Why Crypto Will Be The New Universal Currency.
It has no government regulations, is not influenced by political power, and is a currency that can potentially power a worldwide market of directly connected buyer and seller. Currently, no currency in the world does these things. The potential harm of traditional Fiat currencies can be seen, for example, with the Central African Republic’s 15% tariff on all imported goods.
This country, trapped in civil war, has required substantial foreign aid to support its government and citizens. High import tariffs elevate the price of goods sold, which has a trickle-down effect on the people who are already in extreme poverty. Cryptocurrencies can bypass all of that. By their decentralized nature, no transactions made is subjected to any taxes levied by any nation. This method of direct trade allows citizens who may be trapped in poverty to potentially work for payment in cryptocurrency to trade for goods. Additionally, It’s estimated that there are currently 2.2 billion individuals across the world who have access to the Internet or mobile phones, but don’t currently have access to traditional systems of banking or exchange. The cryptocurrency ecosystem holds the potential to make asset transfer and transaction processing available to this vast market of willing consumers.
What Are Cryptocurrencies? How Do They Work?
Firstly, we should consider money as a societal IOU — rewarded to individuals for the services they have performed for others. For example, by mowing my neighbor’s lawn, I have performed services for her for the reward of $10. She might’ve earned that $10 from her work or job, serving other people. An even more apparent example would be if I went to McDonald’s and they messed up my order, they might give me a coupon with the value of $10. Cryptocurrencies can be exchanged interpersonally for goods or services in the same way, using a peer to peer network verifying each transaction. People can ask for payment for their work in cryptocurrency, and buy anything (including illegal items, since it’s not government regulated) in cryptocurrency.
Although it allows the individual to trade for goods without any government interference, cryptocurrencies are not government-backed. This means that they are constantly growing and fluctuating in value depending on how much Fiat money people have put into it.
Whenever people buy cryptocurrencies, their prices go up, as can be seen with Elon’s recent purchase of $1.5B worth of Bitcoin and bitcoin prices now shooting up to $51,000 per coin. The recent rise of cryptocurrency prices show a societal transition to decentralized finance, as more and more people deposit their money to back the value of assets such as Bitcoin or Ethereum.
The blockchain is what makes cryptocurrencies a legitimate currency. Everything on the internet is an inherent copy of something that has already been uploaded. Before the blockchain, cryptocurrencies faced the double spending problem, where coins would be spent again after they had been spent once for more goods.
It’s like using the same $100 bill to buy 2 meals and getting away with it constantly. However, the blockchain allows each cryptocurrency transaction to be timestamped and logged onto the network to build a history. Each supports the validity of the next transaction to prevent anyone from tampering with the records. Every logged transaction is encryption protected, and are recorded pseudo-anonymously — the public payment addresses of each individual, the amount transacted, and the time of the transaction are all that shows. These pieces of information are also available for everyone on the network to see after being verified by computational work from others on the network, which makes it a peer to peer verification network. Each “peer” on the network is incentivized to confirm and log transactions onto the network by the chance of a small reward in cryptocurrency.
What this all means is that you can carry out actions you would normally be able to do with money, while maintaining full ownership of the money and transacting purely within 2-party bounds. You would tend to think that the money that you own is completely yours, when in fact it’s not. In a traditional banking system, banks have the power of life and death over all the money that you hand over to them. If you happen to violate a banking institution’s terms of use policies, you’d have to jump through multiple hoops to retrieve the money from your closed-down account. Your cryptocurrency, however, is completely yours — not controlled or maintained by any external entity unless you have given them permission to. Cryptocurrency can also leverage blockchain smart contracts to keep transactions purely interpersonal. Some current financial institutions, such as the escrowing industry, require a third party member to hold and release money upon the fulfillment of certain conditionals. Smart contracts can do exactly that. Even more amazing is the fact that they are reusable, so once you set up payment conditions and terms (for example, in the context of rent or subscriptions you pay for), you can pay the other party repeatedly every month in cryptocurrency according to those conditions.
There are many types of coins in the cryptocurrency realm. Some are stable coins, which are coins that can be exchanged for USD for a relatively equal and constant rate. These coins help maintain stability by allowing users to liquidate their cryptocurrency assets. For example, USD Coin (USDC) can always redeem be redeemed at a 1:1 ratio with USD. People are incentivized by rewards to buy and hold onto USD coin. You can also exchange USDC for another cryptocurrency, such as ETH. Centre, the consortium that mints USDC, also collectively holds US$1.00 for every single USDC. These funds are held in a special bank account that is constantly monitored and audited. This constant cycle of people buying USD coin and liquidating the coin keeps the stable coin running. USDC is an Ethereum-based coin, which means that it can only be stored in an Ethereum-compatible wallet (Coinbase and Metamask are both great options to get into).
Bitcoin Spotlight: From less than a cent to over $50k
Invented by Satoshi Nakamoto in 2008, Bitcoin’s beginnings took root when the blockchain was used to solve the long-standing “Double Spending” problem. The Bitcoin blockchain used a proof of work protocol to register blocks onto the network, which meant that each client participating in the network had to go through a series of computer-ran calculations that consumes a large amount of processing power. Each of these blocks were then publicly visible, with everyone being able to see the same transactions at the same time. Given that everyone has a consensus on the validity of the blocks, a bad actor would have to launch a 51% Attack — taking over 51% or more of all clients working on the network, then subsequently maintaining enough processing power to process blocks faster than everyone else on the network so that the bad actor’s transaction record would be recognized as the supposedly legitimate one. All of this makes Bitcoin extremely secure.
So if it is such as secure currency, then why don’t everyone use it? For starters, Bitcoin prices took 13 years to get to the point where it was today. From the first purchase of 2 Papa John’s pizzas using 10000 Bitcoins to nowadays where 1 bitcoin is worth a whole car, bitcoin slowly grew in value. Having people who don’t understand the technology believe that Bitcoin isn’t a pyramid scheme was extremely difficult, especially when you had people like BitConnect running around. The fact that it was first used for black-market transactions on the Silk Road didn’t help its rep either.
However, two more key problems prevented its use as a common currency. The bitcoin blockchain only processes 4.6 transactions per second. For reference, Visa processes 1700 to serve a whole nation worth of demand. This leads to extraordinarily slow transaction processing speeds, which limits its ability to scale as a global currency. Imagine if you went into a store, and when you stuck your credit card chip in the reader you had to stand and wait 1–2 minutes for the transaction to even be registered. Additionally, Bitcoin is extremely volatile. Despite its currently high value, its potential thousand dollar swings in price in mere seconds, or 10–20% swings per day in the growth stage made it impossible to use as a common asset. Currently, its status as cryptocurrency gold (deemed by some to even be better investments than the precious metal) and its very fast grow rate has indeed brought Bitcoin’s daily usage to its peak of around 350,000. Without new technology, Bitcoin faces the threat of having its daily transactions processed capped to 350,000.
There is, however, a new solution in the works.
Layer Two Scaling
The Lightning Channel functions like relaying the result of a private conversation between two people to official records. The two are first recorded to enter a conversation. They then talk out all the details regarding their business. Finally, the final decision on who gets what is put down in the official records. The Lightning Channel allows a transaction already taking place on layer one (the original blockchain) to scale by processing any number of microtransactions to update only the temporary distribution of the channel’s funds without broadcasting those to the blockchain. This way, when the payment channel is closed, the actual blockchain gets one registration of the final results of all the transactions that happened between the individuals in the Lightning Channel.
This technology isn’t present in only bitcoin. Ethereum faces a similar problem with only being able to process 30 transactions per second. Ethereum 2.0 promises a similar scaling technology that can take processing speeds up to 100,000 per second. This thousand-fold increase in speed is beyond anything that current credit cards can manage. If our credit cards right now can serve as a medium of global monetary exchange with a mere 5,000 transactions per second processed, imagine having a technology that can handle more than every single human being on Earth making a monetary transaction on the same day. Ethereum 2.0 can thus potentially usher a shift to this global currency.
In addition to Channels, Ethereum 2.0 also introduces sharding, which is to be implemented alongside the much more energy efficient proof of stake protocol. Proof of Stake allows people to verify transactions for rewards on the Ethereum network by depositing cryptocurrency (32 ETH). If someone acts badly, then they will be penalized with losing the ETH that they have deposited. Although it is more vulnerable to attack than proof of work, proof of stake incentivizes miners to adhere to the rules because rewards for miners who stake will be greater than they are currently. Ethereum 2.0 progresses in Epochs instead of blocks. Each epoch contains 32 transactions verified by randomly assigned validators, who have 6.4 minutes maximum to verify all transactions. The predicted influx of verifiers will be efficiently utilized when they are split into different groups to process transactions on the blockchain simultaneously. Right now, all transactions that are entered into the blockchain are bottle-necked. All miners are verifying the same transaction. The more miners there are, the slower the process becomes. Ethereum 2.0 will spread the network load across 64 separate shards.
I’m definitely not a financial analyst, but ETH can be exchanged at a 1:1 ratio with ETH 2.0, so get in on the crypto as soon as you can!
Altcoins: Doge & More
There’s a lot of recent hype around Dogecoin, but what exactly is it anyways? In 2013, IBM software engineer Billy Marcus and Adobe software Engineer Jackson Palmer created a joke cryptocurrency that served as a counterpart to Bitcoin.
Contrary to Bitcoin, which has a 21 million coin cap, Dogecoin has no limit to how many coins it can have at one time, meaning that the coin can inflate infinitely. Developers have long debated whether to cap off the maximum amount of Doge there can be, and decided to keep circulation around 100 billion coins, which helps to keep the ecosystem secure and compensate for lost coins. Dogecoin also used a different scrypt than Bitcoin, which meant that it required special ASIC devices to mine instead of the traditional SHA-256 bitcoin mining equipment. At one point, it had more trading volume than Bitcoin itself. Some people tried to sell a house in Dogecoin, others used Dogecoin to donate to Charity: Water to build a well in Kenya. People even raised enough funds to get Dogecoin to sponsor NASCAR driver Josh Wise. That DogeCar is still available as a DLC item in the game NASCAR ’14. Notable services such as Dogetipbot helped people transfer Doge balance from user to user using Reddit commands. People use Dogecoin nowadays to purchase things of relatively low value, and to continue to tip people on Twitter and Reddit for their meaningful contributions.
Steem is another altcoin that can be given to online forum contributors for their meaningful work.
When users buy into Steem coins, they actually buy into stake of the Steem forum platform. Users get to vote to curate good content in exchange for more voting power, which can be exchanged into coins for money. Users can also write and produce quality content for upvotes, which earns them coins worth real USD. Before Steem, if your content was demonetized and deemed unfit for advertisements, you wouldn’t earn any revenue from your work besides for user donations. Steem allows people to essentially turn upvotes into revenue. Thus, the Steemit ecosystem allows creators to maintain their independence in content creation by protecting monetization. Steem’s ability to allocate bandwidth allows for free transactions, and it processes transactions every 3 seconds. For comparison, Ethereum takes ~30 seconds. This immense speed allows for never-before-seen scalability, as there have already been hundreds of millions of dollars paid out to users for their contributions
Since its founding in 2017, Matic has leveraged a similar method of scaling as the Lightning Network to build off of Ethereum.
By implementing a side chain and using Proof-of-Stake based checkpoint node system, Matic has significantly reduced the extremely high ETH gas price while providing a faster transaction network that takes finality on the main Ethereum blockchain. It supports many DApps, such as Aavegotchi and Skyweaver. Recently, Matic is transitioning to being Polygon, being joined by prominent researchers from Ethereum to develop Ethereum’s first scaling and infrastructure development platform. It does so via. secured chains (Layer Two chains) and standalone chains (side chains). Secured chains are scaling solutions for transaction systems that require Ethereum’s decentralized, blockchain based security, while standalone chains have more autonomy to operate with their own verifier pools. The standalone chains, in comparison, are more centralized and thus exposed to higher risk, and is better used for enterprises and projects that have stronger community. It is especially used for projects without need for huge amounts of security. Matic tokens (can be exchanged for with ETH) and previous DApps on Matic will not require updates as they transition to Polygon. Polygon is just the way for Ethereum developers to build the Internet of Blockchains and scale.
Liquidity protocols (Aave / 1Inch)
Right now, Aave is powering the future of DeFi banking with their open-source liquidity protocol, which lets you stake or borrow cryptocurrency at very high APYs and APRs. For example, you can deposit your TrueUSD tokens for ~14% APY! Goldman Sachs, for comparison, only offers you ~.5%.
To borrow the token, you have to put down collateral in ETH as assets to be taken if you do not return your loan. This preserves the value of the loaned token. Aave is also very transparent since it shows how much available liquidity and total borrowed it has. It also gives you information on how often the token is used via the token’s utilization rate.
Additionally, 1inch allows you to exchange your cryptocurrency for other cryptocurrencies at the best rates. 1Inch does this by discovering the most efficient swapping routes across all leading exchanges. They show you the trends in price of various cryptocurrencies, and displays the transaction price that Ethereum currently charges for each transaction (which is ridiculously high. $66/transaction at the time of writing this article).
Governance of the ecosystem depends on the amount of 1Inch tokens that people have staked. The more 1Inch tokens staked, the more voting power one has in the network.
What does this all mean?
The next time you pay rent, think about the smart contracts that will soon be in place to allow for almost instantaneous transactions between you and your landlord. The next time you put some money in the bank, think about how much more you can get if you were to deposit ETH into Aave instead. Perhaps in a few years when you write another article, you’ll be paid by your viewers in cryptocurrency instead of being paid by Medium.
I’m Xiangan — a 17 year old blockchain developer passionate for learning, and I appreciate you for reading! If you enjoyed the article, please feel free to follow me on my LinkedIn. Drop me a line and let me know your thoughts!
