Imagine you’re having a conversation with your friends. Now, at some point in this conversation, someone’s going to bring up cryptocurrencies. Now cryptocurrencies are something that everyone wants to talk about, but no one really knows how they work. So today I’m going to fix that.
Introduction To Cryptocurrency
Since man evolved currency has been a very important part of our lives. In the cave manner, they use the barter system. Now the barter system involves goods and services being exchanged among each other.
Now the barter system fell out of use because it had some glaring flaws. Now these flaws include having people’s requirements coincide. For example, say you have five apples and your friend has five oranges. You want some of his oranges, now until and unless your friend has a requirement for the apples that you own, he’ll not be ready to make an exchange for it.
There’s no common measure of value. Now, since there’s no common measure in terms of which value of a commodity can be expressed, there’s a problem when you have to decide how many apples you’re ready to trade for one orange or a mango.
Not all goods can be divided or subdivided. For example, You can’t divide a live animal into different smaller units. The goods cannot be transported easily. Now, unlike how modern currency fits in your wallet or your mobile phone, the goods that you own cannot be taken with you everywhere you go. After realizing that the Barta system didn’t work very well, the currency went through a few iterations in 110 BC in official currency minted.
In 1250 AD gold plated Florence was introduced, and this was used across Europe. And from 1,680 to 1,980 paper currency gained widespread popularity and was used across the world. This is how modern currency, as we know it, came into existence. Modern currency includes paper, currency and coins, credit cards, and digital wallets, for example, you have Apple Pay, Amazon Pay, PayPal, and so on. All of this was controlled by banks and governments. Now this means that there was a centralized regulatory authority that limited how paper currency and credit cards worked.
Now, imagine the scenario of doing an online transaction. Here you are thanking your friend for paying for your lunch, and you’re saying that you’re sending them money to their account. Now, this transaction takes place successfully, but there are several ways where this could’ve gone wrong. There could have been a technical issue at the bank, for example. Their systems could have been down, the machines weren’t working properly, and so on. That means there’s a central point of failure, which is the bank.
The user’s accounts could have gotten hacked, for example, there could have been a DDoS attack or identity theft, and so on, or the transfer limits for that account were exceeded. This is why the future of currency lies with cryptocurrency. Now, imagine the transaction between two people in the future. One of them has the Bitcoin app and there’s a notification asking whether they’re sure they’re ready to transfer 5 Bitcoins. If yes, processing takes place.
Here we are authenticating the user’s identity, checking whether they have the required balance to make that transaction and other things. Now, after that’s done, the payments are transferred and the payment is received. All of this happens in a matter of minutes, and it’s as simple as that.
This in turn, removes all the problems of modern banking. There are no limits to the funds. You can transfer. Your accounts cannot be hacked, and there’s no central point of failure. As of 2018, there are more than 1600 cryptocurrencies available. Now, there are some popular ones like Bitcoin, Litecoin, Ethereum, and Z-Cash, and a new cryptocurrency crops up every single day. Now, considering how much growth they’re having at the moment, there’s a good chance there’s plenty more to come in the upcoming years.
What Is Cryptocurrency
So what exactly is cryptocurrency? A cryptocurrency is a digital, virtual currency that is meant to be a medium of exchange. Now, cryptocurrency is quite similar to real-world currency, just that it does not have any physical embodiment.
It also uses cryptography to work the way it does. Now, one of the features of cryptocurrency is that there’s a limit to how many units can exist with Bitcoin. This limit exists at 21 million. Now, after this, no more bitcoins will be produced. You can easily verify the transfer of funds. Now, the hashing algorithms that Bitcoin uses make it very easy for users to determine whether a transaction is valid or not.
They operate independently of a bank or a central authority. They work in a decentralized manner. Now, new units can be added only after certain conditions are met. For example, for Bitcoin only after a block has been added to the blockchain, will the miner be rewarded with bitcoins, and this is the only way new Bitcoins can be generated.
What Makes Cryptocurrency So Special?
Firstly, there are little to no transaction costs. Now, if you use a digital wallet, you’ll know that if you’re transferring money from your wallet to your bank account, you lose some amount of money. You have 24/7 access to money. You can’t just walk up to your bank at 3:00 AM in the morning and say that you want to withdraw some money.
There are no limits on purchases and withdrawals. There’s freedom for anyone to use. For example, if you’re setting up an account in your bank, you need to do some amount of paperwork and documentation. With cryptocurrencies, all of that can be avoided. International transactions are faster. Now transfers take about half a day to transfer money from one place to another. But with cryptocurrencies, it only takes a matter of minutes or seconds.
What’s The ‘Crypto’ In Cryptocurrencies?
Crypto refers to cryptography. It’s a method of using encryption and decryption to secure communication in the presence of third parties with ill intent. Now, this refers to third parties who want to steal your data or want to eavesdrop on your conversation.
Cryptography uses computational algorithms like SHA256, which is the hashing algorithm that Bitcoin uses, a public key, which is like a digital identity of the user, which he shares with everyone, and a private key, which is a digital signature of the user, which he keeps hidden.
Now let’s talk about a normal Bitcoin transaction. First, you have the transaction details. Now this details who you want to send it to and how many bitcoins you want to send them. Then it’s passed through a hashing algorithm. For Bitcoin, we use the SHA256 algorithm. The output that you obtain is passed through a signature algorithm with the user’s private key.
Now, this is used to uniquely identify the user. This output is then distributed across the network for people to verify. This is done by using the sender’s public key. The people who verify the transaction to check whether it’s valid or not are known as miners. Now, after this is done, the transaction and several others are added to the blockchain where it cannot be changed.
Now we’ll be focusing on two major cryptocurrencies, Bitcoin and Ether. Bitcoin is a digital currency that is decentralized and works on blockchain technology. It uses a peer-to-peer network. To perform transactions. Let’s talk about Ether. Ether is a currency that’s accepted in the Ethereum network. Now, the Ethereum network uses blockchain technology to create an open-source platform for building and deploying decentralized applications.
Bitcoin Vs Ethereum
Now let’s talk about the similarities between Bitcoin and Ether. They’re the biggest and most valuable cryptocurrencies in the market right now. Both of them use blockchain technology, but there is nothing but a technology that involves transactions being added to a container called a block and creating a chain of blocks in which data cannot be altered.
Currency is mined using a method called Proof of Work, which is a form of mathematical puzzle that needs to be solved before a block can be added to the blockchain. Finally, these are widely used across the world. Now let’s talk about the differences with Bitcoin. It is used to send money to someone. This is very similar to how real-life currency works with Ether.
It is used as a currency within the Ethereum network, although it can be used for real-life transactions as well. Bitcoin transactions are manual, which means you have to personally perform these transactions. With Ether, you have the option to make these transactions manual or automatic, or programmable, which means that these transactions will take place when a certain condition is met.
For Bitcoin, it takes 10 minutes to perform a transaction, which is the amount of time it takes for a block to be added to the blockchain. With Ether, it takes about 20 seconds to do a transaction. Now, blockchain is used like money for real-world transactions, and Ether is used to power the Ethereum network and power real-life transactions as well.
Ether is used as a fuel within the Ethereum network to power both of these things. Now there’s a limit to how many Bitcoins can exist, which is 21 million. We are supposed to hit this number by the year 2140. Ether is expected to be around for a while, but not to exceed a hundred million units. Now, Bitcoin is used for transactions involving goods and services, and Ether uses blockchain technology to create a ledger to trigger a transaction when a certain condition is met.
For Bitcoin, we use an algorithm called SHA256 for hashing, and with Ethereum, we use ET hash. As of July 23rd, 2018, one Bitcoin equals $7,668. For Ether, it costs $464.
What’s The Future Of Cryptocurrencies?
The whole world is clearly divided when it comes to cryptocurrencies. On one side, you have supporters like Bill Gates, Al Gore, and Richard Branson who say that cryptocurrencies are better than regular currencies.
On the other hand, we have people completely against it. People like Warren Buffet, Paul Krugman, and Richard Chiller, who are both Nobel Prize winners in the field of economics. They call it a Ponzi scheme and means for criminal activities in the future, there’s going to be a conflict between regulation and anonymity.
Since several cryptocurrencies have been linked with terrorist attacks, governments would want to regulate how cryptocurrencies would work. On the other hand, the main emphasis of cryptocurrencies is to ensure that their users are kept anonymous. By the year 2030, cryptocurrencies will occupy 25% of national currencies, which means a significant chunk of the world will start believing in cryptocurrency as a mode of transaction.
It’s going to be increasingly accepted by merchants and customers, and it’ll continue to have a volatile nature, which means prices will continue to fluctuate as they have been for the last few years.