Just like the Internet, social media, and smartphones have forever changed the business landscape, cryptography and digital currency will do the same in Web 3.0. If small business owners do not adjust the way they do business in the coming years, they will suffer the same fate of businesses like Blockbuster and Kodak that went out of business because they failed to adjust their strategy in light of new technologies and consumer trends.
If your business is not considering how it will need to pivot in the face of the emerging role of cryptography and digital currency that will affect every facet of the business world, it may be time to think about what you want to place on your company’s tombstone. However, if you recognize the massive effects that cryptography and digital currency will have on your business in the near future but are confused about how to digest all the information that exists, you will want to continue reading.
Web 3.0 is the new blockchain-based economy. In Web 2.0, data and content were centralized in a small group of companies known as Big Tech. The Big Tech players offered services to millions of users and thus held sway over user behavior and control of their data. The market has questioned the impact these companies have on privacy, market power, free speech, censorship, and national security policy and consumers are looking for ways to live in a digital world outside of the ecosystem created by these companies.
Web 3.0 is the evolution away from the Big Tech-centric Web 2.0 ecosystem. Web 3.0 incorporates the concepts of decentralization and token-based economy built on the back of blockchain technology. According to Bloomberg, Web 3.0 is an idea that “would build financial assets, in the form of tokens, into the inner workings of almost anything you do online”.
But what does Web 3.0 mean for the small business owner? Plenty, since it will change just about every way of conducting business today. Some short-term areas of Web 3.0 that business owners should consider is how Cryptography and Digital Currency will affect their operations.
What is Cryptography? Cryptography is a communication technique that uses encryption to encode messages so that only the sender and intended recipient can see the message. As the foundation of modern security systems, cryptography safeguards confidential information, authenticates identity, prevents document tampering, and establishes trust between servers, allowing the transmission of sensitive information such as financial transactions and contracts.
What is Digital Currency? Digital currency is any money-like asset that is managed, stored, or exchanged on digital computer systems such as the Internet. Digital currencies are similar to traditional currencies but have no physical form, unlike currencies with printed banknotes or minted coins. This lack of a physical form allows almost instantaneous transactions to occur over the Internet and removes the cost associated with distributing physical notes or coins.
Advantages of Digital Currency
The adoption of digital currency by consumers and businesses is accelerating for the following five reasons:
1. The pandemic encouraged consumers and businesses to conduct contactless payments to reduce their possible exposure to Covid.
2. Transactions that involve digital currency allow payments to be made without the need for complex handoffs between payment gateways, payment processors, and banks, eliminating or reducing the merchant’s processing fees associated with typical credit card payments.
3. The acceptance of digital currency opens the door to a new and growing customer base of people that own and buy things with digital currency. According to Crypto.com, the number of global cryptocurrency users reached 221 million in June 2021, or just under 3% of the world’s population, highlighting that “it took only four months to double the global cryptocurrency population from 100 to 200 million.”
4. The use of digital currency is safer since cash and credit cards can be stolen. Purchases made with digital currency require the use of mobile devices that are secured by secret pins or biometrics, so even if the device is lost or stolen, no one else can use it.
5. Payments made with digital currency are not processed by banks or central authorities, making them impervious to government intervention or manipulation.
The same technology that makes digital currency more secure also makes transactions permanent. Digital currency payments are push only. It is not possible to reverse a transaction once it has been verified, unlike credit cards where a bank can reverse a transaction by issuing a chargeback. Digital currency transactions are more like cash, in that if you pay with cash and discover later that you were ripped off, you can’t call your bank to reverse the transaction. Of course, with a reputable merchant, the transaction can be redone in the opposite direction to refund a purchase.
To see how cryptography and digital currency are changing the landscape for businesses, a general understanding of the underlining technology known as blockchain is required.
What is Blockchain?
Blockchain is the technology behind cryptography that guarantees the reliability and security of a data record to generate trust without the intervention of a third party. Unlike a database that uses tables to store data that can be easily manipulated, blockchain is a distributed ledger enforced by a distributed network of computers called nodes.
The way that blockchain works is to collect information and sort it into groups. These groups are known as blocks and can be thought of as containers with a finite storage capacity. When a block becomes full, it is closed and linked to the previously filled block, forming a chain of data known as the blockchain. Any new information that follows a freshly added block is compiled into a newly formed block that will also be added to the chain once it is filled.
What makes blockchain technology so secure is the use of what is called a “Hash”. A hash is a value that is produced by taking the contents of a block and running it through an algorithm to produce a value. That hash value is then appended to the block as part of its metadata. Since the hash was based on the contents of a block, if even a single bit in the block is changed, the computed hash value based on the block’s content would no longer match the hash that was appended to the block in the metadata, and the block would be flagged as invalid.
In addition to the metadata of the hash that represents the value of the current block is the hash value of the previous block in the chain. If a block is tampered with, the hash value of that block will change. Since the next block in the chain contains the hash from the previous block before it was tampered with, it would make the rest of the chain invalid since the hash value would no longer match the hash of the previous block. However, since blockchain is a decentralized and distributed ledger, there are multiple copies of the unaltered blockchain distributed across a network of computers or nodes that remain valid.
With a basic understanding of blockchain, let’s demystify some of the vocabulary associated with digital currency.
Cryptocurrency is a kind of digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank. Cryptocurrency is built upon blockchain technology and is distinguished from fiat currencies such as the US dollar because a central authority does not issue them, making them potentially impervious to government intervention or manipulation.
Digital Tokens can represent any asset, as well as the right to allow the asset to be traded or redeemed. There are three primary types of Digital Tokens.
1. Security Tokens could represent a stock certificate or a cryptocurrency like Bitcoin or Ether, whose value is dictated by the financial market. Bitcoin is the face of digital tokens but is only one form of digital currency, yet, it has received the lion’s share of the attention. Depending on the source, there are over 9,000 other digital currencies. While owning digital tokens in a portfolio has become all the rage, they represent a very speculative investment, because, like all new companies that emerged as part of the dot com revolution, digital tokens are in the midst of their own bubble that will very likely burst, leading to a consolidation of the market, in the same way, that the bursting of the dot-com bubble gave rise to many of the Big Tech businesses we know today.
The most popular and oldest Security Token today is Bitcoin. More and more online merchants are accepting Bitcoin payments.
2. Utility Tokens offer the right to a service or a product and exist only within a specific ecosystem. Utility tokens can be used as a means of payment on the platform developed by the issuing company. For example, they could represent the travel rewards offered by an airline that could be redeemed by the user to buy tickets or upgrades. Utility tokens can also be sold or traded to pay for goods or services. Another example is the new open-source Brave browser that was designed to be more privacy-focused and that automatically blocks online ads and website trackers. The Brave browser offers users the ability to enable optional ads that pay them for their attention with Basic Attention Tokens (BATs). Users can then use their BATs to send contributions to websites and content creators, which support BATs in the form of tips, with the ability to keep the cryptocurrency they earned. BATs, therefore, allow for a completely new type of advertising revenue model that does away with the need for constant tracking of user behavior, which is nowadays subject to much ad fraud. To be clear, BATs are just one type of utility token that only works with the Brave browser. Another utility token that is gaining traction is the NFT.
3. Non-Fungible Tokens or NFTs are a type of utility token. NFTs are one-of-a-kind digital tokens that can be bought and sold like any other property, but they have no physical form. NFTs are like a recorded serial number linked to a specific buyer which is not fungible (separated). For example, if a buyer buys a physical asset such as a diamond, a piece of art, or the licensing rights to a digital asset, the seller can issue to the buyer an NFT that links the asset, which will include a digital certificate of authenticity/proof of ownership confirming the asset is genuine and the details of the buyer that now owns it.
Stablecoins are a class of cryptocurrencies that offer price stability by being backed by a reserve currency such as the US dollar. Stablecoins are gaining traction as they attempt to offer the best of both worlds, the instant processing and security, the privacy of payments made with cryptocurrencies, and the volatility-free stable valuations of traditional fiat currencies.
Digital Dollars are a form of Stablecoin digital currency that is pegged to the value of the US dollar because it is the world’s dominant reserve currency.
While the Digital Dollar is pegged to the US Dollar, some nations and their central banks also offer Stablecoins that are pegged to other currencies. China, which is our biggest trading partner, created a central bank digital currency in 2021. That said, Digital Dollars are the predominant form of digital currency used today to make payments; however, more and more major vendors are accepting payments in Digital Tokens such as Bitcoin as well as Stablecoins.
Because the US Central Bank, at the time of writing, does not yet have a central bank-issued digital currency, FinTech companies have stepped in and created Digital dollars of their own. Some popular forms of digital dollars are the Celo Dollar, Gemini Dollar, and USD Coin.
Crypto Exchanges are online marketplaces where users can buy, sell, and trade cryptocurrency. A cryptocurrency exchange works similar to an online brokerage, as users can deposit US dollars and use these funds to purchase cryptocurrency.
Digital Wallets are apps that securely store a person’s payment options, such as credit and debit cards, and digital currency, allowing the user to conveniently use their smartphone to make contactless purchases. A digital wallet is similar to a physical wallet or purse in that you have to fill it with money that you get from your bank. At any time, you can electronically transfer money to and from your digital wallet where it will sit until you decide to spend it or return it to the bank.
By using a digital wallet, users can make contactless purchases easily and quickly in one of 3 ways:
Near Field Communication, or NFC: Allows two devices to exchange information if they’re placed close to each other. Apple Pay and Google Pay use this technology. To use one of these digital wallets, the merchant must have compatible card readers at checkout.
Magnetic Secure Transmission, or MST: Generates a magnetic signal, much like when you swipe the magnetic stripe on a credit card. The signal is transmitted to the payment terminal’s card reader. Samsung Pay uses both MST and NFC technology.
QR codes: Barcodes that can be scanned with your smartphone’s camera or a merchant’s handheld barcode scanner. With PayPal and Venmo apps, for example, you can generate a QR code that lets you use your account to pay for an item in a store.
According to Professor Darrel Duffie of the Stanford Graduate School of Business, who conducts research and helps shape public policy in the FinTech Payment space, if you live in a city in China, 95% of payments are made either with Alipay or WeChat Pay, two popular Chinese digital wallets.
Peer to Peer Money Transfers
Venmo, Zelle, and PayPal are considered peer-to-peer payment apps. Each of them allows you to send and receive money from another person for free and quickly, however, they operate a bit differently.
Zelle is the most basic. It simply links two bank accounts so one party can transfer funds between different bank accounts. For Zelle to work, both parties need to have accounts at banks that participate with the Zelle app. Zelle only links bank accounts, so it is supported by most banks.
Venmo and PayPal in contrast not only allow peer-to-peer money transfers but are also digital wallets. However, unlike Zelle, Venmo and PayPal also allow the user to choose a debit card or a credit card to complete the transaction. While most transactions are free, instant transfers from your Venmo or PayPal account to a bank account or getting money from a credit card are subject to a fee.
Smart Contracts
In addition to the role that cryptography and blockchain play on digital payment systems, this technology also enabled the development of smart contract codes that are used to enter the terms of the contract into the blockchain.
Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without an intermediary’s involvement or time loss.
Conclusion
At the time of writing, digital currency and cryptography are a bit like the wild west. While much of the digital currency is held by speculators hoping for a rise in the value of their coins, some are US dollar stabilized. Just as the Internet, social media and smartphones, digital currency and cryptography will evolve in Web 3.0. If your small business is not already thinking about offering contactless payment, conducting monetary transactions using digital currency, or looking at ways to leverage utility tokens and smart contracts, you should so that you will be prepared for what is coming.
How would transacting with a digital currency and leveraging cryptography change your business and economic model?
