April 3, 2019
Originally known for their notorious reputation as safe havens for criminals and money launderers, cryptocurrencies have come a long way in consolidating its charisma with regards to both technological advancement and popularity. The blockchain technology underlying cryptocurrencies has been deemed to have powerful applications in various sectors ranging from healthcare to media.
With that said, cryptocurrencies still remain contentious. For every detractor who declares that cryptocurrencies are a bubble, there’s an enthusiast who extols it as the next wave of the democratization of finance. But in simple terms they are merely the newest fintech craze but at the most complex level they’re a revolutionary technology that is set to challenge and disrupt the financial and economic status quo.
As digital assets cryptocurrencies uses cryptography, a state of the art encryption technique, for security. They are primarily being used to buy and sell goods and services, though some newer variants function to provide a set of rules or obligations for its holders. They don’t have any intrinsic value and are not redeemable for another commodity, such as gold. Unlike traditional currency, crptocurrencies are not issued by a central authority or government and so they don’t qualify as a legal tender.
Some suggest that the use of cryptocurrencies is primarily limited to “early adopters.” If we view the bitcoin landscape there are more than 10 million Bitcoin holders worldwide among which almost half own it as an investment. With government-backed currencies functioning adequately well the mainstream adoption will ensue only when there is a significant tangible benefit in using a cryptocurrency. The advantages that make it attractive are discussed below:
Buying goods and services with cryptocurrencies happens online so disclosure of identities isn’t a requisite. However they don’t guarantee a completely anonymous transaction. What they actually offer is pseudonymity where consumers settle purchases without providing personal information to merchants. If required by law enforcement directives, a transaction can be traced back to the relevant person or entity. Still, amid rising concerns of identity theft and privacy, cryptocurrencies score an edge over others.
One of the biggest benefits of cryptocurrencies is that they do not involve any kind of intermediaries be it financial institutions or governments. For merchants using cryptocurrencies, the lack of a “middleman” lowers their transaction costs. As far as consumers are considered, they are happy with the fact that unlike the traditional payment system, even if a portion of the cryptocurrency system faces any manipulation, the remaining portions would still continue to confirm transactions.
It would be naive to believe that cryptocurrencies are completely immune to security threats. In one of the largest swindle in history of cryptocurrencies, the Decentralized Autonomous Organization (DAO), a decentralized fund which intended to democratize the funding of Ethereum projects was hacked and the hackers gained control of one-third of the fund ($55 million). Fortunately, most of the funds were restored but this alarming incident shook the community and the SEC’s was prompted to subject offerings and exchanges to US securities laws.
Programmable, “Smart” Capabilities
Certain cryptocurrencies are designed in the very fashion that they could confer other benefits to their holders, including limited ownership and voting rights. For example, any organization which is funded by cryptocurrency can insert voting rights in the currency’s software code. Physical assets such as art or real estate are also are waking up to the fact that cryptocurrencies can include fractional ownership interests.
Much of the cryptocurrencies’ capability, popularity and security advantages are the gifts of its ground-breaking technological innovation.
Blockchain Technology Explained
The brilliant blockchain technology is the bedrock of Bitcoin and many other cryptocurrencies. It simple terms it is a huge public, continuously updating ledger which goes on recording all transactions that take place. Blockchain is ground-breaking in a sense because it allows transactions to be processed sans the intervention of any central authority be it a bank, the government, or a payments company. The buyer and seller enjoy the ease to interact directly with each other. The absence of middlemen makes the crypto structure way more economical and renders the businesses and services to be decentralized.
Another distinguishing feature of blockchain technology is that multiple parties can access the ledger simultaneously without any hassle in real time. From a technical perspective the blockchain provides two interesting things. First it utilizes consensus algorithms and secondly transactions are recorded on multiple nodes instead of a single server. A node refers to a computer connected to the blockchain network, which is entitled to automatically download a copy of the blockchain upon joining the network. For a transaction to be valid, all nodes must agree in tandem.
Currently you may find two broad categories of cryptocurrencies- those designed for the purpose of purchasing goods and services and those that allow the creation of “smart contracts,” which are agreements that enforce themselves via code. Bitcoin and Ethereum accounts for the majority of the cryptocurrency market share although many other competitors are rising rapidly.
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