Cryptocurrencies function both as a currency (medium of exchange) and a virtual accounting system. All transactions are logged on a blockchain, most which do not require permission. Anyone is free to utilize the system and post to the ledger.
One of the promising aspects to cryptocurrency is the removal of the banks, central or commercial. The blockchain is responsible for securing each transaction on the ledger. This is done through a variety of methods, depending upon how the system is set up.
The three most common consensus mechanisms are:
Each has it pros and cons. Bitcoin has come under attack for the amount of energy used as a result of the Proof-of-Work mechanism. Since its inception, Ethereum utilized PoW but is switching to the Proof-of-Stake consensus.
Many view the non-PoW system as lacking in security. Of the three, DPoS offers the greatest scaling capabilities.
According to Jan Lansky, there are six conditions that must be met:
- The system does not require a central authority; its state is maintained through distributed consensus.
- The system keeps an overview of cryptocurrency units and their ownership.
- The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
- Ownership of cryptocurrency units can be proved exclusively cryptographically.
- The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
- If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.
Cryptocurrency has the ability to tokenize most asset classes. Many are projecting that stocks, bonds, real estate, and an assortment of other assets will end up tokenized. Synthetic Assets are derivatives that mirror other financial products but reside in the world of decentralized finance (DeFi).
Some examples are:
The best known cryptocurrency is Bitcoin.
This was created by the anonymous Satoshi Nakamoto. Nakamoto introduced the world to Bitcoin by releasing the Bitcoin White Paper on October 31, 2008. It contained an idea for "peer-to-peer electronic cash system". In fact, the paper was called Bitcoin: A Peer-to-Peer Electronic Cash System.
Since that time, Bitcoin mining has exploded globally. At the same time, major players got involved with the price being followed on most investing shows.
Anything other than Bitcoin is called an alt-coin.
There are now thousands of alt-coins. The most best known of these is probably Ethereum which introduced the smart contract. This is the ability to program instructions which allows for the creation of all kinds of applications. It is the core of what brought forth decentralized finance (DeFi).
Digital wallets are a central part of cryptocurrency. Since there is no centralized control of the ledger, each individual is responsible for the safety all funds. This is done through the use of a wallet along with the associated keys.
Each address has a public and private key. The owner has to provide the private key each time in order to transact. Without that, the coins or tokens are not moving.
Securing one's keys (and seed phrases) is vital. Losing the key means the wallet is lost forever, along whatever is in it.
A digital wallet is a threat to the traditional banking system. It serves the purposes that most people find with a bank account. The ability to send, receive, and store money is possible with a digital wallet, the same services a bank account provides.
Cryptocurrency exists on blockchain. Even when using a digital wallet, the cryptocurrency is not actually in the wallet. Rather, the private key is what allows access to the distributed ledger and alert the network that a transaction is being made. Once consensus is reached, the different nodes will update the ledger.
A blockchain is essentially a growing list of records. The data is records in blocks which then are linked using cryptography. Each block has a hash pointer to the previous one, joining them together.
The timestamp and transaction data is also contained in the block.
Wall Street's Interest
A number of corporations and institutions showed an interest in cryptocurrency. While regulation is still full of uncertainty, Wall Street is interested.
The best known entrant is Michael Saylor of Microstrategy. His company has amassed a large holding of Bitcoin. The former CEO of the corporation is fully committed to trying to maximizing the potential of its holdings.
Tesla and Elon Musk is another who entered not only Bitcon, but also DOGE.
Countries throughout the world are wresting with how to regulate cryptocurrency. The unique nature of the asset class makes it difficult to apply older regulations to.
Governments of the world take different positions regarding cryptocurrency. One example is El Salvador which made Bitcoin legal tender. Other have taken the approach to trying to ban it.
The next couple years will see the government entities working on establishing regulation for their countries.
Comparisons to the Eurodollar System
Some feel that cryptocurrency, if constructed on a properly decentralized system, is beyond regulation. Much of this stems from the Eurodollar System which operates outside the realm of governments and central banks.
Like cryptocurrency, Eurodollars exist mostly in digital form. The market is made up of participants who are using nothing more than collateral on a balance sheet. None of this is backed by actually Eurodollars sitting as vault cash in banks.
The Eurodollar System is one that is entirely based upon "ledger technology". Blockchain and cryptocurrency can be thought of an the next stage in the evolution of that.
Posted Using LeoFinance Beta