In our last article, we dove into some mind-boggling topics like the metaverse and NFTs. In this post, we’ll focus on more business-oriented and practical use-cases that are already being deployed in the crypto world. This post will focus on the blockchain, which you can learn the basics of in the first Crypto Compass. Instead of focusing on how it works, we’ll focus on what it’s working on.
Three worlds you’ll hear a lot about in crypto conversations: staking, proof-of-work, and proof-of-stake. In the first installment of this blog, we talked about how before a block of data is added to a blockchain (reminder: just an electronic database), it’s authenticated and authorized by the majority of users on the network (which protects the data from hackers). This authentication process can be done by one of two methods: proof-of-work and proof-of-stake.
Proof-of-stake is all the rage in the crypto world right now, as it’s the more energy-efficient method of the two. It’s gotten popular recently as attention has turned to how crypto mining affects the planet, as the process demands massive amounts of electricity. Proof-of-stake was also boosted by Ethereum’s big merge, which included the currency’s departure from using proof-of-work. In this method, miners pledge an investment in digital currency before validating transactions. The choice for who validates each transaction is random using an algorithm that’s weighted based on the stake’s amount. The more you stake, the more likely you’ll be chosen to validate the block. The chosen miner verifies all of the transactions within the block and adds it to the chain if everything looks good. The miner then receives cryptocurrency as compensation, along with their original stake back. If the miner does not verify the block correctly, the miner’s stake or coins can be lost. By making miners put up a stake, their interests are aligned with the integrity of the blockchain.
Proof-of-work, on the other hand, is the method used in the older imagery of crypto and mining. Miners are often holed up in a dark room surrounded by excessive amounts of computer equipment generating revenue. Proof-of-work, the method used for mining bitcoin, issues complex problems for miners to solve using high-powered computers. The first miner to compete the cryptographic equation (which requires fast computers and large amounts of energy) gets the authority to add new blocks to the blockchain and is compensated with coins. As a network grows, transaction times can slow down since it requires so much energy and power to add a new block to the chain. As this method is more energy-intensive and overall less efficient, we’re seeing a bigger focus on the proof-of-stake method.
Staking is a way to generate income using your crypto assets. As explained above, owners of cryptocurrency can stake their coins to gain the right to add new blocks to the blockchain and receive compensation. An individual must lock up a minimum number of coins to run a “solo” node. This requires a certain amount of time, skill and capital. For Ethereum, the minimum stake equates to about $50,000. Even if you meet that requirement, you still need to have the time and skills to continuously keep software running to verify the blocks. If the blocks aren’t verified correctly, or at all, you can lose the amount you have at stake, which is why the software needs to be both active and accurate. You also can’t access the coins while they are being staked, they’re considered “locked up.” A more popular option is delegating your coins to a larger group of participants known as staking pools. This is easier to do since you don’t need a ton of capital or knowledge to get involved. A popular platform where you can stake your coins is Coinbase, where you just click a few buttons and the platform lets you know that your coins are being staked and you get credited the relevant compensation for it.
The Argument for Blockchain Technology
Just as staking is a real-world use-case in the crypto world, for people actively using it to make money, blockchain technology is another topic that has gone far beyond its initial applications. As a refresher, blockchain can be summarized as an electronic database.
This form of electronic database has several important benefits to note. A key phrase for blockchain technology is a “distributed ledger,” which is software that contains information that is updated in real-time and distributed to all parties authorized to access it. This transparency is a huge benefit of blockchain and a primary reason we’re seeing so many companies adopt it. Without blockchain, each organization has to maintain a separate database and relay their information to the relevant parties every time there is an update. This can involve converting the format to one that is compatible between parties, reconciling multiple ledgers, correcting any discrepancies, and so on. Another important benefit is enhanced security. By creating an encrypted record that can’t be altered, blockchain technology helps prevent fraud and unauthorized activity. Privacy issues can be addressed on blockchain by anonymizing personal data, using permissions to prevent access, and more. Once these lines of code are layered into the technology, it is then automated and requires no furthers steps by parties using the database. So, it’s this transparency, security and automation that makes blockchain unique and an improved option for numerous businesses.
IBM, Microsoft, Anheuser-Busch, Overstock, and more are seizing the benefits of this technology and incorporating it into their day-to-day processes to improve efficiency and lower costs. Walmart, a company we all know and love, has long been known as a leader in supply chain management. However, it was not immune to a problem plaguing the transportation industry for decades: vast data discrepancies in the invoice and payment process for freight carriers, which required costly reconciliation efforts and caused long payment delays. That’s why Walmart employed blockchain technology to create an automated system for managing invoices from and payments to its 70+ third-party freight carriers.
It’s no surprise that Walmart deals with an unimaginable number of deliveries annually. However, the amount of information that needs to be tracked for each shipment is shocking. For example, each shipment requires tracking data points such as stop locations, gallons of fuel and temperature updates that need to be independently calculated and incorporated into each invoice. And with nearly two-thirds of invoices requiring reconciliation efforts, increased transaction costs and unhappy carriers waiting for payment became commonplace. An analysis identified the root cause of the problem: the use of multiple information systems between Walmart and its carriers that could not talk to each other. To solve this issue, Walmart turned to DLT labs, a leader in developing and deploying innovative enterprise solutions using distributed ledger technology (or, blockchain). The system continuously gathers information at every step – the tender offer from the carrier to the proof of delivery and the approval of payment. A shared single source of truth for all parties. This information is automatically captured and synchronized in real-time and is visible only to the parties involved in the transaction (so again, transparency, security and automation). Prior to this system, over 70% of invoices were disputed. Today, less than 1% of invoices have discrepancies, and these disputes are easily flagged and quickly resolved.
As you may have noted from a few of the companies named above, this use of blockchain technology today spans across different sectors. There are healthcare blockchains that help preserve and exchange patient data through hospitals, diagnostic laboratories, pharmacies, doctors, and nurses. The applications can accurately identify mistakes and can improve performance, security and transparency of sharing medical data in the health care industry. One company, Akiri, notes that 30% of patient charts cannot be found on visits, 50% of physicians time is spent on data rather than patient care, and over $200 billion is wasted annually because health insurance payers and healthcare providers lacking access to the right information at the right time.
While a large majority of the population can’t define the term blockchain or use it in a sentence, large publicly traded companies have already moved forward in implementing it into their daily processes. Much of the crypto world faces criticism and skepticism, but it has important implications for improving efficiency and benefitting our economy.
The State and Future of Crypto
The crypto world is experiencing a bear market, and we’re seeing increased skepticism because of it. While this major pullback is happening alongside the overall stock market’s pullback, there are some differences that are worth pointing out. We won’t dive into the differences, as the collapse of Luna/Terra and the over-leveraged crypto companies could be a post of its own. Instead, we’ll take a macro approach of where things stand and where they’re going.
The same macroeconomic forces that are playing a role in the pullback of the overall stock market also impact the crypto market in the same way. For a long time, interest rates were low and investors were forced to buy risky assets as the risk-free alternatives were paying little to nothing. As interest rates rise, investors can retreat to these risk-free assets and still generate some return from them. Additionally, with the unsettling headlines and inflation we’re experiencing, we’ve seen some investors flee their riskier assets, stocks, and crypto alike. The good news is that it’s a good reminder to investors that cryptocurrencies are a high-risk asset, which was easy to forget when everything was going straight up.
A comparison is often made between the new world of crypto and the coming-of-age of the internet. When the idea of the internet was introduced, there was skepticism there, too. More importantly, there were early companies that didn’t end up making it. Part of the silver lining of the bear market in cryptocurrency has been highlighted as weeding out the weaklings. The companies with poor fundamentals who were relying on hype in the media and inflated market to carry them are being exposed and failing. The ones with solid fundamentals and solid use-cases are the ones we’ll see at the end of the volatility. The bear market doesn’t mean the end of crypto. This isn’t some moment that skeptics have been waiting for to show us we’re all wrong and crypto is going away.
We’re also seeing a shift in the trends of cryptocurrencies going forward. Whereas cryptocurrency started with Bitcoin and an idea of digital money, it’s moved far beyond that. While the idea and use of digital currencies has not gone away, we’re seeing a bigger focus on using crypto technology as a way to improve existing processes. It’s being used for things like blockchain technology discussed above, improving the efficiency of transferring money across borders, using programmable money for things like lending, lowering transaction fees in online global commerce, and much more. You also see more people buying crypto coins as an addition to their portfolio rather than spending Bitcoin for a scoop of ice cream at Baskin Robbins.
This article is intended strictly for educational purposes and is not a recommendation for or against cryptocurrency.