Cryptocurrencies have always been caught up with mischievous activities & scams. But it is an important if not, the most important invention of the 21st Century.
This dates back to the concept of money. Money doesn’t have an inherent value by itself. People create value by providing goods or services and to exchange the value, they use “Money”. People are the ultimate wealth creators and money is just an indicator of wealth. The richest person on the planet, Jeff Bezos, has huge wealth on paper because he has created immense value for society by organizing people (employees in his company, Amazon) to provide a product/service to people all around the world (customers).
Similarly we earn money through a salary when we contribute skills toward a company which effectively will create value for society. Society will in turn thank the company for the service and offer money as reward.
Traditionally money derives its value because people believe in it. The belief is reinforced by a complex system comprising the government and financial institutions of which the latter plays a critical role.
Whenever you want to send money from your bank account to a friend’s, your bank account will communicate with a set of APIs, deduct money from your account and credit it to your friends. Banks are responsible for ensuring the math makes sense and that you don’t send a copy of your money digitally but instead send what you originally have. Everything lies in their control to ensure transactions proceed smoothly & securely.
This problem is called the “Double Spending” problem. Till 2008, the double spending problem was solved through centralized entities such as banks. But as a result of that, there have been several shortcomings as well. Since banks have money from you in their banks they can lend it out to less creditworthy borrowers blinded by high profits while the downside can be quite painful.
Centralization has given banks too much power that they could privatize any gains from high risks they take but socialize the losses to the public. Take the example of Financial Crisis of 2008.
The Uprising
It was literally after this incident of 2008, an annoyed anonymous entity named Satoshi Nakamoto came up with a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”, not knowing that his work would entirely change the world forever. Bitcoin was the first decentralized currency to emerge, though currently we have more than 4000 cryptocurrencies today such as Ethereum, FileCoin, Dogecoin etc.
Satoshi provided a solution for the double spending problem & Byzantine General’s problem (video explanation embedded below) through the concept of a distributed database which anyone could audit or write to and that came to be known as the “Blockchain”
Decentralization has always been responsible for shifting power from the institutions to a group/individuals. The last case of decentralization was fueled by the internet. Remember when you had to switch on television to tune to “news channels” to know what’s going on? Now you have twitter and with a click on your phone you can know what’s going on in the news. Remember when a time when only celebrities had the power to endorse sponsorships from brands? Now you have influencers on Instagram & YouTubers who have more demand for brand endorsements. Remember a time when you had to contact incumbent big-wig stock brokers to place a single order? Now anyone with internet connection can buy stocks from zero brokerage stock accounts with hundreds of orders! Technology has always been at the forefront of decentralizing power.
Now technology has arrived at the doorstep of financial institutions who had enjoyed a lot of power over the years. While the world of cryptocurrencies seems perplexing & so volatile, you do have to understand why is it so. The governments & institutions protected banks by placing top class security safeguarding your money and enforcing civil protection. Cryptocurrencies are doing all that with just Mathematics coupled with the scalability of technology.
What does the future hold?
While there are currently a lot of challenges for cryptocurrencies, such as sustainable energy consumption, there are many developers all over the world working on it too. For instance , Ethereum is working to implement a different algorithm called “Proof of Stake” over proof of work algorithms which would reduce energy consumption by huge margin.
El Salvador became the first country to make Bitcoin, a legal tender, allowing its citizens to now transact in bitcoin.
The power of decentralized currencies lies in the fact that no one can delay payments made from one part of the world to another and also that no financial institution would take cascading cuts from the transaction between two individuals residing in opposite ends of the globe.
Cryptocurrencies might be something that the 21st century might be remembered for or there might be something even bigger which is yet to be built & discovered!
