When looking at the most significant tech stories of 2017 one that jumps out is the rise of cryptocurrency. Many theories emerged about the sudden interest in crypto, from fraud to rampant speculation to the next evolutionary step in decentralised technology. Yes, speculation is a big part of what’s happening, but I have another theory, one that sees a rapid shift away from traditional forms of value and commerce to blockchain/crypto enabled Internet-connected things.
First a brief primer on the difference between fiat currency and cryptocurrency. Fiat currency is legal tender whose value is backed by the government that issued it. Fiat currency’s value is supported by the government that issued it, think of the Pound, Euro, etc. In contrast, a cryptocurrency is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions, to control the creation of additional units, and to verify the transfer of assets. It’s less a currency and more means of accounting and transfer/store of value.
Another way to think of the difference between the two is if fiat currency is made for people than cryptocurrency is made for machines.
Over the last decade or so the concept of “Internet of Things” (aka IoT) has been at the forefront of the digital transformation discussion. In a nutshell, the idea focuses on connecting anything and everything to the internet. The use cases could be as simple as a method for monitoring the activity of a device over the internet to more complex usages including various forms of automation.
The market for connecting things to the internet is growing fast. A recent report by Ericsson estimated that by 2023, there could be over 30 billion connected devices, of which around 20 billion is related to IoT. Connected IoT devices include connected cars, machines, meters, sensors, point-of-sale terminals, consumer electronics and wearables. Between 2017 and 2023, connected IoT devices are expected to increase at a CAGR of 19 percent, driven by new use cases and affordability.
Now mix in the use of blockchain technology, a continuously growing list of records, called blocks, which are linked and secured using cryptography, the basis for most modern cryptocurrencies. Adding these technologies to IoT and you start to see exciting opportunities emerge. Imagine that each of the billions of devices connected to the Internet could someday include a digital wallet. These wallets could act as a simple accounting of the output of the device, or a method to generate and store value as well as a way to gain access to other forms of value, be it data, bandwidth, energy etc.
Now Imagine for a moment a wind turbine. A fairly straightforward use case, basically it creates cheap power from wind. Now imagine you included the ability to use part of that power to mine cryptocurrency. For those unfamiliar with how crypto mining works, essentially mining acts as a book keeping services to the crypto network such as Bitcoin or Ethereum. Mining is inherently 24/7 computer accounting called ‘verifying transactions’. Miners get paid a small reward for providing accounting services and receive fractions of coins every couple of days. The most prominent drawback is most of these mining algorithms are extraordinarily complicated and require vast amounts of energy to execute, which is expensive. So the majority of crypto mining happens in places where electricity is cheap such as China. Wind or solar power lowers the cost of energy to point mining “might” become profitable to installing cryptocurrency system alongside makes sense.
The profitability of mining isn’t the point; the ability to generate value is the point. At certain times of the day, electricity might be more profitable than mining crypto-currency, at other locations or times it might be the opposite. This value is tracked in the form of KWH or other units of measuring the output of wind turbine, but it could also be more easily tracked and traded using cryptocurrencies or tokens in the case of Ethereum. Ethereum, in particular, provides a kind of abstraction alongside the currency itself that facilities this well. These tokens are built on something called Smart Contracts.
The innovation in Ethereum compared to that of Bitcoin is how it improved upon bitcoin’s more restrictive contract language (a scripting language of a hundred or so scripts) and replaced it with a language that allows developers to write their programs. This innovation has opened to the world of new opportunities to not only transact, but for internet connected things to interact from a financial/economic point of view.
Ethereum allows developers to program their smart contracts, or ‘autonomous agents’, as the ethereum white paper, calls them. The language is ‘Turing-complete’, meaning it supports a broader set of computational instructions.
These Smart contracts can:
- Function as ‘multi-signature’ accounts, so that funds are spent only when a required percentage of people agree
- Manage agreements between users, say, if one buys insurance from the other.
- Provide utility to other contracts (similar to how a software library works)
- Store information about an application, such as domain registration information or access records, etc.
I imagine a future where utilization is measured directly in correlation to consumption. Taking a shower and automatically subtracts the corresponding amount of water you use, cooking dinner the stove has wallet the blockchain tracks usage in real time.
As we head into 2018, when you think about the power of cryptocurrency, stop thinking about how cryptocurrency enriches people and start thinking about how it enriches the things around you.