With President Donald Trump pledging to make “America the crypto capital” and recently unveiling plans for a “Crypto Strategic Reserve,” it’s an opportune moment to delve into what Bitcoin and cryptoassets truly represent.
Often misinterpreted, blockchain technology and cryptoassets are mistakenly linked to chaos and unrest. In truth, the blockchain community is a sanctuary for tech enthusiasts dedicated to addressing significant issues. With appropriate government policy, this innovative community could deliver substantial benefits to the wider economy. Conversely, inadequate policy could allow for the proliferation of fraudulent activities.
As a researcher and educator in cryptoeconomics, I can affirm that blockchain technology is advancing rapidly. While there are numerous warnings to heed, the potential for opportunity is also immense.
To start with a bit of history, the enthusiasm for cryptoassets was ignited in 2008 with the publication of the Bitcoin Whitepaper, which introduced a technology that we now recognize as the Bitcoin blockchain. In essence, it functions as a digital ledger that documents the transfer of bitcoin, a digital asset created on this ledger. Transactions of the bitcoin asset are stored in segments known as blocks, which are then organized chronologically into a chain—hence the term blockchain—providing a public and auditable record of all bitcoin transfers indefinitely.
Bitcoin is “permissionless,” meaning there is no need for a central authority like a bank to verify transactions. When managed correctly, cryptoassets can foster a more competitive marketplace that ultimately serves consumers better. Nonetheless, the presence of bad actors in the cryptoasset sector adds certain risks to its expansion.
It’s crucial to grasp two key points about Bitcoin. Firstly, Bitcoin is built on established computer science principles, including a cryptographic digital signature system, a hash function, and a protocol for combating spam (proof of work). In essence, Bitcoin is underpinned by solid intellectual frameworks.
Secondly, Bitcoin’s groundbreaking contribution is its solution to a significant economic challenge: the double-spending problem. In conventional finance, all transactions are processed through a bank or equivalent centralized entity, which simply dismisses payments exceeding the user’s balance. However, users of a permissionless payment system could fraudulently utilize the same balance more than once.
Bitcoin’s brilliance lies in its innovative coordination rule, the Nakamoto protocol, which allows multiple decentralized parties to collaborate in preventing double spending, eliminating the need for central intermediaries. This development excited tech enthusiasts globally, prompting developers to explore blockchain technology.
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However, Bitcoin is not the sole focus of the blockchain community anymore. The emergence of the Ethereum blockchain in 2015 brought about a significant shift. While Bitcoin operates merely as a payment system, Ethereum acts as a virtual computer, enabling a broad array of applications. The Ethereum blockchain supports the deployment of programs designed to provide financial services without requiring intermediaries. As anyone can deploy a program on the Ethereum blockchain, it fosters a competitive market that ultimately benefits consumers. Some financial services available via the Ethereum blockchain include trading, borrowing, and lending.
Designing computer programs to deliver intermediary financial services is a complex task. These programs must be simultaneously rigid to ensure transparency while remaining flexible enough to sustain solvency during adverse market conditions. Nonetheless, the blockchain community has made significant strides: billions of dollars are transacted daily through these computer programs, all while maintaining solvency despite substantial market fluctuations.
Bitcoin ignited an intellectual spark that has now grown into a widespread movement. A talented cohort of developers is tirelessly working to enhance financial service delivery through innovative software. In this context, it’s vital to understand that government policy can significantly influence technological and economic advancements.
The president has already enacted an executive order concerning crypto. It’s prudent to embrace crypto as an integral reality rather than ignore it or, worse, reject it. By collaborating with instead of against crypto, policymakers should aim to fulfill an appropriate infrastructural role, akin to how the government has supported the internet. This approach can empower the blockchain community while concurrently offering reasonable protections for users.
Fahad Saleh, Ph.D., is an associate professor in the Warrington College of Business at the University of Florida. His research investigates economic topics related to blockchain and cryptoassets.
