Many experts in the finance and technology field see cryptocurrency as the most important innovation since the internet. However, it can be difficult to understand all of the complexities that come with this emerging market. There are stories of the price going up and down in the news from time to time. However, there is not much discussion on how this technology works and what it means for the future of finance. Yes, understanding bitcoin and other cryptocurrencies can seem overwhelming at first. However, it’s easier to understand the importance of this new technology when you start with the history.
To understand the cryptocurrency market as a whole, you should focus on two crypto networks. These two networks are Bitcoin and Ethereum. These are by far the most widely-used blockchains on the internet. Taking the time to understand the features of these two networks is the best way to start in this space. It is important to understand the use cases of Bitcoin and Ethereum.
Bitcoin is the first successful cryptocurrency. There had been attempts at creating various forms of digital cash before Bitcoin. However, Bitcoin’s focus on decentralization and censorship resistance is what helped it succeed where other projects had failed. In Satoshi Nakamoto’s Bitcoin white paper, he discussed the need to create a peer-to-peer digital cash system.
This cash system did not rely on trusted third parties for payment processing. In his other writings, Nakamoto discussed the problems with modern central banking. Especially, how there was a need for a digital equivalent of a gold-based monetary system.
Bitcoin’s decentralization is what allows the system to remain trustless, permissionless, and censorship resistant. Instead of having transactions tracked by a centralized entity, every Bitcoin user runs software that records every transaction ever made in the system. There is an ability for anyone to run Bitcoin’s full node software. This allows users to confirm that people are following the rules of the system and no one is cheating.
Additionally, Bitcoin users have full control over their money with their private keys. A Bitcoin transaction can only be created by the owner of the private keys behind a particular Bitcoin address. This is in contrast to traditional online banking systems, where the bank or fintech company behind the platform has the power to censor transactions or seize funds.
Bitcoin miners are known as powerful parts of the network. However, the reality is they mainly do the hard work of properly ordering transactions. Miners are effectively the solution to the so-called double-spending problem. Without the miners, users would be able to spend their bitcoin more than once. This is because there would be no central source of truth in terms of the order of transactions.
The popular cryptocurrency, has exploded in popularity over the past decade. This could be due to the view that it can act as a form of digital gold. In the past, gold was seen as a hedge against high levels of inflation. Especially those found with government-controlled currencies. Much like gold, there is no central party. There will never be more than 21 million bitcoin in the system.
Creating a decentralized digital financial system means that individuals have control over their finances. As a result, the power held by banks and governments is weakened. It becomes more difficult to preserve highly-inflationary monetary policy, capital controls, financial censorship, and many other problematic aspects of centralized financial systems in a Bitcoin world.
The idea with Ethereum was to enable the same sort of decentralization and censorship found in Bitcoin. Mainly with a higher degree of functionality at the base layer. There is a more expressive programming language associated with Ethereum. This is what enabled an explosion of decentralized applications. Especially, the ones that have occurred on top of the platform over the past few years. Much of the crypto activity around stablecoins, decentralized finance (DeFi), meme tokens, non-fungible tokens (NFTs) exist on Ethereum.
Developers have much more flexibility in terms of what they can build on Ethereum. However, this does not come without its tradeoffs. In general, Ethereum is a more centralized system than Bitcoin. Ethereum also tends to take a “move fast and break things” approach to core protocol development. The most recent example of this idea is the network’s transition from proof-of-work to proof-of-stake. You should note that many of the sorts of applications built on Ethereum can exist on Bitcoin.
Where to start with Cryptocurrency
Now that you understand the basics of crypto, it should be easier to grasp the market as a whole. The best way to understand this financial technology is to begin using it. For starters, you can purchase a small amount of crypto. You should try sending it back and forth between different wallets. Are you feeling bullish on the potential future of crypto assets as a whole? You may want to begin purchasing your favorite crypto on a weekly basis.
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