The Cryptic World of Crypto

The Cryptic World of Crypto

By Eugene Curtin

The believers are legion, and often armed with painful reminders of missed investment opportunities. Who, they ask, as the now-ubiquitous internet began its rise to dominance in the 1990s, saw the potential of Google, Amazon, Twitter or Facebook and the spectacular income opportunities those publicly traded companies offered?

Who, in 1981, snapped up Warren Buffett’s Berkshire Hathaway at $425 a share, a company that seemed ordinary during the 1970s but was, we now know, on an upward trajectory that today sees that share valued above $426,000?

The latest contender in the “If only I knew then what I know now” sweepstakes is cryptocurrency, a concept that to generations of people marinated in the cash-in-the-bank mentality often seems a mysterious and perhaps even mystical invention. Yet, there is nothing ethereal about the $1.6 billion that a $100 investment in Bitcoin in 2010 yields today.

On May 22 of that year, computer programmer Laszlo Hanyecz famously purchased two Papa John’s pizzas for 10,000 Bitcoin at a time when Bitcoins were valued at an almost invisible 0.0025 cents per coin and were thought of, if they were thought of at all outside the fevered ranks of digital dreamers, as a science fiction fad. Hanyecz’s 10,000 bitcoins were worth a total of $25 back then, not unreasonable for two large pizzas.

A dozen years later, each of those 10,000 coins is valued at $40,000, meaning a $25 purchase of 10,000 Bitcoins in 2010 would today yield $400 million. Round that out to an even $100 investment and you’re looking at more than $1.5 billion.

Indeed, as of June 14, 2021, Bitcoin’s market capitalization above $758 billion exceeded the $647 billion market cap of Buffett’s celebrated investment empire. And it achieved that in 11 years.

The phenomena of Bitcoin — the original cryptocurrency — and of the critical “blockchain” technology that underlies it and the thousands of risky cryptocurrencies that have emerged in Bitcoin’s wake, are taught at Creighton University’s Heider College of Business through its Bachelor of Science in Business Administration, with concentrations in Business Intelligence and Analytics or Finance and Technology FinTech.

What, then, are these cryptocurrencies, often referred to as altcoins — “alternative” coins to Bitcoin, the grandaddy of them all? How do these currencies work? Who accepts them as payment? Is their utility dependent upon being accepted as mediums of exchange?

And what of blockchain? Although cryptocurrencies get the publicity, many among the crypto cognoscenti insist that the true revolution is being wrought by the underlying blockchain technology, a virtually impenetrable and unhackable online ledger that publicly, visibly and transparently records and confirms every crypto transaction with significant anonymity.

For answers, we turned to Jeffrey Milewski, an instructor in economics and finance at Heider who teaches the FinTech course, of which blockchain and cryptocurrencies are components.

“I teach two courses,” Milewski says. “I teach one called Foundations of FinTech (Financial Technology) and the other one is a blockchain course. Foundations of FinTech covers the entire financial services industry in terms of how technology is affecting it, whereas the blockchain course is specifically about the cryptocurrencies, the blockchain, business cases, technologies and case studies.”

Milewski belies the image of the crypto-alchemist mystically transforming digital funny money into huge fortunes. Young and upbeat he may be, and also bullish on the future of blockchain technology, but he is not overwhelmed by the idea of digital money, which he says is really just the latest aspect of the digital revolution — perhaps, really, just the latest addition to a universe of financial tools that already has transcended paper money to include credit cards, debit cards, checks, money orders, and even gold if, for example, a dealership were willing to accept 10 ounces of gold for an automobile, and why not?

“Bitcoin is like any other currency market,” Milewski says. “I would use dollars to buy euros, or I can use dollars to buy Bitcoin. It’s just a medium of exchange to make things more efficient.”

And “efficiency” is a big part of the magic of these cryptocurrencies whizzing about their various blockchains. Transactions conducted on the blockchain are settled instantly, person to person, without the waits associated with traditional banks, along with significant anonymity and essentially unhackable security.

So what is a blockchain?

Blockchain, Milewski says, is much like the internet on which it relies. There is, for example, no Internet, Inc. There is no central internet company in a big building in Silicon Valley that facilitates the billions of internet transactions daily. The internet — and this was hard enough to grasp 25 years ago — is composed of the computers connected to it. It is a global network of billions of private computers — including yours — along which hurtles every request for a website, every transaction, every email.

Similarly, blockchain technology is not centralized anywhere. A blockchain is a globally distributed online ledger composed of the computers (geek word: “nodes”) connected to it, which typically number in the millions. This digital ledger employs algorithms to record transactions in “blocks” of information, which are then “chained” together to provide a history of authenticated transactions. These transactions are authenticated, and added to the blockchain, by armies of freelance “miners” who install and run special software on their computers that allows them to communicate with other miners in order to ensure the legitimacy of transactions.

The resultant information chains may be reviewed but cannot be changed because the cryptographic codes that created them are, essentially, undiscoverable and therefore beyond hacking.

Exact copies of these ledgers are stored on the millions of computers active on the blockchain. Blockchains are, therefore, by virtue of their wide distribution, indestructible, unless you take down every one of the millions of computers that house them.

An individual’s private account on the blockchain is accessible only though the use of two “keys,” a public and a private key that are analogous to a username and a password. The password, however, or “private key” is known only to the user since a blockchain has no central authority. It is not possible, therefore, should one forget or lose one’s password, to recover it. This has led to tragic stories about early Bitcoin investors losing access forever to tens of millions, and sometimes hundreds of millions of dollars in profits because they long ago forgot their private keys, or forgot where they wrote them down.

This blockchain technology, Milewski says, is in its early stages, and advancing rapidly. In the fullness of time, as private companies begin building their own blockchains — and banks already are — records of financial transactions will form only part of blockchain traffic, joined by contracts, websites, sales of music and just about everything else.

“I am very bullish on blockchain,” Milewski says. “Well-functioning applications are being built that used to exist only in a centralized form where a specific company controlled the code base, ran the servers and let people access its website. The decentralized version exists on the blockchain, independent of any centralized control.”

Milewski cites the recent controversy over Parler, a Twitter-like website that functioned on Amazon web servers. When Amazon decided that Parler insufficiently monitored groups advocating violence, it simply removed its web services, instantly killing the company. If Parler had built its website on a blockchain it would have been invulnerable to such intervention, Milewski said, because its database — and its ability to function — would have been replicated on the millions of computers populating its blockchain.

“This distributed model is getting greater and greater adoption as transactions increase and as developers build tools on top of it,” Milewski says.

Nevertheless, in these still early days of blockchain development, the technology remains primarily identified with the exchange, recording, security and relative anonymity of cryptocurrency transactions, which are their own mystery.

Because cryptocurrencies have no physical manifestation their reality can be hard to grasp. But Milewski says that like any medium of exchange — which is all money is — cryptocurrencies like Bitcoin and its progeny require only acceptance to establish a standard of value. After all, the long span of human history has seen many objects accepted as mediums of exchange, including animal teeth, pebbles, rocks and seashells. The eventual appearance of precious-metal coinage made trade possible beyond the confines of a village, but the weight and inconvenience of carting around heavy coins led to the creation of paper banknotes, which were contractual promises to pay the bearer of a banknote its value in gold, thus making paper money “as good as gold.”

Cryptocurrencies, of which thousands currently vie for acceptance, and of which only a small number are gaining traction (fortunes are lost as well as gained in the cryptomarkets), are another step along that road. With cryptos, even the need to carry paper money is dissolved, with balances maintained, transactions instantly performed, and value (money) instantly transmitted, peer to peer, locally and globally, across blockchain platforms without resort to corporate institutions like banks (and their fees).

“There is no sovereign nation that can control Bitcoin,” Milewski says. “The protocol is entirely decentralized. No one controls it. It's just a computer algorithm, and a protocol that functions without any one person saying let's turn this knob or let's turn that knob.

“Because of this decentralized nature, if you shut down one person helping to process transactions the rest of the network will run just fine and keep processing transactions. If Venezuela, or the United States, says we're going to shut down Bitcoin, well then, the rest of the network will continue to function because it’s all decentralized. You would have to shut off the entire internet.”

Cutting the link between institutions like banks and people’s ability to conduct financial transactions has profound implications for poorer regions of the world, where banks are insecure or few and where ATMs are unknown.

“It's convenience,” Milewski says. “Jack Dorsey, of Square and Twitter, is thinking of building out applications in developing countries that don’t have modern financial infrastructure and would use Bitcoin as an intermediary. It would be a cheaper way to have a robust and secure payment network and infrastructure.”

Suddenly, then, financial conveniences long taken for granted by residents of developed nations would be available in the most remote villages of China or previously isolated communities in the Himalayas or the Andes.

“We take Visa and MasterCard for granted because everybody accepts them,” Milewski says. “But you go to some random place in a developing country, and they don’t have terminals where you can swipe a card and make a payment.

“Cell phone penetration, though, is very high because governments have found it possible to skip the entire need to develop expensive landline infrastructure by going to cell. People without access to banking services can now store money, pay for services and get paid, directly and peer to peer, in Bitcoin on a blockchain, which is a proven, secure infrastructure that costs the user in those countries nothing to use. It’s already built. It’s decentralized. You don't need a Visa card to use it, you don’t need terminals to swipe it. You don’t need to pay fees.

The next step in blockchain technology will be devising ways for different blockchains — both the public, decentralized and universally accessible ones, and private, more centralized blockchains created and controlled by private institutions — to communicate with each other.

“Let's say if I’m in a private blockchain and JPMorgan and I want to validate some transaction with some shipping company in the Middle East which has its own blockchain infrastructure,” Milewski says. “Work is being done to allow those two blockchains to come together and agree that a particular transaction is legitimate. That is the next innovation, getting all these blockchains to work together.

“It's going to be a world of multiple blockchains, and stores of value, and participants.”

So, blockchain is the future?

“I think so,” Milewski says. “It's hard to say definitively. Ten years ago, all this did not exist, so who knows, whatever is being invented by some kid right now we might know 10 years from now transformed everything.

“But I'm really excited about blockchain the same way I was excited about the internet when it first arrived. It feels like the internet has become interesting again, experimental again. Instead of big, centralized, controlling companies taking up all the internet capacity, blockchain is this new world where people are trying out a lot of new stuff.”