why the hype about crypto?
Let’s talk about cryptocurrency. Right off the bat, my assumption is that you’ve most probably heard about it, maybe read something about it, or have already started investing in it, I sincerely believe we need to talk a lot more about the crypto frenzy that surrounds us and how it shapes our life in the virtual world.
Do you agree that the past 2 decades have been dominated by an ever expanding digital and virtual space. In my opinion yes and a big yes. Its become a space to work, to shop, to surf, to entertain, to play, to date, to chat, conduct transactions and who knows what not! Internet has been the underlining reason for all these possibilities and there has never been a bigger information diarrhoea among all of us.
To elaborate on how cryptocurrencies are changing the dynamics of this information explosion and the ever increasing online transactions we simply need to understand the technology that makes it works. What is so unique about this technology and how does it integrate itself with today’s resources and infrastructure. Once you know how it works, you will be able understand what makes it a viable virtual currency of the future and all the other potentials that it holds.
So, let’s start with it.
The blockchain technology
Blockchain technology is the special ingredient which gave birth to cryptocurrency. I will be breaking it down into successive questions and hopefully it will give you a structure to visualize the way it works.
i. What is a blockchain?
A blockchain is a digital distributed ledger.
ii. Now, what is a digital ledger in the first place?
A ledger refers to record keeping. A digital ledger means to maintain record in a digital form of storage, like a server or a cloud service.
iii. Why do we need a ledger?
Historically, record keeping in the financial sector meant that accounts and balances where maintained in physical ledgers. Today, currency has majorly gone digital with the advent of the internet. To create a digital cash system, besides a network of accounts and balances we would need a way to execute and record transactions. The biggest challenge in any payment network is to prevent the issue of double-spending, which simply means to avoid anyone to spend the same amount twice. Basically, once a certain amount is spent, the reduced balance should reflect on the account of the user.
iv. So, how do we ensure that the accounts reflect the right numbers?
Typically a central entity is created to maintain and track these transactions. This is where a bank will be expected to have its own database of accounts to debit or credit money. Besides the example of a bank to transfer funds, various kinds of centralized data centres are used to authenticate and authorize flow of sensitive data, or securities between any two organizations, individuals or agencies. The validation and execution of any transaction is based on the authenticity of the data, which means how true, accurate, and reliable is the information which is being stored and used.
Now, we have an understanding of why we need a digital ledger. We can also see that it is essentially used by every organisation that needs to maintain a record of some kind to authenticate the users and validate transactions between them.
v. So, what makes a digital distributed ledger any different?
A conventional digital ledger is a centralized database like the example of a bank. It also means that the data under consideration is controlled and managed by that very entity. This form of data collection and management is prone to all sorts of malicious activities like hacks, leaks, breaches, or attacks as it is a single point of contact for hackers and viruses. Not to mention the misuse of data by the service provider itself. A decentralized digital ledger, also known as a digital distributed ledger, works by creating multiple records of a single transaction across a network. This kind of database is not kept in one place because of which it cannot be corrupted or tampered with at one point in the network. Since the database exists on thousands of computers, it is safer, more transparent as well as easy to verify by anyone on the network.
vi. But, won’t it mean that everyone on the network will know about all the details of every transaction? How do we ensure privacy?
The answer is that no one will know. By using cryptographic code, a public key is generated for every user on the network. This public key is paired with a private key. While anyone can conduct a transaction with that public key, a private key is the only way to unlock the transaction and prove that you are the owner of the cryptocurrency that you received. This way we can safeguard our personal details and our location at the time of the transaction.
This of course isn’t an effortless system. Every entity, also called a node, on the network has to maintain the same whole list of transactions made in the past so that there is no double-spending in the future. They need to maintain an absolute consensus about every single transaction for this system to be a success.
How do they do it? All the nodes use strong cryptography to maintain consensus. In computer science, cryptography refers to secure communication techniques, derived from mathematical concepts and algorithms, to transfer messages that are hard to decipher. Every node has to spend energy and time to decipher these messages and validate a transaction. The work done by these nodes is posted on the network in return for an incentive. The incentive is a cryptocurrency. This is an extremely simplified explanation of how a cryptocurrency like Bitcoin works and is distributed on the network.
By now you would have realized that the topic of cryptocurrency relies on a decent understanding of computer science and the way things happen on the internet. At first, nothing about it seems to be easy or intuitive. The only way to really develop a working knowledge of this technology is to spend time reading about it. My intention is to introduce you to this topic, but the rest of the journey is yours. Dive deeper into the terminologies used around it to make more sense of this technology. You will also find that reading about the white paper of a cryptocurrency and the news related to it is a great way to know how cryptocurrencies differ from each other and the origin story behind them. A white paper is an official document released by the creators of a cryptocurrency that contains technical information about its concept and the roadmap for how it will grow. Doing this kind of due diligence will surely give you the confidence to find informed investment opportunities in cryptocurrency.
vii. By now it is reasonable to question if the blockchain technology is a whole new technology or not, so is it?
No, it is rather a combination of already proven technologies, which were a part of the earlier points that I spoke about and these are:
1. The internet – a platform to perform digital activities
2. Private key cryptography – assigns a special identity to safeguard sensitive personal information. This encrypted key in combination with a public address is then used to authenticate a transaction.
3. Incentivization protocol – a set of rules and procedures that define how the supply of cryptocurrency is distributed to incentivize specific actions.
Now that you know the moving parts behind blockchain technology, it will be helpful for you to know how the word blockchain came into being. The transactions which are validated are bunched into a block and provided to the network for other nodes to process. You can visualize it to create a chain of communication between different nodes and hence the word blockchain.
Now we come to the most essential question, probably a big part of why you wanted to know about crypto in the first place. Why the hype? What is causing it to skyrocket in value
It is crucial that we zoom into the revolutionary properties of blockchain technology. The way it operates creates tremendous opportunity not just for currency but also for all sorts of data interaction. It further reduces the restrictive and regulatory nature of present-day transactions on the internet, which is a direct outcome of centralized services.
i. Transactional Property
Irreversible – Once a block, which is a group of verified transactions, is produced, no transaction can be reversed. It is simply impossible, that Is the essence of this technology. No person or reason is important enough to make a transaction invalid once it’s a part of the network.
Global – One financial network for all. The Internet is simply a platform, with a worldwide presence. It does not discriminate based on location and background. You can send the currency to a person adjacent to you or even one on the opposite side of the globe.
Secure – after all that you have listened to, I’m sure I don’t need to elaborate on this. Just remember, a Bitcoin address is more secure than your bank account.
ii. Monetary Property
Controlled supply – Most cryptocurrencies limit the supply of their coins. The rules of supply are embedded in the code of the cryptocurrency. For example, the supply of Bitcoin should exhaust somewhere in 2140 based on the way it is mined and distributed.
No debt – You can compare cryptocurrency to the gold standard era. Today’s “fiat currency” like the USD is created by debt and backed by confidence. Confidence in the government, their economic policies, and resilience to market crashes and calamities of all sorts. Cryptocurrencies simply represent themselves. The value is created by confidence in the currency itself.
So what do these 2 properties mean?
Until recent times, technology has been primarily understood, applied, manipulated, and monopolized by a handful of companies to promote the exchange of goods, services, information, entertainment, and related things on the internet. It is also obvious that we have all embraced the fusion of these services into our lives and contributed to insane levels of profit for these companies. It is this centralized management of all the information we interact with and provide as content consumers that are being challenged by cryptocurrency.
Now that we know the fascinating properties of cryptocurrency and the benefits that it offers, can we see it beyond just a currency?
Yes, it is soo much more than just a currency and that is exactly what is feeding into the crypto frenzy. Let me explain this with a few examples. With these examples, we will come across new terms and I will try to be super concise about what they are.
i. Bitcoin: How can I skip this. All that I talked about is essentially what Bitcoin does. So without going in too much detail, It is a basic payment network that allows for peer-to-peer transactions based on blockchain technology. It is a financial tool and the one to begin the era of cryptocurrency in 2009.
ii. Ethereum: launched in 2015, Ethereum enables Smart Contracts and Decentralized Applications. A smart contract is a computer program that was created to facilitate, confirm, or enforce the fulfillment of a contract. A smart contract does not need any third party, including lawyers. These transactions are traceable and irreversible. The contract will never lose its authenticity once executed between two parties. Decentralized applications, also called DApps, combine the power of smart contracts and blockchain technology to produce applications that no single entity can exercise control over. The importance of DApps could be understood by the problems it can resolve, like when someone is using an app like Facebook, you interact with the content that shows up on your feed, you interact with people, comment, share posts, click on the like button and whatnot. All of this data is sent back to Facebook which can use the data to direct advertisements and sell the information to a third party. Ethereum is a powerful network and has already seen an incredible boom in its popularity for what it offers to app creators.
iii. Fantom: is an Ethereum token that is used for governance, payments, stakes, and fees on the fantom network. Developers can use this platform to write, compile, and deploy smart contracts. It is fascinating to see how Ethereum tokens can be utilized on different platforms.
iv. Decentaland: it is a virtual reality platform that is built on Ethereum. It can be used to buy land, another decentraland token, or to purchase goods and services on Decentraland. This is such a clever way to create value in a cryptocurrency by making it a part of a game! That currency holds value in such a fascinating way.
v. 1 inch: it is a decentralized exchange that allows you to swap cryptocurrencies. It literally acts as an exchange to trade stocks!
I have randomly picked these cryptocurrencies to simply share the diverse roles that they can perform. The list is endless and a new cryptocurrency gets added to the list almost on a daily basis. The count on coinmarketcap.com is 11,602 as of the time of writing this blog. So much has already happened, just remember that cryptocurrencies may have different functions operating on different blockchain networks.
Takeaways
15-20 years back! when the era of the internet would have started, the idea of a connected digital world would have been soo alien and hard to make sense of. I imagine that as the time would have passed, though the acceptance of the internet would have become wider, things on the internet would have still been slow-paced and online activities would have been restricted to a few things. It simply would have taken information quite a lot more time to go across. People would have been hard-wired to pay bills in-person for utilities and services, only shopped in stores, and made friends over a cup of coffee or playing sports instead of tik-tok videos. Today, the internet has evolved tremendously and has contributed incredibly to the pace and space of everyone’s life. So, knowing what happened to the internet, would it be foolish to say that investing in Amazon, Alibaba, Google, Facebook, and all these giants would have been a great idea around 2 decades back? Absolutely No! It would have been a promising one! These companies have exploded in size and value because they realized the potential of a platform, i.e internet. For example, you would have made almost 400 % return on your investment by investing in Google from 2009-to 2019.
Given the number of online platforms, tech infrastructure, and the number of people who operate and depend on present-day technologies, all I have to say is that cryptocurrency has the potential to replicate the advent of the internet, it is in fact a revolution in the way we operate. What you see today is the recognition of a winning recipe. Try to understand and invest in the giants of tomorrow. I will be covering a lot more topics on cryptocurrency in the future. I hope you liked this introduction to this topic. I have listed the links and books which have helped me tremendously to get a grip on information relating to cryptocurrency. I will highly encourage you to look through them.
Material that helped me understand the various aspects of cryptocurrencies are as follows: Websites: https://tannerphilp.medium.com/the-in...
https://searchsecurity.techtarget.com...
https://www.marketwatch.com/story/how...
https://coinmarketcap.com/alexandria/
https://bitcoin.org/en/
https://www.wealthsimple.com/en-ca/ma...
E-books: Cryptocurrency: Your Ultimate guide by Dimitry KrasilBlockchain and Crypto Currency by Makoto Yano, Chris Dai, Kenichi Masuda and Yoshio Kishimoto
