In 2008, few could have predicted the potential for change that cryptocurrencies now offer. It was in November of that year when Bitcoin was first proposed in a paper by a person going by the name of Satoshi Nakamoto. In early 2009, Bitcoin was officially launched as a cryptocurrency. Since then, it has caught the popular imagination, and even Wall Street is paying attention.
Bitcoin is a digitally-based form of currency, with no centralized governing bank. Instead, it operates on a peer-to-peer level, and each transaction is recorded in real time in an open ledger called the blockchain. Bitcoin and the blockchain operates under a very complicated system of math. The “crypto” in cryptocurrency comes from cryptography, the kinds of math that ensures that Bitcoin transactions are unique and can be processed without a centralized bank.
Bitcoin is not the only game in town, however, and new ventures have sprung up to develop other applications for the blockchain. A major open-source platform for blockchain apps is Ethereum, which launched in 2015. Using a cryptocurrency they call Ether (complete with its own price ticker), developers are working to use the Ethereum blockchain for a number of applications. Colony is one such application, and just went live in a beta version on February 10. Lead engineer Dr. Aron Fischer describes Colony as a way of running a meritocratic and decentralized reputation-based work system. Workers complete tasks for digital tokens, which are linked to the Ethereum blockchain and redeemable for traditional currency.
Beyond a collaborative digital work environment, Dr. Fischer envisions Ethereum-based apps as a way out of what he termed the “balkanized” internet, with users confined to this or that online service with no way to operate them together. With the development of a peer-to-peer micropayments system, he describes the way people could avoid data collection by businesses like Google and Facebook by monetizing small interactions on the web. With the user paying a fraction of a cent to read an article on a website, advertisers like Google would no longer have an incentive to gather data about the user in order to provide targeted advertising.
Cryptocurrencies show no signs of going out of fashion anytime soon, but it’s anyone’s guess whether blockchain developers like Ethereum will get their money’s worth from their investments in apps like Colony.
And that is not the end of the story. Kik, a popular messaging app, has announced it will be launching its own cryptocurrency, dubbed Kin, based on the blockchain platform Ethereum. In the largest-of-its-kind move, Kik will be offering an ICO, or initial coin offering, to investors in order to expand its pool of investors and increase its capital base. Kik intends Kin to be used primarily within the app initially, with the possibility of it expanding in use beyond the Kik ecosystem.
With the integration of Kin into the Kik ecosystem, it stands to potentially become the cryptocurrency with the largest user base, since Kik has an estimated 15 million active users each month. As cryptocurrencies have grown in popularity and value, venture capital firms are taking notice. Even traditionally staid Wall Street firms such as Goldman Sachs are banking on the business potential of blockchain, and are investing resources into growing a blockchain-based portfolio.
The advent of the ICO could herald a new era for startups who are generating revenue for expansion or an initial public offering on the stock market. But under the current financial regulatory system, token-based investmentsare not subject to many of the safeguards and legal requirements as traditional currencies. Additionally, cryptocurrencies remain extremely volatile. Eth, the cryptocurrency based on the Ethereum blockchain, earlier this month doubled in value over just a few days, while Bitcoin lost 20% of its value in one day.
Investors are naturally wary of this extreme level of volatility, but a few less risk-averse firms are betting that they can win big with cryptocurrencies. Boost VC, a California based venture capital firm, has announced that they are now investing directly in ICOs. Other investors are experimenting with ICOs, in a modern-day gold rush. Since the government does not yet regulate ICOs, some will undoubtedly gain incredible riches, while others could be left holding the bag if the cryptocurrency market crashes.