Is Cryptocurrency the Real Matrix?

Everyone remembers when Morpheus offers the red or blue pill to Neo, thereby exposing that everyone was living in a parallel world. Well, the world of cryptocurrencies, blockchains and ICOs (Initial Coin Offerings) fits in the same vein. Today, there are millions of investors who are purchasing cryptocurrencies such as Bitcoin (BTC) and Ether (ETH) into wallets on their computers or hosted by service providers. They trade them on exchanges, watch YouTube videos by self proclaimed experts, and analyze the pricing spreads. WTF?, you might ask yourself. The entire financial industry has been quickly replicated over the last four years into a parallel universe called the Blockchain.

Let me roll back a few years because it might get very confusing. In 2008, while in the middle of the Great Recession, the financial markets were upside down and people’s trust of the financial system was at an all time low. Millions of people lost their mortgages, jobs, and savings. It was a harsh time for the middle class around the world. An unknown person called Satoshi Nakamoto revealed to the tiny cryptology community a new idea called Bitcoin. In 2009, Bitcoin was born, and the world of finance was changed forever. Well, we know that today — but at the time, it was just an experiment by some very clever and libertarian hackers who wanted a better world where money was no longer controlled by humans, eliminating corruption and government regulation.

One Bitcoin today is worth over $3,500 (very volatile) and dozens of other cryptocurrencies are appreciating in value everyday. The entire market value is close to $200B if compared to the U.S. official currency called the dollar (it still matters!)

The real innovation that allows all of this to exist is the Blockchain. This is the backbone of this parallel financial world. It is a ledger replicated among thousands of servers around the world. This enormous database is how hackers, thieves, and dishonest people are systematically rejected from trying to cheat the system. The blockchain is a database but also the ultimate cop who can vote out the bad and keep the good. These servers, also called miners, are rewarded by the system in Bitcoin or other cryptocurrencies for agreeing to host the information. It costs money to add something to the blockchain such as a Bitcoin transfer and if the majority of the servers reject bad transactions, then this fee costs the malicious hacker. It pays to be honest on the blockchain!

Trust has always been the backbone of the financial system. People’s trust enables the U.S. dollar to have value; it also allows banks to keep people’s money in accounts represented by binary numbers. Trust is key to the system. The reason it works is because the U.S. Treasury guarantees its currency. Yes, you can feel safe, because in event of a total meltdown, our government would bail all of us out. This allows every single country to trade in dollars with the United States. Bitcoin and the blockchain is managed by no government and offers no guarantee. So how is it possible that millions of people have come to trust this? This new financial system is working without any intervention or guarantee by any government. This utopian idea is working, and so far it is thriving. The reason is simple: trust has been exchanged by proof. What? Proof of stake and proof of work is the secret sauce behind this entire parallel financial system.

If a transaction is added to the blockchain, the first miner who can guess a complex mathematical equation and get a hash key (a lottery number used to decode a number) will get rewarded in Bitcoin or another cryptocurrency and then every other miner will use it to prove it works. This is proof of work, and in theory, no one can trick it. Because this new financial system is growing so fast, proof of work is slow and cumbersome for the explosive growth we are seeing. Proof of stake is the next big idea for the blockchain and has the ability to scale a lot faster because it will use the existing cryptocurrency holders to decide if a transaction is valid. This is a democratic system with no government. It is a world regulated by people for the people.

With the success of Bitcoin came dozens of cryptocurrencies, as well as utility tokens, that represent not a currency but a service for someone. Imagine a prepaid card for coffee. But these tokens also act as currencies because they are traded on exchanges. Of course, in order to have a viable parallel universe you need exchanges, traders, financial analysts, hedge funds and speculators. All of this exists in this alternative universe. Just go to YouTube and type Bitcoin. You will see how deep the rabbit hole is!

In a matter of a few years, the entire financial industry has been replicated into another universe virtually without regulation, no borders, and no government. I recommend you take the red pill and experience what is probably going to be the future of the financial industry.

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