Cryptocurrencies in 2021 have gone mainstream. They’re a type of digital asset that can be used to buy and sell things, and are more commonly used as a potential store of value as they continue to drive adoption with exciting new applications. Today, there are thousands of cryptocurrencies available on the market. Each of them serve a different function within their ecosystems.
For informed discussions around cryptocurrency, an understanding of blockchain always predicates it. Blockchain opens up a diverse set of opportunities for individuals — the same way open source software disrupted the technology industry nearly 25 years ago. It hinges on the concept of decentralization and reshapes the way we perceive trust in a transactional sense.
Using this technology, an exchange between two parties may be audited. This data isn’t stored in a single server or computer, but rather shared among participants across a series of nodes or computers in what we refer to as a distributed ledger. Essentially, what this means is that there are a set of nodes or computers that will confirm the details of a transaction and allow it to happen. A record is kept separately on each of these nodes which have to remain consistent with each other. These records form a ‘block’ which contains information such as how much crypto was involved, when, and where, and whom the funds came from. Immutability is a key feature, meaning that these records must remain consistent throughout the network and thus cannot be tampered with.
Another interesting feature of blockchain based networks is that they can utilize what we call smart contracts. These are programmable blocks of code that will automatically execute once certain conditions are met. A simple example for this would be for the sale of goods, which is commonly seen in digital asset marketplaces like OpenSea. This platform hosts a wide variety of art, and artists can opt to earn royalties and secondary sales commissions for their work. Once their work is acquired and then re-sold to someone else, they will automatically be credited with a percentage of the total sale price that they decided on.
This creates a new paradigm for the way that information is shared, how businesses interact in a variety of industries, everything from financial technology, to mobile payments, logistics and even for tracking donations sent through charity. In many ways, a decentralized structure greatly reduces the need for intermediaries or middlemen for the transfer of goods between individuals, and ultimately, reduces the cost of trust.
Cryptocurrencies are one of the most popular and widely known use cases of blockchain technology. It is a digital asset that can be used as a means of exchange that governs the generation of monetary units and verifies the flow of funds within a network. There are thousands of cryptocurrencies that currently exist, and you may have heard of popular ones such as Bitcoin, Litecoin Ethereum, Binance, Cardano, and Ripple.
Traditionally, if you would like to purchase goods and services from an e-commerce platform for example, it would be wiser to use services like Stripe or Paypal to ensure that your funds are transferred when you receive what you paid for. However, there are problems that have always plagued these systems due to their infrastructure, from delayed payments, high fees, and frozen accounts. This has allowed blockchain based transactions to gain momentum and serve as an alternative as it does not involve a third party.
~Novel Serialisation: Heavens Fire~
How are cryptocurrencies mined?
You may have heard of the term ‘mining’ in the world of crypto. This is where the magic really happens, and this is what makes transactions secure and transparent. Picture this — when you wire money from your bank account to another person, the banks will communicate using what we call an Automated Clearing House (ACH). They essentially serve as the middleman and protect you from potential fraud with the ability to reverse a transaction.
With blockchain, there are no banks or centralized middleman entities to do this. Instead, they are replaced by a network of miners across the world. Miners will usually own several devices with strong computing power such as a graphics card or an ASIC device. In order to ‘confirm’ a transaction between you and another individual, these miners will use their devices to solve complex mathematical problems. Typically, it takes one to six confirmations for a transaction to push through and could take anywhere from minutes to hours. Once they push through, they are recorded to a block, which cannot be edited nor tampered with. If there are changes to this, another block will be generated linked to the previous one, making them easier to trace.
Going back to the transaction layer between yourself and your recipient, there is a network fee involved in transferring your crypto asset to another individual. The speed at which confirmations could be made depends on how much you want to pay. The higher the fee, the faster the transaction. These fees are also paid out proportionally to miners, thus yielding them profit for acting as the middleman in a transaction.
Of course, there are other ways to confirm transactions on a blockchain network. Different cryptocurrencies are designed to perform a wide range of applications, and thus their mechanisms may reflect that.
What are the advantages and disadvantages of crypto?
Cryptocurrencies were created as a digital alternative to traditional trade methods like cash or credit cards. However, some argue that cryptocurrencies serve as a financial center for fraudsters, terrorists, and criminals, particularly when used in the internet and black-market trading systems. The current surge in Bitcoin’s value, on the other hand, has established cryptocurrency as a genuine investment that, with the favorable buzz around support for blockchain technology, may have a positive influence on wallets and conventional trading habits.
While many view cryptocurrencies to be a form of investment, similar to the way stocks and bonds are traded, its true power lies in the applications they can offer within their respective ecosystems. Here are some examples of such:
Transactions
Retailers, brokers, and attorneys can add layers of complexity and tack on legal expenses for even the smallest commercial transactions. There are papers that need to be signed, brokerage fees and commissions to be paid for, and it overall becomes a cumbersome process to deal with.
The first advantage of crypto-based transactions is that they occur in a peer-to-peer communication structure that essentially cuts out the middleman for a transaction. This leads to greater clarity when it comes to creating audit lines, uncertainty about who should pay what to whom, and better responsibility because all of the participants are aware of the conditions laid out through a smart contract.
Asset Transfer
We can think of blockchain as a “massive intellectual property database” that can be used to create and enforce two parties’ transactions in items such as cars or houses for sale at the same level. The level of transparency and immutability it provides allows individuals to transact within a ‘trustless’ environment enforced by the governing rules of the network.
Easier International Trade
Unless they are widely recognized as an official currency at the national level, cryptocurrencies are not subject to exchange rates, interest rates, transaction fees, or other taxes imposed by a centralized entity such as banks or governments. Cross-border transfers and transactions may be executed on a peer-to-peer basis, eliminating the need for currency swings and exchanges.
Decentralized Ownership
In a traditional bank or credit card system, you are actually giving control of your finances to a third party. These entities have domain over your assets, which could spell disaster for any mishaps. Accounts could potentially be cancelled without warning for violating the Financial Institutions Terms of Service, in which case, you, the account holder, may have exceeded the system reset limits.
Cryptocurrencies is that you are the sole owner of the private and public encryption keys that make up your cryptocurrency address. Unless you have provided wallet management to a third-party provider, you have full control of your assets.
Stronger Security
Once a bitcoin transaction has been authorized, it cannot be reversed, in contrast to a “billing” credit card transaction. This is a protection against fraud that requires a written agreement between the customer and the seller for refunds in the event of an error or return policy. Finally, the strong encryption methods used throughout the distributed platform (blockchain) and cryptocurrency transaction systems protect consumers from fraudulent accounts while also ensuring their privacy.
Low Transaction Fees
You’ll see on your bank statement that the money you spend is charged for each activity you participate in. If you make a large number of transactions in a month, your charge may immediately increase. The bitcoin network will reward data miners, thus there will be no fees or extremely low transaction costs.
Issues Surrounding Cryptocurrencies
For starters, because the nodes of a crypto transaction are in various countries, they may be subject to distinct legal frameworks. Second, because the distributed ledger has no physical location, determining the country of origin for crypto is challenging. Third, because of the global nature of blockchain, establishing relevant laws and choosing the proper jurisdiction for blockchain disputes is extremely complex and oftentimes convoluted. Enforcing rules among blockchain users, transactions, or projects is a monumental effort for any national authority, and frankly needs better coordination.
Below are some of the main hindrances for furthering the adoption of cryptocurrencies:
Volatility
Cryptocurrencies are acquired either through an exchange, another individual, or through means like mining and staking. They’re assets that are traded in large volumes on a daily basis, and therefore fluctuate in value.
As it stands, the price of even the biggest cryptocurrencies is mostly speculative. To illustrate this, a single tweet by billionaire and entrepreneur Elon Musk sparked a surge in Bitcoin’s price. In the following months, he posted about having a ‘breakup’ with Bitcoin along with his company Tesla no longer accepting this form of payment. This caused the price of the coin to drop. He promptly began to promote a rather obscure crypto in the form of Dogecoin, a token with no real application. The price of the token soared up 20% since then.
Simply put, cryptocurrencies are not for the faint of heart.
Data Theft
Additional legal issues surrounding cryptocurrencies include data theft and financial fraud. Many people involved in illegal activities may be lured to use cryptocurrencies in their financial transactions with the promise of blockchain anonymity – as well as the appearance of independent transactions. This is one of the major drawbacks of enabling peer-to-peer transactions. There is still much to be discussed regarding bad actors in these emerging ecosystems.
Privacy Concerns
In the world of cryptocurrency, data theft is closely linked to issues with privacy. One of the main reasons for the introduction of cryptocurrencies such as Bitcoin, as we have seen, was to enable anonymity in user interaction. However, the extra privacy afforded to its users makes them attractive tools for cybercriminals. Bitcoin was originally used as the primary medium of exchange on the Deep Web, an unsupervised corner of the internet for illegal transactions.
Tax Implications
Cryptocurrencies are property, not cash, according to the US federal income tax law. Because of this disparity, bitcoin cannot be used as a functioning currency for purposes of the Internal Revenue Code. Taxpayers in the United States, on the other hand, must disclose cryptocurrency transactions in US dollars on their annual tax filings. This implies that on each transaction date, taxpayers must calculate the fair market value of their cryptocurrencies by translating the virtual currency to US dollars. Other governments may either have stricter or more lenient views, and thus one must be careful in treading the waters.
What are the most popular cryptocurrencies?
The value of cryptocurrency is a direct indicator of investor demand, so it’s no surprise that market capitalization is used in estimates. However, each cryptocurrency has a complex platform behind the statistics. Each has its own set of technical features, application, and protocols.
Here are the 5 most popular and well-known cryptocurrencies, as well as important information that you should be aware of.
Bitcoin
Bitcoin is the first official cryptocurrency to be built on a blockchain backbone. Bitcoin was created in 2009 by the anonymous Satoshi Nakomoto and has since attracted millions of investors, becoming the most valuable cryptocurrency by market capitalization. Bitcoin is fundamentally limited in supply: only 21 million will ever be created. The crypto’s proof-of-work blockchain has become a model for other cryptocurrencies to follow in terms of developing decentralized consensus processes.
Ethereum
Ethereum was established in 2014 by Vitalik Buterin, a Russian-Canadian software developer, and Gavin Wood, an English computer scientist who later contributed to other cryptocurrency projects. The Ethereum blockchain, which is a smart contract platform, provides the foundation for the Ether cryptocurrency.
Ether’s worth is predicated on its capacity to facilitate smart contracts in distributed applications, unlike Bitcoin, which is commonly viewed as a store of wealth by investors. Most Decentralized Finance or DeFi apps are built on Ethereum.
Cardano
Charles Hoskinson, a computer scientist and co-founder of Ethereum, founded Cardano in 2015. He left Ethereum due to a fundamental difference in philosophies and disputes with their developers. Cardano’s native cryptocurrency, ADA, is governed by their Ouroboros system, which supports licensed and unlicensed blockchains.
As opposed to Bitcoin, which currently uses ‘mining’ or proof-of-work (PoW), Cardano’s network utilizes a consensus mechanism called proof-of-stake. This means that the more ADA a user holds, the more power they have to confirm and validate transactions on the network, meaning that they can profit from doing so.
Binance
Binance coin is the creation of Changpeng Zhao, the CEO, and Founder of Binance, a prominent global cryptocurrency exchange. The BNB token was designed to make transactions on the Binance network easier, allowing users to pay trading fees and access other products and services like Binance’s decentralized exchange. Binance users who pay in BNB have cheaper trading costs than those who pay gas fees using other cryptocurrencies like ETH.
Ripple
Ripple’s native currency is called XRP. It is designed to serve as a system for payment settlement, asset exchange, and remittance systems that more closely resemble SWIFT, a service that banks and financial intermediaries use for cross-border and security transfers.
XRP supply is limited, as only 100 billion tokens will be issued. They are pre-mined, which makes it less complicated than Bitcoin. Leading global banks and payment providers, such as Bank of America and American Express, use the RippleNet’s payment network.
However, Ripple has always been surrounded with controversy over the years. The Securities and Exchange Commission sued XRP’s parent company and its two executives, Chris Larsen, founder and chairman, and Brad Garlinghouse, CEO, in 2020. The Securities and Exchange Commission (SEC) said the sale of XRP tokens was an unregistered security.
Companies Adopting Cryptocurrencies
Because of its immense popularity and widespread adoption, even the world’s largest companies are now getting into cryptocurrencies. NASDAQ listed corporations such as Tesla (TSLA), Square (SQ), and MicroStrategy (MSTR) purchased Bitcoin and publicly shared this information to show that they believe in its potential. Square’s $50 million Bitcoin investment in October 2020 sparked institutional interest in the cryptocurrency.
It’s not just limited to financial institutions. A number of companies across a wide range of industries, from high tech to aviation, are adopting cryptocurrencies and allowing consumers to pay for products and services with them.
Here are three well-known companies that currently use and accept cryptocurrency:
Microsoft
As one of the world’s largest software firms, Microsoft’s acceptance of Bitcoin payments was critical in building faith in the usage of crypto. Bitcoin can be used to pay for a number of services, including Xbox Live and Skype, and can be paid off and used to enter user accounts.
Visa
Visa said at the end of March 2021 that it was testing the system with Crypto.com, a digital currency company, to accept cryptocurrency payments on its network. The USD Coin (USDC), a stable cryptocurrency backed by the US dollar, will now be used.
PayPal
Following its announcement in October last year, PayPal users in the United States may now buy, sell, and hold crypts such as Bitcoin, Ethereum, Bitcoin Cash, and Litecoin. The PayPal software will also allow you to track bitcoins. The main drawback is that the funds are locked in the factory’s digital wallet.
Trends In Crypto
DAO
A decentralized autonomous organization (DAO) is a blockchain-based program that provides users with a built-in mechanism for governance driven by code. As opposed to traditional organizations with boards, committees, and other forms of centralized committees, DAOs are controlled by a set of rules defined in code and enforced by a network of computers running a common program, rather than by a small number of people. It works in the best interest of the majority of users on the network.
Users must first join a DAO by purchasing its unique cryptocurrency in order to become a member. Having the asset provides users the ability to vote on proposals and changes proportionally to the amount they own. BitShares, a virtual e-commerce network that connects merchants and customers without a central authority, was the first successful DAO.
DeFi
Decentralized Finance, or DeFi, is the umbrella name for a list of financial systems based on cryptocurrencies or a blockchain aimed at eliminating financial intermediaries. DeFi is crucial because middle-class systems and human gatekeepers can minimize and make things harder, giving consumers less direct control over their finances. However, DeFi is different in that it extends blockchain use in addition to transferring basic value to more complex financial use cases such as loans, yield farming, and automated dispute resolutions.
Avalanche, or AVAX, is one of the most popular DeFi applications, boasting of fast, scalable transaction speeds and more accessibility for financial transactions through its technology.
NFTs
“Non Fungible Tokens” is an abbreviation for NFTs. Anything that is recorded or recorded in a digital ledger is represented by NFT data. A work of art, a music CD, or other forms of digital data may all be represented with NFT. When you buy NFT, you’re basically buying a digital record of token ownership that you may subsequently transfer to a digital wallet.
Recently, digital art and games using NFTs as their anchor technology have taken center stage. Celebrities like Snoop Dogg and Paris Hilton are selling out their NFT collections for millions of dollars, while games such as Axie Infinity, Splinterlands, Plants vs Undead and more have sparked interest with their ‘play-to-earn’ models.
Social Tokens
Social tokens, also known as fan tokens, community tokens, or creator coins, are decentralized and protected by blockchain and are based on the same principle as popular cryptocurrencies such as Bitcoin and Ether.
For the longest time, creators — whether authors, painters, musicians, or thought leaders have had very few options for monetizing their work. Media publishing platforms will typically take hefty commissions on revenue from user-generated content, tweak their exposure algorithms to cater to their paying advertisers, and provide little to no avenue for more intimate engagements with audiences. As of today, social tokens already have a vibrant ecosystem that includes anything from bespoke distribution methods to community tools and aggregators.
BitFans is a platform that allows individuals to issue their own community tokens to their fans and allow their tokens to be tradeable on the BitFans marketplace. Tokens can also be used to create meaningful experiences to boost engagement and foster a sense of community. This allows fans to gain exposure to the upside of a creator’s brand and make them valuable assets to drive growth in the long run.
Mass Adoption
The following three areas are the most crucial to drive adoption and increasing trust for consumers in the cryptocurrency industry:
Regulation
To guarantee that the interests of both consumers and companies are safeguarded, financial authorities must approach the cryptocurrency industry with the same level of surveillance and scrutiny. Regulators will need to provide a standardized framework for security, financial, and auditing standards. While government agencies have made considerable progress on anti-money laundering (AML) and know-your-client (KYC) legislation, other financial industry rules appear to be behind.
Security
Security must be a top priority for exchanges and firms operating in the cryptocurrency industry. Many people have learned the hard way about the hazards of putting their bitcoin private keys on a digital exchange. The breach of Cryptopia, a New Zealand-based exchange, and the inexplicable loss of private keys at QuadrigaX, a Canadian exchange, demonstrate the dangers of entrusting your funds to a third party.
Education
Finally, personal and institutional education about cryptocurrency and safe handling procedures should be improved. Currently, instructional materials in this domain are more plentiful and accessible than they have ever been. First and foremost, properly comprehending the risk and volatility of such a young market is a crucial, and often unpleasant, learning curve. To effectively secure your money, you should be informed of and confident in the security and custody requirements of your selected exchange provider.
