The Blockchain is a Magical Book

After “What the heck is a Bitcoin?” the next most common question is “What is Blockchain?” Although really quite simple, it harkens back to a time when it was normal to ask, “What is the Internet?” So at the expense of an analogy – one that will leave the younger reader with another follow-on question – and could leave a more technical reader chaffing at the crude attempt to simplify something groundbreaking – remember the 1980s.

During that decade, it was ubiquitous to carry a day planner. A day planned is a physical book containing your appointments – and your key contacts. At that time, you housed your full contacts on your desk at work or at home in a Rolodex. But you carried around the key numbers that you may need to call while moving about. In this day planner, you wrote down your appointments and any other important notes from that appointment.

Of course, if you lost that day planner, your life was completely destroyed. There was no backup or second copy.

So imagine that each time you wrote something in that day planner, your entry automatically copied in a duplicate book. For security, that copy was made far away – maybe in Portugal. Then, automatically, another copy replicates in Tokyo. And another in Australia. Copies made over and over again until thousands of copies of your book are held in other places around the world.

Now, imagine that in your copy of the day planner in Dubai, someone changes an entry. We know that entry is false. No other copies throughout the world contain it. A third party cannot alter this magical book because we have so many copies that verify the true contents of the day planner.

The blockchain makes a backup copy of the data you produce and sends that information throughout the Internet, making copies of that data and preventing alteration by a hacker or other bad actor. All the blockchain is doing is reproducing information in a decentralized way, onto computers throughout the world, and making sure it isn’t hacked.

By itself, this seems basic. And it is. Using computers in a decentralized way is the concept of the Internet. But blockchain contains two components that differentiate it. First, a big company does not own the computers on a blockchain network. They are “peers”, operated by a series of different people and companies for pay. This means it is decentralized. Second, the blockchain is trusted because every other computer in the system verifies reproduced information.

This is the basic underpinning of Bitcoin and thousands of other coins. More importantly, this system is driving the innovation of tens of thousands of decentralized and trusted applications.

To have a system that is decentralized and trusted, like our magic day planner, is a very important innovation. And this is for more reasons than a mere distrust of banks and other centralized institutions. It is because now we have a system to transmit information – and more importantly, currency – throughout the world in a way that is much less expensive and practically impossible for large corporations or governments to control.

And to the younger reader – yes- a day planner is Outlook without email. And get this. We had to use a pay phone to call one of those important numbers when travelling on the road. I’ll explain the pay phone another time …

The Most Valuable Currency in the World

Can you guess what the most valuable currency in the world is?  You can buy 1 Euro for $1.24 in Germany using US dollars. Or for $1,300 USD, you can buy 1 ounce of gold. Or you can buy 1 bitcoin for $8,500. Which one is most valuable?

Throughout history people have used various currencies for transactions. In the earliest days, bones and teeth of various animals were used to trade for goods. There were a limited number of animal bones or animal teeth of a certain kind, which gave value to the ones used to transact for other things. Other civilizations used particular shells or other items to denote value.

The Gold Rush that occurred in the United States in the 1800s was basically an opportunity for people work to dig something up out of the ground, something with limited volume, and then use that as money.  There was a great deal of trepidation when the United States moved off of the “gold standard” because that was used in order to back up real US currency.  However, we have now grown used to the fact that the United States government controls the number of dollars that are in circulation, that that number is tied to the value of something, and that we can count on the dollars not to fluctuate too greatly on a day to day basis.

So which currency is the most valuable?

Notice the way your day functions. What do you use to make a transaction? Here in the United States, the United States Dollar is worth the most.  It is worth more than gold.  It is worth more than real estate.  It is worth more than bitcoin.  Why?  Because you can buy things with it.

Money is used to buy things.  It is used as a store of value that can be easily transferred in order to purchase things to eat, for shelter, for clothing, and the other things we need on a day to day basis.  When was the last time that you went to the grocery store and asked to pay using a diamond?  Or you said “Hey, I have got a whole bunch of Japanese Yen, can I use it?”

So the most valuable currency of all is the one that allows you to buy things in the country that you need to buy things in.  That means the United States Dollar is worth a lot less in Europe, than it is in the United States.

So what holds all this together?  It is the ability to change stores of value, whether that be other currencies or precious metals into local currency.  For example, it is very easy if someone were to hand you Euros to accept that as payment, because you could simply go down to either your bank or a company that changes money and make that into US dollars.  You can also accept gold.  There is an easy way to know approximately how much US dollars you can get in exchange for gold.  However, imagine somebody came to you with Malaysian ringgit. If they did that, you would say no. Why?  Because it is incredibly difficult to turn that into United States currency.

This means that the ability to exchange is one of the most essential values of money.  So, it is true in the world of cryptocurrency that the exchange is king.  Without the ability to exchange cryptocurrencies into local currency that allows you to buy things, you have nothing.

At the beginning of the cryptocurrency boom, there was the thought that bitcoin and other cryptocurrencies would be used as a way to replace US dollars or other local currencies. We are quite far from that.  Who knows what the future holds, but for now local currency continues its reign. You will always be able to purchase things in that local currency. Until that time, without an exchange, your cryptocurrency is worth nothing.

Policy makers know this. This is the easiest place in the cryptocurrency ecosystem in order to push forward with governmental power. We have already seen it in China and we are beginning to see it in Korea and India. Keep your eye on the cryptocurrency exchanges. It is the only thing that can change cryptos into the most valuable currency in the world.

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