This is part 4 in my series of blog posts on cryptocurrency:
Each part builds on the previous ones, so I suggest starting with Part 1.
- Part 1: Why should I care? What’s in it for me? Plus, crypto is about a lot more than just making money
- Part 2: How crypto actually works, why Bitcoin is valuable (even if it’s just “made up!”), and what you should know about blockchains (the tech behind them and how they could influence the future of our world)
- Part 3: How the blockchain keeps running, where new Bitcoins come from (i.e., how mining works), and concerns about Bitcoin’s environmental impact
- Part 4 (this post): How crypto offers autonomy, why it can’t be stopped, and the value of decentralization
- Part 5: How to actually store and use Bitcoin (and other cryptocurrencies), a basic intro to cryptography, and how wallets and keys work
- Part 6: Overview of the different types of wallets, which one is best for you, what to be careful of, and why a hardware wallet might be worth the investment
- Part 7: Ethereum (the #2 most popular cryptocurrency, and the one I’m most excited about), smart contracts, dapps, gas (and the high gas fee problem), Proof of Stake (PoS), and Ethereum 2.0
- Parts 8-10 (in progress): Ethereum use cases and dapps (oracles, NFT’s, DAO’s, etc.), more crypto coins and tokens, other ways of mining and staking, mining pools, crypto indexes, investing, leverage, gurus, risks, DeFi, yield farming, liquidity staking, other opportunities, and how to make money in crypto (a comparison of the risk/reward of some of my favorite options)
Part 4 Reading Time: 19-23 minutes
With the blockchain, no one can falsify records after they’re entered.
Let’s go back to my example from Part 2: To run your business, you keep track of all purchases on a ledger.
If there were only one copy of that ledger—on a piece of paper in your office, or even in a spreadsheet on your business computer—it would be possible for an employee or hacker to modify it.
But if your ledger were on the blockchain instead, it would automatically check with the other computers (that the employee or hacker has no control over), and it would quickly recognize the fraud.
In other words, it’s nearly impossible to falsify records on the blockchain (or to create counterfeit Bitcoin).
This goes way beyond business ledgers—crypto can give you personal autonomy and safety.
Ok, so an employee or hacker might try to mess with your ledger to steal from you.
Let’s think bigger.
What if an authoritarian regime came into power and decided to shut down your business or seize your personal assets? What if there were a terrorist attack or some other major news event that sparked panic?
The bottom line is that systems governed by centralized authorities can be shut down. If your money is trapped in that system and you want to pull it out, you’re out of luck. For example:
- During a national panic in 1933, banks were closed, and all transactions were suspended for a full week.
- After big sell-offs in 2008, trading was halted on the New York Stock Exchange.
- Even companies like PayPal can shut down accounts without warning.
Power in cases like these is in the hands of a small group of people (who are not typically held accountable for their actions).
What if there were a different way?
Crypto can’t simply be shut down or halted.
The blockchain network could only be turned off if every single person running a node agreed to shut them down at the same time.
Does it sound naive for me to say it’s that resilient? Surely the US government would be powerful enough to shut it down, right?
Nope, and this isn’t just coming from crypto-savvy programmer types.
Hester Peirce, a commissioner at the U.S. Securities and Exchange Commission (SEC), said in April 2021: “I think we were past that point [being able to shut down Bitcoin] very early on because you’d have to shut down the Internet… I don’t see how you could ban it. You could certainly make the effort. It would be very hard to stop people from [trading Bitcoin]. So I think it would be a foolish thing for the government to try to do that.”
Increased regulation is possible. But governments should be wary since remote work is increasingly common.
The blockchain can’t be shut down. But what the government could do is regulate on-ramps and off-ramps—the websites used to convert regular money to cryptocurrency (and back).
But it’s become clear that over-regulation here can backfire. Blockchain technology will be the foundation of some major emerging technologies in the future. If the US government makes it too hard for Americans to operate in the crypto space, this country will be left behind.
That actually happened at the state level in 2015. New York state passed some laws that made it unfavorable to crypto developers. The result was that a lot of promising startups simply moved to a different state with friendlier regulations. This was known as the “Great Bitcoin Exodus.”
It’s becoming easier and easier to work remotely from anywhere. The pandemic has caused a lot of tech people to move away from expensive cities like San Francisco. And I’ve seen a number of articles arguing that the future of Silicon Valley will no longer be a single physical location (or in the United States) but rather in the cloud and distributed around the world.
Cryptocurrency is a worldwide phenomenon, and there’s a real risk of emerging businesses simply leaving the country if the US government passes regulations that are too strict.
Hopefully, it won’t make that mistake.
Crypto is resilient and borderless.
If your government turned corrupt and tried to seize your traditional bank accounts, you might be out of luck.
But with Bitcoin, you could theoretically memorize the secret key to your account, flee to another country, and log on to any Internet-connected computer or smartphone to get access to all your Bitcoin (Bitcoin ATM’s are even becoming increasingly common across the world).
There’s an interesting story where a Federal agent betrayed the US government and stole money via the case they were supposed to be investigating (the infamous Silk Road). Since they were a Federal agent with the proper credentials to conduct secret investigations, they could go to banks and demand that they erase the records of their theft.
The banks complied, not realizing what was happening.
What finally led to his arrest? When he stole Bitcoin, there was no way for him to cover his tracks, so investigators were able to use the blockchain record to track him down.
Remember that every node carries a complete copy of the blockchain, i.e., every single transaction ever made by everyone. So, as long as one single computer survived, theoretically, it could all restart.
Technology evolves too of course, so Bitcoin itself might not be around forever. But even if the Bitcoin protocol (i.e., the software governing it) is eventually superseded by a new one, the blockchain ledger behind Bitcoin will very likely carry on.
Blockchain-based financial networks are resilient against not only government intervention but also catastrophe—even if the Internet itself collapsed, you could still theoretically carry the blockchain on a laptop and physically wire it to other laptops.
Bitcoin (or whatever future-Bitcoin is called) would survive, along with a record of all transactions.
(By the way, If you’re worried about the government tracking all your Bitcoin transactions, there are alternative cryptocurrencies like Monero that are designed to be anonymous and untraceable while retaining the other benefits of blockchain technology.)
Crypto is decentralized, which means power is less consolidated and compensation goes directly to the “workers.”
One advantage of decentralization is that Bitcoin can’t be shut down because the blockchain is copied across lots of different computers.
Another advantage is that compensation and decision-making power can go directly to the “employee level” rather than remaining at the “executive level.”
Imagine that you want to send an international wire transfer to another country. The traditional way would be to use a company like Western Union, which has to charge enough to pay its 12,000 employees.
With Bitcoin, you instead have thousands of independent people (node owners) competing to validate your transaction. You pay the winner a small fee, and it goes directly to them with no middle-man. Plus, if any of those node owners want to get even more involved in how their blockchain works, they can vote on changes to the Bitcoin platform or even directly contribute to its open-source code.
Is crypto really secure? Can I trust my hard-earned money to live on a blockchain?
This has been the Wild West, but it’s getting much safer.
A lot of brilliant people are constantly working to bolster the security of the major blockchains.
Still, it’s a very tempting target for hackers. And, in some senses at least, there are fewer guardrails in crypto compared to traditional financial platforms.
Regular bank accounts are insured by the FDIC and protected with legal guarantees. Whereas if you lose the key to your crypto account, it’s lost forever, and there’s no legal body you can go to for help. (I’ll explain in my next post why that’s not quite as scary as it sounds.)
The Wild West analogy was more true several years ago, though. Although it’s still not super intuitive to new users, the crypto world has already become a lot more stable than it was.
Years ago, it was more like a group of hackers hanging out in chat rooms discussing the latest coin tech.
Today, the tools are more robust, and there’s a lot more scrutiny on the industry. It’s still possible to be scammed if you’re not careful, but if you use a major exchange (e.g., Coinbase) to buy a small amount of Bitcoin, you probably don’t need to worry that it’s going to suddenly disappear.
In a future post, I’ll go into a lot more detail on how to safely get into crypto investing without being scammed. (If you absolutely can’t wait, I recommend using Coinbase Pro, but please avoid buying any crypto coins other than Bitcoin and Ethereum until you understand more. If you want something even easier, you can buy Bitcoin through Paypal; but, your Bitcoin will be locked into the Paypal ecosystem and impossible to move to an outside account without converting it back to US dollars.)
In terms of the blockchain itself getting compromised, the biggest threat is probably China.
Remember that the blockchain relies on the consensus of many computers to verify that transactions are legitimate.
Since China controls so many computers via its “Great Firewall” (which China uses to censor the version of the Internet that its citizens see), it could theoretically launch an attack on global blockchains by having a huge number of Chinese computers run the blockchain software to act as nodes.
Those nodes could then work together to falsify transactions and claim to the rest of the blockchain network that this corrupt version of the blockchain is the legitimate one. If they had more computers than the rest of the world combined, they could theoretically replace the legitimate version of the blockchain with theirs.
Luckily, this is also a known threat that people are watching for.
There are already plans in the crypto community to combat this kind of attack. Here’s my understanding:
- Blockchain technology is open-source (i.e., the code is accessible by anyone), and it’s not controlled by one central body. So, any of the prominent groups working on the technology could simply “fork” it: Imagine that the current blockchain is traveling straight down a road (i.e., more and more transactions are being piled on and verified with each step forward). “Forking” the blockchain means creating a fork in the road to split it into two parallel roads that start off exactly the same but then diverge.
- Say the Chinese government initiated their hostile takeover yesterday at 5 pm. Groups of security experts elsewhere in the world would easily notice and jump into action to stop it. All blockchain records are easily visible, so these experts could simply move backward along the blockchain to find what it looked like at 4:59 pm. Then, they could fork the code at that point.
- Now, one of the parallel “roads” would be running China’s version of the blockchain, and the other parallel “road” would be running the proper one. Of course, it wouldn’t be very secure if anyone could simply change the blockchain at any time. While anyone can fork the code whenever they want, that new version will only become the standard if everyone else agrees to hop on.
- So, the next order of business would be for those programmers to convince the rest of the world to switch their nodes over to run the new fork of the blockchain. Once the rest of the world switched over, any Bitcoin transactions happening in China would be logged and verified on the Chinese version of the blockchain, and any transactions elsewhere in the world would be logged and verified on the new “rest of the world” standard version.
- By the way, because of how blockchain technology is designed (i.e., very complex cryptography techniques), even if 51% of the node-owners in the world colluded to make malicious changes, it would actually be impossible for them to go back to change past transactions. They’re sealed in place by complex math like a fly in impenetrable amber. These bad actors would simply be able to intercept and modify new, very recent transactions.
That’s of course a highly simplified version of what would happen. But the point is that blockchain technology was designed to be resilient against bad actors.
At the end of the day, it’s a never-ending war between cybersecurity experts and malicious hackers. However, the fact that crypto technology is open source and global in scope means that there are a whole lot of smart people constantly working to make it more and more secure.
Ok, at this point, you hopefully understand the big ideas around cryptocurrency. But one thing we haven’t touched on yet is how Bitcoin actually works at the transaction level.
How does a person store their coins or use them to pay for things (and what makes it safe)? In my next post, we’ll dig into the answer: Part 5: How to actually store and use Bitcoin (and other cryptocurrencies), a basic intro to cryptography, and how wallets and keys work.