Why do we need cryptocurrencies?

The history of cryptocurrency

Cryptocurrency is a digital currency protected by cryptographic technologies. These monetary units do not have a physical analog, they exist only in virtual space. The term "cryptocurrency" came into use after the publication of an article about the first cryptocurrency - Bitcoin.

Its main principles are anonymity for all participants, protection from fraud, and independence from regulatory organizations.

The Bitcoin network consists of interconnected blocks of transactions. Each subsequent block contains information about the previous one. You can build them into a single chain and get information about all previous transactions (but not about the owners of Bitcoins). The process of creating new blocks is called mining. For the next block to appear on the network, it is necessary to generate a cryptographic signature for it. As a reward, you get new Bitcoins. By the way, their emission is not an endless process. It is known in advance that no more than 21 million Bitcoins can be created in total.

At first, it was relatively easy to create blocks, and single miners coped with this. Over time, the complexity grew, and mining required solid computing power, so miners began to join pools and mine new bitcoins together.

Now Bitcoin is one of the most sought-after, reliable, and expensive coins in the world. It was created by a man under the pseudonym Satoshi Nakamoto in 2009. A year earlier, he described the principles of the program and developed an internet protocol for it. Shortly after the launch, Nakamoto created the first Bitcoin wallets and left the project, leaving 1 million Bitcoins in his account, which remain untouched.

As soon as Bitcoin appeared in circulation, his course was constantly changing. For example, in 2010, American Laszlo Hanyecz bought 2 pizzas for 10 thousand Bitcoins - this was the first exchange of virtual money for a real object. A few years later, the exchange rate of the electronic currency rose to $ 1,000 per unit, and as of the time of this writing on September 18th, 2024, one Bitcoin costs $60.500.

How does cryptocurrency work?

Bitcoin is freely exchanged for other cryptocurrencies or fiat currencies. It is also traded on specialized cryptocurrency exchanges such as Bitfinex, Poloniex, Kraken, Coinbase, or Bitstamp. All these platforms help users store their cryptocurrencies, and some of them even offer convenient mobile wallets for wearable devices (smartphones, tablets) that can be linked to an account.

But Bitcoin is not the only cryptocurrency. There are now more than 1,000 different cryptographic tokens on the market, which, like Bitcoin, are based on blockchain technology. In total, the cryptocurrency market is estimated at $150 billion. Half of this capitalization is accounted for by the first cryptocurrency — Bitcoin.

Cryptocurrencies are a kind of alternative currency and digital currency. Unlike multiple electronic money and financial instruments, cryptocurrencies are decentralized, so they are not controlled by the government of any state or organization. Cryptocurrencies are also a onetime tool (peer-to-peer or P2P), which allows individual users to buy and sell goods to each other directly, without the mediation of third-party organizations such as, for example, large banks. Some cryptocurrencies are anonymous.

If we look at the main cryptocurrencies, we will find that they all share a set of basic technologies and concepts that allow us to take responsibility (i.e. organize payment services) and track transactions between banks and users.

Transaction speed - that is one of the many problems that cryptocurrency seeks to solve. Transaction processing time plays a very important role when sending a payment.
Transaction costs - each operation has a set gas cost, and the total gas cost of a transaction is the sum of the gas costs of all its operations. In terms of transaction costs, cryptocurrencies are better than fiat, and their inflationary costs are either already lower or will be lower. Therefore, Bitcoin and Ethereum are a much cheaper and more efficient form of money than the American dollar.
Accessibility - the advantages of cryptocurrency include the availability of cryptocurrency–electronic money is available at any time. It is impossible to freeze the account or withdraw the cryptocurrency. You can check the validity of the performed operations at any time.
Privacy and security - cryptocurrencies provide anonymity and privacy, which makes them attractive to those who want to keep their financial transactions confidential. The very nature of the blockchain (a continuous chain of blocks that cannot be corrected, a distributed network with complete duplication of information on nodes) guarantees the security and impossibility of intruders interfering in any operations already carried out.
Transparency - cryptocurrencies are digital assets that operate on blockchain technology, which guarantees decentralization and transparency of operations.
Diversification - helps to evenly distribute risks across the entire portfolio and not go into deep negative if some asset becomes much cheaper. Placing investments in cryptocurrency on various tokens, coins or blockchain projects is a smart way to balance risk and reward.
Inflation protection - cryptocurrency as a tool to protect against inflation is used by many participants in the crypto market. Using cryptocurrencies to protect against inflation can be incredibly fruitful and profitable, as some cryptocurrencies are credited with the property of protecting capital from inflation of fiat currencies.

Crypto wallets

Unlike the money we are used to, cryptocurrencies are not stored in our usual bank accounts. Instead, cryptocurrency users use special software and/or hardware wallets. Each such wallet contains a unique cryptographic key that allows the owner to access their savings, which are stored within the public blockchain.

Electronic cryptocurrency wallets can be linked to the blockchain to ensure that their balance is true, and new transactions are verified using data in the block chain to ensure that each of them is real and was produced by a cryptocurrency that belongs to the payer (or his wallet).

Wallets can be either "hot" — that is, placed somewhere on the Internet as part of an online service (for example, Coinbase or Xapo), or "cold" - cryptocurrency is stored without access to the network. A "cold" wallet is a file on a computer, the loss of which will result in the irretrievable loss of access to the wallet and the cryptocurrency inside it. The file can be placed in any storage: on a hard disk, or removable media, and some startups even offer to buy a physical keychain wallet, access to which is additionally protected by a user PIN code.

Blockchain

To better understand the structure of cryptocurrencies and how they differ from fiat money, first, you should understand the main mechanism of operation of coins — the blockchain.

A blockchain is a chain of blocks with transaction records that are interconnected and secured using cryptography. Each block contains its unique cryptographic identifier, which indicates (binds) it with the previous block of the chain.

After being added to the blockchain, the blocks can no longer be changed without losing data about the entire subsequent chain, which immediately lets other users know that third-party interference has been committed to circumvent the rules. This makes it possible to simply refuse to use the modified version of the chain (because, without recognition of the modified block by most of the participants, it is useless) and continue working with the original branch.

Here is the mechanism of the blockchain technology:

1. User A sends money to user B;

2. the transaction is "processed" in the blockchain as a block of information;

3. each user of the blockchain receives a notification about the appearance of a new block;

4. most users approve of adding a block to the chain;

5. the block is added to the chain. In this form, it can no longer be changed or deleted from the blockchain;

6. the transaction is executed, and user B receives his money.

The additional security of the blockchain system is provided by the principles of cryptography. All transactions take place thanks to a sophisticated system of exchanging encrypted keys and electronic signatures that confirm that the transaction has not been forged.

It is possible to bypass such algorithms, but this will require huge computing power, which is currently inaccessible to mankind. According to scientists, full-fledged quantum computers can theoretically cope with this task, but now there are only small prototypes of them. Even according to the most optimistic forecasts, cryptocurrency lovers can sleep peacefully for at least another 30 years.

The blocks are interconnected using the same cryptography, as well as the generation of unique indicators that compress information in a special way for each of the subsequent links.

With each new element of the chain, information is compressed more and more, which is why an "avalanche effect" is formed. This is the reason why mining cryptocurrencies is becoming more expensive every year.

Another reason why the blockchain is so difficult to crack is that most users must accept changes in blocks. When trying to make changes to one of the links, all participants in the blockchain immediately receive a notification about it and decide what to do.

When you make a bank transfer or any transaction, your issuing bank does not immediately take money from your account and transfer it to the recipient's account. The bank simply stores information about the payment in its database for as long as it needs and is convenient. Only the balance on your bank account and, possibly, the recipient's balance changes instantly. Money is now moving according to the principle of changing records in databases, and not physical.

For the cryptocurrency to function independently of any centralized intermediary, all participants in the process must have a way to record and store financial transactions to eliminate the problem of double debiting, which allows you to pay twice with the same cryptographic token, to "buy" goods for twice the amount available. The problem should be solved without using some kind of central server and database, as is done in banks.

Cryptocurrency Mining

Cryptocurrency mining refers to the addition of new blocks to the blockchain chain. To reach a consensus on which transaction blocks should be added to the block chain and to banally create these data blocks, some users participate in the so-called mining process.

These so-called miners use the computing power of their equipment to perform more and more complex mathematical calculations to "prove the job is done." Proof-of-work is one form of economic regulation of the blockchain. It was invented to prevent various attacks using computing power, such as fake records, transaction failures, spam, and so on.

This process is difficult and requires huge computing power. Mining is the solution of complex mathematical calculations with the help of your equipment. Moreover, every year, the tasks become more difficult, and the required capacities increase, which makes it almost impossible to mine tokens at home. This is especially true for popular cryptocurrencies.

A standard mining farm looks like this - a guarded, well-ventilated room in which there are system units with a large number of video cards and coolers for cooling them. There must also be a backup power supply for uninterrupted network operation.

Industrial mining still exists, but it is expensive and takes a long time to pay off. Since effective mining is now an extremely expensive event (if we are talking about "basic" cryptocurrencies, for example, Bitcoin), an individual cannot start adding his blocks bypassing the rules without the approval of the entire network. Others simply don't recognize them as real.

Types of cryptocurrencies

Blockchain technology allows to create an infinite types of cryptocurrencies, but not every cryptocurrency is interesting for miners and investors.

The main requirement for any token that wants to claim any kind of demand is the presence of a developed network. If there is a reliable team behind the cryptocurrency that develops a sought-after product and constantly supports it, the chances of failure are almost zero.

In addition, the cost of electronic money is influenced by:

total number of currency units;
the number of currency units in circulation;
demand for and distribution of coins;
news.

At the moment, there are a huge number of cryptocurrencies, while the top 10 occupy about 90% of the market, and the share of Bitcoin in it is almost 50%. The remaining part consists mainly of "soap bubbles" or simply electronic financial pyramids, which can collapse at any moment.

Top 10 Cryptocurrencies Based on Their Market Capitalization:

1. Bitcoin (BTC). Market cap: $1.1 trillion. Year-over-year return: 122%.

2. Ethereum (ETH). Market cap: $281.9 billion. Year-over-year return: 47%.

3. Tether (USDT). Market cap: $118.4 billion. Year-over-year return: 0%.

4. Binance Coin (BNB). Market cap: $75.8 billion. Year-over-year return: 150%.

5. Solana (SOL). Market cap: $62.6 billion. Year-over-year return: 654%.

6. U.S. Dollar Coin (USDC). Market cap: $35.2 billion. Year-over-year return: 0%.

7. XRP (XRP). Market cap: $30.3 billion. Year-over-year return: 13%.

8. Dogecoin (DOGE). Market cap: $15.0 billion. Year-over-year return: 70%.

9. Toncoin (TON). Market cap: $13.3 billion. Year-over-year return: 211%.

10. TRON (TRX). Market cap: $13.2 billion. Year-over-year return: 96%.

Altcoins

The Ethereum cryptocurrency, founded by Gavin Wood and our compatriot Vitalik Buterin in 2015, deserves special attention. Unlike Bitcoin, Ether is not only an electronic currency but also a whole platform for creating new online services based on the blockchain using smart contracts.

This technology allows you to automatically transfer assets between the parties if certain conditions are met. Smart contracts can become one of the most important tools of blockchain platforms, as they potentially provide much greater security compared to traditional contracts and reduce transaction costs.

NFT

An NFT is a digital asset that represents real-world objects like art, music, in-game items, and videos. The most popular NFTs exist on the Ethereum blockchain.

NFT (non-fungible token) or non-—interchangeable token is one of the newest types of electronic assets, the main difference of which is its uniqueness. If, for example, there can be up to 21 million of the same Bitcoin units, then each NFT token can exist only in a single copy.

Because of this feature, NFT is used to create electronic copies of unique items, as if transferring them to the blockchain. All transactions with tokens take place in it.

Copies are mostly in the format of pictures, videos, music, and GIFs, and they are sold and bought through special auctions. NFT tokens are widely distributed among collectors, gamers, and art lovers.

Initially, this type of token appeared as a way of earning money for creators of electronic content, but now its main function is to monetize popularity.

Celebrities can sell anything in the NFT format and earn a lot of money from it. For example, Twitter founder Jack Dorsey sold his first message on the site for $3 million in NFT format. And the Grimes singer created her collection of tokens, which were sold for $5 million.

Stablecoins

This type of digital currency is linked to tangible assets such as oil, gold, and dollars. If the exchange rate of the same Bitcoin jumps several times a day, then the quotes of stablecoins almost do not change, as their name suggests.

Stablecoins are great for those who want to transfer their money digitally with minimal risks. Or, on the contrary, it is safe to take them out of the country, if there are almost no other ways left. Currently, there are more than 1,000 different tokens on the cryptocurrency market, with a total capitalization of more than $2 trillion.

Summing up, it can be noted that, at the moment, cryptocurrencies are in an ambiguous position. Many are afraid to invest money in them because they do not understand how coins work.

Technical difficulties in introducing cryptocurrencies into business operations are also causing great difficulties, as well as the fact that they are almost not regulated by legal legislation.

In addition, not everything is so clear with electronic money and with the prospect of investment. This is potentially one of the most profitable earning tools, but it is almost impossible to predict it.

On the other hand, the cryptocurrency market is actively developing, and every year new platforms and opportunities for the development of electronic money appear. This is not to mention the fact that countries are starting to take cryptocurrencies more seriously, trying to introduce them into their economies.

Why do we need cryptocurrencies?

As mentioned before, cryptocurrency has several significant advantages. Firstly, cryptocurrency is not afraid of inflation. If the printing press goes crazy and stamps a frenzied amount of fiat money, it is logical that this money will become worthless. While with Bitcoins, such a situation is excluded: remember that their number is known in advance and limited.

Another advantage is decentralization. There is no single center from which the system is managed, so it is extremely difficult to disrupt the operation of this system by forcibly restricting the distribution of currency. The network simply does not have a single owner, it is controlled by users all over the world.

The next advantage is anonymity. It is possible to track transactions and see how many Bitcoins have moved from one wallet to another, but it is not so easy to determine who exactly is the owner of the wallet. Anyone can open a Bitcoin account. For this, you need the appropriate software and access to the Network.

Why use cryptocurrencies?

Because of their accessibility, immutability, low transaction fees, and, potentially, high speed (coupled with anonymity, if necessary), cryptocurrencies have more and more new applications almost every day. We have yet to find out what this technology is capable of. With thousands of small businesses, large corporations, and entire states entering this market, it is only a matter of time before cryptocurrencies become the new standard for financial transactions.

But even though the benefits of using cryptocurrencies are obvious, there are still serious obstacles to their mass adoption. First, this is a low level of awareness and misunderstanding of the technology by the general public, the lack of regulatory documentation for cryptocurrency transactions and smart contracts, the unclear legal status of cryptocurrencies, technical problems, etc.

In several countries, all these legal difficulties have already been partially resolved, but the technical complexity of integrating blockchain solutions and the lack of business-oriented products are still the main obstacles to the implementation of cryptocurrencies in business economic activities.

Conclusion

Cryptocurrencies are no longer a curiosity, but a very profitable industry that has challenged the traditional banking system. It is widely used by professionals (traders and investors) and ordinary users. However, it is still difficult to say how quickly cryptocurrencies will replace ordinary money. Firstly, many people have a distrust of digital coins. Secondly, there is no unified regulation of the crypto sphere in the world yet.