Lately, it’s hard to cursorily scroll a news feed without coming across new tech crazes like Cryptocurrency, Blockchain, and perhaps the most famous Bitcoin. If you know nothing about these buzzwords and how they fit into the greater context of our world, here is what you need to know first.
A Quick Beginners Guide
Most famously Bitcoin has made news headlines over the last few years, but specifically during its surge in value during 2018 – 2019.
So, What Is Bitcoin?
Bitcoin is a specific type of Cryptocurrency. Cryptocurrencies are purely digital currency designed to allow you to easily conduct a transaction over the internet. In a sense, you can think of cryptocurrency like the internet’s dedicated currency. In the same way an American would exchange American Dollars for British Pounds when traveling to the U.K., people looking to spend money on the internet can exchange their local currency to a cryptocurrency to spend online. Bitcoin is just one of many cryptocurrencies available for people to exchange and use.
But with credit cards and debit cards available, why would anyone need or want to use cryptocurrency?
There are several reasons why someone would, and perhaps should, prefer to use cryptocurrencies:
– Security reasons
– Minimize transaction fees
– Less transfer time between sender and receiver
– No bank accounts needed
These are just a handful of reason why anyone may want to use cryptocurrencies rather than their local currency to conduct a transaction online.
For some generations, the idea of cryptocurrency seems unusual and maybe a little risky. Most new things in life have this perception at first, because without a crystal ball in hand, who really knows how things are going to pan out. After all, this was the sentiment for historical firsts like the motorized vehicle, electric powerline, removing gold as the currency standard – still some debate on this one, the microwave, and the internet.
Looking back with nearly all of these examples, it would seem that not only were they great additions to our modern society, but some of them carved out huge platforms for our modern way of life. At the time, advocates for preventing the construction and use of powerlines in cities touted that they were dangerous, unnecessary, and ugly. However, what would life even look like without a free-flowing power grid? And how often does one even notice powerlines anymore?
All of this is to say, cryptocurrencies are following a very similar trend to these examples. We as a greater society have become accustom to a very specific way of conducting our business and new ways of doing anything can often lead to push simply because of its novelty.
Going back to online payments, the bulk of transactions conducted on the internet are done through credit card/debit card transactions linked to your bank account, which is held by an institution/business that makes money by helping you secure and use money.
But with that, comes a lot of trust for that institution. There’s trust that a bank, the centralized place you hold your money will protect your money from being misplaced, stolen, manipulated, and made readily available in a timely manner. Again, for a lot of people, this is the way things and always been done, so it doesn’t seem unusual or even all that risky. However, cryptocurrency gives users a completely different frame work to hold and use their money.
As a centralized entity tasked with safe guarding your money in the digital age, if something does go amiss, say an account transfer gone wrong from checking to high-interest savings, you’re reliant on the bank create, issue, maintain accurate records of this transaction so that you have some recourse in the matter. If you’re unable to obtain the right paperwork, and the records for the event, as issued by the institution handling your transaction, there may not be a whole lot you can do. At least not in the immediate future.
One such report of this happened to a New Jersey man that had nearly $80k wiped out during a “routine” account transfer.
This is one area in which cryptocurrencies can be considered more secure than current centralized banking organizations because cryptocurrencies are built specifically so that there is no one centralized entity controlling how things are recorded, operated, and secured. Instead, it’s a whole network of accountability partners to ensure accuracy and transparency – and by these merits, you have security. This method of security is known as a blockchain.
What Is Blockchain?
Blockchain is a distributed ledger of the transactional activities that occur between two parties on the internet while using cryptocurrencies or other securities in a transaction that specifically uses this technology, i.e. it keeps meticulous records of transactions. A part of the block chain process is that these records of transactions, whether it be money, or baseball cards, are authenticated and stored across all the computers that use that blockchain technology. Kinda like hitting “Send All” on the company email system – everyone sees what you’ve done!
Often, blockchains consist of thousands, or millions of users, and their computers, all of whom are adding to this very long digital chain of custody with every transaction that occurs, and not one of them is directly in charge of deciding what gets added, or how it’s organized. Due to the decentralized nature of this process, the ledger cannot be managed or owned by any individual or group, making the its data immutable or corrupted.
Here’s a video that can visually show you how this works:
Today, the global standard of banking has changed a lot over the last 50 years, and would be nearly unrecognizable looking back 200 years. While the principles are the same – you give someone else your money for safe keeping in hopes to be able to retrieve it at a further date, how we interact with banks has changed greatly.
Today, we are able to log onto an app, take a picture of a check and have it deposited in our accounts within house, if not minutes, so that we can get on a different app, click a few buttons and purchase something hanging in a boutique shop window 3,500 miles away – it’ll likely arrive on Tues before 9 p.m.
These are all, essentially speaking, conveniences provided to us by our financial institutions to help make our lives better and easier so that we continue to invest money with them instead of going somewhere else (there’s a much larger collective economic argument to be had about this subject, but effectively that the general idea). However, with every transaction comes a cost, often taken from the sellers, not the buyers.
These fees are seen everywhere – 30 cents + 2.9% per transaction, $10.00 account transfer fee, 3% service fee. All of these are finance charges put in place so that the banks make revenue for allowing you to access money in convenient ways.
Similar to how banks process transactions cryptocurrencies do the same thing, but do it much cheaper than their centralized counterparts.
One key feature of cryptocurrencies is their unit of spending “coins/tokens/GUnits/etc” have the ability to be split into smaller fractions than what coins can be split into, and this can be done easily and cheaply. When you transfer cryptocurrency there is a transfer fee but often on the scale of only a few cents, a fraction of a coin, and they transfer costs are always fixed, never based on percentages.
It’s because of this low-cost method to transfer value from one party to another that makes cryptocurrency a much cheaper option of payment for so many – especially if you are working with large sums of money.
Since blockchain was created with the intent to be a decentralized system with no single party in control, the technology was built to specifically with security as its core principle―even administrators do not have the ability to manipulate the information recorded in each chain.
As eluded to earlier, as a record for a transaction is made and up loaded to the blockchain (that long digital ledger), the block of data holding all your information is then encoded with the block of data that was added just before it. Then, when a new block of data with its own information about a completely unrelated transaction gets added next, it will be tied to your transaction block creating a chain (Blocks of data chained together). This creates a chain of custody where each block before, and after every block of data has redundant copies of the information of the blocks beside it.
Manipulating one block doesn’t actually do anything, as the other blocks in the chain can verify the integrity of any manipulated data by comparing it to data copied to itself when forming the initial chain. The errant data is then discarded as inauthentic. A simple and elegant method for keeping records accountable.
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To get a better understanding of cryptocurrency, blockchains, and how they are used in real the real estate world, we are launching a new segment called, “Blockchain in the Real World.” We will break down the world of blockchain and how the use of this technology has, and will continue to change the world we live in, and specifically how real estate is noticed, funded, and sold.