the westminster news
Published by the students of Westminster School
By Allen Zhou '23
In a recent Uber ride, I got a 15-minute lecture from the driver about how he makes money trading bitcoins and ethers. Admitting that I am not the most up-to-date person on cryptocurrency and NFTs, I have been asking myself the question: “What is all this buzz about really?” Well, this nagging thought had been consuming my mind for a good while, ever since the first instance of a hideous ape avatar cropped up as a celebrity’s profile picture on social media. So, after wasting precious man-hours not sleeping or reviewing for any of my many upcoming assessments, I have some information to disseminate and a couple of opinions to sling around.
To understand the issue at hand, an explanation of the mechanisms and technology it is founded upon is needed. The blockchain is the backbone of the entire concept, a very specific method of data storage. With a traditional database, everything is run on one set of servers where clients store and read information. The blockchain stores data locally on every user’s computer, with every node in the network having access to the data. This means that no node will affect the other; if one client holding the information is somehow attacked and disrupted, others are unaffected. This marks a distinction from the typical database, where if the central server is disabled, the entire system is paralyzed. Another important aspect of the blockchain is that data is arranged into “blocks” and every block is bound to its predecessor, forming the “chain”. The immutability of these blocks means that it is extremely difficult, if not impossible, to change, remove, or manipulate data in the blockchain without being easily detected because the same data is stored in sync throughout all nodes over time. It can be used to secure transactions of currency notes, which leads to cryptocurrency. NFT is another application of this technology. It attaches one token to each copy or transaction of an underlying asset. These tokens are non-fungible because they are authenticated by blockchains. Most tokens are fungible, meaning that all the tokens are the same, it does not matter which one you hold. An allegory would be the paper money we use every day: a dollar is a dollar, legal tender no matter which particular dollar you use. While with nonfungible tokens, it matters which particular token you hold; token numbers 16 and 23 are unique and distinct. Usually, these are used to represent and safeguard unique assets, guaranteeing that the owner can be protected against the internet’s power of costless reproduction.
Cryptocurrencies sound great on paper. Any person would greatly appreciate more control over their finances and a more direct stake in the tumultuous marketplace that we live in. Yet we must consider the potential downsides and flaws in embracing these methods of exchange and trade. The two arguably most critical aspects of the base logic for the value of cryptocurrencies have doomed their destiny: their utility as a relatively unmoderated means of common exchange, and the resources expended to create each new block in the blockchain. Certainly, cryptocurrencies are very good in terms of the decentralization of financial power, as previously discussed; but this also leaves them with some very major weaknesses, namely, the difficulty to regulate such an industry. Any attempts by a government to fetter the power of these trading services and wallets would simply destroy part of its functionality, as an unregulated means to avoid middlemen and even conduct some more unsavory business. If we were to adopt some sort of nationally recognized cryptocurrency and backed it with government power, it would erase part of this utility, but leaving it unregulated and still treating it as an official tool of exchange would be economic suicide. There also exists an issue of obtaining the cryptocurrencies themselves: by their nature, to create a new block in the chain for some popular cryptocurrency, e.g. bitcoin, takes a great deal of resources. Currently, the most popular method to generate a new token is through a method called “Proof of Work”, i.e. to solve a mathematical problem for the code of a particular block, the solution of which can be easily double-checked by other users. The energy required to do so typically derives from fossil fuels, meaning that mining bitcoin places quite the heavy strain on our already tenuous environment, and as more blocks are generated, this strain becomes more severe. It also means that individuals with more money to throw at stronger computational power to devote to the task of creating cryptocurrency will permanently have an immense advantage over those with lesser means. The stories we hear of small towns, and regular people profiting from the system are no different than the stories spun by Horatio Alger. The failures and the destitution are always glossed over when it comes to a new and exciting narrative.
NFTs on the other hand might well have some kind of genuine value, mainly because their encryption can be used to safeguard and authenticate valuable physical and digital assets. Yes, the NFT dumb monkey profile pictures actually might be more worthwhile in the long term than bitcoin or Ethereum, simply because of the value of its underlying asset, not NFT itself. All in all, while these new developments have generated a great deal of buzz, I believe that in the long term crypto is merely the new fool’s gold. As I noticed some ads for a Crypto Kids Camp targeting historically underrepresented communities, I am a bit concerned about what they are going to be taught. But who knows, this article of mine can curdle and age like a bucket of anchovies and milk left outside on a hot summer day.