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Why do we need cryptocurrency?
Let’s say you want to send a hundred-dollar check to someone. The check is just a piece of paper that the other party will have to deposit in his bank. And through a series of entries into a ledger, the hundred dollars is transferred from your account to the person you are transacting with.
Now, this is just for one transaction, imagine repeating these processes millions of times. The global economy depends entirely on transactions. Every time an asset exchanges hand a transaction is made. Your expense is someone else income.
The financial system is the most important pillar of an economy and banks are the steel than supports the pillars. The entire financial system is based upon ledgers. When money exchanges hand, it is just an entry on a ledger.
Trust is needed for everything transaction. If I don’t trust you, I won’t do business with you. This is why we rely on third-party to establish, maintain, and manage trust in every transaction. Third parties can be banks, brokers, lawyers, or even the government.
These third parties act as intermediaries in every transaction. Trust is pledged by contracts and everything is stored on a ledger or database. The system works pretty well and is efficient, but it also has some flaws.
Financial authorities have always controlled the flow of money. The government can print more of it, stop you from borrowing, control interest rates, prevent you from having a bank account, or even freeze your asset.
Centralized financial authorities manage all transactions in their ledger. This means they control almost everything on their database. The problem here is that this creates a single point of failure. Centralized institutions are prone to attack. They can be hacked, corrupt, or even failed. And the data can still be changed, altered, tampered or even delete.
Even if every transaction seems easy from our devices, the process is still carried out by employees in the background. The financial sector is heavily dependent on human capital. This also means transactions can be slow and liable to human errors.
A transaction can take days if not weeks upon completion, especially for international proceedings. And intermediaries are not free of charge since you have to pay for every transaction. International transaction and remittance services are costly and highly inefficient.
What’s worst is that key decision-making that concern millions if not billions of people are formulated behind closed doors by a few out-of-reach, privileged groups. Now what is even worst is that banking scandals can surface months if not years after the fact.
Furthermore, not everybody has the privilege to access financial services as billions of people across the globe are still unbanked and thus excluded from the system. But the problem is not only in the financial mechanism, it is also in the money itself.
There is no inherent value in a note or a coin. They are just pieces of identical paper or metal that contain numbers on them. The only reason these things have value is that we’ve all decided they should.
The value of your money is controlled by the government based on how well they are managing the economy. Your money is also subject to inflation where it loses value based on economic performance.
Now with the internet, we started to use digital money. Payment has become direct deposit via bank transfer. Everything is just a number on the screen. The use of physical money is disappearing slowly. But even with this leap, everything is carried up by humans in the background.
Now, digitalization has facilitated international trade and transactions. But while technology facilitates trade, it also raises the complexity of the system and is prone to error.
There is also a high barrier to entry for new players who want to start a financial company. An individual needs to have massive capital and also contacts.
Moreover, a bank’s balance sheet that contains all entries in its ledger raises a very important question in a period of a financial crisis. Questions like, whose ledger is more trustworthy. Because crises create a lot of uncertainty and banks can fail and go bankrupt.
And since there are many banks across the world offering services, a foreign credit card may not work in a particular country. Transferring currency across borders is expensive.
Today in the digital age, it is also easy to set up an online business, but hard to get a bank loan. Our access to money and ability to freely transact is being held captive by intermediaries. These institutions are standing in the way of innovation.
The financial sector and banks are very important to the modern economy, but the way they operate is under the threat of new disruptive technologies like blockchain and cryptocurrency.
What is cryptocurrency?
Cryptocurrency is considered to be the next generation of a decentralized database. It is digital money that isn’t run by any government or bank. Bitcoin and Ethereum are the most ubiquitous cryptocurrencies.
Currently, Bitcoin is the presage of a new cryptocurrency era. This digital asset was first introduced in 2009 by a mysterious creator named Satoshi Nakamoto. Ethereum, which is the second most popular cryptocurrency, is a platform for decentralized transactions.
The foundation of cryptocurrency is based on a special field of mathematics called cryptography. Cryptography is the study of how to secure communication. These currencies use cryptographic processes to protect against fraud and the risk of double spending.
Cryptography works by masking the information and verifying the information’s source. And everything is recorded in a blockchain. Blockchain is a decentralized distributed ledger that contains every transaction.
The blockchain record all the transaction one after the other. Everything is done through computer code, running on thousands of networked computers around the world. All the computers in the network are collectively confirming every transaction automatically.
Crypto is based on collective global knowledge of transfers. Everybody in the network has a copy of the ledger where the transaction is recorded. The mechanism behind cryptocurrency is designed to incentivize people to create and invest money.
The system is created to maximally decentralize trust in a system as well as eliminate the dependence on intermediaries. There are a lot of companies across the globe who already started accepting these currencies.
Importance of cryptocurrency
The world is run by out-of-reach big banks, corporations, and governments. And everything is transacted through middlemen who make things incredibly inefficient. An economy is highly volatile and depends on these institutions.
And with everything in these institutions’ hands, there is no transparency and you don’t know if the economy can go into a situation like Venezuela, where money was being printed, thus losing its value and people’s savings were being destroyed.
Blockchain replaces trust with mathematics, so we no longer have to trust banks’ ability to protect our money and the government to keep its value.
Crypto is creating a world where you control your own money, not any centralized financial systems. It is also creating a system where governments cannot eliminate or erode your wealth by printing more money backed by debt and with no inflation.
Instead of a piece of paper, cryptocurrency is creating a financial system where citizens can store their wealth digitally and can send it to anyone in the world instantly at any time for almost no cost without any barrier.
With a growing number of businesses accepting cryptocurrency as payment, the crypto market is becoming an increasingly popular way to pay. Unlike traditional currencies, cryptocurrencies have no central bank and no administrative costs.
There’s no need for bank accounts or credit cards in the world of digital currency. All that’s needed is a digital wallet in a device and transactions are recorded on the blockchain. The decentralized aspect of the blockchain makes them virtually unchangeable and difficult to hack.
Furthermore, the transaction information associated with a cryptocurrency wallet can be stored offline as well. Because of the trustless nature of the digital currency, it is not dependent on any government or nation-state. Instead, it relies on the collective action of everyday users to keep the public ledger secure and updated.
Moreover, crypto-currency makes international business and transactions easier. They are easily transferable to any part of the world. With a limited supply, it is estimated that the value of digital money will continue to increase exponentially.
And while it is always risky to use cash on unfamiliar websites, the potential for fraud with cryptocurrency is minimal. This means that a lot less money is at risk when people buy goods and services online.
Cryptocurrency may soon become a popular payment method in the business world and peer-to-peer sectors. Because digital currency is global, it is easy to use. If successfully implemented, it will greatly improve the ease and safety of making in-country and foreign money transfers.
As cryptocurrency does not have any national boundaries, individuals from any country can send coins to another. This can help people without access to traditional financial systems since the money does not belong to a particular country.
Another major benefit of cryptocurrency is the fact that services are available round the clock. This means that transaction is possible 24/7. As compared to traditional banking which only operates during office hours and working days.
Using decentralized currency can facilitate remittance. This means that individuals in one country can send coins instantly to anyone else in the world for almost nothing and without the need to have a bank account.
This is especially valuable for those who lack access to traditional financial systems. Furthermore, because it is permissionless, many people can access it. It is censorship-resistant, which makes it ideal for global use.
Another potential benefit of cryptocurrency is the emergence of decentralized finance (DeFi). This decentralized platform offers financial services without the need to use legacy institutions that take large commissions and other fees.
DeFi record every transaction in public ledgers on the blockchains. In this type of financial network, smart contracts automatically execute transactions once conditions are met.
Apart from offering diversification from traditional financial assets, cryptocurrency is also a promising investment. As a digital asset, it is comparatively uncorrelated to other markets, so adding cryptocurrencies to a portfolio can help generate more stable returns.
Moreover, its limited supply makes it an ideal way to store value. As a result, it has the potential to create new asset classes and solve problems related to global poverty. However, everything is still in the early stages, which makes it difficult for anyone to predict them.
Impact of cryptocurrency
The first cryptocurrency, Bitcoin, is already transforming the money storage, transfer, and international business industry. The use of crypto assets has many advantages.
For instance, it eliminated the need to keep cash at home, a problem that is growing more prevalent in the modern world. The amount of fraud that occurs with credit cards is staggering and crypto can also eliminate that.
While most investors do not want to accept payment in a volatile cryptocurrency, a few businesses have already accepted Bitcoin. Some experts view Bitcoin as a gold-like asset because it has a limited supply. The number of coins in circulation is set at around 21 million.
While the first generation of cryptocurrencies has become popular, a large number of people are trying to get their hands on them. This has paved the way for many alternative digital currencies.
We’re entering a new era of programmable money which is very exciting, but it raises some uncertainty. Cryptocurrencies can be used for illegal transactions. This has also given rise to scammers, trying to fool people to invest in fake crypto.
The rapid rise of cryptocurrencies and the decentralized financed industry raises several regulatory concerns. The currency industry is not well regulated, which leads to issues such as cybersecurity, scam, and fraud.
It could also become a dominant form of global payment, reducing the power of central banks to enact monetary policy. In addition, cryptocurrency could undermine the control of smaller countries’ money supply.
While cryptocurrencies do not pose a direct threat to the financial system, critics worry that they can empower terrorist organizations and criminal groups.
The lack of third-party transaction protection is also an important problem, especially for new investors. And only a handful of people accept decentralized currency as a means of payment.
Furthermore, critics of cryptocurrencies believe that they are environmentally damaging as they consume a huge amount of energy to mine. It is estimated that all the special hardware and equipment used for crypto mining consume the equivalent amount of energy of that of a small country.
Many people have expressed concerns over the energy and carbon footprint of cryptocurrencies, but its proponents argue that this is a problem that can be solved by using renewable energy sources.
For instance, El Salvador has pledged to mine Bitcoin with volcanic energy. Ethereum has recently switched to a proof-of-stake model that uses much less energy.
One of the most compelling aspects of this new type of currency is its ability to decentralize the financial system. A lot of business around the world already uses cryptocurrency as exchange, but the future holds many surprises.
Governments have mixed feelings when it comes to cryptocurrencies. Some have embraced them, while others have opposed them. For example, some Nobel Prize winners Robert Shiller and Paul Krugman have questioned its validity.
For instance, if the US government were to allow the sale of cryptocurrencies in the United States, the value of Bitcoin could double overnight. Ultimately, it is not clear how many cryptocurrencies will work.
While many governments initially took a hands-off approach to crypto, the rapid rise of cryptocurrencies has made it difficult for them to regulate this new financial technology. As a result, governments across the globe have varied views on the future of cryptocurrencies.
Some governments have embraced them while others have banned them entirely. Regulators also face the dilemma of balancing traditional financial risks and innovation.
Furthermore, crypto is also highly volatile and thus can increase the volatility of an overall portfolio. And the emergence of crypto payment services and decentralized finance has fueled a debate about how decentralized currency will affect society.
The rise of crypto has raised questions about the global economy. Though bitcoin remains a popular investment, the industry has become more complex and regulated. Regulators may target the crypto industry, which could jeopardize their future. However, the industry’s growth has made it possible for more institutions to join.
Future of cryptocurrency
The world is changing rapidly and the internet is entering a new technological era. Blockchain technology is the next generation of Internet technologies that will offer many interesting technological, economic, and social innovations.
The blockchain brings with it innovations such as digital currencies, web 3.0, distributed Ledger, blockchain IoT, smart contracts, decentralized finance, decentralized autonomous organization, etc… These systems are set to transform many industries from finance and insurance to energy and cybersecurity.
The future of money is programmable. Cryptocurrency is the idea of permissionless innovation. It is considered to be the first step to a world with global programmable money.
We are already living in a programmable world where everything is run by software and hardware. We’re about to enter a new phase of transacting money. And this will remove humans and institutions from the loop.
It is argued that in a world with programmable money, people can pay or transfer currency securely without having to sign, ask permission, do a conversion, or worry about their money getting stuck.
People can send money anytime, anywhere, and faster for cheaper than traditional systems. The Internet has changed the way we communicate and access information. Just like that, programmable money is going to change the way we pay, allocate and decide on value.
The Internet was built upon an open architecture that allows easy cross-border communication, and access to information has led to an explosion of innovation.
It is estimated that once the cryptocurrency industry is stabilise and regulators get better at allocating value, people will become more constructive in the way they use their money and their energies.
Programmable money will decouple the need for large institutions that are said to establish trust. Programmable money will democratize money. In the future, we won’t be transacting anymore since money will be directed by software creating a safe and secure flow.
Cryptocurrency and blockchain give the perspective that we are exchanging cash directly with someone as there are no intermediaries. Also, there are around 1.7 billion people in the world today who don’t have access to banking facilities but they do have cell phones.
What’s powerful about cryptocurrency is that it lets anybody join the network, all that is needed is a device connected to the internet. This way nobody is excluded from the economy.
This shift will enable people to buy goods and services and transact in a global economy instead of a local one. The decentralization of money eliminates the idea of a single point of failure which is the middleman.
Because there are different individual nodes, computers, hard drives, and phones around the world that are managing all transactions, the probability that all fail at the same time is almost impossible. That network effect makes it unbreakable and highly secure.
The future of cryptocurrency is not just about sending money back and forth. It is also about funding companies. People can create decentralized autonomous organizations also known as DAO. DAO is a company that is run by smart contracts.
Future cryptocurrency will create a more global economy. This is very important because there is a lot of talent everywhere around the world, but opportunities are not distributed evenly.
If you have talent, skills, and knowledge, you can easily contribute to the global economy. You can benefit from the world, and the world can benefit from you. All that’s needed is a mobile phone, digital wallet, assets, and internet connection.
Blockchain and decentralized currency also facilitate creators and artists with Non-Fungible Tokens (NFTs). With NFTs, artists can easily get paid, and their creations stay authentic and cannot be duplicated.
We can have a more prospective and innovative economy if we had a global currency because everybody will engage and invest in it. It opens up an opportunity for everybody.
In a world where this technology is fully adopted, it won’t matter what country you’re born in, your religion, or your background. Everything will be run by codes thus increasing fairness in transactions.
If you are doing good work in the world, someone will compensate you for it. The idea is powerful because it encourages people to try to do more good things. On a broader level, it’s like people are investing in your success.
Moreover, a lot of people are wary of the integrity of a financial institution. Thus, they keep cash at home which is not a very safe idea and an economic crisis can cause great stress.
While many people are worried about the security of their money, future cryptocurrency would help to eliminate this concern. For example, it would allow for instant global transactions with minimal to no fees.
Transactions are also transparent, meaning all parties can see how money is being spent and when. In volatile countries, cryptocurrencies of the future would provide a lot more stability. Also, the freedom of choosing your own money could be a huge benefit.
But it is important to note that cryptocurrencies are still in the early stages of development. The market is unpredictable, so it may not be an immediate choice for the average consumer.
Final words
While the limitations of cryptocurrencies can be overcome through technological advances, the basic paradox of the system will be more challenging to solve.
The more popular cryptocurrencies become, the more government scrutiny they face, which will undermine their core premise. But with the right government policy and regulation, decentralized currencies could become a major force in the global economy.
Blockchain-based finance will make global transactions more efficient and transparent. This technology eliminates the need for intermediaries and cuts down on costs. It also provides greater financial privacy and reduces transaction complexity.
Using blockchain, a stock transaction can be settled in minutes without the use of a third party. As a result, the world will be a better place to live. In fact, this will lead to an unprecedented level of innovation.
All new technologies are disruptive and come with trade-offs. For instance, the Internet hooked our attention and brought us a lot of ways to waste time. But it also improves our productivity in unimaginable ways.
Mobile phones are annoying because they have decreased our attention span and make us feel that we have to stay connected to work all the time. But they also help us stay connected to friends and family.
Right now, with cryptocurrency, we’re like in a world that is seeing the first automobile. Just like the first car was slow, hard to understand and use, and expensive but later a whole economy was built around it. Cryptocurrency will create a whole new global economy around the blockchain.
If successful, cryptocurrencies will have a huge impact on humanity just as the internet or the first car has been. Cryptocurrency and blockchain will be disruptive and can bind us in ways that we couldn’t before.
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