Now that we have a basic understanding of blockchain technology, it’s time to explore how it can be used in your everyday life. (Be sure to read our Basics of Blockchain article if you have not done so!) One of the most common use cases for blockchain technology is cryptocurrency (a.k.a. crypto). The terms cryptocurrency and Bitcoin have become buzzwords in recent years. Most newbies to the decentralized space have probably heard these terms but don’t have a solid understanding of them, so let’s examine what exactly cryptocurrency is and why we should care about it.
Cryptocurrency is a 100% digital currency exchanged directly between users, without a third-party intermediary such as a bank or financial institution. Cryptocurrency allows for the global exchange of funds, quickly and 24/7, for little to negligible fees(most of the time). Gone are the days of having to wait for the “next business” day or pay an excessive amount to have a wire transfer completed. Most cryptos are referred to as “coins” or “tokens,” however, there are no tangible items such as paper money or actual coins. This piece can be challenging to wrap one’s head around since most people are accustomed to traditional money exchange such as USD (US dollars). Luckily, since the inception of crypto a little over a decade ago, the US and many other countries have moved further in the direction of a “cashless” society, so in my opinion, the adoption of 100% digital currencies is becoming less foreign, especially for younger generations.
What’s Required to Buy, Sell, & Store Crypto
To use cryptocurrency, you need access to the internet, and you must have a wallet, but it’s not the typical trifold kind that comes to mind. In the simplest of terms, crypto wallets allow you to send and receive cryptocurrency as well as store your cryptocurrency. Wallets also store encryption keys that confirm the user’s identity and links them to their cryptocurrency. These keys are long and individualized. You always want to triple-check the encryption keys involved in each transaction, as once the cryptocurrency is sent, it cannot be reversed. Getting just one digit wrong will send the coins to the wrong recipient!
There are a variety of wallets available. They can be soft (digital) or hard (a physical device), all of which have varying benefits and drawbacks. Keep an eye out for our next post for a deep dive into cryptocurrency wallets.
With each transaction, a “gas fee” is paid. The cost of gas fees vary based on the coin’s market value at the time of the transaction, volume of transactions at a particular time, etc, and is used to compensate the miners who verify the transactions on the blockchain. Gas fees are typically paid in the blockchain’s native currency. These fees are generally (sometimes, not always) less than those charged by traditional financial institutions and can be so minor that they are basically negligible. Some of the lower gas fees equate to a fraction of 1 cent in USD.
Benefits of Cryptocurrency
As we discussed in the Basics of Blockchain, because (almost all) cryptocurrency transactions are recorded on a blockchain, inherent benefits come with its use. There are a few cryptocurrencies not on a blockchain, but the vast majority are “on-chain.” Some cryptos have their own native or dedicated blockchain built specifically for its use (i.e., Bitcoin and Ethereum). Many blockchains host cryptocurrencies other than their own native crypto as well. Now, let’s review those benefits:
- Trustless- No trust in third-party institutions is needed since transactions occur directly between users.
- Permissionless- Everyone can participate and send or receive crypto as they see fit. There is no third-party institution that transactions go through, so there is no such thing as freezing accounts or activity.
- Secure- Transactions are verified and recorded on the blockchain, increasing the system’s security. The hacking of well-operated blockchains is nearly impossible.
- Private- Encryption keys are used to verify recipients’ identities rather than personal information traditionally required to send or receive currency. Therefore, participants can remain as anonymous as they’d like.
- Global reach & increased access- Money can be sent and received quickly, across borders. Cryptocurrency removes the barriers encountered by groups that traditional financial institutions underserve.
Potential Drawbacks of Cryptocurrency
- Market Volatility- The cryptocurrency market can be volatile, which, as you would expect, is great when prices are going up but not so awesome if prices fall.
- Government Regulation- To this point, most governments don’t know how to approach cryptocurrency. Many in the space think this is a good thing, but there is also the chance that future attempts at regulation will significantly change or hinder how the systems operate.
- Environmental Impact- The nodes (computers) that keep the blockchains up and running consume tremendous amounts of energy. It’s safe to say this was an unforeseen consequence of cryptocurrency. The good news is there is movement being made by many to reduce the environmental impact of current and future coins.
How Many Cryptocurrencies Exist?
Bitcoin, the O.G. cryptocurrency, was created by Satoshi Nakamoto in 2009 with the establishment of blockchain technology. Bitcoin has become somewhat of a household name, which is fantastic, but there are many more options called “altcoins,” with new coins popping up almost daily. Just how many altcoins exist? According to https://coinmarketcap.com/ as of July 20, 2022 there are greater than 20,000 cryptocurrencies in existence. This estimate will continue fluctuating, with coins coming onto the market and dropping off rather frequently. With that said, there is a group of coins that have been on the scene for quite some time. Also of note, there are several types of cryptocurrencies with varying utility. (We will explore the types of cryptocurrencies in a future post). Here is a graphic from NerdWallet that discusses some of the most widely circulated coins:
The question on everyone’s mind is, “Will cryptocurrencies take over as the primary currency exchange in the future?” Time will undoubtedly tell.
We’ve just begun to scratch the surface and will explore other cryptocurrency topics in the future. Next up is a deep dive into wallets!
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Want to read Satoshi Nakamoto’s Bitcoin white paper? View it here: https://bitcoin.org/bitcoin.pdf
The content is for informational purposes only. Nothing contained in this article constitutes a solicitation, recommendation, endorsement, or offer of a security, token, or application. This is not investment or legal advice. Please do your own research.