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Utility of cryptoassets

We know that countless scams involving Bitcoins and other currencies have been developed, that several ponzi schemes promised 500% return in six months, that some companies have already claimed that were hacked to justify the disappearance of investor resources, that most ICOs

Utility of cryptoassets
Utility of cryptoassets

By Marcelo Martins - July 31, 2020

During the past few years some financial market participants, bankers, large investors and investment advisors have insisted that cryptoassets, also called digital currencies or cryptocurrencies:

We know that countless scams involving Bitcoins and other currencies have been developed, that several ponzi schemes promised 500% return in six months, that some companies have already claimed that were hacked to justify the disappearance of investor resources, that most ICOs (Initial Coin Offerings) were other types of ponzi schemes. This does not mean that all projects are fraudulent or that there is no use in blockchain technology and value in a project like Bitcoin or Decred.

It is important to take into account the position of these people in the financial market, if they could be shorting some crypto, if they may have missed the moment of buying the dip and now wish to force a retraction, if their businesses or jobs are threatened by the crypto market, if they are in favor of a powerful State and if they have any knowledge of the technology they are talking about.

However, a few understand the utility of cryptoassets and think they will not go away:

Even without diving deep into macroeconomic aspects, theories of price, value and exchange, or what money means, a quick analysis shows that cryptoassets have many advantages and some disadvantages. Check out the list below.

Cryptoassets like Bitcoin or Decred can have their authenticity verified through a block explorer hosted on the Internet or, preferably, on a local copy of the blockchain. It is not possible to fake a Bitcoin or Decred because creating a currency, however intangible, requires a huge computational effort to solve a cryptographic challenge. This calculation is performed within a period of 10 minutes on average for Bitcoin and 5 minutes for Decred. Even if new computers are added to the network to speed up the resolution of the problem, the network periodically adjusts the difficulty of the challenge, making the resolution time go back to the initial period.

Cryptoasset are available 24 hours a day, 7 days a week, including holidays. The Bitcoin network has been operating more than 99.99% of the time since 03.01.2009 when it was turned on. To maintain an expressive uptime like this it is necessary that the code is robust, as the maintenance will be done with the engines running. Which bank can get close to such a number?

Many cryptoassets, like Bitcoin and Decred, are divisible up to 8 decimal places. In Bitcoin the smallest unit, 0.00000001 BTC, is called 1 Satoshi. In Decred it’s called 1 Atom. It is possible through a fork in the source code to increase the number of decimal places, if necessary.

Two people who want to send and receive funds do not depend on third parties, such as banks and governments, who authorize the transaction and who are previously or later custodians of the funds.

Sending resources to the other side of the world can be a 10 to 20-minute task if a cryptocurrency is used. International remittances usually involve two or three banks, foreign currency bids, filling out forms, authorizations and waiting days until receipt, in addition to the need to give inside information to many people involved in the process. A festival of stamped papers to send 10 euros. Apart from the cost of SWIFT and the lack of information on prices at both ends of the transaction, generating information asymmetry and leaving the customer in the hands of the banks, paying high spreads at the worst times.

Purchases through e-commerce that accept cryptocurrencies do not depend on processing gateways, and when they do, they are usually companies in the industry, which convert cryptocurrencies almost instantly and at moderate rates.

For crypto assets with a fixed maximum supply, such as Bitcoin and Decred, which will have a maximum of ~21M units issued, inflation occurs when new coins are being generated via block mining (coinbase). Governments cannot simply issue new ‘coins’ to devalue the currency against others in the market, as happens with fiat currencies like Euro and Dollar.

For citizens of authoritarian governments or where there is little freedom, storing value in cryptoassets helps savers to avoid arbitrary confiscation of their resources, even if that confiscation is covered by the sacred mantle of inflation reduction.

Journalists, NGOs fighting for the freedom of people in war zones, citizens of authoritarian governments, and voters persecuted by dictatorships can use cryptoassets as a store of value, a means of exchange and fund activities censored by the State. Censorship can take place in a dictatorial manner, without respect for the country’s laws, or technologies can be implemented to monitor its citizens, with firewall and package inspection rules that censor unwanted behavior.

With a mobile phone and Internet access anyone can transfer funds between accounts, without depending on the banking infrastructure that is precarious in many places in the world, where millions of people don’t even have a bank account because they are not accepted by the institutions because they do not make enough profit. to justify opening an account.

With cryptography anyone can store their own resources, without depending on third parties. Anyone can be their own bank.

Any payment error must be resolved directly with the other party. There is no central authority, like a central bank or a commercial bank, that can mediate and have the transaction undone. So it is necessary to check the details very carefully. Transfers made to an unknown or non-existent address will be impossible to chargeback or fix.

Malicious codes can alter a deposit address that the user pastes into his wallet, or the web interface of an exchange platform before the payment is sent. Therefore, you should always check if the address that was pasted is correct.

Decentralized mining currencies rely on mining power to generate new currencies and ensure blockchain security. Mining is a competition with the aim of validating a block and finding a number within a range of values, where miners validate processed transactions. This competition depends on the processing power of computers, which in turn consume a lot of energy to do billions of calculations per second over and over again. The mining of several crypto-products has greatly increased energy consumption worldwide, but it is also a great opportunity for new investments in renewable energy, since the use of blockchains is still in its infancy. The electricity sector, which tends to pay a lot of dividends to its shareholders for not making a great deal of retention for investments in new projects, now has a good opportunity to execute projects that previously would not have been viable.

As there is no central authority, verification of documents and chargeback, in possession of the seed (or private key) anyone can access and transfer the resources stored in a digital wallet. Thus, it is important that the devices where the seed will be typed or stored are secure and to store a copy of the seed on another device or another physical environment.

Learn more about security hardening for digital wallets.

It is easier to transfer the ownership of accounts on exchange platforms, registered through documents issued by the government, than of portfolios that store digital resources. You need to plan ahead and evaluate the security of the solution:

  • seed stored in bank vault
  • 1-of-2 or 2-of-3 multi-signature key
  • instructions for accessing a USB drive encrypted in the will

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