It’s 2021 and almost everyone has become a self-proclaimed financial advisor, preaching the gospel of cryptocurrency to literally anyone they see. At the same time, there are also some people who have no idea what cryptocurrency is but “hey, it’s a great chance to make life-changing money” they say to themselves as they ape into it. My point is, in the year 2021, talk about crypto is everywhere and more and more people are getting interested in it. However, there are still people who are not into crypto because they simply do not know what it is and would not want to invest in something they are unsure of. It is for these people that I am writing for.
A cryptocurrency is a digital medium of exchange facilitated through the use of cryptography, thereby removing the need for a third party to ensure security. The idea of cryptocurrency was first proposed in 2009 by Satoshi Nakamoto, which is the pseudonym used by the founder (or possibly, the founders) of Bitcoin which is the original cryptocurrency. In his (hers or their) whitepaper, Satoshi Nakamoto noted the inherent flaw in the current financial system particularly when it comes to online transactions. With online transactions comes the fear of fraud especially in a growingly connected world, where it is possible for people to spend money at a terminal and then reverse it if they are savvy enough to do so. This only applies to electronic money because with cash, if you hand over the payment to the merchant in person, you cannot duplicate that payment to keep for yourself unless of course, you rob him afterward. So far, we have managed this problem by using financial institutions i.e. banks as a medium of security, allowing them to do all the security checks when payments are made electronically. However, this has been a bitter-sweet solution as we have had to deal with things like transaction costs and the hassle of excess documentation for identification. At the same time, there is also the argument that financial institutions have so much more control over their clients' funds than the clients themselves do. For example, there have been many issues of banks restricting the access people have to their own accounts. Lastly, many are fed up with the way governments handle fiat currency. For example, in America, many are upset about how much money the Federal Reserve System also known as Fed, (no pun intended) has been printing for years now. It is from issues such as these that the argument of the need for cryptocurrency is built on as people desire to be their own banks and take charge of their finances.
Unlike the traditional financial system where banks and their employees have a duty to monitor and record transactions, in the cryptocurrency system, transactions are monitored and recorded by a group of computers that act as servers on the network. These computers are operated by individuals all around the world and they are the ones who do the monitoring and recording using a digital ledger called a blockchain. A blockchain is a chain of transactions and these transactions are referred to as blocks as they are grouped set by set. Each time a new transaction is made on the network, the information is shared across the individuals on the network and each of these individuals makes their own record of the transaction, deciding whether or not to accept or reject the transaction and sharing records to make sure every transaction is accounted for. These records are also available for the public to see and this makes it difficult for people to commit fraud with crypto as every transaction is visible on the network and can be traced to the exact wallets transacted with. As said by Satoshi Nakamoto in the Bitcoin whitepaper, “the system is secure as long as honest nodes [individuals] collectively control more CPU power than any cooperating group of attacker nodes'' (Nakamoto, 2008).
It should be noted that the individuals who maintain the network do so voluntarily hence why it is referred to as a peer-to-peer network. These individuals are numerous and scattered all across the world so it makes it difficult to cooperate together to commit a crime or to be influenced to do so. This adds another layer of security to the network as it will be difficult for one peer to commit fraud and get the whole network to agree to let it occur.
Currently, there are a little over 12,000 cryptocurrencies currently in existence and each of them serves a different purpose. I like to think of them as a group of ‘digital ventures’ because apart from Bitcoin and a few others that primarily identify as a store of value, a majority of cryptocurrencies were established to provide a form of service to the world using cryptographic technology and other forms of technology as well. These ventures also make constant improvements to the services they offer in the form of projects just like a traditional company would. For example, Ethereum was established to provide developers with the platform they need to create smart contracts and decentralized applications on the blockchain. Ethereum has its own cryptocurrency called ‘Ether’ which is the second-largest cryptocurrency by market capitalization and this is what is traded on cryptocurrency exchanges. Similar to Etherum, other ‘digital ventures’ alike have their own cryptocurrencies or tokens which are traded on the cryptocurrency exchange and I like to think of them as shares of companies as this makes it easier to understand.
It is important to note that whilst there are over 12,000 cryptocurrencies in existence, you may find that more than 10,000 of them might have no utility and may serve as bad investments in the long run. It is very easy for anyone to create a cryptocurrency as this is a decentralized space, meaning that there is no form of formal governance in place. Therefore, it is extremely important that you take some time to do your own research before you invest in any cryptocurrency, keeping in mind that the cryptocurrency environment is one that is very volatile.
In the coming write-ups in this cryptocurrency segment, we will explore different types of cryptocurrencies and their ‘digital ventures’, learning about what they were established for, their current projects and if applicable, their upcoming projects as well.