The new year arrived on the heels of Multi-Collateral Dai, which has attracted many new people from around the world to Maker. To help these new users learn all they can about crypto, blockchain tech, Dai, and everything the Maker Protocol has to offer, we begin today a 6-part Welcome to Crypto series. The series will cover everything from the advantages of digital assets and how to buy crypto to how to read cryptocurrency price charts, and why they matter. Dig in!
Digital currencies are shaking up organizations and markets around the world, sparking the promise of economic freedom for all through decentralization. At the foundation of the allure of cryptocurrencies is blockchain technology, which is bringing profound innovations to industries—the financial industry especially. For example, MakerDAO’s stablecoin, Dai, the world’s first unbiased digital currency, is built on the Ethereum blockchain and resistant to hyperinflation. Soft-pegged to the US Dollar, it allows businesses and individuals to realize the benefits of cryptocurrency without experiencing volatility and third-party interference. As such, MakerDAO has become a key player in a movement helping to inspire the fast-growing decentralized finance (DeFi) ecosystem.
To fully grasp the advantages of both crypto and blockchain technology, it’s best to first learn how the two are connected.
The Connection Between Cryptocurrency and Blockchain
A blockchain is a database (or ledger) of transactions (or agreements) that exists on a network of computers. Cryptocurrency transactions are represented by smart (digital) contracts that enforce agreed-upon details, such as crypto type, sender, receiver, and amount. As new groups of transactions are requested, they are processed in blocks and recorded in the ledger for anyone in the world to view.
Moreover, the software code that powers the blockchain is free and open-source, meaning that developers can use that code to build decentralized applications (dapps) on the blockchain—and even to build dapps on top of dapps. This is a huge benefit to businesses, as they can build on existing code to create new dapps that offer very specific business solutions.
Blockchain inventor Satoshi Nakamoto (a pseudonym) applied this new technology to cryptocurrency first with the introduction of Bitcoin in 2008. As a result, it’s nearly impossible to discuss the blockchain and its benefits without talking about cryptocurrencies.
Over the past 12 years, thanks to fast-growing interest in blockchain technology and the popularity of Bitcoin, crypto has exploded as an industry. Today, cryptocurrencies and tokens are the foods that nourish blockchain-based ecosystems. They serve to address different concerns across markets, and they function in very specific ways. The many benefits of cryptocurrency for businesses and individuals highlight a blockchain’s unique capabilities.
The Benefits of Cryptocurrency
Bitcoin was first mined in 2009, just after the 2007-2008 world financial crisis, which underscored the public’s growing frustration with dysfunctional centralized systems. The dissolution or bailout of financial services companies once considered “too big to fail” highlighted the harsh realities of counterparty risk. Lehman Brothers, for example, was the fourth-largest US investment bank when it initiated bankruptcy proceedings in 2008. The company’s closing sent shock waves through the entire financial industry, contributing to an eventual $700 billion US government bailout.
Cryptocurrency offers a decentralized framework that levels the playing field by eliminating intermediaries and making it possible for individuals to transact autonomously, peer-to-peer. For example, Dai addresses counterparty risk by ensuring that its solvency does not rely on any trusted counterparties. All Dai is backed by collateral that has been escrowed into publicly viewable smart contracts on the Ethereum blockchain, giving market observers the chance to see the system’s health in real time (unlike with Lehman Brothers, where risks were obtuse and nearly impossible to pinpoint).
Consequently, cryptocurrency offers the following benefits:
- Low Transaction Fees. Because cryptocurrency transfers are peer-to-peer and require no centralized intermediaries, transaction costs are minimal. For example, an international fund transfer using a centralized bank, such as Bank of America, would include fees related to the conversion of funds. Decentralized systems do not charge currency conversion fees.
- Instant Payments. In addition to increasing costs, centralized authorities and third parties increase transaction times as a matter of procedure. Cryptocurrency resolves this frustration by enabling nearly instant peer-to-peer transactions.
- Fraud Reduction. Individuals and businesses often deal with strangers when buying and selling items across geographic boundaries. That can open the door to fraud. While there will always be those who attempt to scam a system, the technology behind cryptocurrency helps to address fraud risk because transactions made on a blockchain are transparent and cannot be changed.
- Accessibility. We may live in a connected world, but transacting across geographic and political borders can be complicated when using traditional financial systems. Cryptocurrency leverages decentralization to equalize financial infrastructure access across dissimilar boundaries and serve the underserved. In other words, anyone can access crypto from anywhere without interference from a central authority. For example, a small business owner in South Africa can open a Maker Vault to generate Dai and take advantage of the stablecoin’s low volatility as an alternate way to fund their business.
These benefits are why Dai has gained momentum and continues to propagate quickly through the Ethereum ecosystem.
The Rewards of Blockchain Technology
Centralized financial systems have inherent weaknesses that can be exploited. Misallocations of funds can occur, and ﬁnancing and equity gaps may arise. In the end, system weaknesses can cause consumers to suffer. Blockchain technology offers a stronger, more trusted system that delivers value through:
- Decentralization. Blockchain technology offers a truly decentralized framework for stakeholder governance, putting decision-making powers in the hands of individuals, not central authorities with no real skin in the game. While not all digital assets are decentralized, Dai is. With the Maker Protocol, there is no central administrator that acts as an intermediary (as with centralized, fiat-pegged stablecoins), and MKR token holders govern the system, working to ensure the stability of Dai. To that end, MKR holders aim to maintain the system’s health and defend it from harmful proposals.
- Immutability. The financial world is currently dominated by centralized entities that people and businesses rely on to authenticate information and settle transactions ethically and accurately. However, those entities are vulnerable to exploitation. Wells Fargo is a prime example. In 2016, federal regulators revealed that employees of the financial services company secretly created over 2 million unauthorized bank and credit card accounts. Those accounts not only earned customer-paid fees for the bank, but also bonuses for some employees. A year later, the number of found fake accounts ballooned to 3.5 million. The immutable nature of the blockchain’s general ledger eliminates the chance for internal actors to manipulate data to their benefit.
- Transparency. The blockchain’s transparent nature allows anyone to review every single transaction and then make decisions based on observable activity. Like immutability, transparency can also cause bad actors to think twice.
- Security. Blockchain transaction records are distributed over a network of computers, so there’s no single point of failure. That makes it extremely difficult for hackers to infiltrate. Additionally, security methodologies, such as mnemonics, help to protect crypto wallets.
Decentralization Is at the Center of Cryptocurrency and Blockchain Technology Benefits
The advantages of crypto and blockchain protocols stem from decentralization. Through blockchain technology, businesses and individuals are in complete control of their transactions and needn’t fear interference from—or missteps or misuse by—central authorities, such as banks. Further, the more businesses and individuals use blockchain technology, the stronger it becomes. For example, when Vaults are used to generate Dai on the Maker Protocol, it fortifies the economic foundation of the currency.
If you’re ready to put your newfound knowledge to work, get Dai on an exchange, such as Coinbase, generate your own Dai by creating a Maker Vault, and then earn the Dai Savings Rate (DSR) on the Dai you hold by locking it into Oasis Save.
Next up in the 6-part Welcome to Crypto series: How Does Cryptocurrency Have Value, and Why Should I Care?
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. Charts, graphs and references to any digital assets are for informational and illustrative purposes only.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any purchase decision. The content speaks only as of the date indicated.