Notre Dame professors delve into blockchain and crypto asset valuation // The Observer
Editor’s note: This is the second in a three-part series exploring the world of cryptocurrencies and crypto assets across all three campuses. The first part of this series focused on student engagement, and the final part will focus on investment recommendations and the University’s ties to space.
Notre Dame finance professors agree that one way to understand the value of a crypto token is to look at the technology behind it – blockchain.
blockchain is a shared, immutable ledger for recording transactions. For cryptocurrencies like Bitcoin, the technology tracks and confirms information through a distributed network with no central party.
The purpose of blockchain is in its name. The technology saves data, such as Bitcoin transactions, in a “block”. After the block completes, it becomes part of the “chain” with other blocks before and after that prevent any changes to data or transaction information.
Jason You, a second-year computer science PhD student at Notre Dame, said blockchain applications are more complex than technology.
“Blockchain is actually a general-purpose database, but the advantage is that it can secure transactions, preventing untrusted parties from tampering with data,” You said. “Blockchain is unique because there is no centralized server, but they can still allow untrusted computers to work together, and they can log the same data on all or most of those computers. “
A cryptographic process called mining is central to reaching consensus within the network.
“You want all computers to store the same data. You want them to agree on the things they communicate about, and that requires some sort of mechanism,” You said.
You compare mining to solving a complicated mathematical puzzle. In reality, this puzzle is a hash function that works like a trapdoor, meaning a computer can find the door or entrance efficiently, but struggles to find the exit in the opposite direction.
In the cryptocurrency mining process, the first computer to solve the puzzle receives a cryptocurrency reward. Once a function has been solved, it is virtually impossible to solve it in reverse, creating the security of a blockchain-powered currency.
Still, you said the technology could still be improved in terms of security and user interface. He also said that blockchain applications are far more valuable than technology alone.
“Blockchain by itself won’t create as much value because it’s just a database technology,” You said. “This can allow multiple untrusted parties to work together and store the same data in the database. This is something that has never been done before. Yes [developers] understand this point and then apply it to other technologies or industries, then it can potentially be something revolutionary.
Currently, many companies are applying Blockchain technologies to currencies. Whether or not this is the best use of technology remains unknown.
Bill McDonald, a finance professor at Notre Dame, said the value of cryptocurrency could come from applying blockchain to monetary transactions.
“When you look at cryptocurrencies, you have to look at the valuation proposition in the same way. It’s a question of, ‘Is it a useful medium of exchange?’ said McDonald.
The potential value is magnified in countries where the national currency is unstable, he said.
After teaching several courses on crypto assets and Bitcoin, McDonald remains uncertain about the future of cryptocurrency.
“At the end of the day, I don’t know if it’s going to take over the world or not, but when I look at people working in space, I’m very impressed,” McDonald said.
He compares the unknowns of the potential of cryptocurrency to the unknowns of the potential of the early internet.
“I lived through the first Internet going online, and I saw then how difficult it was to explain to someone: “Your computer will be able to talk to my computer”. People used to say, “So what? They don’t think about Amazon. They don’t think about eBay. They don’t think about the things you can do when you open that door,” McDonald said.
The cryptocurrency growth narrative may follow that of the internet, or it may end up buried in the graveyard of overhyped tech, perhaps alongside the Blackberry smartphone, the Theranos health screening scam, or even of the less dramatic Internet bubble.
“I don’t think most people understand some of the things that can be done in the crypto space.“, said McDonald. “I think it has huge potential, but I’m not entirely convinced that we’ll ever realize that potential, or that our countries will ever feel comfortable allowing these currencies to grow within their own borders. There are potential benefits, but as always, there are risks.
Like any emerging technology, buying cryptocurrency is a risky investment, but just like a poker table in Vegas, with enormous risk comes the possibility of compensatory reward.
Brad Whitton, a Notre Dame senior and future employee of Chicago-based crypto asset investment firm Walden Bridge Capital, played down more dramatic accounts of the US dollar’s replacement with Bitcoin and said cryptocurrencies have a potential value as an inflation hedge.
“I don’t really see a world where bitcoin is going to undermine the stability of the dollar. At the end of the day, people have to pay taxes in dollars. All business is done in dollars. I don’t think that’s going to really change,” Whitton said. “People talk about bitcoin being analogous to digital gold. I think that’s a fair way to look at it right now, and I think going forward it’s a good mental framework to know how to think about it.
Bitcoin and similar cryptocurrencies exist in limited supply, creating economic pressures that mirror those in the gold market. Much like buying gold, some investors view buying crypto assets as a method of diversifying their portfolio. While cryptocurrency prices are volatile, their prices often move independently of the market, giving them a potential portfolio diversification advantage.
Whitton said cryptocurrencies might even have an edge over physical gold.
“[Cryptocurrency] has many of the same properties as gold, but it’s better in the sense that you don’t have to pay to store it and you can transfer it over the internet. It is not confiscable,” he said.