Now that Good Life Legal accepts cryptocurrency as a form of payment for legal services I wanted to share some thoughts for anyone interested in entering the realm of cryptocurrency.
In December 2021, congress took the testimony of 6 crypto executives. The topic: future regulation and landscape of cryptocurrency. They testified about web 3 and how the feds can regulate blockchain and crypto without stifling innovation. Many members of congress enthusiastically inquired with the leaders of the crypto industry on this new technology. The overall answer, web 3 is the newest evolution of the internet and it has arrived.
A brief evolution of the internet was explained by Brian Brooks, CEO of Bitfury. At first, they called the internet web 1. This is when internet providers only allowed users to read content posted on a website. The second layer, web 2, is when internet providers also allowed users to post and interact with internet content. Now for web 3, In short, it is the next generation of the internet, and it is unrelated to 5G. It allows web users to have an ownership stake in the actual network, so a centralized power cannot exercise unscrupulous, absolute dominion over the network’s users. “What makes web 3 different is the ability to own the actual network. That’s what crypto assets themselves represent, is an ownership stake in an underlying network.”
Mr. Brooks explained how Ethereum is a great example of web 3. On the Ethereum blockchain, individuals get rewarded for work they do, i.e., network maintenance, creating new tokens, or making artwork. This network functions like the internet because one can read posts and interact with content. But instead of Google owning the whole network the users own a stake.
What exactly is owning a stake? Well, it means possessing the token (like Ethereum). Now the action of “staking” is when you lend the network your Ethereum. And because that token is used for building, maintaining, and verifying transactions, the network creates more value on the Ethereum network. This allows the network to return the value you lent it, along with 5 – 16% interest rates.
Owning any part of an Ethereum gives you access to the network. Even one portion, 0.0001, requires a private key to access it. Thus, so long as you have an internet connection and your private key, you may participate and access the network.
I like comparing crypto to property, mainly because the IRS categorizes it as such but also because most of my clients own real property. Say you own a house. There are three primary things you get when buying a house. You get a key to the front door, a deed, and an address. When you purchase a crypto asset, you get three similar things. A private key, public key, and public wallet address.
The key to your home, and a private crypto key, are similar. Both are used to access the property. Both are personal and should not be shared. And both can be misplaced. This is quite scary with private keys used for crypto because one cannot change the locks or call a locksmith if a private key is misplaced. If you lose your private key, there is about a 0% you recover the money. So, don’t share your keys and do your best to keep track of them. One sure way to keep private keys safe is to print them and place them in several secure locations.
Pushing the real property and crypto analogy along, the information available on the county’s property appraiser’s website is similar to the information obtained by one’s public keys. One can see information about transfers, mainly the amounts and dates. Nevertheless, the information is public because the ledger is public. You will not be adversely affected if someone knows the legal description of your house, and the same is true if someone knows your public keys. They would merely know the description of some property but could not gain access to claim ownership.
“Public wallet addresses” are what you want to share because the more people who know your public address the more that can send you money. This is like a home address where you can receive checks in the mail, or where mail is returned. So, your public wallet address is how one sends and receives crypto.
The last part of my analogy is about rents, which we alluded to above. Like real property where you allow others to use your property in exchange for rents. You may lend cryptocurrency, or the computers used to mine crypto and verify the blockchain, in exchange for monthly, weekly, or sometimes daily payments. One can rent their share, or stake in the network, in exchange for payments.
For example, if one stakes their Ethereum on the Ethereum network they will receive payments every few days as consideration for the network using that share of the network which you own. The same is true allowing the network to rent your computer, which is my favorite way of contributing to the network. One can connect their computer to the network, run an algorithm, and in a few days the network will automatically send payments to the wallet address you have listed with the network.
I hope this helps bring the big picture of crypto in common terms. The big takeaway here is cryptocurrency is property and may be used to produce income. Let’s end by labeling crypto as a virtual space, which allows people to use common resources to achieve the common goal of financial independence. My next article will be a more in-depth look at mining, staking, and other ways to earn crypto, particularly on the Ethereum network.
If you have questions or want to talk more about cryptocurrency, please call or e-mail me.