In three series, conCBS asked Prof. Dr. Dr. Dietmar Janetzko the most important questions about two top digitalization topics. In the second part, Prof. Janetzko gives insights on Crypto Currencies.
What are Crypto Currencies?
Internet commerce is absolutely dependent on payment systems, and two groups of systems are tough rivals. One group with players like PayPal leaves existing banks intact and even strengthens them. The second group of payment systems is disruptive, because payment transactions bypass powerful players in the financial system such as commercial banks, central banks and governments. Crypto Currencies belong to the second group.
Crypto Currencies are a counter-movement to the establishment sharing values with like-minded organisations like WikiLeaks. Interestingly, technologies developed for digital currencies are now attracting interest from the establishment, in this case from banks, states and so on, because a number of goals of crypto currencies, such as the avoidance of intermediaries, are also key economic rationales. One goal of Crypto Currencies is to generate trust without having to rely on central institutions (e.g. banks). In order to achieve this, one point is ensuring that digital money cannot be spent twice. This “double-spending” problem was unsolved in many designs for Crypto Currencies.
Only Satoshi Nakamoto – the mysterious developer of Bitcoin, whose identity is unclear – found a solution and published it in 2008 in a white paper (https://bitcoin.org/bitcoin.pdf), one month after the collapse of Lehman Brothers. Subsequently, Bitcoin became the first Crypto Currency. The concept behind Bitcoin has often been copied or further developed. This has led to numerous other Crypto Currencies such as Ethereum.
How do Crypto Currencies work?
The term Crypto Currencies already emphasizes that cryptography, i.e. encryption technologies, are used extensively here. Encryption is indispensable in many areas like traditional online banking data transfer. Satoshi Nakamoto has shown that encryption is essential not only in data transmission, but also in many other aspects related to the organisation of a currency, and it is part of the solution for the “double-spending” problem. Money creation, traditionally a privilege of central banks when it comes to cash, is also performed in Crypto Currencies – via encryption, called “mining”. Besides encryption, the distributed “peer-to-peer” approach is a second pillar of Crypto Currencies. Thousands of computers have downloaded all transactions, the blockchain, in a compact form and check each new transaction. Both encryption and the distributed approach, or “mining” and “peer-to-peer”, interlock to prevent fraud and create trust.
In the third part of the series on Blockchain Technology and Crypto Currencies, Prof. Dr. Dr. Dietmar Janetzko answers questions regarding the future of crypto currencies.