If you haven’t heard of Bitcoin or Ethereum yet, all I can say is you are not paying attention to the world. In today’s time, it is almost impossible to miss them on social media or in conversations with friends.
Anyway, cryptocurrencies are digital currencies much like currencies that we use in our daily lives – INR or USD. Like most currencies which are valid in a defined territory, cryptocurrencies also work on defined network of computers for transactions. Most of the cryptocurrencies exist because these softwares are enabling decentralisation, which means that there is no central computer to manages the entire network rather the network manages itself. In order to enable this and also providing leverage for people to join the network, cryptocurrencies became useful and is used as a currency.
But what are they?
Cryptocurrencies are a part of complex programmes called blockchain. The easiest way to understand blockchain is to see it as a distributed ledger of transactions that happen on the network. The ledger is owned by the entire network. Everyone in the network has a copy of that ledger and it gets modified whenever a new block of transactions is added to it. The currency in which the transaction can happen over the network between the computers is its cryptocurrency.
💬 Does then cryptocurrencies have value?
It is a good question. And the short answer is No! Not all of them. All the cryptocurrencies apart from Bitcoin can’t be said to have inherent value. And the reason is that none of the other cryptocurrencies follow the same principle to establish that transaction has happened as Bitcoin. The proxy for validity of transaction is different for different systems.
What do you mean by proxy of validity?
Like explained in post Bitcoin, which uses Proof of Work, to establish validity of the transaction, each cryptocurrency uses a proxy which the developers of the system has created or using the ones which have already been established. Few of the other proxies are:
- Proof of Stake: It uses stakes to establish the consensus of validity of a transaction. Ethereum uses this approach for its network. Downside: whoever has higher stakes is more likely to be selected as the validator.
- Proof of Capacity: In this method, disk space contribution is used as a stake to validate the transaction.
Downside: whoever has higher disk capacity has the higher chance of being selected as the validator.
- Proof of Elapsed Time: Created by Intel, in which a 3rd party becomes the validator which actually establishes that the time has elapsed. Downside: Owned by third party, centrally controlled. Not really decentralised.
There are more such proxy systems that people have devised for decentralised transaction systems.
Does bias towards higher stake means these cryptocurrencies are bad?
No! It doesn’t mean that cryptocurrencies other than Bitcoin are bad. As mentioned above, they all aim to solve some problem and at the core of those problems is to build a decentralised system in which computers should be able to reward each other without human intervention.
The fundamental problem that any cryptocurrency solves that it is programmable and work on protocols. Any computer understand these two things very well instead of INR or USD. While paying each other in cryptocurrencies, computers don’t have to worry about the conversion factors of the physical world currencies.
The value of these cryptocurrencies comes in effect when someone tries to cash them out. For cash, the cryptocurrency has to be transferred to an exchange were people trade these cryptocurrencies for money.
💬 Understood! Can you give some examples though?
Yes of course!
- Ethereum – Ethereum enables building of decentralised apps on its platform by providing tools for it. For a lot of cryptocurrencies, Ethereum has been used as the base. Underneath them they require Ethereum to transact.
- Matic – It is used to power the system to scale Ethereum network to work with other networks.
- Uniswap – Uniswap or UNI enables decentralised financial system infrastructure like swapping of tokens and other financial tool.
- Filecoin – This enables decentralised disk storage, think of it as Dropbox but which can also use people’s PC.
- Basic Attention Token – Not a cryptocurrency but token built on top of Ethereum is the future of advertisement. It aims to build an ad network in which people are rewarded and advertisers get better targeting without compromising on privacy.
- Render Token – Allows you to access pool of GPUs for rendering models.
And there are 100s more which solve some other problem. The one thing that cryptocurrencies solve by default is decentralised financial system.
This makes the financial system to be the first industry to get disrupted.
The old age financial system has many shortcomings from its agility to ability to reach. And these cryptocurrencies are aiming to solve these problems without any middleman. This is also the reason why most people see them as currencies today rather than enablers of the decentralised system or a layer over internet of the future.
What is the future?
The future is very interesting if everything works out as anticipated. First, the concept of money that we have established over millenniums will be changed. I have written in depth about the changes that will happen in economies and money in posts: Bitcoin, History of Money and Economy and Two Types of Economies.
Having said that, with decentralisation, the ownership will also get redefined. Digital assets will change hands more frequently and sharing will be easier to begin with.
- Websites will be hosted on decentralised network which could not be banned unlike on AWS or Azure. You will be able to host your website from your computer.
- The entire network will work as a huge VPN network which will strengthen user privacy.
- Data storage will become further cheaper and distributed on a much wider system making it more secure. Practically Dropbox.
- Coupling with projects like Upspin and Solid which aims at data ownership, it can take a very different turn. People might never ever again transfer data ownership but only share them at a cost.
- World of games will also be changed where anyone could play and pay for mods. Companies won’t have to worry about the conversion rates, payment integration etc.
- Governance will change in a massive way. Transparency will enable catching of unwanted activities like fraud and corruption quickly.
- Economists will be able to run and test their models with real world data. Meaning better understanding of the economy and its functions.
Imagine any area which can be affected by traceability, transparency, transactions and decentralisation, it can be disrupted.
Cryptocurrencies are here to become a level on top of the internet in stack.
Everyone in the world will have access to internet very soon through satellite internet. Imagine a world where as soon as you have an internet connection and you will have an access to financial system. You don’t need to go to banks for account or loan or investment. You can start your business, if it doesn’t require government nods, without having anyone involved with just few clicks or taps.
As you think more, you see all of this coming together. An exciting future.