What do you know about cryptocurrency?
You’ve probably heard a lot about Bitcoin, and the people who became very rich from it. But that’s just the tip of the iceberg. There are thousands of cryptocurrencies in existence today, like Ether (built on Ethereum, the most actively used blockchain) and Dogecoin (which started as a joke).
Matthew Reyes (BMath ’19), co-founder and COO of Hypotenuse Labs, says we should all be paying attention because the blockchain technology being developed today will likely inform daily banking in the future. He likens what we are seeing today with blockchain technology to the innovation of the dot-com era 30 years ago, when the World Wide Web was an exciting novelty but unnecessary for everyday life.
Reyes points out that the internet didn’t die when the dot-com bubble burst. “We saw useless websites vanish, the ones that didn’t have any long-term value – but the infrastructure stayed. People used that base to build new things, and many of them are tools we now use every day.”
Hyptenuse Labs co-founders from left to right:
Anthony Zhang (BCS '19), Calvin Chan (BCS '19), Matthew Reyes (BMath '19)
Hypotenuse Labs, which builds cutting-edge web, AI and blockchain solutions, is building part of the infrastructure that could one day transform our finances. In 2021, the company launched AlgoSwap, a new exchange protocol for the Algorand blockchain. AlgoSwap works like the currency exchanges used to exchange Canadian dollars for euros, pesos or yen. It allows people to use their Algorand tokens in different ways or “locations.”
In many ways, cryptocurrencies resemble their real-world counterparts. But more and more, those real-world currencies, and the ways we use them, are changing to resemble crypto systems. National banks and financial institutions are already making connections between cryptocurrencies and our everyday finances. Someday our finances might rely on a blockchain too – or something like it.
Learn more from the Hypotenuse co-founders on the Waterloo alumni podcast:
Built-in security
Blockchains are large databases that record the system’s transactions in a public ledger. There’s a consensus among all users that creates a unique self-governing security system.
“A blockchain is simply a consensus, append-only log of events,” Reyes says. “Consensus means that everyone has to agree on what’s in the log. Append-only means you can add information, but never change or delete it. These properties are important for building a transparent financial system.”
Plus, the newest generation of blockchain designs are improving efficiency and reducing environmental impact. Algorand, for example, uses “proof of stake,” which replaces the mining process with a lighter algorithm.
The key part of a decentralized network is minimizing the trust we need in other players.
Mining involves solving difficult math problems, which creates new coins and allows transactions to occur. It’s what you see in videos of large computers, constantly running – and takes considerable energy.
With proof of stake, mining isn’t necessary. In the most popular version, users gain coins by validating transactions. A user’s validation power requires them to put some of their coins at stake. When they successfully validate a transaction, they receive a small reward (more coins.) If a validator tries to approve a fraudulent transaction, their staked coins are taken away.
“The key part of a decentralized network is minimizing the trust we need in other players,” Reyes explains. “With proof of stake, if you have more coins, you have more validation power. But you also have more to lose, and less incentive to do something malicious.”
In theory, and some practice so far, proof of stake creates a fairer, energy-efficient system compared to other cryptocurrencies.
Blockchain and banks
But how will it translate to your bank account?
Canadians only used cash for one in three transactions last year. In fact, the Bank of Canada has already begun research in digital currencies – including cryptocurrencies and ledgers like those used in a blockchain – and it’s considering a “central bank digital currency” for the future.
Proof of stake means nothing to our lives today, but it could be a pivotal step toward something we’ll all use in the future. And that makes Reyes’s work worthwhile:
“Regardless of whether projects like Algorand break into the mainstream, there are valuable insights and research coming out of this work already. I think we’re entering the cyberpunk era.”
Learn more from the Hypotenuse co-founders on the Waterloo alumni podcast:
