What should we make of Bitcoin (BTC) and other cryptocurrencies these days? The world’s preeminent cryptocurrency ended 2013 riding high, with supporters proclaiming that it was destined to revolutionize the global financial system. 2014, by contrast, turned into a roller coaster ride, prompting some watchers to question both BTC’s market maturity and overall potential. Last year, BTC experienced a headline-grabbing 67 percent drop in value ($951.39 to $309.87). That prompted many articles that reflected poorly on the industry, such as by focusing on the Mt. Gox collapse. The price even briefly fell below $200. News this month about the $5.2 million hack/theft of Europe’s top BTC exchange Bitstamp—which Forbes last year labeled the “Backbone of Bitcoin’s Economy”—did not do much to improve the story.
But despite the setbacks, many cryptocurrency advocates remain bullish about BTC’s future, and their optimism should not be quickly dismissed. In 2014, trading in both BTC volume and value increased by more than 50 percent. Over the same period, the number of BTC transactions per day approximately doubled, exceeding 100,000. And merchants are accepting it as a way to pay. That includes both small players around the world as well as large conglomerates like Dell, Paypal, and most recently Microsoft. However, while these trends are positive, total value of all BTCs in circulation hovers around $3 billion. And we have yet to uncover the “killer app” that might drive it mainstream.
That may well be changing due to new technological developments that some call “Crypto 2.0”. This we can loosely define as a layer built on top of BTC’s underlying blockchain technology that enables a variety of applications. What’s important is that such apps can be decentralized, not subject to any one controlling authority.
Crypto 2.0 has been hailed for its seemingly limitless potential. Once fully developed, Crypto 2.0 could allow market participants to use BTC or other tokens or alternative cryptocurrencies (known as Altcoins) to transfer ownership or access rights to connected devices by logging and verifying information on the blockchain. For example, you could use the blockchain to transfer ownership of a car or allow your neighbor entry to your home to feed a pet while you are on vacation.
Even more appealing may be Crypto 2.0’s potential for programmable smart contracts that allow money to be held in a kind of “digital escrow” before being sent to an intended recipient. This transfer would happen only after certain conditions—which can now be monitored digitally in real time—are met. Many existing cryptocurrency applications, like the peer-to-peer financial platform Counterparty, are being built on top of the BTC blockchain. Others, such as Ripple and Ethereum decided to build their own parallel systems, including currencies, from scratch, aiming to design even more customizable, flexible, and efficient systems.
In many ways, Crypto 2.0 applications will be easier for people to understand than Bitcoin itself. Confusion and misunderstanding of an admittedly complex set of concepts has been a big barrier to the cryptocurrency going mainstream. Even though the traditional banking sector has inherent shortcomings, like steep fees and long lag times for transactions to clear, many consumers still prefer to entrust their money to the devil they know rather than rely on anonymous cryptocurrency platforms that they have no confidence in.
That being said, pretty much everybody has used tokens or tickets in exchange for certain privileges, such as riding a roller coaster at an amusement park. In principle, the same logic can be applied to innovative Crypto 2.0 concepts such as smart contracts, where one pays a token (BTC/Altcoin, etc.) to leverage the computing power of the blockchain.
Unfortunately, implementing these new technologies will not be quick or easy. Several important issues need to be addressed first. For starters, although it is appealing to separate the blockchain technology from BTC’s financial base, Crypto 2.0 will not take off before BTC/Altcoin use gains additional traction. Miners—those users that spend time, energy, and computing power to maintain the blockchain—are incentivized to participate by receiving compensation in the form of BTC/Altcoins. The more widely used and valuable these currencies become, the larger the pool of computing power available to scale and speed up the entire ecosystem.
Crypto 2.0 also raises other important questions that need to be explored before our societies will be ready to embrace such radical innovation. We at Spitzberg Partners use the term “Government to Googlement” to characterize a broader shift in informational power concerning the lives of everyday citizens from the public to the private sector. Seeing Crypto 2.0 in this broader political and societal context helps clarify both the concept’s appeal and challenges. Most importantly, it also illuminates a potential pathway and motivation for Crypto 2.0’s mainstream adoption—even if it remains years away.
Citizens and even governments around the globe are looking for ways to break up the digital monopolies of Silicon Valley tech titans in order to safeguard their privacy and identities in this digitized world. Some early adopters are turning to privacy technologies like the Blackphone, giving up convenience and scalability even as they pay more to protect their personal data. Such an approach will not appeal to everyone.
Conceptually, Crypto 2.0 offers a promising alternative by both providing users with increased control over their data while offering news ways of interaction and collaboration. For example, rather than asking consumers to trust a company with their identity as we are used to, there are important cloud-based initiatives—such as the Windhover Principles—co-authored by pre-eminent BTC and Crypto 2.0 companies in collaboration with the MIT Media Lab—designed to return control over personal data.
This vision for the future is certainly bold and, admittedly, still far off on the horizon. However, that does not mean Crypto 2.0 advocates should sit and wait. Regulators around the world are still trying hard to assess the promises and pitfalls of cryptocurrencies—especially regarding BTC, Altcoins, and the associated financial ecosystem. For governmental decision-makers to appreciate the vast potential of Crypto 2.0, they will first need to be equipped with a foundational knowledge base regarding BTC.
All those who believe in the Crypto 2.0 revolution should thus continue advocating for, collaborating with, and supporting their colleagues who continue to lay down the first layer of crypto’s foundation even as they pursue their own projects.