What is Cryptocurrency? – The Defiant
The 21st century has arguably changed course with the advent of blockchain technology. One of its main features, of course, is cryptocurrency, the digital currency powered by blockchain’s peer-to-peer (P2P) mechanics.
Thirteen years after the introduction of Bitcoin, these digital assets have reached a turning point in 2021 in terms of adoption. According to a Gemini survey, 41% of new crypto owners bought their first coins in 2021.
Will we see a future in which cryptocurrency replaces fiat money? To find unpack this question let’s discuss money.
What is Currency?
Modern currencies managed by central bank government officials. This is why money is called fiat (fiat) money. The central bank operates by decree of the state, and in conjunction with policy makers, central bankers help set the value of currency by using interest rates and regulating the printing of money by national currencies .
In times of crisis like the subprime mortgage crash of 2008 or the Covid-19 pandemic in 2020, central banks can take emergency action to support economic stability.
In the second and third quarters of 2020, for example, the Federal Reserve increased its balance sheet by $4.5 trillion to ease economic contraction after the United States embarked on a series of lockdowns to stop the spread of Covid. . (Lawmakers have also flooded the economy with cash by doling out stimulus payments directly to businesses and households, a policy that has directly led to soaring cryptocurrency valuations through 2021).
There are, however, consequences to creating more money. The Fed has made every note less valuable. This triggered the worst surge in consumer price inflation in 40 years and prompted the Fed to raise interest rates. As a result, investors have moved en masse from risky assets such as stocks and cryptocurrencies to cash.
Previous digital money attempts
Satoshi Nakamoto, the mysterious creator of Bitcoin, designed his invention to bypass the central bank system using the Internet. Still, there have been previous attempts to create digital currencies. In 1990, Digi Cash electronic money issued called eCash. It used cryptography to encrypt the sending and receiving of data, which enabled private transactions.
Yet as a business, DigiCash was centralized. In 1998 he went bankruptand eCash perished with it.
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Another attempt was made in 1996 by Dr. Douglas Jackson and Barry Downey. They established e-gold, in which electronic money is pegged to the precious metal. Instead of trading physical gold, users could trade a synthetic version of gold online. Both of these attempts failed because they were not decentralized.
In 1998, computer scientist Nick Szabo developed the concept of cryptocurrency as we know it. Its outlet was called Bit Gold and used mining, cryptography, a public ledger, and a peer-to-peer network. Some claim that this paved the way for the first true cryptocurrency – Bitcoin.
The “crypto” part in cryptocurrency means that all transactions are encrypted. Although this implies financial confidentiality, it exists as long as his wallet address is not linked to a real identity.
A digital wallet handles encryption and unlocks with a private key. Accordingly, digital wallets are called noncustodial, unlike custodian wallets which are cryptocurrency exchange accounts at Binance or Coinbase.
Digital wallets unlock access to a blockchain network. For example, a user called Stefan Thomas lost access at 7,002 Bitcoins he bought at the beginning, losing hundreds of millions of dollars.
Indeed, he no longer has the key to access the blockchain network or more precisely, to unlock the part of the register that recorded his transaction.
How Cryptocurrencies Work
In technical terms, cryptocurrency is software and part of a digital network. The cryptocurrency architecture consists of:
- Source code: It defines the total coin supply of the cryptocurrency and the schedule with which new coins are released.
- Mining or validation: Whether Proof of Work (mining) or Proof of Stake (validation), these consensus algorithms ensure that there is no double spending. The latter is the difficulty with which someone can duplicate cryptocurrencies or spend them in more than one instance.
A blockchain network consists of nodes – the computers that maintain it. Each full node on the blockchain maintains a copy of the entire transaction ledger, which is continually updated by miners/validators.
Solving the double-spending problem is the key that unlocks the value of cryptocurrency. For example, if you spend $5 on ice cream, you cannot reverse that transaction without physically sneaking in and stealing the banknote. With digital currencies, we are dealing with immaterial code.
A blockchain network such as Bitcoin uses miners to verify each transaction and add thousands to the ledger as new data block.
Each block of data is timestamped and forms a continuous chronological chain. In other words, if someone were to modify it, they would have to create a new blockchain with the fraudulent transaction as a Genesis block – the starting point for a new ledger. This is why the Bitcoin blockchain is immutable.
Without this immutability provided by miners, as they wield their cryptographic hashing power, cryptocurrency could be easily knocked over and rendered worthless.
Additionally, there must be a cost involved in the subversion itself. In the case of Proof of Work cryptocurrencies like Bitcoin, this cost is huge because miners use power-hungry ASIC machines to verify transactions and add blocks.
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Then they generate a hash as proof of work. An entire nation-state would have to coordinate and produce enough hash power to attempt such subversion. And even then it would fail because other miners would coordinate to kick them out.
Cryptocurrencies are self-sustaining as miners receive rewards for processing transfers. This gives them a strong incentive to maintain the network in good faith.
Whenever someone pays a fee to transfer cryptocurrencies, those fees accrue to the miners/validators. For this reason, a cryptocurrency like Bitcoin does not need to have owners, CEOs, accounting departments, or customer support.
Without these central points of failure, cryptocurrency sustains itself and monetizes. This is why it rises in value as a decentralized, trustless asset that cannot be overthrown. This should be kept in mind when evaluating thousands of other cryptocurrencies.
This article in the series is intended for general guidance and informational purposes only for beginners participating in cryptocurrencies and DeFi. The content of this article should not be construed as legal, business, investment or tax advice. You should consult your advisers for all legal, business, investment and tax implications and advice. The Defiant is not responsible for lost funds. Please use your best judgment and exercise due diligence before interacting with smart contracts.
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