The Importance of Cryptocurrencies
Cryptocurrencies might not be the solution we expected but it's the right form of money we all need
The world is still evolving they say, and money with time has also evolved. From the use of beaver pelts to gold back issued currencies and the current standard of fiat currencies.
All these forms of money were accepted at one time because people trusted in them.
Fiat currency which is the current standard was initially captivating because of its economics, but over time its flaws became clear.
Issues ranging from privacy, lack of transparency, inflation, centralization of power with the government and banks plagued its usage.
One of the major highlights of these flaws was the hyperinflation in Zimbabwe which saw 100 trillion Zimbabwe dollars trading for 40 cents in USD.
Several possible solutions have been explored, but none has solved these issues until the emergence of CRYPTOCURRENCIES.
Note: Fiat currencies are currencies issued by the government like US dollar, Euro, Pounds, Naira, etc
What Are Cryptocurrencies?
Cryptocurrencies are digital currencies secured through cryptographic techniques on a public blockchain. They can be used as a means of exchange or an investment.
In the early '90s, some experimentations were made on cryptocurrencies, but they all failed due to economical and technical errors.
Not until 2008, when an anonymous figure with the pseudonym 'Satoshi Nakamuto' released a Whitepaper explaining a new digital currency called Bitcoin.
Through the wise combination of cryptographic techniques like hash functions, public/private key cryptography, peer-to-peer networking and a consensus mechanism, Bitcoin became a huge success.
Just the way fiat currencies was considered valuable because of the economics governing them, so also Bitcoin gained value because of the techniques (cryptoeconomics) Satoshi Nakamuto applied.
The success of bitcoin gave rise to the development of more innovative cryptocurrencies often referred to as alternative coins (altcoins).
A few of them include ETH, XRP, SOL, DOT, LTC, BCH, BTG, ZEC, DASH, etc.
How Do Cryptocurrencies Work?
In the normal traditional banking process, governments issue the currencies and banks act as intermediaries in providing people with this money.
The problem with this system is that the government control the systems most times with little or no transparency on their part and breach of privacy on the individual level.
People want to see how the money they trust is being used and issued.
Also, most persons are not comfortable with government/bank workers accessing personal information that might be sensitive to them.
The Crypto Way
Cryptocurrencies make use of consensus mechanisms to distribute decision making across several individuals in a network; Proof-Of-Work (POW) and Proof-Of-Stake (POS) being the most used.
It is through this process of consensus that transactions are validated and new currencies are brought into circulation.
This solves the problem of transparency and excess printing of money.
For transparency, every individual in the network has real-time access to the entire transaction flow without compromising privacy.
If printing money helped the economy, then counterfeiting should be legal
Brian Wesbury
Concerning the excess printing of money, cryptocurrency networks use algorithms that incentives people to maintain their ledgers by 'printing' new currencies to reward them.
This is the only way new currencies are 'printed', hence when transactions do not occur in the network, supply does not increase.
The maximum supply of some cryptocurrencies is also capped to ensure scarcity. An example is Bitcoin which has a maximum supply of 21 million.
What About Your Privacy?
The cost of privacy has always been high when transacting with fiat currencies.
To open a bank account, you are required to provide sensitive information such as age or even family background.
But with cryptocurrencies, you can decide to remain anonymous when transacting.
The requirement for sending and receiving cryptocurrencies are alphanumeric characters which are known as wallet addresses, and of course, having the currency you intend to spend.
Challenges Facing Cryptocurrencies
Ignorance
Cryptocurrencies in the past have been misunderstood to run like pyramid schemes or illegal businesses because of misconceptions surrounding their architecture.
People who don't take time to do enough research are often confused as crypto is still in its early years.
Such misconceptions are not surprising because new innovations often face this.
Well, reading this article already exempts you from such a category of persons.
Money Laundering & Illegal Activities
The privacy of cryptocurrencies has made them a target for money laundering and funding illegal activities.
However, the same privacy has enabled activists across the world to receive donations.
The #EndSARS protest of 2020 received donations in Bitcoin when the Nigerian government decided to freeze the bank accounts of most activists supporting the cause.
Fiat currencies are also used for most crimes under the radar.
Considering that they do not run on transparent system, no one can tell the billions that have gone into funding crimes and terrorist groups.
But for cryptocurrencies, their transparent nature has helped in tracking down criminals over the past years.
Volatility
This is one battle cryptocurrencies still face today. The price of Bitcoin has seen many ups and downs in the past few years.
Just in May recently Bitcoin dropped over 50% in price, and other cryptocurrencies followed suit because of their high correlation with Bitcoin.
This makes cryptocurrencies a poor choice for legal tender. But this can also be a good thing when the market goes in your direction.
Imagine getting paid 1BTC for your salary when it was $39,000, and two weeks later your 1BTC now reads $45,000. But the reverse can also be true.
User Errors
People are prone to make mistakes sometimes when transacting and the immutable nature of cryptocurrencies prevents any form of correction when transactions are made.
This calls for more carefulness when carrying out transactions.
Another problem is that rising from wallets - misplacing your paper wallets or forgetting your private keys results in the loss of your cryptocurrency forever regardless of the amount.
The alphanumeric long characters of private keys are hard to memorize.
Third-party wallets have since emerged to combat this limitation but they are prone to hacks also. This is why hardware wallets are the best, especially for long term hodlers.
Technical Errors
Cryptocurrency exchanges have been subject to series of hacks in the past because they don't run on blockchains.
Mt Gox, the largest crypto exchange as of 2013, declared bankruptcy in 2014 after a hack that saw over $450 million worth of Bitcoin stolen.
Hence, people are encouraged not to store their cryptocurrencies in an exchange wallet.
Since then, decentralized exchanges have been developed to reduce the need for centralized exchanges.
Conclusion
The Gartner Hype Cycle for cryptocurrencies shows that it's currently at the slope of enlightenment which indicates better days in the next few years.
Proper understanding is required at this stage to fully embrace cryptocurrencies and not miss out.
Fintech giants such as Square and PayPal are currently processing Bitcoin transactions. While El Salvador has made bitcoin legal tender.
Cryptocurrencies might not be the solution we expected but it's the right form of money we all need.
We have elected to put our money and faith in a mathematical framework that is free of politics and human error
Tyler Winklevoss