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What Are Cryptocurrencies, And Why Do You Need Them?

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2022-05-23
What Are Cryptocurrencies, And Why Do You Need Them?

Cryptocurrencies are digital currencies secured by cryptography and blockchain technology to prevent double-spending and tampering. Okay, so why do we have to go through all the trouble to use digital currencies? This question will open a whole can of worms.

It is best to understand cryptocurrencies through the OG, Bitcoin. We had an article detailed how Bitcoin works, so let’s do a short recap here.

Bitcoin was initially designed as a peer-to-peer electronic cash system that is decentralized, transparent, and immutable. Why are we so fond of Bitcoin and treat it as a store of value, like gold?

IT IS IMMUTABLE; TRUST THE TECH

Bitcoin is built upon blockchain, and blockchain is inherently immutable. Blockchain is a database storing data blocks chronologically where one block is linked after another using cryptography.

If they want to alter the data in a block, they will have to rewrite the entire data strain in the blockchain.

The Bitcoin network utilizes this technology to store immutable transaction records. Therefore, in the world of crypto, we do not entrust a third party to execute our transactions on our behalf. Instead, we trust the protocol to maintain transactions for us. No manual error; No human tampering; No middleman.

NO ONE CAN STOP YOU FROM USING IT

On top of its immutability, the Bitcoin network is also decentralized, where no single authority has the right to issue it or prohibit one’s usage of it.

How decentralized is it, you ask? The Bitcoin network is secured by multiple nodes simultaneously across different geographic locations and in the hands of different individuals. Therefore, no one could tamper with the transaction records of Bitcoin.

That is why, unlike a bank that could freeze your savings to look for “suspicious activities,” no one could stop you from receiving and sending Bitcoin. Since Bitcoin is a digital coin without a physical form, you could send receive it across the world via your smart devices without the need for intermediaries.

IT HOLDS VALUE, UNLIKE FIAT

In our modern society, the idea of money revolves around using fiat currency, which is a representation of value, to exchange goods and services. The problem is that the supply of fiat currency is increasing exponentially, which means the same 1 dollar in your hand will not carry the exact value of 1-dollar next year.

People treat Bitcoin as a store of value because it has a finite supply of 21 million BTC. Only so many BTC could be ever mined into circulation. The scarcity and usage made Bitcoin the “Digital Gold” in the eyes of many.

Although not every cryptocurrency has a finite supply, the inflation rate and supply in circulation are often taken very seriously in the realm of crypto.

Other cryptocurrencies have alternate, practical mechanisms to counter inflation, such as Burning, making fiat currency look like money created in thin air.

Moreover, the security and value of the Bitcoin network only grow over time as the network expands. With more nodes joining the network, it is harder for bad actors to tamper with the data as every network change should have the majority consent of the network.

In other words, more decentralized; more secure.

With its value and decentralized feature, no one could stop you from sending and receiving cryptocurrency in exchange for goods and services in this world. That is also why Bitcoin is called the “Sound Money”.


INSTITUTION IS BUYING IN

If you are reading this article, you have already heard of some giant institution going into the crypto space, and they are not wrong. More leaders in different industries have been jumping into the crypto space recently.

Not only banks and institutions are thinking of ways to connect with crypto, but countries are also struggling to get in too.

Countries with more lenient regulation on crypto are winning the tug-of-war of talent population as there is a talent vacuum in the crypto industry. Some countries go as far as considering Bitcoin as legal tender.

In summary, cryptocurrencies started to receive massive adoption, and we know the sky is the limit from here.

BEYOND BITCOIN

It is hard to believe, but there is more to cryptocurrency than Bitcoin. Every crypto aside from Bitcoin is called “Altcoin,” and the greatest altcoin of all is Ethereum.

Ethereum has something a little more than Bitcoin, called Smart Contract. Smart Contract is a program on blockchain that will execute automatically when certain predetermined conditions are met. This feature transformed blockchain from a mere ledger of transaction records to a virtual computer. That is why Ethereum is also known as the Ethereum Virtual Machine.

Alright, it is a virtual computer, now what? Well, it is everything. Smart contracts enable blockchain to push a database into a machine that could execute predetermined commands. Many buzzwords we heard in the crypto space like Defi, Dapp, and DAO all required smart contracts.

DAPP

If smart contracts had made blockchain a virtual computer, naturally, developers could program new applications on top of it. Spoiler alert, they did, and it is called Dapp, which stands for decentralized applications.

The unique property of blockchain also applies to Dapps, such as transparency, decentralization, etc.

On the surface, Dapps are no different from regular applications, but a typical application run by a centralized authority could take control over all the data without you knowing it.

However, Dapps are not run by a centralized authority, and most of them are open-sourced, which means you are not using the Web3.0 app in expends of your privacy, unlike every app you are using in Web2.0.


DEFI

Decentralized finance, also known as Defi, revolutionized how people perceive finance. Banks and financial institutions had a strong oligopoly over financial services, such as borrowing, lending, and investing. By holding a tight grip on financial services, they could harvest tremendous gains.

Since smart contracts are known for cutting out the middlemen, which is the bank in the case of finance, financial activity is much more profitable for common men like you and me.

Gone the day where 5% interest rate is considered a great deal, many defi projects could easily offer over 10% interest rate when you lend your crypto to the platform. They could offer this rate simply because there is no third party to steal a slice from the pie.

DAO

Smart Contracts also enable the possibility of DAO. DAO, also known as Decentralized Autonomous Organization, enables stakeholders to participate in the decision-making of an organization through holding its governance token.

Like buying stocks of a company, the only difference between a DAO and a regular company is that the smart contract will execute the command when the DAO has reached a consensus.

Therefore, DAO could execute changes automatically, which are transparent to everyone and save tons of expenses like labor costs. In fact, many Defi and Dapp projects on the blockchain are running in the form of DAOs.

NFT AND METAVERSE

Finally, aside from smart contracts and the benefit they bring, cryptocurrencies also got us NFTs!

We have lived in this digital embedded world since the birth of computers and the internet for decades, yet we haven’t found our way to digital ownership until we have non-fungible tokens (NFTs).

NFT had taken the world by storm, and it has the reason to. NFT is a non-interchangeable unit of data stored on the blockchain. Essentially, you could finally own the data.

Combining the grand vision of Metaverse people cannot stop talking about, NFTs will play an essential role in the future.

All and all, cryptocurrencies are disruptive and innovative; they have proven themselves by changing people’s perceptions of the world.

People will survive as a no-coiner now; how about the future?

Disclaimer:

This is not financial advice and cannot be treated as such. Please consult a professional financial adviser before investing any digital assets and do your due diligence before any investment regarding cryptocurrency as it is highly volatile.