This is part 3 of an introductory series of Blockchain and Bitcoin, the purpose here is to explain some of the high level concepts about the crypto and blockchain technology. Here are the Part 1 and Part 2.
For a long time, money has not seen an upgrade. While money has been around for many centuries, it is now a collection of hundreds of “fiat” currencies, which are issued by government agencies. Banks and governments control the creation and distribution of new currency.
Fiat currencies are only as strong and stable as the government they are controlled by. People who live under unstable governments will be stuck with unstable fiat currency — Venezuela, Argentina, and Zimbabwe are just a few examples. This system allows banks to control who has access to money. Many billions of people lack access to banks and are thus locked out of the global economic system. Modern economies rely heavily upon a complex network of intermediaries to move funds, which has led to massive inefficiencies that often go unseen. The same system led to a financial meltdown.
This was the way that currency worked until Satoshi Nagamoto launched Bitcoin on the internet in 2009. The blueprint for a new currency was revealed. Currencies in which governments are replaced with clever software programs, and banks are replaced by global networks made up of anonymous computers that are run by volunteers. Currencies are open to all who have an internet connection.
Every cryptocurrency has a software protocol that allows users to send money over the internet. This software can be shared among computers around the globe, creating a global network. The network’s computers validate transactions by using a special type of ledger called a Blockchain. This record keeps track of all transactions that have ever taken place on the network.
Bitcoin was the first cryptocurrency to be created. However, other cryptocurrencies like Monero, Litecoin, Zcash, and Bitcoin Cash have all experienced significant success. Each one consists of its own software, which is shared over a global network and maintained in separate blockchains.
Volunteers are made up of institutions and individuals who operate the computers that run each cryptocurrency’s software. Some create applications and businesses that users can access the network, such as digital wallets or exchanges. Others do a crucial task called “mining”. This updates the blockchain with new transactions. Miners are paid in the newly created cryptocurrency. Bitcoin miners create the Bitcoin blockchain and earn bitcoin. Litecoin miners are responsible for updating the Litecoin Blockchain and earning litecoin. Miners also get rewards which are used to release new cryptocurrency into circulation.
Origin of cryptocurrencies
To create a new currency, you need a government that is backed up by an army. Bitcoin has changed this.
Satoshi Nakamoto made Bitcoin’s program open-source. This means anyone can download the software and check out how it works. Software developers all over the globe were able to use this blueprint to create their own cryptocurrency.
A blockchain engineer can download Bitcoin software and make adjustments to create a new cryptocurrency. A new cryptocurrency can be created if they convince miners to use their software and users to transact with their currency.
Litecoin and Bitcoin Cash are just augmented versions of Bitcoin that run on their own networks. These modifications were made to correct the disadvantages of the Bitcoin system.
Nakamoto created Bitcoin’s software to process new transactions approximately every 10 minutes. And the total max supply of Bitcoin is 21 million. The developers of Litecoin modified the Bitcoin software to make it faster and more appropriate for small transactions. New Litecoin transactions are processed approximately every 2.5 minutes, with a limit of 84 million Litecoin max supply. Bitcoin Cash transactions still get processed approximately every 10 minutes. However, developers have increased the block size to allow for much more number of transactions per block.
It is a common misconception that cryptocurrencies are the first form of digital money. It is often surprising to learn that only 11.6% of US dollars are in the form of paper cash or coins. The rest of the money is digital.
Nearly 90% of US dollars are made up of numbers stored in a database
Banks all around the globe own almost 90% of the databases that hold our money. These trusted third parties, which include middlemen such as Visa/Mastercard, are required to facilitate the majority of our financial transactions.
During modern transactions, although the bank’s databases may change, no actual cash is actually transferred.
Bitcoin and other cryptocurrencies are a way for digitally to pay. It relies on an autonomous global network rather than a bank.
Why we should pay attention to cryptocurrency?
Why would we need money that isn’t dependent on governments and banks?
Chances are you’re reading this in a country with a strong traditional financial system. A credit card is linked to your bank account. You probably don’t spend much time worrying about how much money you spend each day. This is a luxury that many people in the world cannot afford.
Nearly 3 billion people are “unbanked”, which means they are not able to access basic financial services. They are also locked out of the global financial system. You cannot borrow money to start a business if you don’t have access to basic financial services. The best place to save your savings and life’s expenses is under your mattress. Many more people are “underbanked”, meaning that they have to use non-traditional financial services like money transmitters, which can charge high fees. Anyone can access cryptocurrencies via an internet connection and a smartphone. With smartphones becoming more affordable and the internet available everywhere, cryptocurrency is a viable alternative for people that are underbanked and unbanked.
It is not common to live in a country that holds its currency’s value. Venezuela is an example of hyperinflation due to irresponsible policies by the government. Hyperinflating currencies are like lighting up a lot of your savings. They have less purchasing power every day, so holding on to them is like putting your life’s savings in danger. Cryptocurrencies are a viable alternative to inflationary currencies that unstable governments issue and have already created new micro-economies for Venezuelans as well as other people all over the globe.
A more efficient global economy
Cryptocurrencies can be a great alternative to hyperinflating government currency and provide alternatives for those who are unbanked.
It takes less time to send an email from New York City to London than to email your neighbor next door. You can send $100 to your London friend by flying to London and then handing it in person. It takes five days for the money to reach its destination from abroad because it is processed by many middlemen. One of the values of cryptocurrencies is allowing money to move like email and is not restricted by borders, and fewer middlemen.
International transactions are much more complicated than in-person transactions. Although it may seem simple to swipe your credit card to purchase a cup of coffee, the process behind the scenes can be complex and messy. These middlemen make huge profits by charging merchants fees, which they don’t typically receive until three days later. These fees are passed on to the consumer by merchants, which inflates the cost of goods and services. Because smaller transactions are less profitable, businesses are often required to establish minimum credit card amounts of $10. By allowing payments to flow instantly from the consumer to the merchant, cryptocurrencies eliminate all middlemen.
What’s the point?
Because cryptocurrencies are so different from the currencies we know, which are issued by governments and controlled banks, they can be difficult to grasp at first. They become more understandable when you look at the world our current system has created. 3 billion people do not need to be excluded by the financial system. Venezuelans do not need to use worthless government currency. You don’t have money to be limited by borders. Seven institutions are not required to buy a cup of coffee.
Although cryptocurrencies have the potential to address these problems, there is still much to do before we see any meaningful results. They are currently unstable and difficult to use in everyday transactions. Blockchain networks cannot handle the size of centralized systems such as Visa and Mastercard. The technology of cryptocurrencies is still in its early stages and it will take some time to rebuild the global financial system.
Some of the most brilliant minds in finance and tech have been drawn to the excitement and promise surrounding cryptocurrency. These innovative new technologies will continue to develop and integrate into our daily lives as more resources are available. When cryptocurrencies achieve their true value and potential, we will look back at the times when governments and banks monopolized money and wonder what the world was like before.