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CRYPTCURRENCIES HAVE BECOME A BUZZWORD IN THE FINANCIAL MARKET.

 

Despite the skepticism that surrounds them since inception, yet, they are accepted as a means of payment. Today, there are over 15, 000 businesses that accept BTC (the first successful cryptocurrency) as a means of payment.

Cryptocurrencies rode to mainstream adoption with no struggles and are generally considered a great alternative to traditional payments of today (and many other possibilities for socio-economic transformation). If you’ve ever been wondering how this alien thing came to our world, this article will expose you to the origin of cryptocurrencies, how they work and the different types of crypto assets.

 

WHAT DOES A CRYPTOCURRENCY MEAN?

 

Practically, cryptocurrencies are mere variations of Bitcoin. Just like traditional currencies denote value in units, for example, you can say “I have 15 Bitcoin, same way you could say, I have $15. While cryptocurrencies were created to be politically independent and highly secured against cyber threats, they offer advantages that local financial systems don’t provide.

Aside from that, a government might decide to seize or freeze any of the bank accounts in its hegemony, but if the funds were to be in cryptocurrency, it is very difficult for the government even if the holder is a citizen or a legal resident or anywhere in its jurisdiction.

Nevertheless, cryptocurrencies also suffer from drawbacks such as value volatility and illiquidity that isn’t common to fiat currencies. Also, some perpetrators utilize crypto to perpetuate illicit transactions thus, making most countries frown at them and ban their use. Before delving further, let me explain how Bitcoin came about.

 

THE BAKCGROUND STORY (PRE BITCOIN)

 

The story of virtual coins can be traced back to an American cryptographer named David Chaum. In 1983, he developed a cryptography system named eCash. After 12 years, he developed another system and named it Digicash. With DigiCash, economic transactions can be done confidentially with the use of cryptography.

However, the term cryptocurrency came alive in 1998. It began when Wei Dai, a computer programmer, thought about developing a new payment method that will use a cryptography system but will operate in a decentralized manner.

 

THE BIRTH OF THE FRIST CRYPTOCURRENCY BY SATOSHI NAKAMOTO

 

If you’ve been conversant with the news, you should be aware of the financial crisis that happened almost a decade ago. Back in 2008, a funding crisis was looming, affecting everyone, including America. The effects of the economic disaster were so devastating that coins were losing value faster than normal.

In 2009, a pseudonymous Satoshi Nakamoto created the first cryptocurrency, Bitcoin. Satoshi explained the concept of Bitcoin in his/their whitepaper titled “Bitcoin: A peer to peer electronics cash system.” As revealed in the whitepaper, the primary aim of bitcoin is to create a new payment method that can be used internationally, globally, having no financial inclusion and works in a decentralized manner.

Satoshi created bitcoin as a result of the huge financial crisis that affected millions of citizens. Not only that, but also to satisfy the need to make another unconventional type of money that isn’t subject to crisis, people can derive monetary benefit from it and actually use it.

 

CRYPTOCURRENCY IN THE PRESENT DAY

 

Today, the concept of cryptocurrency has changed in the minds of many, despite the rough struggle in the beginning where people couldn’t trust it as a means of payment, it is now accepted by many companies. Some of these companies created their own cryptocurrencies and accept it as an exchange for their goods and services.

Two of the most interesting examples are KodakCoin from the multinatinational design and photography company Kodak; likewise Libra, from the Facebook social network. Other companies and  industries like airlines, hotel chains and so on allow virtual currencies as their means of payment.

 

HOW DOES A CRYPTOCURRENCY WORK?

 

Do you know why cryptocurrency is amassing superfans in multifolds? Its source codes, technical controls and supports are ridiculously complex. But that doesn’t mean to scare you, laypeople can understand its basic concepts and become knowledgeable about the rudiments of a cryptocurrency. There are several concepts that embodies the values, integrity and security of a cryptocurrency which are:

 

Cryptography

If you aren’t a nerd, cryptography means “secret writing”- the ability to code a message such that only the recipient can decode and understand its content.  In the cryptocurrency context, cryptography is a system of uncommonly complex codes, securing the units and exchange of sensitive data transfers.

 

These protocols were built on advanced mathematics, mixed with computer engineering principles that make them virtually impossible to break, hence, the protected currencies can neither be duplicated nor counterfeited.

 

Overall, cryptography guarantees a secure transaction through safety of the participants, ensures coordination without the need of a central authority, and prevents double spending.

 

Blockchain Technology

For a cryptocurrency to thrive, there must be a database to record its transactions. That is the exact work of the blockchain technology, It is the public ledger that stores all the activities like transactions, validates ownership of all currency units at any given time.

 

The blockchain stores the entire transaction history of a cryptocurrency, no matter the length and despite that it tends to increase periodically. Unlike a centralized database where a copy of  the transaction is stored by the bank issuing the currency, cryptocurrencies make use of  nodes to store their transactions. Nodes are networks of decentralized servers which anyone can volunteer to set up.

 

Before a cryptocurrency transaction can be finalized, it has to be added to the blockchain. This process usually occurs within minutes and once finalized, it is irreversible.

 

Besides, cryptocurrency transactions have no built-in chargebacks or refunds functions, unlike credit cards and payment processors like paypal. In some cases, there might be lag between the initialization and finalization, the units are kept in a sort of escrow, making it unavailable for both parties, and thus, prevent double spending.

 

Non-Centralized Control

The principle of decentralization is deeply rooted into blockchain technology. Most of the supply and value of a cryptocurrency are controlled by their users and the complex protocols engraved in their governing codes. A cryptocurrency is not controlled or governed by a bank or other regulatory authorities. Although, there has been a rise in some central bank digital currencies (CBDC) such as the Bahamian Sand Digital Currency.

 

For a fully decentralized cryptocurrency, there are some nodes called miners. This set of people can be an individual or team of people that use vast amounts of computing power to record transactions and create new blocks on the blockchain(more on that below).

 

Private Keys

You might want to ask, how is identity authenticated in a cryptocurrency? Simple, it is through the use of a private key. Every user can make their own private keys, these keys are generated using a random number generator and formatted as a whole number up to 78 digits long.

 

Once you have a key, you can receive and send cryptocurrency. Without one, a holder cannot spend or convert his/her cryptocurrency making the funds worthless until the key is recovered. This has been one of the critical security measures to reduce theft, and avoid unauthorized usage.

 

However, some people consider this to be severe,even if you  generate another key, you can no longer have access to the  funds in the lost keys. Some cryptocurrency users avoid this by storing their keys in multiple digital locations, or perhaps in other physical forms like paper.

 

Cryptocurrency Wallets

Aside from private keys that denote identity, crypto wallets collect and confirm information about the owners of a particular crypto. Although private keys ensure authenticity of cryptocurrency transactions, wallets protect the unused units against theft.

 

Wallets can be stored on the cloud, external storage device or internal storage.When you backup a wallet, it doesn’t denote duplication of the funds but rather you have just stored another copy of your transactions.

 

Miners

Using huge computing power, miners solve cryptographic puzzles using highly technical methods to ensure accuracy, completeness and security of currencies on the blockchain.

 

The term miners is derived from their work as they literally create wealth by adding new blocks to the blockchain. Upon solving the hard puzzle, miners are rewarded with a new unit of the cryptocurrency and a percentage cut, as a transaction fee. The transaction fee might be as low as 1% and theoretically, it can happen that a transaction will not require a fee.

 

Earlier before, cryptocurrency mining was a highly lucrative side hustle. All you needed then was the resources to invest in hardware mining operations. Nowadays, mining is not meant for just any hobbyists but individuals who have thousands of dollars to invest in the hardware intensive and professional level mining equipment. It turns out, the more miners and larger network, the more processing power that is required to mine a cryptocurrency. Thus, more processing power requires thousands of dollars to set up the needed equipment.

 

The overall goal of the mining processes in a cryptocurrency is to ensure an average interval between new block creation at a predetermined level. For instance, Bitcoin has 10 minutes for a new block to be created.

 

Finite Supply

While mining controls the production interval of new cryptocurrency units, most cryptocurrencies have their finite supply.

 

For the long haul, miners will receive fewer units per block and at the end receive only few transaction fees for their work. Although it is yet to happen, the finite supply is a key to guarantee value in a cryptocurrency.

 

Bitcoin, for instance, has its own finite supply. Observers predict that the last bitcoin will be mined around 2140. Although it is still a speculation but can come to pass if the current bitcoin trend of slow mining continues over time.

 

The idea behind this finite supply is to make most cryptocurrencies deflationary. Similar to precious metals like gold where there are finite supplies, as opposed to fiat currencies where banks can theoretically produce more of.

 

Cryptocurrency Exchanges

Some unpopular cryptocurrencies can only be exchanged via private, peer-to-peer transfers, meaning they are illiquid and hard to value. Other popular cryptocurrencies such as ripple and bitcoin, trade on prominent secondary exchanges similar to fiat currencies and forex exchanges.

 

These exchange platforms allow cryptocurrency holders to exchange their crypto unit for their native fiat currency like euro or U.S dollar. Typically, exchange platforms take a cut (usually lesser than 1%) in the transaction value.

 

In particular, some special online markets also support the exchange of crypto currencies to fiat. Such markets have their own exchange rate with major world currencies.

 

No doubt, cryptocurrency exchanges play a vital role to institutionalize liquid markets and as well, set values in relation to fiat currencies. The major workload of exchanging platforms has made it a haven for hackers. It is worthy to note that exchange prices can also be volatile, for instance, the market increased tenfold during the 2017 bull run whereas it reduced about 50% in the wake of Mt. Gox’s exploit by hackers.

 

 

FINAL THOUGHTS

For cryptocurrencies to gain mainstream adoption, it must break barriers and gain confidence in the public. However, it could be truly transformative and pass the test of time. Imagine an election where total votes are confirmed by hundreds of nodes as opposed to the central database from the government. You can keep on imagining but the limit is your imagination.

 

Behind the development of cryptocurrencies lies much more than the advent of new currencies, but a new economic system that confronts the inherited logics that are at the root of the systemic failure we are facing as a society.  Although there is a whole movement of speculation and financial engineering behind it, there is also a strong ideological drive for dissidence and emancipation. The dream of an alternative world, without banks, with new forms of governance, in which decentralisation and peer-to-peer relations generate an empowerment of communities so that they can still have the opportunity to decide the futures in which to live.

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