As crypto becomes mainstream, it’s raising a lot of questions. If you ask someone off the street what cryptocurrency is, you might get a variety of answers ranging from “it’s a Ponzi scheme” to “it’s internet money” to “it’s a powerful blockchain-based digital asset class.” Some people seem fanatical about it, and others… less so. But more people are trying to wrap their heads around this digital phenomenon as celebrities flash NFTs (non-fungible tokens) worth millions, crypto companies set up shop in Manhattan, and governments scramble to keep up.
But what is the point of crypto? To some, the original premise of Bitcoin was enough. It allowed people to privately transact peer-to-peer (kind of like Venmo) with no government oversight, no third parties profiting off of your money, and no question of manipulation.
Bitcoin was born partially due to the financial collapse of 2008 as a way to avoid intervention from governments, corporations, and banks that were becoming harder to differentiate in their concentration of power. So someone — the pseudonymous Satoshi Nakamoto — decided to make a new system of currency that isn’t controlled by corrupt entities.
That was back in 2009. Now, the uses for blockchain and crypto are virtually endless. Ethereum and smart contracts have changed everything. Cryptocurrencies have immense underlying value as they are ingrained in the software that runs platforms where we can lend, borrow, trade, and perform virtually every financial service or internet use there is. But that’s not all. Let’s try to explain some of the benefits of crypto in detail.
Cryptocurrency, in some ways, is like time for money. Seconds don’t happen because the government decides to mint more. Seconds, minutes, and hours happen because there is an uncontrollable force that humans aren’t able to manipulate — or else we would! In the same way, the blockchain-based systems that cryptocurrencies are built upon are designed to be completely immutable (unchangeable) and decentralized.
With fiat currency (the term we use for government-issued money), governments effectively control the supply and value of money. Since most countries have left the gold standard behind, there is little backing the value of fiat currencies. In this way, citizens are left completely at the mercy of their government. If inflation explodes due to poor monetary policy, savings accounts could be rendered useless, as we’ve seen in countries that have faced hyperinflation recently. Cryptocurrencies like bitcoin are now used extensively by individuals and institutions as a hedge against inflation. With a built-in immutable supply schedule, cryptocurrency is designed to be immune to these types of failures and can even be deflationary in nature.
People are unpredictable and sometimes deceptive. The “Byzantine Generals Problem,” or the “Byzantine Fault,” is often discussed in computing to illustrate how “trustless” systems solve an age-old problem. As an abbreviated version, the Byzantine Generals are placed in different areas surrounding a city (Constantinople) they are going to attack. However, to coordinate the attack successfully, they need to agree on a time.
Their only method of communication is a messenger on horseback, and there is a big risk that a spy could impersonate the messenger to disrupt the attack or that the messenger may be intercepted by the enemy. In other words, it’s a problem of coming to a “consensus” between all parties without having a central authority. Crypto and blockchain solve this problem for money by creating a decentralized global ledger agreed upon by all parties (nodes) that can’t be tampered with. Now, you don’t need to place your trust in people behind systems like banking. This gives us a viable “internet native” alternative to currency issued by central banks and governments.
If you lend $5 in cash to someone expecting them to pay you back $5.50 next week, there is nothing preventing them from taking the money and disappearing without paying you back. For this reason, we typically rely on banks to act as intermediaries. They use the money you have deposited in the bank to lend to others who need it now. But thanks to smart contracts, crypto applications can hold everyone accountable without relying on anything but the software.
When Ethereum first introduced smart contracts, it changed cryptocurrency forever. Smart contracts are predefined sets of rules or contracts that facilitate agreements between parties that are automatically enforced via a blockchain protocol. For example, if you wanted to lend crypto via a lending pool on a DEX such as Compound, you can do so safely while collecting interest. That is because the predetermined and precoded smart contracts prevent people from breaking the rules with no need for humans to regulate behavior behind the scenes.
There is a growing movement that goes far beyond crypto and even beyond blockchain: Web 3.0. What is it? It is the future generation of the internet that is just now beginning to gain traction with a greater number of users. Web 2.0 changed our lives by letting everyone contribute and make content on the web. Web 3.0 will take the notion of the internet for all to a whole new level. Web 3.0 crypto wallets like MetaMask enable users to interact with dApps and Web 3.0 platforms. These will span the Metaverse and decentralized finance (DeFi) applications that require no logins, only a connection to your independent wallet.
Part of the reason we have governments is so they can act as the central authority to tell us who owns what. This isn’t needed so much with things like crypto and NFTs. As we spend more of our time online, we will own more digital property and media. NFTs will act as the indisputable ownership model, where all purchases and transactions are verifiable on the blockchain.
The above reasons are just the beginning of this revolutionary technology. There are many more reasons unmentioned and unrealized as of this date. You don’t have to completely understand cryptography or blockchain to benefit from the new economics of Web 3.0 and crypto, but it will help give you an advantage in adopting the future of commerce and finance with millions of others.
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