What are cryptocurrencies?
Digital money is often not well understood and this earns it some bad reputation among the media. As a result, many people are poorly informed about Bitcoin and other cryptos, how digital money is created and how it works. There is nothing wrong with that, as it is a relatively new technology, it isn’t taught in schools and you can only truly learn about it if you are actively searching for information.
In the beginning there was Bitcoin
Bitcoin (BTC) is a cryptocurrency – decentralized digital money enabling payments without the need for third-party approval. It was created in 2008 by an unknown person or organization under the pseudonym Satoshi Nakamoto. We will probably never really know who is behind this name. Bitcoin is deployed on a blockchain, which works without any connection to the banking system. This makes it possible for the value of this currency to be determined by its users and no one else. We could safely say that this is a currency that really belongs to the people.As Bitcoin’s popularity continued to grow, other blockchain-based digital money, such as Dogecoin and Ripple appeared and started enjoying a global acceptance. But none became quite as popular as Ethereum.
Ethereum, the second most popular cryptocurrency
In 2013, one of the earliest Bitcoin enthusiasts, a programmer by the name of VitalikButerin, came up with a brilliant idea. He devised a scripting language for building decentralized applications on the Bitcoin blockchain itself. The Bitcoin community said no, so Vitalik developed a new blockchain-based distributed computing platform and called it Ethereum. It was the first blockchain network that featured a scripting functionality enabling the deployment of smart contracts.
Smart contracts are scripts on the Ethereum blockchain that make it possible for transactions to be executed only if a certain set of conditions have been met. This was the revolutionary functionality that opened up a world of use cases for blockchain beyond digital moneyand enabled the creation of decentralized applications (DApps).
The difference between cryptocurrencies and Blockchain
Digital money is just one of the use cases of Blockchain technology, but it definitely does not limit Blockchain’s other potential use cases and Blockchain’s overall potential to change the world as we know it. Once we figure out how to properly scale blockchains in such a way as to enable instant data transfer across multiple blockchains, this technology can help us improve public administration, education and healthcare. Wholesalers, retailers, manufacturers and construction services will finally be able to meet the public demand for provenance and traceability. Imagine a blockchain-based, sky-mapping system that enables everything from Amazon drone deliveries to dedicated medical emergency drone corridors. Imagine the benefits of blockchain-based communications, media, marketing, advertising and entertainment. Blockchain’s potential future use cases beyond digital money are virtually limitless.
Blockchain wallets explained
Blockchain wallets are called wallets but they don’t really store your crypto inside; they only safeguard the private keys (passwords) that give you access to your crypto funds on the blockchain. Your crypto funds always remain on the blockchain. Having control over your private keys is what lets you safely send, receive and store your crypto.
Blockchain wallets come in many forms, from hardware wallets like Ledger (which looks like a USB stick) to mobile apps like the Coinhaven Wallet, from simple-to-use apps to more complex security solutions. There are 2 main types of blockchain wallets:
Hardware wallets (cold wallets)
Your private keys are stored in a USB-like device that you must keep in a safe place and only connect it to a computer when you want to use your crypto. Hardware wallets are considered the safest way to store crypto long-term.
Online wallets (hot wallets)
Your private keys are stored in an app or on an online platform and are usually protected by two-step encryption. Not having to locate your hardware wallet and not having to connect it to your laptop makes using transacting your crypto much convenient and quicker. However, online wallets aren’t considered quite as secure as hardware wallets.
Some words about decentralization
Every blockchain can technically be called decentralized because copies of the blockchain are stored and shared between computers in the network. We call these network-connected machines nodes. Participants in the network need to only download and run the blockchain’s software on their machines in order to become validators. The validation (usually Proof of Work) process itself is running automatically. Even though these machines are known as nodes, that definition can also encompass other users that interact with the network in any way. For example, a simple cryptocurrency wallet app installed on a user’s phone can be called a light node.
Since no one has the power to go back and edit what’s already been hashed in the blockchain system, the blockchain can function as a public ledger of record. Every node in the network is constantly in agreement about the data contained within every block. This blockchain technology function that allows blockchain use cases to extend far beyond a niche record-keeping device. This is how the blockchain becomes a global network database that makes global phenomena like Bitcoin and other digital moneypossible. Not only that, blockchain technology can also host more complex transaction networks, such as Ethereum, which involves smart contracts functionality on the blockchain itself.
How crypto transactions work
Let’s imagine that Alice wants to send $500 in fiat to Bob via bank transfer payment. First, she has to notify her bank (assuming, of course, that Bob has an account in the same bank). The bank has to first check that Alice has the necessary funds in her account to perform this transaction. Then the bank updates its database (for example, -$500 to Alice, +$500 to Bob), updated both Bob’s and Alice’s balance in their accounts.
What goes on with blockchain transactions is actually quite similar, since the blockchain itself is also a database. However, there is one crucial difference – there is no single entity that performs the checks and updates the balances. This process is performed by the nodes on the blockchain.
When Alice wants to send, for example, two bitcoins to Bob, she broadcasts a message that informs the network of her intention. The transaction will not be added to the blockchain straight away, but the nodes will see it. This is enough to initiate a transaction. Follow-up actions must be completed in order for the transaction to become confirmed.
After confirmation, the transaction’s record gets added to the blockchain. That’s when all of the nodes will see it’s been executed and will update their copy of the blockchain to reflect that change. This is how blockchain networks solve the double-spend problem – now Alice can’t send those same two bitcoins to a third party, as the network has already recorded her earlier transaction of the same funds.
The increasing popularity and likely future of cryptos
Since Bitcoin first appeared after the global economic crisis of 2008, some believe that it was the reality of the crisis that contributed most to the emergence of such independent currency. The idea is not so unrealistic, as it is somewhat within the realm of possibility that Bitcoin and/or some of the other cryptos currently in existence will be one of global currencies of the future. Banking institutions often charge high fees, do not carry out all bank orders and, last but not least, can freeze their customers’ accounts without good reason. Because of such drawbacks, people tend to think that banks have too much power.Perhaps this is the reason why cryptos have been steadily gaining more and more popularity and acceptance across the globe, especially in the past 5 years. Platforms that offer spot and derivatives trading, especially ones that provide users with personal fiat and cryptocurrency wallets, are also enjoying widespread popularity. The total decentralization of the monetary and banking systems may very well happen within the next decade or two, however nobody knows for sure what geopolitical and economic forces will be in play and what kind of stance on cryptos the Central Banks will take.