The Age of Cryptocurrency — How bitcoin and the blockchain are challenging the global economic order, Paul Vigna and Michael J. Casey, Picador, 2014 (with a revised afterword in 2016).
In The Age of Cryptocurrency, financial journalists Vigna and Casey cover a lot of ground, explaining some of the use cases and the technical underpinnings of cryptocurrencies and blockchain. This book is a good read if you are new to the topic. It is also a good resource for people who have more experience buying, selling, and trading cryptocurrencies, but it challenging to explain how they work.
For me, this book felt less character-driven than Digital Gold — Bitcoin and the inside story of the misfits and millionaires trying to reinvent money (although the authors do mention many of the same names that are well-known in bitcoin circles), but it was heavier on the technical details of how the systems work. The technical parts were approachable, and I imagine I’ll re-read certain parts and descriptions as reference material in the future.
As they are introducing the book, the authors write about how the public’s general knowledge of bitcoin is often limited to mainstream media reports, or its affiliation with drug dealers, or how its crazy price swings make it look like a bubble. They write:
All of these elements of the circus sideshow that has arisen around bitcoin are both colorful and important to understanding its story. But to dismiss it as a con because of them is to turn your back on something that may well change your life. Bitcoin is a groundbreaking digital technology with the potential to radically change the way we conduct banking and commerce, and to bring billions of people from the emerging markets into a modern, integrated, digitized, globalized economy. If it works— and it’s still a big if — an awful lot of things that today seem like part of the natural state of the world are going to look as antiquated as Gutenberg’s printing press.
How math can take the trust out of the monetary system
One of the key points that Vigna and Casey make in the Age of Cryptocurrencies (and this point was also made in Naked Money), is that our whole economic system, and all economic systems that involve currency, are ultimately based on trust.
The problem is that citizens have to put faith in governments for currency to retain its value. When that faith and trust erodes, people will start looking to move their wealth from the nation’s currency to some other asset.
The true innovation that drives digital currencies is that it removes the the need for trust, or at least spreads the trust around a little bit. Think of cryptocurrencies like robotic money — no longer tied to the fate and futures of politicians and governments, but organized behind logical principles that are executed by algorithms. This allows the exchanging of modern money without the backing of any kind of government.
Cryptocurrencies also promise efficiency. Middleman, such as banks or payment services (like PayPal or Western Union) and their associated fees and hassles are removed. However, what we are seeing now, as cryptocurrencies mature, is a the rise of new middleman and fees in the form of exchanges and other services that allow allow users to trade a degree of freedom for more security and ease of use.
Consensus: the great opportunity and the great liability
Many cryptocurrencies are mined, which means that people join a network specific to a given currency and contribute their computing power to that network to provide bookkeeping support in the form compiling transaction data that has been compressed and encapsulated using cryptography. (Bitcoin’s algorithm is SHA-256, which breaks down transaction information into a series of 64 letters and numbers. It doesn’t matter if the data is simple or complicated, the result will always be 64 characters.)
Once the data is encoded according to the cryptocurrency’s algorithm — or hashed — it is then compiled into a block. A block is a series of transactions that are eventually vetted by other miners on a network, in a process known as proof of work, in order to become a permanent part of the blockchain. The process then continues for the next series of hashes and blocks.
Miners are racing to try and compile and complete a block first. If they do, they are rewarded with coins.
The network is driven by consensus. A block is only installed on the blockchain if there is agreement (or at least a majority opinion) by the computers in the network that the transactions in a block are legitimate. This consensus model prevents fraud and double spending of coins, and ultimately replace the government trust model that we talked about earlier.
One of the things I learned while reading The Age of Cryptocurrencies are some of the vulnerabilities to the bitcoin network in particular. One big challenge that bitcoin developers are facing right now is whether or not to enhance the block size, which would enable the network to handle more transactions and scale the use of bitcoin, particularly as a payment service.
Put simply, increasing the block size would require miners to handle more data, which would drive up the need for computing power and the cost associated with maintaining the network. On the other side, proponents of increasing the block size say that it’s the only way for bitcoin to grow and become more widely used and accepted.
Another issue related to cryptocurrency mining and the consensus model is the threat of something called a 51 percent attack. The fear is that if a miner or group of miners are able to consolidate power and influence they could theoretically work to create a false consensus. That would enable them to introduce and confirm fraudulent transactions, which would ruin the integrity of the blockchain.
The Age of Cryptocurrency
Like I mentioned at the top, Vigna and Casey’s The Age of Cryptocurrency is a great read for a deeper understanding on some of the technical details that are driving cryptocurrencies and for how people around the world are using them.
The only thing that I really wanted more of was to learn more about cryptocurrencies besides bitcoin. As we know, bitcoin is dominate and many other cryptocurrency systems are built on the same proof of work blockchain model, but still I would have liked to learn more about some of the other methods and ideas being developed.
As they are wrapping up, the authors write:
Given that the blockchain will allow anybody to attach a digital value to anything, it’s conceivable that you could end up with a world in which everything is its own currency…These digital coins, or tokens, would trade against each other via interlinked blockchain-based exchanges that would fairly and transparently set universally recognized prices. This dynamic, multi-asset, giant digital exchange would do away with the need for a common currency altogether. It becomes, in effect, a form of barter, but a form whose divisibility and flexibility overcome the original limitations of that ancient form of exchange, because now, quite literally, you could sell half a horse in exchange for a flight to Acapulco.