Understanding Cryptocurrencies: Part I

May 28, 2020

Like any currency across the world, digital currencies have been created to serve an essential purpose: to act as a medium of exchange for products and services. However, unlike standard and fiat currencies, most cryptocurrencies are decentralized, which means they do not rely on governments or central banking systems to process their transactions. Instead, they use modern complex technology called cryptography and blockchain to allow transactions to take place.

The world of cryptocurrencies is brimming with ambiguity, criticism, and turbulence. Bitcoin itself went from being a bizarre, darknet invention to perhaps the last decade’s most successful asset. So, what’s all the fuss about? Let’s dig deeper and learn more about cryptos!

“Bitcoin and other cryptocurrencies are dependent on blockchain – the underlying distributed ledger that guarantees tamper-resistant permanent transactions – to do business. But that’s not all blockchain does or has the potential to do.” ― Olawale Daniel.

What is a cryptocurrency, and who created them?

A cryptocurrency is a digital asset designed to be used as a payment method in exchange for goods and services without the standardized cash system. Cryptocurrencies use secure cryptography in order to verify transactions. Unlike traditional banking systems and fiat currencies, cryptocurrencies are decentralized, which means they are not governed nor regulated by any government bodies or central banking systems.

Cryptocurrencies rely on a technology called blockchain, which is commonly defined as “a distributed, decentralized, public ledger.” To simplify things, a blockchain is a digital information (the ‘block’) stored in a public database (the ‘chain’). Blocks store information such as time, date, and transactional amount, as well as who is participating in the transaction. Blocks are distinguished by a unique code called a ‘hash.’

A digital currency can be considered a cryptocurrency if it meets the following conditions:

  • It does not have a central authority and is maintained through a blockchain.
  • If it maintains an overview of its units and their ownership.
  • It defines whether or not new units are produced as well as their origin and how to verify the ownership of these units.
  • Ownership of units can only be proved exclusively cryptographically.
  • It allows transactions to be performed in which ownership of the cryptographic units is changeable. Transaction reports can only be released by an entity proving the current ownership of these units.
  • If simultaneously two different instructions for modifying the ownership of the same cryptographic units are recorded, the system performs at most one of them.

The very first cryptocurrency that was created and released was the infamous Bitcoin, but the idea of digital currencies materialized long before. Cryptographer David Chaum first proposed the concept in 1983, and in the mid-90s, he released the very first version of cryptographic electric money called ecash.

Later, in 2009, Satoshi Nakamoto circulated Bitcoin’s white, titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System,’ which was a detailed report on how P2P networks work to produce “a system for electronic transactions without relying on trust.”

Cryptocurrencies rapidly grew in popularity due to the anonymity they offer. Transactional details are secured, and the identity of senders and receivers is entirely pseudonymous. Users are represented by a keychain of 30 characters. Cryptocurrencies are based on a cryptography system, which means they are secured from the public. They are also entirely irreversible, unlike transactions in traditional banking, and they are also available to anyone.

Unlike fiat currencies, cryptocurrencies do not represent debt. For example, government-issued currencies such as the EURO or the USD are not supported by any hard commodity like gold. Their value is based on governmental financial stability, which can cripple it.

In addition to this, cryptocurrencies have a controlled supply, which means they are not affected by inflation. A good example of this is Bitcoin, whose total supply is 21 million; currently, there are 18,382,487.5 bitcoins in circulation. Bitcoin cannot be created arbitrarily but needs to be mined. Based on its creator’s schedule, the total supply of Bitcoin should be extracted by approximately 2140.

Are cryptocurrencies legal?

The legality of cryptocurrencies differs globally; some countries accept them, some tolerate them, so they have completely banned them. At this stage, cryptocurrencies are totally banned in:

  • Algeria
  • Bolivia
  • Egypt
  • Iraq
  • Morocco
  • Nepal
  • Pakistan
  • United Arab Emirates

There is an “implicit ban” in another 15 countries, such as Bahrain, Bangladesh, China, Colombia, the Dominican Republic, Indonesia, Iran, Kuwait, Lesotho, Lithuania, Macau, Oman, Qatar, Saudi Arabia, and Taiwan.

China has a complicated relationship with cryptocurrencies: The People’s Bank of China (PBOC) has completely banned financial institutions from running Bitcoin transactions in 2013. In 2017 the PBOC also banned ICOs and cryptocurrency exchanges from working domestically in China. Eventually, it even banned Bitcoin mining, even though over 70% of the world’s Bitcoin is mined in China. However, despite this, the Chinese government, particularly President Xi Jinping, has publicly praised blockchain technology and announced that China would launch its own, sovereign, centralized digital currency called DCEP (Digital Currency/Electronic Payments).

In Russia, cryptocurrencies are legal, but you cannot use them to purchase products or services. In the USA and Canada, cryptocurrencies are heavily regulated, and marketing them is quite tricky since most social media platforms have prohibited advertising them.

What are altcoins, and how many are there out there?

As you may already know, Bitcoin was the very first cryptocurrency to ever be created and is commonly nicknamed digital gold. Bitcoin leads the entire crypto market – it is the largest cryptocurrency by market capitalization, $169,025,175,680 at the time of writing. Its current price is $9,192.29, and in the last decade, Bitcoin’s value has grown by 9,000,000%, and its daily transaction volume is over 200,000 per day.

But since the release of Bitcoin, over 6000 alternative cryptocurrencies were released, most of them with unique features. The cryptocurrency market is worth $200 billion.

Ethereum

Understanding Cryptocurrencies: Part I

Ethereum is actually a platform that was designed to help developers build decentralized apps and programs. It was created by young prodigy Vitalik Buterin who is a Canadian-Russian programmer and crypto enthusiast.

Ethereum also developed two cryptocurrencies, Ether and Ethereum Classic, that are used on the platform but also traded on crypto exchanges. Ether’s current price is $207.43 while its market capitalization is $23,048,447,712. Ethereum Classic’s price is $6.74, while its market capitalization is $ 783,654,484.

Litecoin

Understanding Cryptocurrencies: Part I

Litecoin was built to resemble Bitcoin strongly but to process transactions much faster (a block is processed every 2.5 minutes, rather than Bitcoin’s 10 minutes), which is why it is often dubbed as digital silver. And has a larger number of tokens in circulation versus Bitcoin. The maximum supply of Litecoin is 84,000,000 LTC.

Litecoin’s current price is $43.76 and its market capitalization is $2,675,384,623.

Ripple (XRP)

Ripple is a native cryptocurrency that operates like a network that processes IOUs rather than a method to store value. Unlike Bitcoin and Ethereum, there is no mining in Ripple since all the coins have already been extracted. The maximum supply of Ripple is 100,000,000,000 XRP.

Since Ripple is a network, many banks have joined it in the past, which has immensely increased its value on the market, $0.196327 per coin, while the market cap is $8,660,548,750.

Some other popular cryptocurrencies include:

  • Tether
  • Monero
  • Cardano
  • IOTA
  • Bitcoin Cash
  • TRON
  • NEO
  • Stellar

Why Do Cryptocurrencies Exist?

Cryptocurrencies were designed to address flaws in traditional and fiat currencies, which are backed and regulated by central governments, which means they are often subject to corruption and manipulation, amongst other issues. While governments can print more money and inject it into the economy, causing inflation, cryptocurrencies have a maximum supply.

“Unlike traditional currencies, there is no governing body that backs Bitcoin and other cryptocurrencies, which means they aren’t subjected to anybody’s whims.”

What attracts most crypto enthusiasts is their complete transparency and decentralization, but also their fluctuating nature that often has brought many investors significant profits when trading or just holding the currencies.