In the late 1990s, Kevin Werbach, a professor at the Wharton School and author of "The Gamification," worked at the Federal Communications Commission and witnessed the dot-com boom. Today, he is a renowned expert studying the impact of internet and communication technologies on business, policy, and society. With the rising interest in cryptocurrency and blockchain, Werbach has authored a new book, "The Blockchain and the New Architecture of Trust," set to release soon.
The discourse around cryptocurrency and blockchain often swings between revolutionary potential and fraudulent misuse, leaving many confused about what these technologies truly entail. Werbach points out that much of the confusion stems from people talking about different things under the same umbrella. He breaks down the field into three distinct branches: cryptocurrency, blockchain, and cryptoassets. While they share basic design principles and technological foundations, their goals, researchers, and prospects differ significantly.
Understanding the Three Branches
Werbach introduces the three branches with corresponding principles:
- Cryptocurrency enables the transfer of value online without third-party intermediaries.
- Blockchain allows networked entities to reach consensus across trust boundaries.
- Cryptoassets represent the "financialization" of virtual tokens into tradable assets.
To simplify, he associates each with a "T" principle:
- Trust-minimizing for cryptocurrencies
- Tracking for blockchains
- Trading for cryptoassets
Cryptocurrency and Trust-Minimization
The most familiar cryptocurrency is Bitcoin. Werbach suggests that the simplest way to understand Bitcoin is not to focus on mining or digital cash but on the decentralization of trust. Traditionally, trust relies on partners or intermediaries, but centralized trust mechanisms can be fragile—people, companies, or institutions may become unreliable. Cryptocurrencies demonstrate that we can benefit from trust without needing to trust any single entity, using something inherently valuable (like currency) to verify transactions.
However, this requires the trust mechanism to function perfectly. Decentralization also comes with costs, such as network maintenance, electricity, and the resources consumed by mining communities.
Blockchain and Tracking
Blockchain shares roots with cryptocurrency but has a different goal. While cryptocurrencies aim to reduce reliance on trust, blockchain takes a more moderate approach, operating on limited trust—where you trust only yourself or your organization. In essence, cryptocurrencies minimize trust, while blockchain enhances it.
Society relies on processes that require tracking transactions across multiple agencies. Globally, companies spend approximately $10 trillion annually on logistics. Manufacturers, distributors, and retailers must maintain separate records for the same items in a supply chain. When information flow encounters bottlenecks, transaction costs arise.
Werbach notes, "Most transaction costs between businesses (or within companies) stem from trust issues. If every party has access to trustworthy transaction information, even if they don't trust each other, it could reduce costs and improve efficiency—that's the essence of blockchain."
Cryptoassets and Trading
Cryptoassets turn cryptocurrency tokens into trading instruments, functioning as financial tools. Unlike cryptocurrencies, which facilitate transactions, cryptoassets are viewed as a new asset class. Being inherently digital, they offer flexibility and global accessibility, enabling more efficient trading.
Cryptoassets depend on cryptocurrencies for value exchange. For traders, trust is irrelevant—it's merely a means to achieve liquidity.
Interdependence and Independent Evaluation
Werbach emphasizes that the success or failure of one branch does not necessarily impact the others. Each technology must be evaluated on its own merits. The prevalence of fraud in Initial Coin Offerings (ICOs) doesn't negate blockchain's potential, just as optimism about blockchain doesn't guarantee its success. Sometimes, the more we hype a technology, the harder it becomes to see its true nature.
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Frequently Asked Questions
What is the main difference between cryptocurrency and blockchain?
Cryptocurrency focuses on eliminating intermediaries for value transfer, while blockchain aims to enhance trust through shared, verifiable records across entities.
How do cryptoassets derive value?
Cryptoassets gain value from their tradability and utility as digital assets, often backed by underlying cryptocurrencies or blockchain functionalities.
Can blockchain work without cryptocurrency?
Yes, blockchain can operate independently for applications like supply chain tracking or secure record-keeping without involving cryptocurrencies.
Are cryptoassets the same as cryptocurrencies?
No, cryptocurrencies are mediums of exchange, while cryptoassets are investment instruments representing ownership or value in a digital form.
What are the risks of investing in cryptoassets?
Risks include market volatility, regulatory changes, and potential fraud. Due diligence is essential before investing.
How does blockchain improve supply chain efficiency?
By providing a transparent, immutable ledger, blockchain reduces delays and errors, enabling all parties to access accurate data in real time.