A digital currency (or cryptocurrency) is a decentralised virtual money that, via the use of a blockchain and a cryptographic system, enables safe, verifiable, and auditable transactions.
After the 2008 subprime mortgage crisis, Satoshi Nakamoto invented the first cryptocurrency, BTC, as a protest against the monetary practises of central banks. In fact, unlike fiat currencies such as the U.S. dollar or the euro, which are issued by an institution such as a central bank, these new currencies (which are still still more digital assets than currencies strictly speaking in the payment sense) are not controlled.
Their worth not being legal cash, they are not guaranteed. These digital currencies are not backed by any physical medium (such as euro banknotes), and they may be held in a digital wallet (wallet), which consists of a public key that other users can use to send you money and a private key that only you know. For further protection, it is also feasible to store crypto-assets on a physical media, such as a Ledger key, which enables offline storage.
How does a blockchain function?
The blockchain (which literally translates to “chain of blocks”) is analogous to a public ledger listing all completed transactions.
In particular, this enables anybody who desires to do so to review any or all completed transactions. A block is produced to contain the information pertaining to completed transactions. This block contains a fingerprint of every transaction in the preceding block. Additionally, its storage capacity is restricted.
When this storage capacity is achieved, a new block containing the details of new transactions and a fingerprint of the preceding block is generated. With this architecture, it is impossible to edit the blockchain’s history at the block level, since the set of subsequent blocks includes a record of the prior blocks.
For the blockchain to function, new blocks must be generated. For this purpose, there is a consensus that may vary amongst blockchains.
The several consensuses that exist today include “Proof of Work” (PoW, the most well-known), “Proof of Stake” (PoS), as well as “Delegate Proof of Stake” (DPoS), “Proof of Authority” (PoA), and “Proof of History” (PoH) (PoH).
Proof of Work
Bitcoin makes use of Proof of Work. This is achieved via rivalry among miners (block creators). The first miner to solve a mathematical challenge set by the blockchain gains the privilege to generate the next block.
To tackle this issue, miners need a great deal of computational power. Therefore, the miner with the most powerful computational capability has the greatest chance of winning the tournament.
However, the usage of such computational capacity incurs considerable expenses for miners (cost of equipment, energy), necessitating the implementation of an incentive mechanism.
When establishing a new BTC block, miners are paid with transaction fees and a set number of BTC, which is now 6.25 BTC. This incentive is half every time Bitcoin is halved, which happens usually every four years.
Proof of Stake
Ethereum wants to go from Proof of Work consensus to Proof of Stake consensus with its 2.0 upgrade draught.
With this consensus, validators “stake” (block their electronic money), allowing them to participate in the generation of a new block. The selection of validators is arbitrary and dependent on the quantity of cryptocurrency staked.
The more cryptocurrency a validator wagers, the more likely he is to be chosen to produce a new block. This may be problematic, though, if the validator is offline when it is chosen. Indeed, this would render the network inoperable.
Delegate Proof of Stake
The “Delegate Proof of Stake” resolves the “Proof of Stake” issue.
Notably, the EOS blockchain employs this consensus. In practise, the holders of a cryptocurrency choose, by a vote, the validators who will be the only ones allowed to validate blocks. In return for their election, the validators will divide the collected fees to all voters.
Despite being one of the most powerful consensus mechanisms available today, this system has several drawbacks. In fact, validators may determine the degree of redistributed rewards; hence, voters are motivated to choose validators with the greatest rate of redistribution.
Proof of Authority
The “Proof of Authority” is comparable to the “Delegate Proof of Stake,” except there are only a predetermined, restricted number of validators.
It is more appropriate since there is better control with this method, but it is also a flaw because this centralization goes against the blockchain’s core concept, which is decentralisation.
Smart contracts enable the automated execution of a transaction based on predetermined conditions.
Through blockchains, smart contracts are a vital aspect of the bitcoin ecosystem. The automation of smart contracts provides not only time savings but also assurance that the contract will be executed when the requirements are satisfied. Certain industries, such as insurance, are already moving in this direction by automatically rewarding a client if the contract terms stated on the blockchain are satisfied.
Nevertheless, there is still an issue at this level.
In fact, smart contracts developed on one blockchain do not communicate with data on another blockchain (for example, a smart contract created on the Ethereum blockchain will not access the information published on the Solana blockchain). Through the use of parachains, the Polkadot project teams intend to overcome this issue and make the various blockchains compatible.
The universe of digital currencies
In the modern world of cryptocurrencies, it is possible to categorise the whole market. Among the most prominent are DeFi (decentralised finance), DApp platforms (decentralised apps), DEXs (decentralised exchange platforms), the Web3 universe, and Metaverse.
Decentralized Finance is a revolution that is primarily directed at the present centralised financial system.
Using smart contracts, the DeFi universe enables two people to lend and borrow money from one another under predetermined circumstances and without the need for a middleman. On a broader scale, this enables people to lend their cash (in this case, their crypto-assets) directly to the market and earn interest, as well as allowing other persons to borrow tokens with interest.
Numerous DeFi systems, notably Aave and MakerDAO, have been created. To borrow liquidity using centralised finance, however, it is required to give collateral (such as BTC or ETH, or even stablecoins such as USDT or DAI) as collateral.
These are the DEXs
Decentralized exchanges are digital currency exchange platforms similar to ones we are familiar with (such as Binance or Kraken), but they have the benefit of being decentralised and consequently independent of a central authority, as their name indicates. These let you to “switch” (i.e., trade) a cryptocurrency you own for one of your choosing. If you want to conduct a trade between two obscure cryptocurrencies, it may seem difficult or even impossible to locate the pair in question. Part of the DEX’s function is to make the required transactions on your behalf, establishing the shortest or cheapest route for you to complete the transaction.
A DApp platform is first and foremost an open-source blockchain network that enables the construction of several decentralised apps in diverse industries, including as insurance, real estate, and financial services, and whose operation is based on smart contracts. These many platforms attempt to enable as many individuals as possible to build and interact with these apps rapidly and reliably.
Among these ecosystems, Ethereum is the platform that currently hosts the most decentralised applications (DApps). Avalanche is a second ecosystem that focuses on execution speed, while Solana is an open-source project that emphasises scalability.
Web3 is the third generation of the internet.
In contrast to Web 1.0, which only permits access to information, and Web 2.0 (current web), in which it is also possible to share information, particularly through social networks, but where power is centralised by the digital giants, Web3 tends to give users more control through the blockchain, by creating decentralised infrastructures and thus returning power to application users.
This Web3 is being developed by many projects, including The Graph and Polkadot.
Inspiring initiatives like as the Brave browser and associated token, the Basic Attention Token, have also developed (BAT). On this browser, the user gets rewarded in BAT for viewing all adverts.
As its name implies, therefore, the user gets compensated for his attention, or more accurately, his time (while in Web 2.0, it is only the sites broadcasting the advertisements that receive remuneration). Audius (and its Audio currency) is a decentralised music streaming project that aims to eliminate all middlemen between musicians and the audience and facilitate a more equitable division of the revenue earned by artists. Artists will also be able to provide members special stuff.
The metaverse may be characterised as a virtual environment or a network of virtual worlds in which avatars can interact in real time.
According to the concept, the metaverse will be a virtual universe resembling the real world, in which users will be able to move freely, work, do a variety of activities, play, attend a concert, and many others, all while using a VR headset and other sensory technologies, and doing so from the comfort of their own homes.
Multiple initiatives are under work to build metaverses:
- The Decentraland project (and its MANA token) promises to create a virtual reality platform where users can purchase land parcels that they can then develop and monetise as they see fit.
- The Play Area (and its SAND token)
- Axie Infinity (and its token AXS) is a “play-to-earn” game that enables you to gather and battle little creatures known as Axies in exchange for prizes upon victory.
These monsters are NFT cards, enabling Axies players to resell them on the market.
In recent months, the sector has seen enormous uptake, particularly from developing nations.
These nations are especially interested in cryptocurrencies as a potential hedge against rising inflation. El Salvador has likewise voted to use Bitcoin as legal money. In addition, institutional and individual investors participating in conventional financial markets exhibit great interest in this market’s expansion.
This increasing use further strengthens the link between financial assets and cryptographic assets, since the price of cryptocurrencies plummeted substantially at the outbreak’s onset. Some political personalities have declared that they are now being compensated in Bitcoin. Cryptocurrencies, and Bitcoin in particular, seem to be attracting an increasing number of political figures, with some announcing that they are now being paid in BTC.
Under addition, there are initiatives in progress, such as the European Central Bank’s (ECB) plan to introduce the digital euro. Facebook has abandoned its attempts to launch its own stable cryptocurrency, Diem (previously Libra).
However, monetary policies and the infusion of liquidity poured into the market to counteract the economic ramifications of the epidemic seem to validate the why and how of the production of Bitcoin, the number of which cannot surpass 21 million units.