For many, cryptocurrency, blockchain and non-fungible tokens (NFTs) are new concepts that some may first associate with wealth, technology or digital artwork. However, while interconnected, each of these terms have a distinct purpose and role in our economy.
Vivian Fang, an associate professor in the Carlson School of Management, is available to explain what these are, what they are for, and what could be next for cryptocurrency, blockchain and NFTs.
Q: What is blockchain technology?
Prof. Fang: A blockchain is a multi-party, data-sharing platform. In simple terms, new data can only be uploaded if the participating computers on the network agree. Existing data can not be edited. In more technical terms, a blockchain is a distributed, append-only ledger of provably-signed, sequentially-linked and secured transactions (e.g., through encryption) that’s replicated across a network of computers. Updates are determined by a software-driven consensus.
Q. What are cryptocurrencies and non-fungible tokens (NFTs) and how do they work?
Prof. Fang: There are three key characteristics of cryptocurrencies:
- All cryptocurrencies are digital, meaning there is no physical form of it. There are no bills or coins or other notes.
- All cryptocurrencies are secured through cryptography. This means encryption algorithms and techniques are used to ensure that the ledger isn’t tampered with.
- Most cryptocurrencies are decentralized, meaning that they use a distributed ledger technology. Typically, this is through blockchain technology.
Cryptocurrencies work similarly to government-issued currencies that are not backed by a commodity, such as the U.S. dollar, because they can be used to buy goods and services. However, no government authority is needed to issue cryptocurrencies and no central agency is needed to clear transactions (e.g., banks and credit card companies).
NFTs are tokenized, digital work. You can think of NFTs as digital collectibles, or crypto alternatives to antiques or baseball cards. NFTs are created to authenticate ownership of creative digital work because transactions of NFTs and their ownership are recorded on blockchain (mostly Ethereum).
Q: In business, what roles do cryptocurrencies and blockchain have?
Prof. Fang: As more companies start to expand into the crypto space, customers can now use cryptocurrencies to pay for goods and services at millions of merchants where PayPal is accepted after the online payment giant introduced its “Checkout with Crypto” service. Furthermore, an increasing number of companies, such as Tesla and MicroStrategy, are starting to invest directly in crypto assets. As a data sharing platform, blockchain has a much broader application in business. If used right, an enterprise blockchain can help save time, cut cost and mitigate risk.
Q: How do cryptocurrencies have value?
Prof. Fang: Whether cryptocurrencies have value is perhaps the toughest question to answer. While I can give you some arguments about whether cryptocurrencies do or do not have value, it would only be scratching the surface of a complex system.
On one side of the argument, cryptocurrencies are of great value to libertarians and cypherpunks. They have long yearned for a currency that is free from government intervention and truly native to cyberspace. Cryptocurrencies are also of value because they can now serve as a medium of exchange, and they are anti-inflationary by nature.
However, on the other side, most cryptocurrencies have no intrinsic value. This is because they do not generate cash flows nor do they have stable stores of value (i.e., a currency that can maintain its relative value over time without depreciating). For cryptocurrencies to move toward mainstream acceptance, a certain measure of price stability needs to be achieved.
Q: For those who aren’t active investors or lack sufficient understanding of these areas, why should they pay attention to what happens?
Prof. Fang: The distributed ledger technology that bitcoin builds on is closer to everyday life than one may think. Take Walmart, for example, who required all suppliers of its leafy greens and farm products to join its blockchain by 2019. Customers are effectively relying on the technology for food safety. Also in 2019, blockchain-as-a-skill overtook major skills such as cloud computing and artificial intelligence, and it became the number one hard skill in demand among global employers, according to LinkedIn Learning. This trend will likely continue.
Vivian Fang, Ph.D., is an associate professor and the Honeywell Professor in Accounting in the Carlson School of Management. Along with expertise in cryptocurrency and blockchain, Fang’s research lies at the intersection of corporate finance and financial accounting, with a focus on the real effects of trading in financial markets, managerial myopia, executive compensation, and fraud.