Note: We’ve highlighted common crypto buzzwords in bold so the next time someone talks about “blockchain” or “Web3”, you know exactly where to look!
Currency: What is it Really?
To understand cryptocurrencies we must first have a basic understanding of how currencies are created. Most national currencies we use are issued by the government with an assigned value — this is called fiat money. For example, the US Dollar is a fiat currency; assigned value by the United States government, depending on multiple factors such as inflation, public debt, and political stability. Fiat money is always regulated by a central bank — an institution that monitors and controls national (e.g. US dollar) or union (e.g. Euro) currency and policy — which is what has kept it relatively stable. It was originally created in physical (cash) form, however, with the rise of the internet, digital transactions (i.e. through electronic transfers, debit or credit cards) became popular. When working with fiat currencies, each of these digital transactions is still verified by banks and sometimes has associated fees. For example, when you want to buy a souvenir while on holiday, your card may get blocked because your bank doesn’t recognize the currency or you may have to pay a fee for using your credit card in a different currency.
Why Was Cryptocurrency Created?
This is where cryptocurrency came in: there was a demand for digital transactions without regulation by or dependence on any single government or institution — i.e. decentralization.
This means that all of the transactions that happen in a cryptocurrency are not information that is held by any single particular government or banking system. Let me explain it in terms of a specific common cryptocurrency: Bitcoin. Let’s say I have exchanged US Dollars into 1 bitcoin through a currency trading platform (a virtual version of the currency exchanges you see at airports), which I now hold in my own virtual wallet. This transaction is then recorded into a virtual ledger: an account of who sent and received this 1 bitcoin. The data from this ledger is then replicated, stored, and updated constantly on the bitcoin network and is audited constantly by bitcoin miners — which is a network of about one million physical processors around the world. To put it in perspective, your purchase of 1 bitcoin then translates into an entry into a ledger that is verified by one million “computers” and then updated across all the ledgers of this network. On top of this, you wouldn't have to pay any transaction or exchange fees — because of decentralization, your bitcoin holds the same value around the world.
How are Cryptocurrencies Made?
You may have heard of the term “blockchain” — well here is where that is used. Blockchain is the type of highly secure technology that safely stores these ledgers across the network. Think of it as a chain of blocks: each block holds all of the information of each transaction and of the block before it, and each time there is a new transaction a new block is added to the chain. It is highly secure and encrypted as it is updated and checked constantly by all of the separate miners; if there is an issue of hacking on any one of these processors, it can be spotted by all of the others immediately.
This is also the process by which new coins are made. In bitcoin, every time a new block is added to the blockchain it triggers the system to create new bitcoin, which is then paid to the miner that created that block. Simply, new bitcoin is made to pay miners for their work in creating, auditing and maintaining the system. The basics of this creation system are the same for most cryptocurrencies, but differ slightly in detail; some require larger or more complex hardware, take more power, or might even take more investment to complete the task of mining than others.
How are Cryptocurrencies Valued?
Now we can go back to the idea of our original purchase of 1 bitcoin. In real terms, 1 bitcoin is valued at $30,269.94 USD today — a pretty hefty price point! Because of decentralization, the value of bitcoin is not decided or controlled by any one person or institution: its price is completely dependent on supply and demand. This means it can fluctuate wildly depending on a multitude of factors; anything from the Ukraine War to an Elon Musk tweet could affect its value. Bitcoin is the oldest cryptocurrency, which means that people can track its stability better and therefore trust it more. However, it also requires a lot of heavy-powered machinery for the mining system to function. There will also only be 21 million bitcoin created — as of today there are 19 million in existence, and the remaining 2 million are still being paid out as blocks are added to the blockchain. These are all factors that weigh into its value as it is dependent almost solely on public opinion and demand.
Other cryptocurrencies are valued differently, based on their characteristics and uses. Ether, for example, is the second most popular and highly valued currency; its price went up from $0.311 per token of Ether upon launch in 2015, to $2,054.45 per token today. This is because the network that Ether runs on, Ethereum, is an open-sourced blockchain platform and provides its users with the technology needed to build and run secure applications.
It has grown rapidly because of its popularity in finance (e.g. MakerDao — a credit platform), art (e.g. NFTs — unique tokens for collectible assets like internet art pieces) and gaming (e.g. Gods Unchained — a competitive card trading game) sectors. New cryptocurrencies are coming into existence every day. Many offer advantages in technology, sustainability, or connectivity. Some might take up less energy to mine, some may specialize in creating shared-interest communities, and some might only be invented as a joke.
Let’s Interrupt Our Breakdown With a Quick Web3 Lesson
You may have heard the term Web3 being discussed in depth in relation to cryptocurrencies — but what does this mean? Well, to go back to the beginning, the World Wide Web came into existence in the early 90s. At this point, websites were basic, information-based platforms created by their publishers. You visited them to consume content, marketing or information — not to interact with the page. This is referred to as Web1, the first stage of the evolution of the internet. In around 2005, social media began to rise and it revolutionized how we used the internet. We were no longer just ingesting information but engaging with communities and each other using internet platforms set up by corporations. This was the second phase of the internet, Web2. With Web3 comes a new use of the internet, one based on blockchain and its benefits of privacy, security, decentralization, and individualized benefits. Web3 seeks to replace the 2D simplicity of Web1 and the institution dependence of Web2. It sounds a little vague — which it is because it is still being built!
Now, why have we brought this up?
Because Web3 is still being built, it isn’t easy for many people to understand. There isn’t a manual on this internet space — and because of decentralization, there aren’t many rules yet either. The unknown can be scary and intimidating, especially when you’re putting your money into it. This brings us to our last section —
Cryptocurrency: A Tech Trap or The Future?
Because of the lack of regulation and external control, it is easier to use cryptocurrency for illicit activities and criminal enterprise. While some currencies can be stabilized, many currencies are highly volatile, driven by speculation and therefore not protected against inflation, recession or any other instabilities. Hacking and theft are possible and target new users who enact transactions incorrectly. Because this technology is relatively new, it isn’t as easy to understand for laypeople — there is still a lack of trust in the system as opposed to that of institutions like governments and banks that have been running for hundreds of years.
However, there is still a lot of hope for the future of cryptocurrency. Blockchain technology itself is so secure and is advancing so quickly that it will most probably be the basis of new technology development moving forward. This system allows those that have institutional, political, geographic or financial barriers to entry to finally have access to products and services they have never been able to acquire. Cryptocurrency definitely has its pros and cons but there is no doubt that it will play a large part in the future of the internet, and we can’t wait to see what the space comes up with next.