Is it a fad – or is it the money of the future?
Based on the previous post, we now know that a currency is needed to effect these transactions on the blockchain, but also that the blockchain exists because of the invention of cryptocurrencies.
This was Satoshi’s greatest achievement in my Opinion. When he set about after the global recession of 2008 in creating a currency that is not funded by debt, he had to find a way to decentralise the process. He knew very well that any institution could modify the framework to suit their needs, but a decentralised system would remain pure, and free of debt incumberment.
He looked at the peer-to-peer networks that were currently dominating the software, music and movie scene, with sites like PirateBay and Torrentz starting to see massive users and programs like uTorrent being installed on Millions of computers worldwide. This gave Satoshi a solution on how Bitcoin can be safe, secure and non-duplicative. Just like a P2P file, if 1 byte of the download is not in correlation with the whole file, then that part is discarded and attempted again. Only when there is 100% consensus can the file be downloaded to your computer.
What are cryptocurrencies really?
In reality cryptocurrencies, just like fiat currency (which is Latin for “let it be done) like Euro, Dollars, Pounds etc… is tender that is not backed by a physical commodity. Notice how I have not called it legal tender as you would call normally recognised paper money, due to most countries not recognising it as legal tender since it does not have a central authority (like a central bank), which is ironically the strength of the currency.
The cryptocurrencies work on a system of Coins. These coins represent the value of the currency, which is usually compared to one of the major currencies like Bitcoin or Etherium. A coin can be split into fractions, and for certain currencies, those fractions can be split further, for ease of calculation.
An example of this would be to look at the older systems of using wholes, cents and mills. A whole is written as 1.00, a cent as 0.01 and a mill as 0.001
a
a milli-BTC is 1/1000th of a BTC (0.001 BTC), and importantly
a Satoshi is 1/100,000,000th of a BTC (0.00000001 BTC)*
*it is interesting to note that the Satoshi was created to serve as a template for the fee structure for Bitcoin, which we will discuss later.
So a take away from this is simply that a cryptocurrency is very much like any other currency, in that the conditions for
Are Cryptocurrencies Finite?
One big difference between fiat currency and cryptocurrencies is that when the cryptocurrency is launched, a finite number of coins are created. This number can never change and therefore there is never a cash injection or artificial boosting of the economy leading to an increase in debt. This is a fundamental of the foundation of a cryptocurrency which Satoshi wanted to tackle. Through this, Satoshi realised that releasing all the currency would devalue the currency whilst also leaving no room for work.
This Work was important, as the blockchain requires its users to solve the cryptographic puzzles that allow for transactions to be attached to the blockchain. You may think of it a one big treasure hunt. Hidden within each blockchain lies a solution to manage to attach a new block to the chain. This solution requires working our hundreds of millions of mathematical sums and looking for a number that would solve the problem from both blocks and thus create the joining link.
On finding this solution, Satoshi created a reward, which the successful miner can use to attach a Proof-of-Work payment to the block which is called a coinbase transaction. As the blockchain gets longer and the solutions and puzzles more complex, even more computing power is required to find the solutions. This is coupled with the fact that Satoshi created an exponentially decreasing reward system, meaning that although more work is being done, less bitcoin is being rewarded. This worked perfectly as the price of bitcoin soared, the prizes decreased and the economy was stable.
This is the only way of creating “new” Bitcoin, but this will eventually run out, and Miners will have to rely on charging a fee to complete transactions. Nowadays mining
Proprties of a Cryptocurrency
Irreversible.This is one property we have mentioned many times and it is also the basis of the blockchain. Once an action is taken, it cannot be undone. There are no chargebacks, no change of minds. It is important to remember also, that unless there is a general consensus, there is no way to recover stolen currency. So make sure to keep your wallets safe.
Private.The need for privacy is increasing on a daily basis, with banks, marketing companies, government agencies, large corporation all trying to make sure they know as much as they can about as many people as they can. One such way is using banking information like online purchases. With the use of cryptocurrencies, your wallet is not associated with your name but to a set of 30 numbers and characters that is nearly impossible to ever be identified to you.
International and Quick. Transactions happen within minutes hitting the send button, and they are not restricted by any borders or by exchange rates. In the example of Bitcoin, as long as there are teams of miners working the blockchain, then transactions happen within seconds.
Security. Everything in your online wallet is encrypted using your private key, which is an extremely complex set of characters that is impossible to guess. Only the owner of this key is able to make transactions using that wallet. Warning! (1) There is absolutely no way of recovering a private key, so multiple copies of it should be stored. (2) Do not keep a digital copy of this key unless you are sure you will not lose it and no one will be able to access it!.
Available to all (Permissionless). Cryptocurrencies are available to anyone, you do not need permission from any authority to use it. Unlike a bank account where you need to go through multiple layers of checks and whistles, a crypto wallet can be opened in minutes and transactions can happen instantly.
How do cryptocurrencies have value?
Amount of Coins available. Unlike Central Banks and other financial institutions, cryptocurrencies have a finite number of coins or tokens, just like a commodity. This in itself creates a finite supply that regulates the price of the currency. If we take bitcoin as an example, the number of bitcoins being created through mining will dry up by the mid-2100’s and therefore the amount of circulating currency can be calculated. With this in mind, the supply vs demand scale triggers the price of the coin, which causes the wild fluctuations in the market. Unlike fiat currency, there is no regulating body to stop these fluctuations by increasing or decreasing inflation or by printing new money, and therefore it is a free market.
Continue Reading about blockchain:
- What is Blockchain?
- Why is Blockchain Important?
- What is a Crypto Currency?
- What is an ICO?
- Are Cryptocurrencies and Tokens the same?
- Can Blockchain be used without a Coin or Token?
- Blockchain in Use (Real Estate)
- Will Blockchain replace banks? (Part 1 – Banking and Finance)
- Will Blockchain replace banks? (Part 2 – Blockchain Adoption)
- What is Distributed Ledger Technology? (Coming Soon)
- What is the future of Blockchain? (Coming Soon)
If you want to learn more about Blockchain Technology, Cryptocurrencies, ICOs, Distributed Ledgers, Smart Contracts or other fields related to the technologies, contact me using the contact page, or leave a comment below.
Thanks for Reading
