This was originally from a post I published on my blog on 27th February 2020 about Cryptocurrency. This post is intended to encourage discussion rather than be some scientific study about the topic. If anyone has expertise in these areas please let me know.
Welcome to the 5th installment to my Selfish Effective altruism series, this time revolving around money - more specifically a digital kind of money called 'Cryptocurrency'.
TL;DR: Cryptocurrency has the large potential to transform currency, but has the bottlenecks of governance, scalability and power cost since it goes through computationally taxing processes which require a lot of energy - which may also damage the environment.
Cryptocurrency is potentially a very world-changing technological innovation, similar to how the internet changed the world over 25 years ago. This post was inspired by an 80,000 hours podcast episode where they interview the founder of 'Ethereum'. Cryptocurrency is digital currency which can be transferred on-line and anywhere in the world. Bitcoin is an example of cryptocurrency. Whilst I was doing research for this post, I thought that since it was digital it could be hacked by some very seasoned programmers, but I was proven wrong. Let's just say that, whilst it's not impossible, it's not exactly worth anyone's time either. Another thing I've learned whilst writing this post is that cryptocurrency is also not subject to things like inflation, therefore it can be quite a reliable currency - especially for the poor suffering from corrupt institutional control of their money. I will explain all of these in detail in the post.
But first of all, before we get into the specific problems, you will need to learn what a "Blockchain" is, as that's a very important aspect of cryptocurrency.
Introduction to Block-chain
Block chains are a large collection of data, much like a virtually endless spreadsheet on many computers, created by a mysterious Japanese entity called Satoshi Nakomoto. The 'block' is what contains the data and the chain is what strings it together to form a block-chain. Let's demonstrate an example: Say you want to purchase something - maybe a lamp on-line. The block stores information about the transaction like the date, time, the dollar amount of the said purchase and who was involved in the transaction. Up to 1MB can be stored in a single block, less than an MP3 file but can contain the data of a few thousand transactions.
Real world currencies are managed by public institutions like the Bank of England for the pound sterling or the US Federal bank for the US dollar; they make sure that money supply is well-managed and suppress inflation. However, this system is not held by any particular institution, therefore this means that people can make transactions on this without needing to worry if an institution has checked their transactions.
There is also a term called 'Mining' which is adding blocks to the blockchain; the meaning is a bit counter-intuitive since mining would be extracting from something rather than adding to it. Though there is a part of the definition of mining that agrees with this term. This process is done through a "Proof of work" system, which has a computer prove the work they have done by solving a computationally taxing maths problem. The amount of effort there is similar to the physical effort of mining. As of this January, the chances of solving such problems are 1 in a trillion - thus requiring a lot of energy to run the programs to solve these. Despite this immense power cost, it can prove useful to weeding out frauds such as accidentally sending things to the wrong person, as the miners try and find who made the transaction as well as which transaction occurred. Since there is this "Proof of work system", hacking into the blockchain is as difficult as moving a mountain, as you would need to be able to seize control of over 50% of all the blockchains to hack into it. Although it is possible, it is pretty unlikely since most hackers may not have the tendency of Dashrath Manji, so they may just decide to give up.
Keep in mind the definition of 'Mining' for later, since I will go on to the problems with mining. For now we will be looking at what problems Cryptocurrency can solve.
Possible solution to poverty
Bill Gates, despite being against cryptocurrency in the past, believes that it is the solution to the money problem occurring in low-income countries and it can also help to improve healthcare and agriculture. Sun Exchange is helping this idea come into fruition, to make sure that, for example, no child cooks with unsafe kerosene.
A city in turkey called Konya, with a population of 2.4 million as well as a place with rich mosques and a past, plan to use this currency, as revealed by Mayor Ugur Ibrahim on 16th January. Turkey itself is one of the largest users of cryptocurrency along with Brazil, South Africa, Columbia and Argentina with 20% use. Turkey also has quite a high level of inflation, therefore they are likely to be one of the first places to use Bitcoin. Konya plans to use this for social support programs, corporation events, public transport and environmental services. A doctoral who goes by 'Cibikdiken' (I cannot pronounce the name), who operates as the adviser to projects like 'True Feedback', states that they want their crew of 7 block-chain developers to seek ways in using block-chain to finance social platforms, the prototype is plan to be debuted in 2021.
The Global Findex Database 2014 mentions that digital payments have both benefits for senders and receivers such as increased payment speeds and lowered costs of disbursing and receiving them. Joi Ito, director of MIT media Lab, says that Bitcoin can reduce the complexities of the financial system, with an even playing field not needing to have people like pensioners with lots of money go through mediums that don't resemble them well.
This can also elevate poverty in places like sub-Sahara Africa, where people live on just $1 a day. There are some solutions to this poverty like micro finance, which provide loans for individuals or small businesses like farmers. However this could be manipulated through inflation and government corruption - hence, at best farmers would be denied access to these loans or at worst getting lands taken away. Since bitcoin does not operate on any kind of government institution, there is a more level playing field which could be a solution to this issue. One such company that tries to solve this problem is GoTenna who have made a product of the same name which is a low power node, reliant on Bluetooth networks without needing the internet. They have teamed up with 'Samoruai Wallet' to make Txtena which allows bitcoin transfer without needing the internet - though eventually they will need it.
In October 2019, Xi Jinping (whom you may know from my post about china), gave his consolidation about cryptocurrency, therefore China, already bursting with growing innovation, may release their cryptocurrency this year.
Of course, Bitcoin doesn't come without its problems, most notably, scalability, cost, speed, governance (conflicts with public and private chains). I hope that you have kept the term "Mining" in mind because it will come up here.
Dangers and problems with Bitcoin
There are seldom many rules set in place for governance, since Blockchain is in its infancy. The internet, despite being a public platform like Blockchain, has standards put in place thanks to institutions like the Internet Engineering Task Force. Although companies like IBM, AWS, Oracle, Microsoft and others are experimenting with Blockchain, as well as JPMorgan and Skrill offering cryptocurrency services, Blockchain is still quite niche.
There are some solutions, for example Jack Dorsey who is the CeO of a fintech company called Square, has in interest in cryptocurrency and wants to establish a "Layer 2" solution which is basically a payment protocol which operates on top of the cryptocurrency, intended to take off some of the processing power of cryptocurrency which can solve the scalability problem. This is also known as the "Lightning network" - though it is far from a polished solution. This solution was also agreed with by Brian Armstrong, CeO of Coinbase as he believes that they are vital to making cryptocurrency useful. He also says that there is a 'privacy coin' being developed over the decade because it does not make sense to broadcast every payment as transparent - though this could create conflicts with certain institutions.
There is also a concern about energy usage which is said to have been a lot. As mentioned before, the "Proof of work" is a very demanding procedure for the computers. The energy cost of mining is speculated to be far greater than Google's entire computing power - a mere 5% of the cost of mining. Mining happens where there are large amounts of speeds and costs are low. Since the mining energy is not concerned with where the energy comes from, they end up coming from power plans that consume fossil fuels, which generate pollution. This has a number of climate impacts, according to a study by New Mexico University, for every $1 of bitcoin produced, almost half of that contributes to climate damage in the US. Not to mention there is also the energy required to cool down the machines mining the bitcoin.
Cryptocurrency is quite a promising digital system. Although it does have a lot of bottlenecks, it does not take short of experienced people to tackle these bottlenecks. If we solved these problems then the cryptocurrency could be a very promising way of solving problems with corrupt governments, poverty and could help less developed countries get an edge in this competitive 21st century economy.
In the future I may make a post about the specific cryptocurrencies out there and perhaps mention the goals of them. I would like to thank 80,000 hours for inspiring me to make this post with their podcast with the founder of Ethereum. I recommend you check that out too.
That's all from me!