Cryptocurrency
What Is a Cryptocurrency?
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
This consist of coins and tokens.
Token vs Coin: What’s the Difference?
If we look at the differences between coins and tokens, here are a few to be outlined.
Tokens are much easier to create. Basically, you can use a standard template available on a blockchain platform instead of creating a new code. Yes, you and everyone else can easily create their own token. Coins and tokens have different structures. Coins have their own separate blockchains, whereas tokens are created on the existing blockchains, e.g., on the Ethereum blockchain. The Ethereum blockchain was actually the first to simplify the creation of tokens.
Coins represent a method of payment for buying or selling products and services, while tokens can be a company’s share.
Finally, coins function independently, and tokens are used for specific crypto-projects, being used as a method of payment within certain platforms.
KEY TAKEAWAYS
A cryptocurrency is a new form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.
The word “cryptocurrency” is derived from the encryption techniques which are used to secure the network.
Blockchains, which are organizational methods for ensuring the integrity of transactional data, is an essential component of many cryptocurrencies.
Many experts believe that blockchain and related technology will disrupt many industries, including finance and law.
Cryptocurrencies face criticism for a number of reasons, including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. However, they also have been praised for their portability, divisibility, inflation resistance, and transparency.
Understanding Cryptocurrencies
Cryptocurrencies are systems that allow for the secure payments online which are denominated in terms of virtual "tokens," which are represented by ledger entries internal to the system. "Crypto" refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.
Types of Cryptocurrency
The first blockchain-based cryptocurrency was Bitcoin, which still remains the most popular and most valuable. Today, there are thousands of alternate cryptocurrencies with various functions and specifications. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch.
Bitcoin was launched in 2009 by an individual or group known by the pseudonym "Satoshi Nakamoto."1 As of Nov. 2019, there were over 18 million bitcoins in circulation with a total market value of around $146 billion.
Some of the competing cryptocurrencies spawned by Bitcoin’s success, known as "altcoins," include Litecoin, Peercoin, and Namecoin, as well as Ethereum, Cardano, and EOS. Today, the aggregate value of all the cryptocurrencies in existence is around $214 billion—Bitcoin currently represents more than 68% of the total value.
Some of the cryptography used in cryptocurrency today was originally developed for military applications. At one point, the government wanted to put controls on cryptography similar to the legal restrictions on weapons, but the right for civilians to use cryptography was secured on grounds of freedom of speech.
Special Considerations
Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology, which is used to keep an online ledger of all the transactions that have ever been conducted, thus providing a data structure for this ledger that is quite secure and is shared and agreed upon by the entire network of individual node, or computer maintaining a copy of the ledger. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories.
Many experts see blockchain technology as having serious potential for uses like online voting and crowdfunding, and major financial institutions such as JPMorgan Chase (JPM) see the potential to lower transaction costs by streamlining payment processing.4 However, because cryptocurrencies are virtual and are not stored on a central database, a digital cryptocurrency balance can be wiped out by the loss or destruction of a hard drive if a backup copy of the private key does not exist. At the same time, there is no central authority, government, or corporation that has access to your funds or your personal information.
DeFi, also known in full as Decentralized Finance, is a complete ecosystem of financial applications built on other blockchain networks. Decentralized Finance also represents a movement focused on creating transparent financial services, open-source and permissionless - meaning international financial products and services are accessible to everyboody and operating without a central authority.
Why DeFi Matters
In essence, decentralized finance applications allow users to exercise full control and ownership of their assets as well as the interaction within the financial sytstem using a peer to peer model.
The distinguishing element between DeFi and cryptocurrencies is the former fully focuses on decentralization while using lucrative incentive structures as an approach to encourage investors to take part in the movement. More so, DeFi has grown through crowd-funding startup models called ICOs (initial coin offering) and has been able to attract funding into projects quickly.
DeFi projects are software protocols running on top of a blockchain network such as Ethereum or Cosmos. These projects leverage the underlying protocol technology as well as new improvements to automate financial services.
How DeFi Works
DeFi projects earn this term because they are supposed to be fully non-custodial and decentralized. Noncustodial means the system doesn't manage or are control the user's crypto assets. DeFi projects allow you to be in full control of your cryptocurrency, you do not deposit your asset with a central authority. On the other hand, decentralization in DeFi projects means owners of the project devolve or cede all their power of executing transactions to using smart contracts.
What DeFi Does
Defi projects are solving unique problems within the financial services industry.
Lending and Borrowing
DeFi projects focused on lending and borrowing allow users to lend and take out a loan by using software and bypassing the need to engage a trusted third party. Instead of using paper contracts, they leverage on the use of code to automate processes such as calculating interest rates and maintenance margins necessary in lending. For instance, a user wishing to lend part of their cryptocurrencies will send their desired amount to lend in form of tokens and or coins to an address controlled by the protocol. In return, they earn interest depending on the amount lent.
On the other hand, borrowers place the desired cryptocurrency by the borrower in the form of a cryptocurrency and will only borrow a percentage of the posted value. Examples of leading borrowing and lending DeFi projects include Compound, Aave, and yEarn.
Decentralized Exchanges
Also known as DEXs, these are exchanges allowing users to exchange their cryptocurrency assets without the use of a mediator in the form of a centralized exchange. Decentralized exchanges operate as a true peer to peer exchange. They are increasingly becoming popular because users can instantly convert their cryptocurrencies, have quick access to trading pairs, high security and privacy of funds. The main examples of DEXs include Uniswap, Kyber Network, and 0x.
Derivatives
Derivatives are markets where buyers and sellers interact by exchanging a contract of an underlying asset based on the future value of that asset. Examples of these underlying assets can be cryptocurrencies, stocks, bonds, or an outcome of a future event. Examples of these DeFi projects include Synthetix, Augur, and Gnosis.
Get Started in DeFi
Individuals interested in trying out or diversifying their portfolio using DeFi projects need to follow the following steps:
Acquire an Ethereum wallet and using your browser connects it to the identified DeFi protocol.
Buy the appropriate coin or token for the particular DeFi protocol desired. For example, most of DeFi projects are live on the Ethereum protocol; hence one should buy ETH or any ERC20 token. If using Bitcoin, you should convert it to Wrapped Bitcoin wBTC which is an ETH version of Bitcoin.
You are not set to take part in the DeFi revolution by participating in the various use cases as discussed above. However, it is important to conduct their research as this is a high-risk high return space in the crypto industry. Besides, scammers and vulnerability to errors are quite rife in this domain.
DeFI Advantages
Decentralized Finance is bent on revolutionizing traditional finance.
No intermediaries or arbitrators- DeFi projects use code that specifies the resolution of every possible future dispute. More so, users have control over their funds.Eliminates single point of failure- DeFi projects are built on top of blockchain networks, hence data secured by this technology and decentralized using thousands of nodes. Consequently, making it difficult to orchestrate shutdown or censorship of these new financial services.Secure and less complex- DeFi applications are built-in advance making the process of deployment easy and secure.Global access- DeFi applications are open ecosystems making it possible for anyone around the world to access financial services and products.
Advantages and Disadvantages of Cryptocurrency
General Advantages
Cryptocurrencies hold the promise of making it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or credit card company. These transfers are instead secured by the use of public keys and private keys and different forms of incentive systems, like Proof of Work or Proof of Stake.
In modern cryptocurrency systems, a user's "wallet," or account address, has a public key, while the private key is known only to the owner and is used to sign transactions. Fund transfers are completed with minimal processing fees, allowing users to avoid the steep fees charged by banks and financial institutions for wire transfers.
General Disadvantages
The semi-anonymous nature of cryptocurrency transactions makes them well-suited for a host of illegal activities, such as money laundering and tax evasion. However, cryptocurrency advocates often highly value their anonymity, citing benefits of privacy like protection for whistleblowers or activists living under repressive governments. Some cryptocurrencies are more private than others.
Bitcoin, for instance, is a relatively poor choice for conducting illegal business online, since the forensic analysis of the Bitcoin blockchain has helped authorities to arrest and prosecute criminals. More privacyoriented coins do exist, however, such as Dash, Monero, or ZCash, which are far more difficult to trace.
Criticism of Cryptocurrency
Since market prices for cryptocurrencies are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely, since the design of many cryptocurrencies ensures a high degree of scarcity.
Bitcoin has experienced some rapid surges and collapses in value, climbing as high as $19,000 per Bitcoin in Dec. of 2017 before dropping to around $7,000 in the following months.2 Cryptocurrencies are thus considered by some economists to be a short-lived fad or speculative bubble.
There is concern that cryptocurrencies like Bitcoin are not rooted in any material goods. Some research, however, has identified that the cost of producing a Bitcoin, which requires an increasingly large amount of energy, is directly related to its market price.
Cryptocurrency blockchains are highly secure, but other aspects of a cryptocurrency ecosystem, including exchanges and wallets, are not immune to the threat of hacking. In Bitcoin's 10-year history, several online exchanges have been the subject of hacking and theft, sometimes with millions of dollars worth of "coins" stolen.
Nonetheless, many observers see potential advantages in cryptocurrencies, like the possibility of preserving value against inflation and facilitating exchange while being more easy to transport and divide than precious metals and existing outside the influence of central banks and governments.
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