To understand cryptocurrency, you need to understand how money works and what makes these new assets useful, and potentially useful as currency in the future. First, there was “physical” money – notes and coins. Then came e-Money – the numbers that show up in your e-banking apps. Both are issued by the government.
And then came cryptocurrency, a type of electronic money that is not issued by any government. It is also called Math Money because it is created and managed using blockchains, computer networks powered by advanced mathematics. Today, the use case for cryptocurrency is mostly its value as an asset, while the underlying blockchain technology is already powering a number of applications. But the future of money may look very different.
1. What is Blockchain?
Let’s say Svetlana borrows 10,000 rupees from me. She was supposed to return it in a week but doesn’t. I remind her, but she conveniently ‘forgot’. What can I do? Nothing, except never lend her anything again! True story.
Now suppose that a few friends are present at the time of lending the money. They all clicked on a photo or made a video in which I lent Svetlana the money and promised to return it within a week. And each of these friends posts the photo/video on Instagram, Facebook, etc. That’s solid proof. And Svetlana can’t really delete all these videos/photos from the internet.
That is now something like a blockchain.
A blockchain is usually a number of computers (nodes) that are connected to each other. All these computers contain the same information (for example, a ledger of transactions). To “hack” this information, you must “hack” most of these computers at the same time. And that is quite difficult to do!
There are many blockchains in the world. The Bitcoin Blockchain is the first and oldest. It records all transactions of the bitcoin cryptocurrency. Anyone can run a node of this blockchain. All you need is a computer with enough storage space and a strong internet connection.
2. How are cryptocurrencies made?
There are 2 common ways to create cryptocurrencies. One is the style used by Bitcoin and the other is the style used by Ethereum.
In the Bitcoin style, there are a number of computers called miners that are constantly trying to solve mathematical puzzles. About every 10 minutes, one of these miners wins this race to solve the puzzle. This miner wins a reward that is currently 6.25 bitcoins. That’s about Rs. 2 million. Yes, you read that right. Every 10 minutes someone gets 2 Crores worth of bitcoin.
But don’t be too jealous of these miners. They have to spend tons of money on computers and electricity. And they can never be sure how much they will eventually earn.
Many years ago, anyone could mine or create bitcoins using a laptop! Well, not anymore. You need a lot of computing power for that these days. If you want to understand this concept of mining in all its complicated technical glory, you can download the free Future Money Playbook I wrote.
Ethereum-style, you can create your own crypto in minutes. My daughters were tired of hearing about Dogecoin. So they decided to create their own cat-based cryptocurrency. All they had to do was modify a “smart contract” and publish it on the Ethereum blockchain. That is it! Within minutes, they had created a new cryptocurrency with a supply of 7 billion tokens – one for every human being on Earth. True story.
3. What are the types of cryptocurrencies?
There are 3 common types of cryptos: medium of exchange, utility coin and stablecoins.
A medium of exchange crypto can be used to buy and sell stuff. Examples are Bitcoin, Dogecoin, Litecoin and Monero. These are the kinds that governments hate. That’s because they can be used by criminals. But hey, criminals can use cash too! So it’s a bit unfair to blame these poor little cryptos.
Then there are utility coins. Just as oil “feeds” the global economy, “burn” utility currencies, such as Ether, blockchain-based companies.
And finally, there are stablecoins. These are backed by regular fiat currencies such as the US dollar or the Japanese yen.
4. Numbers don’t lie
The first and most popular cryptocurrency in the world is Bitcoin (BTC). It is a medium of exchange with a total value of more than $880 billion. And the world’s largest bank, JP Morgan Chase, is worth $470 billion.
The world’s most popular utility currency is Ether (ETH) with a total value of $377 billion. India’s largest bank, HDFC Bank, pales in comparison with a total value of $140.37 billion.
Tether (USDT) is the most popular stablecoin with a total value of $64 billion. Doesn’t seem like much? Well, that’s the size of ICICI Bank too!
(Note: Figures are as of August 20, 2021)
Rohas Nagpal is the author of the Future Money Playbook and Chief Blockchain Architect at the Wrapped Asset Project. He is also an amateur boxer and a retired hacker. You can follow him on LinkedIn.