Normalizing digital assets and currencies: Moving beyond incremental innovation

Almost like a slap in the face to the burgeoning presence of cryptocurrency and its disruptive potential in the mainstream marketplace, Visa and Mastercard, the world’s two largest credit card platforms, recently raised their transaction fees. Blissfully oblivious to the changes afoot in the payment landscape, or just getting theirs while they still can? It’s hard to say what the strategy is, but retailers aren’t liking it much and aren’t necessarily willing to accept credit card companies holding… well, all the cards. With everything from fee hikes to the normalization of cryptocurrency — conceptually or in reality — the writing is on the wall in terms of where the future of payments is leading us: away from centralization, away from out-of-control fees, and away from being locked into just one traditional method of payment.

Not surprisingly, those who stand to benefit most from the status quo seem to be the loudest proponents of said status quo, claiming that cryptocurrencies are an illusion, that merchants don’t accept crypto because it has no future… but these doom-and-gloom naysayers have a vested interest in ensuring that things remain the same. While some of their reasoning has a basis in fact, for example, retailers and consumers alike need stability and protection from volatility before adopting crypto on a mass scale, the truth of the matter is that every great innovation has been challenged by existing interests that stand to lose most.

Innovation at pace and scale: Moving beyond increments

There has been, until recently, very little large-scale innovation in money or payment systems. That is not to say that there have not been big changes in how we pay and in the conveniences offered to consumers. But in the background, the fundamentals of how these payment systems work and who is in charge of them has not changed much. We have seen incremental innovation in that new devices allow people to carry around and use their traditional payment methods more widely and in new ways. Think mobile payments, platforms like PayPal, instant money transfer apps like Venmo, Square Cash, Swish or Vipps. But these almost always lead back to traditional fiat currencies, credit cards and standard brick-and-mortar banks and financial institutions with all the sluggishness experienced at settlement and exorbitant and unpredictable fees that affect businesses and consumers alike. There isn’t a great deal of transparency in these models, but we accept them because most of the time they work seamlessly enough, doing what we need them to. And disrupting this status quo, understandably, strikes fear not only in the hearts of those with vested interests in keeping things as they are but also in businesses and consumers who aren’t necessarily sure about the technologies underpinning completely new payment solutions.

Moving beyond the incremental change we’ve seen over the years, some companies have decided, as we have written about Norwegian before, to fly rather than sit idly in the hangar. Norwegian Air Shuttle has always looked into the long-term future in its planning for air travel, and their approach to digital assets and currencies is similarly future-oriented. Recognizing the power of cryptocurrency and a currency-agnostic payment platform, Norwegian has run with the idea of developing a crypto trading and payment platform from scratch. As a pioneer in this space, though, Norwegian also recognizes that the marketplace and the businesses and people in it also need to be comfortable with, understand and adopt these new concepts in order for this endeavor to be successful. Norwegian is betting that both consumers and businesses are readier for greater control over their payment options than the mainstream anticipates, and knows that before a consumer can enthusiastically exclaim, “I want to pay with crypto!” the merchant (and to some extent the marketplace more broadly) has to make those options understandable, available and easy to use.

In the coming weeks, our blog will start to make these things more understandable for the average, non-technical audience and contribute to our aim of making digital currencies and assets an everyday experience.

The very basics of blockchain

You’d be forgiven if you couldn’t quite pin down what blockchain is, does or means. Most mainstream news on the subject of blockchain mentions “blockchain-driven innovation” in the vaguest of terms, but for the average person, it is not clear what this even means. And specialist media that focuses on blockchain, cryptocurrency and technology tends to position itself at a level of understanding too advanced for the average person. In the middle ground somewhere, some basic understanding of the fundamentals of blockchain is needed.

What is blockchain?

In most non-tech contexts, blockchain is mentioned alongside cryptocurrencies (or simply Bitcoin), which often obscures what blockchain actually is.

At its most basic, blockchain is a technology that allows for keeping track of the ownership and value of something without having to 1) physically possess the item in question, or 2) get a single, centralized third party to authenticate or verify this ownership. A blockchain at its most basic is made up of a series of transactions (which we can call blocks) that are linked together in a kind of digital chain and distributed among all the users of the blockchain. The blockchain that is formed from all of these transactions becomes an unchangeable, transparent ledger of virtually any type of transaction and provides ultimate proof of ownership or value. Blockchain’s applications so far have been within the cryptocurrency space, but can also be applicable for smart contracts and any number of other things that permanently record transactions of anything involving something of value. The revolutionary aspect of blockchain technology is that blockchains do not rely on an external third party to verify or authenticate the data within the blockchain.

It may be a bit much for the novice reader trying to understand blockchain, but there are essentially four key ideas underpinning how and why blockchain technologies work. While you don’t need to know these concepts to accept the validity of blockchain as a secure, distributed system, it doesn’t hurt to understand what these factors boil down to (this is quite simplified):

  • Transaction blocks get a unique, irreversible identifier: Thanks to something called cryptographic hash functions, each block of transactions gets a unique identifier. You don’t need to know right now how this works except to know that the hash identifier can only work one way: that is, it creates the identifier but cannot be reversed. Every new input gets a unique identifier.
  • Irreversible ledger: Each block in a chain contains the unique identifier of the block that came before it, meaning that one block cannot be changed without modifying the entire chain. If someone in the chain tries to make changes, it generates an error in every block within the chain and ultimately invalidates the whole chain.
  • No external authority required: Blockchain data is distributed among all the users, so every user ends up with a copy of transactions and blocks, and through this distributed network, new transactions and new information about transactions is automatically distributed to all users. Nothing is stored by an individual or centralized authority, meaning that no one can make changes. And only once a block of transactions is validated is it added the chain. But how are these blocks validated?
  • Validation: Validation consists of using a common protocol to reach consensus about block validity. What this means is that a new block is always checked against established proof of work or proof of stake methods to ensure that it meets the requirements of consensus protocol. This means that the block itself — and all the transactions in it — need to meet the requirements before the block is considered valid and can be added to the blockchain. This might seem a bit more technical than needed here, but it’s just to explain that the checks for validity are rigorous and methodical.

Blockchain and cryptocurrency

Perhaps having read the previous section you’ve put two and two together and realized how cryptocurrency is built on blockchain. Because blockchain is generally employed to keep track of things of value without having to rely on a centralized authority, it’s the perfect technology for digital currency and assets. Cryptocurrencies are a part of the blockchain ecosystem in which many other things can and will be a part of the ecosystem. As it stands today, cryptocurrencies act as tokens to use for transactions made through the blockchain.

What is cryptocurrency?

For the average person, cryptocurrency is often mistaken as being interchangeable with blockchain, but in fact cryptocurrency is just one application of blockchain technology, as we have alluded to above. Recognizing — again — that we’re talking to a lot of people for whom digital currency isn’t a native concept, here is a very brief overview of what we are talking about and what cryptocurrency can or may mean for the future of money, of business and of value.

To set the scene, most people know how fiat currency and its proxies (credit cards, for example) work. You are exchanging your money for a good or service, and depending on how you undertake that transaction, there may be some level of trust involved as well as, in the case of the ubiquitous credit/debit/mobile payment scenario, at least one third party who has to process and settle the transaction. The consumer doesn’t usually deal with the middleman unless something goes wrong with the transaction. But the whole financial and commerce system is built on this basic premise.

Cryptocurrency, built on the aforementioned blockchain, is an entirely different way of doing things — first and foremost because it removes the middleman. Because of the existence of a decentralized database of transactions (the blockchain or distributed ledger — whether this is a record of money, goods, property or whatever item you are keeping track of) there is no central control (i.e. a credit card company or bank). Blockchains are transparent and available to see by the entire community, and because existing transactions cannot be altered and can be easily verified, their authenticity is also not up for question. Cryptocurrency, though it may eventually work just like standard methods of exchange we use today, operates in a completely new way, and the tokenization of value will eventually move us beyond just looking at cryptocurrency as a kind of money. But for the moment, we really do want to think of it as a new kind of money.

But this still sounds pretty theoretical for people who are just trying to grasp the idea of what a cryptocurrency is when you can’t really see or touch it. How do you get it and how can you use it? You have probably read in mainstream media about Bitcoin and its ups and downs, have possibly seen mention of other digital currencies, such as XRP or Ethereum, and want to make some sense of what these are, what they do and whether it makes sense to get involved.

In our next blog post, we will go into the nitty-gritty details to answer the most basic of questions about cryptocurrency and what’s in it for you.

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NBX Editorial: The voice of the Norwegian Block Exchange, a pioneering cryptocurrency exchange & payments platform that’s dedicated to the tokenized future.