End of 2017: Cryptocurrency rises to the world as Bitcoin (BTC) explodes to a record price of $ 19,891. The media then grabbed the information creating a buzz around the oldest cryptocurrency. The image associated with blockchain is often mentally correlated with Bitcoin which itself continues to echo the Dark Web and money laundering in the general public perception. Let’s put things back in place for this article to demystify not cryptocurrency, but cryptocurrency.
To understand cryptocurrency you must first understand how our society works
For years now our company has been comforting itself in the system it has established. Indeed, banks are the pillars of our economy, embodying apparently essential trusted third parties. The latter’s entanglement with the state has become ubiquitous in our world.
But is our money really worth?
In 1971, Nixon decides to end the supremacy of the gold standard. The stated aim was to bring stability to the currency. However, this historic decision caused a backlash whose effects are regularly in the news and whose control has now become a central issue: inflation. Indeed, among other consequences of this decorrelation, the dollar has since no equivalent reflecting its fair value.
Since then, the miracle solution has boiled down to running the printing press at full capacity to meet the liquidity shortage, and the purchasing power of the population thus ends up suffering. The hyperinflation of Weimar Republic – although historically set in 1923, 48 years before Nixon’s decision – , is particularly representative of what could well threaten our current world: “a wheelbarrow of tickets to go buy bread”, a reality of the past but also a metaphor for the loss of purchasing power in recent years.
However, the arrival of the cryptocurrency and some blockchain, the platform on which it works, disrupt existing paradigms.
The genesis of the first blockchain, birth of Bitcoin
The banking and financial crisis of autumn 2008 shook the world at the same time Satoshi Nakamoto bought the domain name bitcoin.org. In 2009 the first block of the Bitcoin Blockchain was created. The creation of Bitcoin, the first of the cryptocurrencies, was an almost immediate response to the crisis. It is important to understand the will that animated Satoshi Nakamoto, the mysterious creator of Bitcoin.
Nakamoto therefore wanted an international and decentralized currency that everyone could use without discrimination and whose use would be completely transparent by its very nature. At this stage, in order to better understand the concept of cryptocurrency, it is important to define what a blockchain is.
A blockchain can be imaged as a representative a large immutable accounting register That is, none of the data contained in it can be corrupted or modified a posteriori. It’s a system peer to peer (peer-to-peer) where each person making up the network simultaneously ensures their security and the validity of transactions. Each user keeps track of all transactions. In order to confirm a new transaction, the different users check that all these “accounting books” correspond. The transactions are grouped together in blocks which in some ways represent the links of an immense chain that can be traced back to its creation.
At the same time, we are talking about consensus regarding how a block is valid. On the Bitcoin Blockchain, it is the so-called “proof of work” which is operated by the miners of the network allowing the validation and creation of a block.
Each new block has its own lock, it is only once the corresponding key is found that it can store transactions forever. When a network user finds the key they say he mined a block. In return for this operation, the miner (and most often today, the group of minors) is then rewarded and earns a certain amount of bitcoins created on this occasion. This block reward is not the only incentive for miners to work for the proper functioning of the network. In fact, minors also get a reward as part of the validation of each transaction that they validate and secure on the Bitcoin blockchain.
You will understand that cryptocurrency depends on and results from its Blockchain.
Bitcoin’s proof of work quickly encountered certain limits. Indeed this approach is energy consuming and only allows a limited number of instant transactions: 7 per second to be exact. As the number of users and transactions increases, solutions have emerged, the lightning network especially. Other consensuses such as Proof of Stake have also appeared, increasing the number of transactions / seconds. Proof of Stake is often seen as the future of the industry.
At this point, and if you are completely new to the subject, you might start to get a little confused by the many new concepts that need to be absorbed. As it is often easier to understand a new and exotic concept when compared to one already well known to everyone, the following should please you!
FIAT or crypto?
To concretize this concept which may seem abstract, let us now draw a parallel between Bitcoin and cryptocurrency and what is called FIAT which represents fiat currencies.
These are the dollar, the euro and generally all the currencies that are affiliated with a state. On the contrary, cryptocurrency is not affiliated with any state authority. It is therefore independent of geopolitical situations due to its decentralization. The only tangible factors that are able to generate price variations are supply and demand. By its decentralized and distributed nature, uCrypto-monetary currency sees its value primarily based on the trust that its community and users have in it.
The principle sounds simple, but perhaps it is this characteristic that alone makes cryptocurrency so revolutionary.
What is cryptocurrency used for? From Bitcoin (BTC) to Ethereum (ETH)
With Bitcoin’s scope of application having limits in its use cases, community members have submitted proposals to evolve the protocol. The best known of them is the young Vitalik Butterin Creator Ethereum.
Indeed, quite early in the young crypto history, Vitalik submits a project to the Bitcoin Foundation. This improvement is presented as likely to allow the execution of codes in the Bitcoin blockchain in order to automate certain types of transactions. Sadly, young Buterin opposes a rejection of his proposal by a conservative majority, which saw this innovation as the loss of the very essence of Bitcoin.
Convinced by his idea, Vitalik decides despite everything to develop his own blockchain. Ethereum was created in 2015 with its famous smart contracts which are computer protocols allowing the verification or / and the establishment of mutual contracts between several parties, so-called smart contracts.
From the birth of Ethereum, the use cases of cryptocurrencies are starting to multiply.
Many Dapps (Decentralized Applications) are born. These are decentralized applications using the Ethereum blockchain. Cryptocurrency is no longer just used for buying or selling it is now part of larger ecosystems and is being transformed into tools. It is now used for online games, social networks, marketplaces or decentralized finance platforms, making possible the recent emergence of the famous DeFi. At this point, it is important to understand that these Dapps do not directly use Ethereum cryptocurrency but can generate their own cryptocurrency through the use of a smart contract (smart contracts). In this context, the notion of cryptocurrency becomes a generic term which includes Ethereum itself (whose currency symbol is ETH) as much as the ERC-20 tokens which are generated thanks to the smart contract. As use cases increase, cryptocurrencies tend to move away from purely speculative models associated with their value. Companies such as ConsenSys notably propose to provide support and help in the development of Dapps on the Ethereum blockchain.
Some concrete examples of the use of Blockchain and cryptocurrencies
- Populations living in countries in political instability such as Venezuela sees the course of their currency, the Bolivar constantly strive towards zero. This hyperinflation has a considerable impact on the population, which sees its purchasing power diminish considerably from one day to the next. Cryptocurrency is very popular with these populations, who can now protect their purchasing power, by converting for example their Bolivar into stablecoin which is a cryptocurrency having for characteristic its stability and its absence of fluctuation.
- A Chinese winegrower is developing a blockchain in order to be able to trace all the stages of production and distribution of their high quality wine! We can therefore access all this information using a QR code.
- The world of video games could be overwhelmed by Blockchain technology and the use of cryptocurrency as for the Sand Box project which is a metaverse where you can buy a piece of land in order to personalize the gaming experience.
- Axa insurance with its fizzy platform works on the Ethereum Blockchain. It allowed its subscribers to be reimbursed instantly when the plane was more than 2 hours late. To do this, the smart contract is connected to global air traffic databases to be able to observe aircraft delays directly.
We hope that by now you will have a clearer vision of what cryptocurrency is and how blockchain is already present in our daily lives. Satoshi Nakamoto’s vision of providing a universal currency that makes all humans equal is still in its infancy …
Freelance artist who became passionate about Blockchain. I explore this vast universe a little more every day with a penchant for DeFi.
Also I like sushi pools and chopsticks! (ps: this is not investment advice)