The birth of cryptocurrencies
You’ll be surprised to learn that cryptocurrencies weren’t born with the purpose they have today, they are actually sort of a spin-off of another invention. So yes, Satoshi Nakamoto, the creator of Bitcoin, never wanted to create a currency, but rather a decentralised payment system, a system not based on trust, but entirely based on mathematics.
Satoshi tried to build a digital payment system without a central entity, In the form of a peer-to-peer file-sharing network.
The puzzle piece that all its predecessors lacked (attempts had been made since the 1990s to invent a such a payment system) was in fact cryptocurrency.
The biggest obstacle in eliminating a central body (and therefore a central computer) that controls movements and accounts, is to entrust someone else with the responsibility of controlling. Decentralising means, in essence, giving this task to all the people involved (or rather to their computers). Each node (or peer) in the network must have a list of all transactions to verify if future transactions are valid or if there is any ongoing double-spending attempt.
Obviously we are dealing with nodes, so servers and mathematics, not with people and opinions, although those servers belong to real people who are part of the network and who are all around the world.
But how can we make all these nodes agree? Only absolute consent can work, kind of like the approval of a bank that tells you, “yes, you can send money to your mom because you actually have that money in the bank, it’s a clean transaction and you’re not trying to launder money.”
And then, just like magic: Satoshi Nakamoto comes out of the blue with the answer to the unsolvable problem of decentralised consent. Cryptocurrencies were part of his solution, the secret ingredient that made this new recipe really exciting.
The advantages of distributed control
Cryptocurrencies are free from direct control by banks or financial institutions, which is advantageous for many reasons.
For example, if you increase the production of coins and put them on the market, that coin loses value and consequently generates inflation.
For cryptocurrencies, this is not the case because the maximum number of coins or tokens and how they will be released are decided before they are placed on the market. For some of these cryptos, such as Bitcoin, the introduction takes place gradually through mining.
The creation of Bitcoins through mining, for example, is made possible thanks to the work of the miners, who check the validity of each transaction performed on the blockchain and receive in return freshly minted coins. The bitcoin miners, as well as most of the validators of other blockchains, control each other and the transactions are verified by everyone because they are publicly recorded.
In traditional finance, on the other hand, it is the governments that take care of which coins are valid in their country, of certifying their authenticity and of monitoring their value.
Government control over currencies
Each government has the task of minting the currency that is valid in its own country and certifying its authenticity and value. States may decide to entrust this task to other bodies, usually the Central Bank. This way, there is central control of the currency, of its validity and of its value. Each government can, at least in part, control inflation by increasing or decreasing the introduction of new currency on the market. For example, if you print more Pounds, their value will tend to decrease, like that of any widely available asset.
Cryptocurrencies, on the other hand, completely escape this mechanism, because they are based solely on a mathematical algorithm and the task carried out by the Central Banks is instead taken on by the contributors of the network scattered all over the world. The difference is that the latter, both collectively and individually, do not have the power to control or modify the issue of money, because the release of new currency follows a predictable mathematical trend and is not influenced either by the people who materially create it nor by human events and decisions. This way, the economic system on which Bitcoin and other cryptocurrencies are based eludes the control of the banks.
What’s the difference between cryptos, coins and tokens?
The term “cryptocurrency” or “crypto” refers to all types of digital currency, including both coins and tokens.
A coin, such as Bitcoin, Bitcoin Cash, Ethereum, Ripple, does not depend on any platform or blockchain. It can be used outside its native environment and has an intrinsic value. Basically, these are the “cryptocurrencies” that we all know.
On the other hand, there are tokens, i.e. cryptocurrencies that have been created on a pre-existing platform, all the most popular tokens (Tether is a unique case) are based on the Ethereum protocol, ERC-20.
Tokens represent an asset or a utility of a company and are usually launched on the market with a public sale called ICO (Initial Coin Offering).
What is the difference between mining and validation?
A mining node is a node that contributes to the network by guessing the combinations necessary to “seal” the blocks containing the transactions and then confirm them, producing new coins in the process. A validation node is a node that validates the information associated with each transaction (also contained in the blocks), ensures that it is true and passes it on to other nodes, thus allowing the transfer of value from address A to address B. Mining nodes are a subset of validation nodes, since each mining node is also a validation node.
Anyone with computer skills and a sufficiently powerful device can become a miner or validator, and you are usually rewarded with a small percentage of cryptocurrencies or fees. Often mining pools are formed, of various sizes, some of which are powerful companies, especially those that control bitcoins.
The cryptocurrency market is fast and wild. Almost every day new cryptocurrencies emerge, others die, the early users become rich and investors lose money. Every cryptocurrency has a promise, mainly a great story to change the world. Few survive in the early months and many are bought and sold by speculators and continue to live as zombie currencies until the last holder of that currency loses hope of seeing a return on his investment.
What is certain is that cryptocurrencies are here to stay and are changing the world. People buy Bitcoin to protect their savings, in the hope of having an opportunity to change their financial situation. More and more companies are discovering the potential of blockchain and smart contracts, starting real-world applicability projects. Institutional investors and investment funds are also starting to invest in this sector. A sector that is like an anthill moving underground, soon to be discovered.