to millions of dollars and have begun attracting a more diverse audience to the crypto market.

Myth 6: Cryptocurrencies are only created by large companies

The year 2019 saw several large companies announcing that they would be creating their own cryptocurrencies, including AirAsia, Facebook, JPMorgan, and Goldman Sachs. With giants in tech and finance now in the crypto race, a common misconception has emerged around cryptocurrencies, namely that only large companies are capable of creating cryptocurrencies.

Naturally, that is not the case. The entire crypto ecosystem was designed to function in the absence of governments and private companies. Popular cryptocurrencies such as Ethereum, Bitcoin, and others are open source, which means that singular companies and individuals do not manage or own these projects. Several developers contribute to cryptocurrency projects on their own time to varying degrees. Since everyone can audit changes to the code, it becomes trivial to fix bugs and other security loopholes that surround these open-source cryptocurrencies.

Even though Bitcoin was developed by one individual — Satoshi Nakamoto — it has since witnessed the involvement of hundreds of individuals, according to figures available on Github.

Anyone can create one their own cryptocurrency by starting from scratch or even modifying specific characteristics of an existing project. Litecoin, for instance, was one of the first alternatives to Bitcoin. The creator of the 2011-launched cryptocurrency, Charlie Lee, wanted a faster digital currency that was similar to Bitcoin in most other ways.

A group of developers even decided to create a spin-off of Bitcoin, named Bitcoin Cash, in August 2017.

Myth 7: Cryptocurrency mining damages the environment

Cryptocurrencies are often criticized for their power-intensive nature since they need resources to be mined. Some statistics even claim that the energy for mining could be used to power around 6 million American households. However, this argument is somewhat flawed since mining would still only consume approximately five percent of the total domestic electricity usage in American homes.

CoinShares Group, a digital asset management firm, concluded in November 2018 that more than 75 percent of all cryptocurrency miners are putting renewable energy to use. The report also highlighted that a significant portion of the global mining infrastructure is setup in places that have surplus renewable energy, such as the Sichuan province in China.

For infrastructure that it not based on renewable energy, it is also worth pointing out that other digital payment methods consume energy as well to power trading terminals, wire transfers, and credit card transactions.

Nevertheless, Ethereum and a handful of other cryptocurrencies have moved on to using Proof-of-Stake (PoS) consensus mechanisms that do not require validators to consume copious amounts of energy. Many in the cryptocurrency community believe that this would give Ethereum an edge over other cryptocurrencies; however, the impact of PoS is yet to be seen.

Myth 8: Bitcoin is the only blockchain

Bitcoin is an important name in the cryptocurrency scene. However, as mentioned above, it is not the only cryptocurrency. Cryptocurrencies are based on digital ledgers, and there are alternative cryptocurrencies such as Ethereum, Monero, and Litecoin, that have their own blockchain with varying characteristics, records, and sizes.

According to data from CoinMarketCap, there are around 3,000 cryptocurrencies in circulation as of December 2019.

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Recent years have seen companies such as Microsoft and IBM venturing into the commercial applications of blockchain as well, particularly in the logistics and healthcare industries. IBM partnered with the shipping giant Maersk to bring supply chain events to a private blockchain with the aim of eliminating legacy systems and paperwork. The companies believe that this will bring down the rate of human error and other kinds of fraudulent activities at a lower cost than other mitigation strategies.

Token-based usage of blockchain has also grown in popularity. Companies such as HTC, Opera, and Samsung have added digital wallets to their browsers and mobile devices that could potentially boost the adoption of blockchain technology as a whole.

Blockchains and cryptocurrencies are growing in usage and application, opening new doors for companies and financial institutions across industries. This decade has been significant for these two emerging platforms, and the next decade could have even more in store for them.