How does cryptocurrency work and how valuable can it be?
Ask researcher Svein Ølnes at Vestlandsforsking.
1. What is the purpose of a cryptocurrency?
Cryptocurrencies are a large and heterogeneous group, so I chose to use bitcoin as a starting point in the answers. The purpose of bitcoin is uncensored money with strong privacy, in line with physical cash. Moreover, the purpose of bitcoin is a clear monetary policy, in which the number of coins is determined – Bitcoin – It’s set at 21 million and it will never be higher. Due to its property as a safe deposit box, bitcoin is also referred to as “digital gold”.
2. Why are there so many different cryptocurrencies?
CoinMarketCap was listed at the beginning of August with over 11,000 cryptocurrencies. The vast majority of cryptocurrencies are based on open source – open source software – Thus it is easy to copy. Bitcoin, as the first cryptocurrency, was published as open source in 2009, and many of its successors took this token as their starting point and made some changes.
– Easy to create new cryptocurrency. Too much might say too easy. But it is the same with open source. There is no one who can stop someone from using the code and making small or big changes. The vast majority of cryptocurrencies are worthless, but overall the large number contributes to a richer ecosystem and the testing of new solutions.
3. What makes cryptocurrency valuable?
In the case of Bitcoin, there is free access to an unsupervised digital good that can also be transferred directly to anyone in the world without the use of intermediaries. The new and radical way in which Bitcoin can transfer values gives it value. Digital infrastructures such as Bitcoin are also heavily affected by network effects, and a large number of users will have a self-reinforcing effect and give the network more value.
4. How do you pay in cryptocurrency?
Money has three main functions. As a means of exchanging goods and services, store value and measure values. So far, bitcoin is mostly used to store value. But payment solutions based on a protocol called the Lightning Network are emerging, making it easier and cheaper to pay with bitcoin. El Salvador just introduced Bitcoin as legal tenderAll trading venues are required to accept Bitcoin if the customer wants to pay with it. With the increase in the number of solutions based on the Lightning Network, this will lead to an increase in the use of Bitcoin for payment in the future.
5. What should future research focus on?
There is, first and foremost, an urgent need for more knowledge, and the university and college sector has a great job to do here. Cryptocurrency challenges the traditional economy in that technology and the economy are closely intertwined. To understand Bitcoin – And other cryptocurrencies, both must be understood, and teaching must have a true interdisciplinary starting point.
In terms of research, there are many unresolved challenges in both technology and economics, but also in the interaction between them, such as game theory issues. An important research challenge on the technology side is new encryption methods that can also be secure against attacks from quantum computers.
This article was first published in TU Magazine No. 7/2021
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