Numbers, numbers and more numbers
The word cryptocurrency is derived from the fact that the currency is secured by means of cryptography. What is cryptography? Modern cryptography is a system purely based on mathematics where randomness and probability prevent predictability and thus provide unparalleled security. Numbers are an objective, universal language that enable humans to quantify information. So universal that even computers and technology understand numbers. They can enable digital barriers to be constructed and are the basis of what has made cryptography such a secure system.
Cryptography has been around for thousands of years and allows for the protection of information with the use of symbols or math puzzles that require secret keys to decode. Cryptography can be irreversible in some instances meaning that you cannot decode a message. It can be a one-way street, which is why cryptography is ideal for securing and verifying the integrity of information.
Applying these objective cryptographic concepts to a digital currency system allows for the global, trustless and secure exchange of value and information across a network of peers, without the need for a middleman.
Modern technological advancements have allowed these cryptographic techniques to move onto computers, permitting the construction of impenetrable digital barriers needed to protect your valuable assets on an internet riddled with prying eyes. So to recap, cryptocurrency is a system whereby value is exchanged, created and secured by means of cryptography or complex math puzzles used to build a digital fortress of protection on a network of computers, without a middleman or central authority. So why do we need this cryptocurrency stuff?
Sorry bankers, the gig is up
We have lived under the reigns of centralized authorities for as long as any of us have been alive. Nations have risen and fallen time and time again under their rule. What puts these authorities in power? Currency. Where is this currency distributed and created? Banks. Why should one small group of individuals have the authority to control this currency? Why do not we, the people, play a part in how this currency is created and distributed? We are the ones that work so hard for it and slave over it day to day. Why do we have no say? Cryptocurrency takes all of these questions and concepts, flips them on their heads and asks one final, imperative question. Would you rather rely on a decentralized system of objective numbers that have been proven to work or a centralized system of subjective, greedy humans proven not to work?
Power to the people
Cryptocurrency empowers the individual. It allows for a trustless system of value exchange directly from one person to another without anyone telling either of you when, who and how much you can send or receive. Bitcoin, a “peer-to-peer electronic cash system” created by the anonymous individual/group Satoshi Nakamoto in 2008, is the best well-known example of a trustless cryptocurrency being successfully implemented on a large scale. It gives you freedom, security and peace of mind that you will not be taken advantage of nor tampered with in any way. You truly and directly own your cryptocurrency if you own your keys. In fact, taking these basic human rights from you is impossible with cryptocurrency due to the objective nature of numbers. Numbers cannot lie, cheat, steal nor deceive and are the very core of what makes cryptocurrency such a revolutionary concept.
A belief system of value
A currency system is nothing more than a large enough group of people who believe that some entity has value. It does not necessarily need to be backed by anything physical. All it needs is belief. If enough people believed that tulips had value, then they could exchange these tulips with other people who believed they also had value for goods, services or even another form of currency. However, some work had to be done to create and obtain these tulips as well as ensure that no tulip is traded by the same person twice or what is referred to as “double spending”.
Cryptocurrency has managed to solve this notorious double spend issue that any currency system faces, for the first time ever in a decentralized fashion. Decentralized due to the fact that the network, or blockchain, is maintained by thousands of people around the world solving math puzzles, thus verifying and recording transactions with their computers. The transactional history of cryptocurrency is where the blockchain comes in, however, that is a discussion for another article.
Cryptocurrency is to the blockchain as money is to an accountant. The money comes from some source, is verified as legitimate and recorded. Keeping track of this transactional information in a decentralized manner and getting everyone to reach consensus upon the legitimacy of said transactions is how fraudulent activity is prevented. Stealing candy in a small closet (a bank) is much easier than in a room full of people all with their eyes on you (blockchain). The point being, fraud/double spending is next to impossible on the blockchain. Anyways, let’s get back to the tulips.
Tulip gardens, lots of them.
Imagine millions of people around the world with their own tulip gardens. They need to put in work to grow these tulips thus giving them value. These tulips are then exchanged with others who believe they have value and distributed amongst more and more people until an economy develops (not much different than attributing value to pieces of paper with presidents on them). This is no different for cryptocurrency. A large enough group of people with a bunch of computers (tulip gardens) came together and started solving math puzzles (growing tulips) with their computers and exchanging the answers to these math puzzles (tulips) with one another and with those that believed their work (gardening) was worth something.
This process of solving math puzzles with computers and creating cryptocurrency is termed mining. But why math puzzles? Because numbers are the language of computers and enable powerful digital barriers to be built. The complexity and difficulty of the math problems is how these digital barriers are created. Complex math problems that generate randomness prevent predictability due to the astronomically low probability of guessing what numbers will be generated from these complex math problems. The difficulty is automatically adjusted dependent upon the speed at which the math puzzles are solved by the miners. If these adjustable barriers did not exist, anyone could create cryptocurrency with ease at any rate and there would be no value, competition or security.
The value of cryptocurrencies come from:
- The work put in to solve these math problems
- The rate at which units are created
- Total number of units ever allowed into circulation
- The competition between miners
- The specific issue a cryptocurrency solves
Whoa, that was alot. Let’s recap
Magic Internet Money
So, cryptocurrency is the result of a large enough group of people with computers coming together because of how corrupt our current central banking systems are and solving math problems with these computers to create a secure and decentralized system of value exchange. This cryptocurrency is then distributed and can be sent from me to you directly, without a middleman or bank in a matter of hours, sometimes seconds. You owning and trading cryptocurrency contributes to its distribution. Everyone involved are the distributors. Cryptocurrency is representative of digital value while the blockchain records the movement of this digital value all the while incentivizing individuals to participate in supporting the network. Yup, that is pretty much what cryptocurrency is.
The beauty of cryptocurrency is that there is no corrupt central distributing authority, no money printer. Cryptocurrencies have a hard cap and are therefore deflationary. No more than what is specified in the computer code in the beginning can be created and this is enforced by, you guessed it, numbers and math problems outside of anyone’s control. Anyone with the right computer resources can begin mining cryptocurrency and can get paid in cryptocurrency for doing so, thus, incentivizing people to participate in the network.
No one can tell you that you cannot start mining and make money from solving math problems with your computer hardware in your own home. These miners all around the world are the equivalent to the bank of cryptocurrency. The major differences being that no one owns this bank, tells the users when & where they may spend their cryptocurrency, who they may send it to and how much they may send. Nor does anyone control the creation and distribution of the currency in this bank. Objective numbers incapable of stealing, lying, cheating, or censoring do that for us, hence the trustless nature of cryptocurrency.
Below is a list of things that differentiate cryptocurrency from traditional fiat currency used on the internet:
Peer-to-peer. Cryptocurrency is transferred from peer-to-peer or directly from me to you, without a middleman.
Immutable. Once a transaction has been confirmed, it cannot be reversed. Central banks can and do reverse transactions.
Pseudo-anonymous. A user does not need to provide any identity information to use cryptocurrency. Although technically traceable, a user can have peace of mind that even though transactions are made public, the identity of the transaction is unknown.
Accountability. Every transaction is recorded permanently on the blockchain. This information cannot be messed with and thus provides a tamper-proof system. This tamper-proof network is applicable to many instances such as voting, company spending, contractual agreements etc.
Permissionless. Cryptocurrencies do not require any kind of permission to use them. No one can tell you how much you can send or receive or when you can use cryptocurrencies. It is a 24/7 global market. All that is required is an internet connection and a computer/smart device to start sending and receiving cryptocurrency.
Secure. Cryptocurrency is secured by means of cryptography which has been around for millennia. It is impossible to break, at the moment, and is what contributes to you and only you truly owning your currency/data.
Quick, cheap & borderless. Sending and receiving cryptocurrency happens very quickly and cheaply relative to traditional systems. Sending $100,000 of bitcoin from the U.S. to China would take an hour or two and cost less than $10. Other cryptocurrencies are even faster and cheaper.
Barriers to global adoption of cryptocurrency
As with any system, cryptocurrency is not perfect. At the time of writing, one must go through a centralized exchange to directly buy, trade or liquefy one’s cryptocurrency. These exchanges also require lengthy KYC (know your customer) procedures and can take weeks to verify a new-comer. This is a large barrier for those already unbanked by society who may not have identity documents or a legitimate address/bank account. These centralized exchanges can charge high fees, own your cryptocurrency, commit fraud and are not much different than a centralized bank in my opinion. Until decentralized exchanges become more liquid and omnipresent, I don’t see world-wide adoption happening as quickly as I would like.
To become a world-wide universal currency, scalability is imperative. How well can the cryptocurrency network handle huge volumes of transactions? This is an issue faced by every cryptocurrency and is something of great concern for some of the top ranked cryptocurrencies. Bitcoin and ethereum both experienced high degrees of network clogging when their value shot up to $20,000 and $1,300, respectively, in December 2017. Transaction prices went way up and transaction speed slowed to a halt. Promising solutions are being developed for both of these platforms and there are other cryptocurrencies, such as EOS and BitShares, that can handle these transaction loads without a hiccup. If bitcoin and ethereum do not catch up, they could lose their place as the number 1 and 2 cryptocurrencies.
Lack of governance
Yes I agree. I think bringing governance to a blockchain goes against the entire ethos of a blockchain. However, there needs to be some degree of guidance and oversight as to where said blockchain/cryptocurrency is headed and why, without forks, for it to be adopted on a global scale and used by businesses. If there is a disagreement in the bitcoin community, a fork occurs. There needs to be a guidance system in place for the inevitable difference in views all us humans have towards these world-changing products and a way to express these differing views on an individual basis.
For example, EOS is the first to experiment with blockchain governance on a large scale. EOS allows for token holders to vote and have a voice. There are some issues with their system, however, they have demonstrated many instances of the successful implementation of governance on a blockchain. EOS is an example of what is referred to as “on-chain governance”. They illustrate how a governing model could possibly be implemented onto a blockchain/cryptocurrency.
This can be viewed as a good and bad thing. Good in that unimaginable gains can and have been made in the cryptocurrency space. But for global adoption to occur, there needs to be stability. If bitcoin is to be a store of value away from centralized control, it needs to hold its value. At the time of writing, 10–20% swings in value within a 24 hour period are common. These swings can be even more severe in some cases and is yet another barrier to global adoption.
As demonstrated, cryptocurrencies offer a way to transact with one another in a faster, cheaper, direct and all around more efficient and libertarian way than traditional banking systems. Bitcoin was the first cryptocurrency on the scene and has exploded in awareness since its inception in 2008. It is an incredibly innovative and pioneering project that is the poster child of cryptocurrency. There are many more examples of extremely innovative cryptocurrency projects that seem to evolve and capitalize upon the short-comings of the ones before them. Cryptocurrency and blockchain technology are taking on the daunting task of challenging the current world order. It takes brave pioneers like those behind bitcoin, ethereum and the many others to empower the individual rather than the agenda driven state.
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Revised from an earlier version of the article at steemit.com
What is Cryptocurrency? was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.