Before going to the whole concept of, What ‘Cryptocurrency’ is I would like to enlighten about the current social need and the uplifting question, ‘Why do we need Cryptocurrency and Why does it matter?’
Currently, our everyday financial transactions rely upon a trusted third party to maintain a record of transactions. For example, when you do a bank transaction, the banking system keeps a record, a ledger & guarantees that the transaction is safe & reliable. Likewise, when person ‘A’ transfers 10 to person ‘B’ using PayPal, PayPal maintains a central record of 10 dollars debited from A’s account and $10 credited to B’s. Intermediaries like banks, PayPal, and other members of the current economic system play an important role in regulating the world’s financial transactions.
The main question that arises is that are these intermediaries required, are these records and guarantees are reliable and false-proof. Ok let me show you some of the limitations of these intermediaries,
- Unfair value capture: These intermediaries gain billions of dollars in wealth creation but pass virtually nothing onto their customers to show any kind of satisfaction or regard.
- Fees: Banks and companies charge nominal fees for facilitating transactions. These fees often disproportionately impact lower-income earning groups who have the fewest alternatives and find it hard to meet the two ends.
- Censorship: If a particularly trusted intermediary decides that you should not be able to move your money, it can place restrictions on the movement of your money. (account freezing)
- Permissioned: The trusted intermediary serves as a gatekeeper who can arbitrarily prevent anybody from being part of the network.
- Pseudonymous: At a time when the issue of privacy is gaining greater urgency, these powerful gatekeepers can disclose or force us to disclose more financial information about ourselves than we may want. (wrapping up the factor of privacy)
So everything has a beginning, and the whole concept and application of cryptocurrency transpired during the ‘2008 International Financial Crisis’ which essentially gave birth to the revolutionary idea of Blockchain. You can’t talk about cryptocurrency without mentioning blockchain. The financial crisis was primarily caused by deregulation in the financial industry. That permitted banks to engage in hedge fund trading with derivatives. Banks then demanded more mortgages to support the profitable sale of these derivatives, which indirectly created the financial crisis that led to the Great Recession. This was one of the main reasons which questioned the reliability of these intermediaries.
So how do blockchain and cryptocurrency relate to each other, Blockchain is the technology that enables the existence of Cryptocurrency. Bitcoin is one of the most popular cryptocurrencies out there in the market. Bitcoin’s “peer-to-peer electronic cash system,” launched in 2009 by an anonymous programmer (or group) Satoshi Nakamoto, was a watershed moment for the freedom of money. For the first time in history, people could securely exchange value, without requiring a third party or trusted intermediary. Payment in Bitcoin meant that people could pay each other directly, bypassing institutional fees, obstructions, and intrusions. Bitcoin was truly a currency without boundaries, powering, and connecting a new global economy.
Thus revolutionary was the idea of cryptocurrency. Cryptocurrency has a limit to how many units can exist thus improving the factor of decentralization and the Halving Effect was a part of this key feature. Cryptocurrency has many key features and these includes:
- Transfer of funds can be easily verifiable.
- Operates independently of the banks.
- Allows new units to be added after certain criteria are met.
- No transactional costs
- 24/7 money access.
- Freedom of use.
- International Money transfer is faster.
The Crypto in Cryptocurrency
Cryptography is a method of using encryption to secure a connection in the presence of a third party with ill intent. So cryptocurrency uses many essential cryptography features like;
- Computational Algorithms, like SHA256 which is a one-way encryption.
- A public key – which the user shares with everyone.
- A private key – a digital signature of the user.
So how does it work?
During a transaction, the details are encrypted using the hashing algorithm like SHA256 passed along with users private key to initialize the transactional process and thus with a digitally signed output which is distributed across the networks along with users public key and as a final process verification is done and is added to the block. This may sound quite weird but the actual process is simple and happens faster and there is no third-party Governance.
Proof of Work: A proof-of-work system is a consensus mechanism. It deters denial-of-service attacks and other service abuses such as spam on a network by requiring some work from the service requester, usually meaning processing time by a computer. Usually, this is done by solving a mathematical complex problem commonly termed mining which is done so, in fact, to regulate and maintain the decentralization system in Blockchain and the user is awarded a certain amount for solving the computational problem.
Popular cryptocurrencies include Bitcoin and Ethereum and both of them have different use cases, Bitcoin is mainly used for the purchase of commodities and has higher transactional and mining values and the last Bitcoin to be mined will be probably by 2140. While in the case of Ethereum it is used in the Ethereum network to deploy and maintain decentralized applications.
There have been large conflicts between regulation and anonymity of cryptocurrency, both sides have major supporters and oppressors, many try stories relate the anonymity of blockchain and cryptocurrency to questioning relations to terrorism and all. There are requests to put out governing bodies to regulate the working of cryptocurrency, but this indirectly moves against the whole idea of why it started. Putting these complications aside, Cryptocurrency has a bright future. It is said that by 2030 cryptocurrencies shall occupy 25% of national currencies. It shall be acceptable worldwide and by everyone and still maintain its volatile nature intact.