Unless you are a government, printing currency used to be a complicated, inconvenient, costly and illegal affair. But now technology seems to be offering new ways of thinking about money. Digital cryptocurrencies are neither cumbersome nor costly (to some extent) to create.
Until governments start to regulate them, cryptocurrency tends to proliferate quickly. Currently, the value of cryptocurrencies in use has reached hundreds of billions of dollars. For the first time in generations, there are more currencies in circulation than countries and this discrepancy will only broaden as more cryptocurrencies are launched each year.
Cryptocurrency is an online currency without a physical form. It exists as a block on a server that records data on transactions. Because cryptocurrency transactions are highly encrypted, you cannot use them for every online purchase. Instead, you should purchase cryptocurrency as an investment.
What makes cryptocurrencies truly revolutionary is that they don’t need a central government authority to be issued and circulated widely. In theory, at least, cryptocurrencies also fulfill Milton Friedman’s dream of “replacing the Fed with a computer.” That is, instead of the governors of the Federal Reserve making decisions about interest rates and the supply of money, cryptocurrencies would be controlled by computer algorithms.
Consider how cryptocurrencies may alter citizens’ relationship with their government if the government no longer has control over the value of money and the worth of assets and liabilities over time. It will certainly change the practice of finance and banking as we know it.
The value of a cryptocurrency depends on its scarcity. The cryptocurrency industry has made a big splash in the media in the past couple of years. It is widely accepted by some as a legitimate method of payment and it has radically changed the way many businesses operate.
This technology is based on cryptography, which ensures the privacy and authenticity of transactions. The digital currency blockchain is a public ledger with multiple verifications by various nodes. Because of this, transactions are not just anonymous but can be traced back to unknown accounts.
And cryptocurrency is a form of electronic cash in which transactions are authenticated by senders using cryptography. Payments and balances are recorded in a kind of electronic registry that every participant can access. This record-keeping device is called the blockchain.
The idea of the blockchain is very simple, imagine a record where every time a transaction is carried, the information is inscribed starting with the top row. The next transaction is inscribed in the row after and so on. The only rule is that each transaction must be written next to the one previously entered, ensuring that there are no gaps.
Thus, as people contribute, the top row fills up, then the row below and so forth. No record can be erased once it has been entered into the record and everyone can see every record. Once the record is full, a second one is built in parallel and the process resumes.
The purpose of cryptocurrency blockchain is to keep track of every transaction of a user or who owns each coin or banknote in circulation and when the money is used to make a payment. Instead of keeping these kinds of records on a physical record, it is kept in a digital registry of concatenated and immutable records in the blockchain.
The computers which get access to it can verify each transaction and provide the whole system with the required transparency. Each computer has an identical copy of the entire blockchain. What’s more impressive is the safety requirement where more than half of the computers in the network must provide approval for the modification of a record or transaction.
The bitcoin blockchain is very secure. The probability of hacking a bitcoin private key, which uses 256-bit encryption, is a minuscule 1 in 2256 or 1 in over 115 quattuorvigintillion, a number with seventy-six digits. That’s equivalent to the odds of winning the lottery nine times in a row.
This decentralized system of transparency is exactly what Satoshi Nakamoto proposed in the famous white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008. The paper proposed the revolutionary notion that “a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
Ever since we invented money and banking, trust has been at the core of any financial activity. The boldest claim contained in the bitcoin white paper is that a cryptocurrency operationalized through the blockchain is “a system for electronic transactions without relying on trust.”
Nakamoto might well have brought thousands of years of financial development to an unceremonious end. Nakamoto’s purported goal was to democratize financial services, an objective shared by all cryptocurrency visionaries, aficionados and entrepreneurs. “Our mission is to create an open financial system for the world,” says Coinbase CEO Brian Armstrong. “We believe open protocols for money will create more innovation, economic freedom and equality of opportunity, just like the Internet did for publishing information.”
Since cryptocurrencies are decentralized, there are no central banks or governments to regulate their value. The concept of is very similar to printing your own money. Instead of going through a bank, you can exchange your coins without a middleman. This makes it more like the wild west of the digital world, where you can trade anything and nobody is watching you.
While it’s easy to believe that the future of cryptocurrency is based on bitcoin, economists studying the technology believe otherwise. Although there are many national banks and the Federal Reserve interested in using blockchain technology as the basis for their national currencies, experts do not see a bright future for cryptocurrency.
In fact, as the world moves away from physical money, the future of cryptocurrency lies with countries and their people. Blockchain technology can be used for payments. The blockchain has a decentralized structure and it can be used for payments. However, the biggest disadvantage of cryptocurrency is its inability to be used on a national scale. For instance, VISA’s credit card network can handle 65,000 transactions per second, while bitcoin’s framework can only handle 7 transactions per second.
Another attractive feature is that, in Nakamoto’s words, “nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.” In spite of its sound technical foundation, bitcoin has largely failed to establish itself as a trustworthy and convenient means of exchange, let alone a unit of account or store of value.
The reasons are complex but mostly have to do with the uncertainty as to how governments intend to regulate cryptocurrencies and with the insatiable desire of speculators to make an easy killing. But while no cryptocurrency has yet supplanted any physical currency, the blockchain has already begun changing the world as we know it in fundamental ways.
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