This is your ultimate guide to understanding blockchain and cryptocurrencies in general while covering other related concepts as well to get you going.
In this section, we will help define and discuss the following concepts:
- What is blockchain?
- What is bitcoin?
- What is Ethereum?
- What are alt coins?
- What are stablecoins?
- Why cryptocurrencies are the future of money
- Discuss the global financial system
- Discuss the evolution of money
- Discuss the future of money
Now that we have an outline of what to expect, let’s dive into blockchain and cryptocurrencies.
What is Blockchain
The foundation of cryptocurrency lies in the idea that the power wielded by the big banks and government should transfer to the masses.
Crypto aims to do this through the decentralization of the current monetary system.
The ability for cryptocurrency to be decentralized is a result of its innovative blockchain technology.
Blockchain was invented by an individual or group of people under the pseudonym Satoshi Nakamoto in 2008 to serve as the public transaction ledger of the first cryptocurrency, bitcoin.
The details of blockchain can be found in Bitcoin’s white paper but can boil down to one basic concept.
The blockchain serves as a type ledger that contains information regarding transactions that is so complex it is impossible to forge.
To understand how blockchain can do this, we will break the process down into steps.
- Transactions are entered in the order in which they occur and generate a hash (a long string of numbers and letters).
- The hash generated depends not only on the transaction but on the previous transaction’s hash as well.
- Even the smallest of changes in a transaction generates an entirely new hash.
- The hash generated depends not only on the transaction but on the previous transaction’s hash as well.
- Nodes (responsible for checking the validity of transactions) then check to make sure a transaction has not been forged by inspecting the hash.
- If the majority of the nodes approve a transaction, it is then written into a block (think of this as a spreadsheet in an Excel workbook).
- Each block then refers to a previous block that has been filled with information and forms the blockchain (the Excel workbook).
Important notes about blockchain:
- A blockchain is spread over a network of computers (nodes) in which each computer has a complete copy of the blockchain.
- A blockchain regularly updates all nodes in the network. For example, Bitcoin updates every 10 minutes.
- As soon as a spreadsheet (block) is updated, it becomes permanent and cannot be changed. Only new entries can be added to it. The updates occur across all the computers in the network at the same time. These measures are what make blockchain very tough to hack.
What is Bitcoin
Bitcoin was launched in January 2009 as the first decentralized cryptocurrency.
An individual or group of people created Bitcoin under the pseudonym, Satoshi Nakamoto.
The core concepts of the cryptocurrency are in its white paper.
The ideas found in this white paper have served as the foundation for all subsequent cryptocurrencies.
Without Bitcoin and Satoshi Nakamoto, the cryptocurrency market would not exist as it does today as Bitcoin is the first implementation of blockchain technology.
Bitcoin is designed to be a peer-to-peer version of electronic cash that allows online payments to be sent from one party to another without going through financial institutions or central authorities.
Bitcoin has been immensely successful as its market cap has exploded to over $160 billion.
The closest competitor to Bitcoin is Ethereum, which has a market cap roughly 1/10 the size of Bitcoin’s.
Bitcoin has become so successful in the crypto market that its price is often looked at as the determining factor for the current state of cryptocurrency.
You may have noticed sometimes the b in bitcoin is uppercase and some times lowercase.
The two refer to different things.
Since Bitcoin is both a currency and a protocol, capitalization can be confusing.
Accepted practice is to use Bitcoin (singular with an uppercase letter B) to label the protocol software and community, and bitcoin (with a lowercase b) to label units of the currency.
What is Ethereum
Ethereum serves as the most popular alternative to Bitcoin and has assumed a massive role in the cryptocurrency market.
Ethereum was launched in July 2015 and has now become the largest and most established, open-ended decentralized software platform.
In terms of market cap, Ethereum is the second-largest cryptocurrency in circulation and only falls behind bitcoin.
What makes Ethereum so unique and impressive is its vast array of potential applications.
Ethereum is a smart contract platform that enables developers to build and run decentralized applications.
Smart contracts are a self-executing contract where the terms of the agreement between the buyer and the seller are written directly into the lines of code.
When running on Ethereum’s blockchain, smart contracts are like a self-operating computer that automatically executes when specific conditions are met.
Ethereum is the pioneer for blockchain-based smart contracts.
These abilities and potential applications are then packaged as value into Ethereum’s token Ether.
Ether has two primary uses.
The first is its use as digital currency in exchanges like many other cryptocurrencies, and the second is its use on the Ethereum network to run applications.
To understand this latter usage, think of Ether like a car.
Developers use Ether to drive around and navigate the Ethereum platform so that they can develop and run applications inside the Ethereum network.
What Are Altcoins
The term altcoin refers to all cryptocurrencies other than bitcoin.
Altcoins generally brand themselves as better alternatives to bitcoin and vary widely in terms of features and functions.
There are over 2,000 altcoins in existence, and they range from name brands like Ethereum to meme coins such as Dogecoin.
What Are Stablecoins
With the rise of cryptocurrencies such as bitcoin, blockchain has now become widely recognized as the currency of the future as more people become disenfranchised with fiat money.
Many investors looking for a more stable asset, though, can be turned off by cryptocurrencies such as bitcoin and Ethereum as they are known to fluctuate in price and be quite volatile.
Stablecoins are the perfect compromise for those investors as they are a type of cryptocurrency that is immune to the high volatility found in bitcoin and Ethereum.
The values of stablecoins are pegged to real-world assets such as the US dollar, gold, or a basket of currencies, which allows them to experience the benefits of cryptocurrency without the high volatility.
Stablecoins are assets that fit seamlessly into the financial plans of an investor who sees the value in cryptocurrency but wants the stability found in real-world assets.
Why Crypto is the Future?
Cryptocurrencies are the future as they provide a solution to a rising crisis in the global economy.
As time has passed, more and more people have come to realize the flaws in fiat money and centralized banking.
Look no further than Venezuela to see all the flaws of this system in action.
Due to the ongoing political and socioeconomic tensions that began in 2016, Venezuela had an inflation rate of 1,370,001% in 2019.
Yes, you read that number correctly, and it is not typo.
This level of inflation is known as hyperinflation, and it destroys the real value of the local currency.
To better explain how devastating hyperinflation is to countries, here is a simple example.
Imagine it is 2018, and you want to get lunch at your favorite restaurant.
You get your favorite sandwich and pay 4 bolívars. Fast forward to 2019, and you go to the same restaurant for the same lunch.
When you leave your house, make sure not to forget to bring your wheelbarrow of cash as that sandwich now costs 54,804.04 bolívars.
Congratulations, you are currently experiencing hyperinflation, and any money that you have saved up throughout the years is now useless.
Hyperinflation happened because the government printed and put into circulation an exorbitant amount of money.
With the current centralized financial system, there is nothing to stop this from happening in your country as each country decides how much money to print and put into circulation.
Often, these decisions are what is best for the powerful and not the citizens and country as a whole.
Cryptocurrencies solve these flaws and many more through their decentralized nature and finite supply.
These reasons are why, in the wake of hyperinflation, many Venezuelans are turning to crypto for their monetary needs.
But there is more to crypto than just its fiscal application.
The innovative blockchain technology behind cryptocurrencies has limitless applications for developers both inside and outside the financial world.
Crypto is the future for both currencies and technology.
Global Financial System
A financial system is a set of institutions that permit the exchange of funds or currency.
The institutions involved in a financial system include banks, insurance companies, and stock exchanges.
A financial system also consists of a set of rules and practices that borrowers and lenders use to decide terms of economic deals, who are allowed to finance specific projects, and which projects get funded.
Financial systems exist in varying scales, with the smallest being the systems involved in a singular company and the largest being the global financial system.
The global financial system is an extensive system that covers all financial institutions, borrowers, and lenders within the global economy.
It is the global framework of legal agreements, institutions, and both formal and informal economic decision-makers that dictate the international flows of financial capital.
The institutions involved in the decision-making end of this system include central banks, major private international banks, government treasuries, and monetary authorities, the World Bank, and the International Monetary Fund.
There is a lot of financial jargon and technical words being thrown at you when you look for what the global financial system does, but it boils down to one straightforward concept.
The global financial system is responsible for ensuring stability throughout the global economy.
That is quite a lot of pressure for the institutions involved, as they are the sole decision-makers and are responsible for the global economy.
All it takes is one divergent nation or crisis for this delicate stability to shatter.
The Evolution of Money
Money, in some form, has been a part of human history for the last 3,000 years.
Over this time, this structure of payment has changed drastically as money, in of itself, is nothing of value.
Money’s worth comes from its ability to be a medium of exchange, measurement, and storage of wealth.
If society did not universally agree to this accepted value and form of payment, money as we know it would be worthless.
That is why the types of money and currency have evolved so drastically over the years.
Coins made from precious metals were the first evolution of money from the previous barter system of trading goods for services.
Over time, the use of paper currency began to replace coins as they became too inefficient to use.
The first instances of paper currency issued by a government occurred in early North America as shipments between Europe and the colonies took so long that the colonists would often run out of coins.
Instead of going back to the barter system, they traded IOUs as a form of currency.
In the beginnings of paper currency, it could be traded in at any time for precious metal coins at a bank.
Paper money that was backed by precious metals is known as the gold standard.
The gold standard eventually came to an end for the world in the 20th century and was replaced by fiat money.
Fiat money is the term used to describe currency that is used by the government’s order and must be accepted as payment.
Fiat money is backed by nothing other than the word and power of the issuing government.
The use of fiat money has also evolved.
Most payments are made now without the exchanging of physical currency as plastic cards backed by fiat money are used instead.
This evolution has also given rise to payments through applications like Venmo, where currency exchanges virtually.
The Future of Money
Cryptocurrencies are the next stage of the money evolution as their usage has increased dramatically throughout the 21st century.
With cryptocurrencies, there is no physical money or coins, but it offers the same uses as fiat money with the benefits of lower transaction fees and decentralized authority.
Cryptocurrency is the future of not only money but technology as well.
The blockchain technology that allows cryptocurrencies to function has endless applications outside the financial world.
Cryptocurrencies are an investment in both the future of money and the future of technology.