In 2008, Bitcoin captured the attention of the world with the creative combination of technologies such as public-key cryptography, digital signatures, blockchain, and peer-to-peer networking. The first decentralized cryptocurrency was born. Despite the appeal, many organizations do not know how cryptocurrencies operate, nor do they know what to do with them. For instance, there are regulators who still don’t know whether to treat Bitcoin as a commodity, a traditional currency, or something else.
It’s a mysterious world of code, cryptography, and terminology, but here’s an explanation, courtesy of Associate Professor Jean-Philippe (JP) Vergne, who is researching the world of Bitcoin.
“Bitcoin is a digital, peer-to-peer payment platform. Cryptocurrencies digitize value without any central authorities such as banks or the government,” said Vergne. “If the World Wide Web heralded the internet of information, cryptocurrencies are heralding the internet of value. Thanks to blockchain technology, digital money is now programmable by code and that will change both how economic actors transact and how industries operate.”
Vergne’s research investigates the behaviour of cryptocurrencies and whether they act like regular commodities or traditional currencies. In the process, he discovered that Bitcoin possesses features from both, with one differentiating factor: it is a technological platform.
“Behind each cryptocurrency, there is a software that implements new technological innovations, which makes it very different from the U.S. and Canadian dollar. There is no technology behind the dollar, only supply and demand,” said Vergne. “When the technology improves behind each cryptocurrency, their price can be expected to go up. In this sense, they are different and should be treated as a technological platform, like Facebook or Amazon.”
His research explains that when the technology improves behind each cryptocurrency, the market value rises due to its innovation potential.
Vergne said we can apply our existing knowledge of technological platforms to cryptocurrencies. “With proper incentive developers will contribute to the code and enhance the growth of the technology. In turn, this can create positive network externalities that will grow the platform’s user base.”
Vergne explains the two broad categories of blockchain platforms where others can contribute:
Open platforms: Open platforms are typically created by using open source code, which grow at a fast rate. For example, Bitcoin is open and public. Therefore, anyone can join in and see how the algorithms function, making its functions predictable and transparent.
Closed platforms: In contrast, Vergne explained how other cryptocurrencies follow a closed model, thereby growing at a slower pace. Closed platforms are usually targeted towards specific types of clients or businesses, in order to protect their innovations or create consortiums for specific purposes.
“With bitcoin, we have created a currency that is backed by technology as opposed to a currency that is backed by government. Cryptocurrency is not just digital money but technological money, which opens up new opportunities.”
As technological currency, Vergne said cryptocurrencies are programmable. Therefore, software can be inserted inside the money itself, allowing businesses to program payments inside each unit of currency if certain conditions are met.
“Imagine a vending machine getting new supplies delivered by a drone. In the process, the vending machine can automatically make a payment directly to the supply company through the drone itself. This means that intermediary human interaction between the transactions would no longer be needed. Cryptocurrencies allow these types of innovations, which are called smart contracts.”
Vergne’s overall research focuses the role pirate organizations play in reshaping industries in capitalist societies, and some of the core technological blocks that underpin Bitcoin were created by these pirate communities, in particular the Cypherpunks – a hacker group which counted WikiLeaks’ Julian Assange as member.
In hindsight, Vergne explains that the technological innovation of cryptocurrencies happened rapidly, but our ability as humans to understand and categorize Bitcoin is very slow. Still, over the last ten years, our perceptions around cryptocurrencies have evolved substantially. Formerly, Bitcoin was illegal and associated with criminal activity, but now it has gained wide public acceptance.
“The technology became mainstream and viewed as radically innovative by many people, including the very actors that felt threatened by it in the early years,” said Vergne. “Particularly, banks and governments were very much against Bitcoin, but now they are embracing the blockchain technology behind it because they see a lot of potential in that.”