Banks and financial institutions reign supreme in the present financial system. In exchange for entrusting our funds and personal data to these institutions, they process the majority of our transactions and oversee our financial activities. Though this system has worked for many people over the years, it still comes with its own drawbacks.
All the data is kept in their central servers which processes every single transaction. With the centralization of processing power and storage, the smallest problem in the system greatly affects everyone in the network. Millions of transactions go out every second in major payment systems, and points of sale and interruption in the process will cause problems to arise.
When servers and networks crash, transactions go unverified and sales don’t pass through. This becomes an inconvenience to individuals and when a major crash happens, not just businesses are affected but also large markets. In a volatile market where deals are time-sensitive, every second counts when it comes to any financial transactions.
But the traditional financial system fails not just in the scope of systems and servers. Though they promise to keep our personal information safe, fraudulent activities still occur and our data can still be robbed.
While there are plenty of problems with the current monetary system, the one that causes the most inconveniences is the double spend problem. This is when you’re credited twice for a product or service you bought once due to a glitch in the system. This costs millions of dollars, and to solve this problem, cryptography came to the rescue.
Cryptography is a form of technology that uses algorithmic functions to keep information safe and confidential. To ensure the security and decentralisation of financial matters, Satoshi Nakamoto utilized cryptography in creating the world’s first cryptocurrency, Bitcoin.
What are cryptocurrencies
At its core, cryptocurrencies are virtual currencies or payment systems that lets you send money on a peer-to-peer framework. It removes the need for a middle man to process and verify transactions before it passes through.
This means no more know-your-customer protocols, no more private information held on a centralized server and no more double-spending problem. All verified transactions are kept on an open-source ledger called the blockchain that is available to the public’s viewing, unlike bank records.
Cryptocurrencies utilize cryptography and blockchain technology to ensure its unparalleled security. Transactions run on a decentralized network, so instead of being governed by a central form of authority like a bank, they are validated by all participants of the network before it is verified by a mining node.
Once a transaction is validated by all network nodes, verified by a mining node and added to the blockchain, it becomes immutable and impossible to tamper with. This effectively decentralizes the control from a single point to more than a million while maintaining the security of the process.
Types of digital currencies
Not all cryptocurrencies are made equal. Though they share similar characteristics, crypto coins differ in terms of purpose, utility and value. But no matter the purpose it was created for, a digital coin needs to be decentralized, trustless and immutable for it to be considered a cryptocurrency.
Bitcoin, the first of its kind, is created to be a store-of-value coin meant to be used as online cash on the Internet. But with more people utilizing the decentralised power of blockchain technology, more digital tokens are created. Some were created as a medium of exchange within a specific platform while tokens were created to represent a value in a particular ecosystem.
Below are some examples of the most well-known types of cryptocurrencies.
This type of coin is intended to function just like fiat money and as an instrument of exchange in a peer-to-peer network. Using these coins, you can receive and send money directly without giving out personal information and needing a bank account. You can use these to buy your coffee at physical stores that accept it or purchase things online.
Bitcoin and Litecoin are two of the most popular store-of-value cryptocurrencies.
Cryptocurrencies are volatile in nature since they are not like traditional markets. Their prices can change any second which can be a huge setback for some. To counter the volatility of cryptocurrencies, stablecoins are created. The price of stablecoins is pegged to a traditional asset or fiat currency, making it more stable as its name suggests.
Tether (USDT) is the first stablecoin and now leads as the third-largest cryptocurrency in terms of market capitalization. Its price is pegged to the US dollar which means its value is constantly at US$1.00. Other stablecoins include USD Coin (USDC) which is also pegged to USD.
Unlike store-of-value crypto which acts as money, platform tokens have specific uses in their native platforms. These are often needed to develop a decentralized application on a blockchain network and utilize its services.
Ether (ETH) is the most well-known platform token today and it runs on the open-source Ethereum network. Smart contracts are created on this network and for these contracts to run, you need Ether. Other notable examples include NEO, EOS and IOTA which have their own native blockchain networks where decentralized applications and smart contracts can be built.
Utility tokens differ from coins in that they represent something and they can only be used within their specific ecosystems. These are usually on sale during ICO or Initial Coin Offering and are promised to gain value in the future once a project is well underway. Tokens have different roles and purposes depending on the creator.
They can represent voting rights or a user’s stake in a certain ecosystem to name a few. For example, having more tokens gives you more right as a member of the network and you can vote on important decisions that will affect the ecosystem. Golem (GNT) and DAO are some of the most popular utility tokens today.
Cryptocurrencies: Changing the world one bit at a time
At a time where change was direly needed, cryptocurrencies stepped onto the spotlight and forever changed the game. This is only the beginning of the revolutionary improvements that are still bound to happen. Be sure to check CryptoShimbun to always know all the latest cryptocurrency news and updates!