A crypto-currency is digital money which can be exchanged for USD, GBP, EUR or any other fiat currency in circulation. The unique thing about crypto-currencies which makes it a “valid” crypto-currency is that it uses cryptography to regulate its supply and to verify its transactions.
The Crypto-Currencies market seems to have a bright future ahead of itself. It all started with the launch of Bitcoin in 2009. Later on, in 2017 Bitcoin peaked at $14.748. At the time of writing it is still quite high at an unexpected $9.860.
Most people are confused as to why a digital asset like Bitcoin has become so expensive when it is not backed by any “real” currency. The short answer is: 1. the Blockchain technology on which it is built. and 2. supply vs. demand, of course.
What’s the advantage of this Blockchain?
The blockchain enables the currency to be “decentralised”. This means that there is no one entity that has control over its supply, like governments or banks. The blockchain is a modern technology that self-regulates itself. There are no middle-men and false transactions cannot occur.
The difference between a centralised system and a decentralised system is that in a centralised system, the amount of money sent from person A to person B has to go through the “regulating body”.
In a decentralised system, however, the amount of money doesn’t go through the regulating body. In the case of blockchain, imagine a bunch of people in a room. Not everybody knows everybody. Person A needs to give an envelope to person B, but doesn’t know what person B looks like. So Person A gives the envelope to somebody who is more likely to know who Person B is, and remembers who he gave the envelope to. That interim Person passes the envelope to someone who is even more likely to know who person B is, and again, remembers who he passed the envelope to. On and on, until Person B receives the envelope. So, in a blockchain-powered network, the entities who make a transaction inbetween themselves are not required to be linked (like they would’ve been linked via the regulating body). But because every node inside the network is connected to the network, the envelope will still arrive at its destination eventually. Keep in mind that the envelope is not actually passed between people, but between nodes in a programmed network.
The security of the blockchain
Each transaction that takes place on the network is being registered and becomes visible and verifiable. So when a payment is made, the whole network is notified. Payments cannot be reversed. The network cannot be hacked.
Each time a “node” from the network sends out a payment, that “sender node” (which bear in mind, it is the software of the network that is handling these operations, not humans) signs the transaction. (the equivalent of signing a cheque). That signing is registered on the network, as if it were an extra onion layer covering the onion. In this case, the “onion” is the network. So, with every transaction, the network changes.
If a fake transaction is attempted (somebody spending more bitcoin than they own), the network rejects it because it doesn’t fit in with the history of transactions.
The key is that all previous transactions are taken into account, when a new transaction is requested. In order to bypass this (to hack it!) all of the previous transactions must be simulated, so that the proper code block of a new transaction is generated and fits into the block chain. (That is what the blcokchain is: a chain of code block that fit, one into each other, like puzzle pieces). In order to generate the correct code-block to make a fake transaction, a lot of computing power is required. And the more previous transactions, the more CPU power is required to generate the correct code (like a very complicated key that takes a lot of work to replicate). Not even the most powerful computer on earth has the necessary power to try out ALL of the possible combinations in order to make a fake transaction on the blockchain. And with each new transaction made (i.e. each code-block added) the complexity increases even more. So the more it is used, the more secure it is!
Each transaction is being verified and certified with the use of the so-called “miners” (you might have heard of bitcoin mining). Mining is the action of putting computers to work on verifying transactions requested on the blockchain network and authorizing them. This process is done by software, but still, computers are required to do the processing. I will not go into that process in this article.
Where is it’s value coming from?
Crypto-currency value is determined by supply and demand. There are some online exchanges on the internet which play the part of a “crypto-Wallstreet”, if you will.
Also, there is a limited supply of coins that can be bought and exchanged. The maximum supply of Bitcoins, for example, is 21 million. This helps with inflation, as it limits supply and therefore it will stop the price from going down in the long run.
There are many other crypto-currencies than Bitcoin, each with their own perks, which have been created for different purposes. Bitcoin was created more as a proof-of-concept than anything else, and it has performed amazingly well. It is being used as an investment vehicle as well as a currency and is being adopted more and more in society. If it is here to stay or not, only time will tell, but what is certain is that there are over 1000 of crypto-currencies to date, and the number keeps growing. Some of them, like Banano for instance, have made a big impact in countries which are facing economical difficulties.
The future is now.
