Cryptocurrency: A Learner’s Guide
Yet, with over 20,000 Cryptocurrency projects and 300 million users, understanding the breadth and width of this technology can be challenging. That’s where TechDogs comes in – we are here to simplify Cryptocurrency. Learn all about this technology; how it works, how it evolved, its benefits, importance and future trends!
Have you ever tried making a payment and received an error message saying, “bank server unavailable”? Or perhaps you incurred a heavy processing fee on an international transaction? Or maybe you’ve had trouble hiding millions in cash just like Walter White? (We’re kidding about the last one!)
There exists a technology that can solve these problems and more – Cryptocurrency. It is essentially a digital or virtual currency that is secured by cryptographic proof. That means you can carry out transactions securely and verify each transaction to avoid double-spend or counterfeit. Most Cryptocurrencies are hosted on decentralized blockchain networks, creating a digitally distributed ledger. Every computer (or digital wallet) on this network is part of the ledger and owns some amount of Cryptocurrency. Since every digital wallet is connected, each transaction can be independently verified on the network.
The defining feature of Cryptocurrencies is that they are not issued by any central authority and can be mined or purchased from Cryptocurrency exchanges. Don’t worry, we are going to look at these things in detail!
What The Heck Is Cryptocurrency?
The origin of the word Cryptocurrency is based on the Greek word kryptós, meaning “hidden” and currency, which refers to standardized money. The “hidden” here implies that users can anonymously own Cryptocurrency (crypto, as the cool kids say!) since there is no central issuing authority. Instead, a decentralized approach records transactions and issues new units into the system. This peer-to-peer system ensures security and transparency as transactions have to be verified by over 50% of the blockchain users. Each time Cryptocurrency is transferred, the public ledger records it permanently on the blockchain network.
Yes, we know it sounds like something out of a science fiction novel. The major difference, as opposed to physical money, is that Cryptocurrency exists digitally or virtually. Yet, when the concept was first proposed, it did not seem rooted in reality at all – let’s check out the timeline of Cryptocurrencies.
Evolution And Origins Of Cryptocurrency
Remember how Walter White used to be a simple, down-to-Earth chemistry teacher before becoming the shadowy drug lord, Heisenberg? Oops, #SpoilerAlert for those who haven’t watched Breaking Bad yet! Anyway, our point is that Cryptocurrency was also created (in part) by a shadowy, anonymous individual – read on to know how:
The roots of Cryptocurrency can be traced back to the 1980s with the invention of the “blinding algorithm.” It allowed users to carry out a transaction without revealing the entities on both sides.
In 1983, An American cryptographer named David Lee Chaum published this technique in his paper called ‘Blind Signature for Untraceable Payments. The same year, David Chaum created eCash. The platform's purpose was to allow consumers to send money anonymously over the internet. He was a pioneer in the struggle for digital privacy and employed blind signatures to keep transactions secure and confidential.
Then in 1989, Chaum founded DigiCash. The service started to peak in the mid-90s. However, DigiCash ultimately failed due to issues with scaling, market acceptance and lack of securing contracts with significant financial institutions.
It was in 1998 that the term “Cryptocurrency” gained prominence. Coincidentally, it was the same year DigiCash went bankrupt. A computer engineer named Wei Dai created B-money at this time, focusing on decentralizing online transactions. He serves as the inspiration for Wei, the smallest unit of the Ethereum Cryptocurrency, the second largest by market cap after (you guessed it!) Bitcoin.
In 2008, the economic collapse shook the foundations of the financial industry. The economic recession reduced the value of traditional currency. This crisis is cited as an inspiration by Satoshi Nakamoto, the mysterious unidentified creator(s) of Bitcoin. The next significant turning point came in 2008 when Nakamoto formulated the founding ideas of Bitcoin, the first Cryptocurrency to arrive on the scene. The aim was to show that digital currency could be decentralized without relying on any financial institution.
In October 2012, one of the most recognized exchanges, Coinbase Global Inc was launched. Brian Armstrong and Fred Ehrsam launched the exchange, which had over one million members by 2014! It is currently the largest exchange in terms of trading volume.
In 2016, as the popularity of blockchain technology rose, various use cases of Cryptocurrencies were developed, including smart contracts. They refer to applications that are set up on a blockchain network to execute a set of predetermined rules.
Today, Cryptocurrencies have sparked the interest of individuals, investors and businesses. Currently, there are thousands of Cryptocurrencies and at least 20 new projects being listed daily. Yet, their working remains common – let's explore!
How Does Cryptocurrency Work?
Don’t worry; it’s not going to be one of those blogs. We will break it down into simple concepts:
It is the process used to create new Cryptocurrency units. To create new coins, crypto miners use their computer's processing power to solve challenging mathematical puzzles. The miners receive a portion of these new coins as payment. Additionally, users can purchase Cryptocurrencies through exchanges using fiat money.
Buying, Selling and Storing:
Cryptocurrencies operate on blockchain, which is a distributed public ledger that keeps a record of all transactions and makes them available to stakeholders. Cryptocurrencies, once purchased, can be stored in digital wallets. Digital wallets can be hot or cold. Hot indicates an online connection that makes transactions simple but leaves the wallet open to fraud and theft. On the other hand, cold wallets are more secure but make transactions more challenging.
Now, let’s look at the two major models which are used by most Cryptocurrencies:
It refers to a built-in consensus mechanism used by a Cryptocurrency to validate transactions. Here, users are randomly chosen to validate transactions to ensure transparency and decentralization. Based on the number of tokens you stake, the probability of you being chosen increases. This method is much more energy-efficient and quicker.
Proof of Work (PoW):
This method entails validating transactions by expending a certain amount of computational effort. Here, transactions are secured and verified by miners who race to be the first to solve computationally-extensive math puzzles. In return, the miner receives a small amount as reward and the transaction goes through. Naturally, as the method requires “proof of work” it consumes energy and time.
Knowing these four terms will help you navigate the world of Cryptocurrency easily. Unlike Walter White, you do not need to know every chemical formula!
What you may need to know, though, are the types of Cryptocurrencies – read on!
Types Of Cryptocurrencies
Cryptocurrencies may have different functions, use cases and specifications. However, they can be roughly sorted into 4 labels:
Store Of Value:
These include some of the most well-known projects like Bitcoin, Solana and Ethereum. They are meant to be used as digital currencies and have intrinsic value. They are typically listed on major exchanges and use either a PoW or PoS consensus mechanism.
The value of stablecoins is derived from an external asset, which distinguishes them from other Cryptocurrencies. For instance, the value of Paxos Gold (PAXG) is derived from gold reserves. The price of the Cryptocurrency varies along with the value of gold (or the associated asset).
Users can buy and sell services using these digital tokens over blockchain networks. For instance, KodakCoin, a Cryptocurrency launched by Kodak, aims to manage digital image rights for photographers, while Dragonchain token provides users with access to its serverless cloud architecture. Heck, Dentacoin is a Cryptocurrency for the dental sector that enables patients to pay for procedures and dentists to share medical records!
Yes, this is a category we cannot ignore! Although these coins don't serve any financial purposes. As users adopt them, they become a part of the crypto ecosystem. The most notorious are Dogecoin and Shiba Inu, both influenced by the popular Shiba Inu meme. Others include the Nyan Cat-themed Catcoin and Nyancoin!
Here’s a GIF of Nyan Cat for no good reason:
The Importance Of Cryptocurrency
The most significant question is: how important are Cryptocurrencies?
Consider the following scenario: you wish to repay a friend by sending money online to their bank account. Several things may go wrong: technical difficulties with the bank's systems, a poor internet connection, or the possibility of identity theft. #Shudder
Now picture a similar exchange taking place between two individuals utilizing Cryptocurrency. The system verifies the users' identities, determines whether they have the necessary balance to complete the transaction, processes the payment and transfers funds over the blockchain to the recipient's account. All of this occurs in a matter of minutes.
Cryptocurrency solves every issue with modern banking. Transaction limits are unrestricted, your accounts are secure and there is no single point of failure, such as the bank's servers or mobile payment application. Naturally, this is not all Cryptocurrency has to offer.
Benefits Of Using Cryptocurrency
Privacy And Security:
The blockchain technology that powers Cryptocurrencies assures user anonymity and a high level of security through cryptographic validation.
Decentralized And Transparent Transactions:
The entire system runs on shared accountability, with all members having access to the same transactional data. Since each transaction must be verified by more than half of the members, the transactions are tamper-proof and indelible.
Hedge Against Inflation:
Cryptocurrency can make for a great investment! Since they do not correlate with other financial assets and have a limited supply, they can rise in value during inflation.
Transactions, whether international or domestic, are extremely rapid and available 24/7 as verification and transfers take very little time.
No Transaction Costs:
Extra transaction expenses are eliminated by cutting out the middleman or third parties such as banks and processing service providers.
Now do you see why Cryptocurrencies are the hottest technology on the market today? Well, we’re here to tell you to put on some sunscreen because it’s about to get a lot hotter – here are the top trends for Cryptocurrencies!
What’s The Future Of Cryptocurrency?
Is this how you feel when you read about the emerging trends in Cryptocurrency? Here’s a simple summary of what to expect.
The biggest challenge in the coming years will be the conflict between regulation and anonymity. The main goal of Cryptocurrencies is to ensure users can remain anonymous and transact all over the world. Yet, governments and leaders demand that these transactions be regulated and governed by local and international laws. Nevertheless, we will see more major corporations accepting crypto as a form of payment. It is expected that future regulatory clarity will help in bolstering this trend.
Moreover, the advent of DeFi (Decentralized Finance) applications will aid crypto adoption on an institutional level. This will allow traditional financial transactions to take place on blockchain networks with the use of smart contracts. Another trend that will continue to prosper is DApps, where software applications run on a peer-to-peer blockchain network and use Cryptocurrencies for transactions.
Cryptocurrencies have become an international phenomenon. They will play a crucial role in our transition to a cashless and decentralized society. Through peer-to-peer networks powered by blockchain technology, Cryptocurrencies will enable safe and private online payments. With these direct payments, a trusted third party would no longer be necessary. We believe that Cryptocurrency is the future of finance – Walter White agrees with us, right?
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