To understand cryptocurrency, you need to understand how money works and what makes these new assets useful and potentially usable as currency in the future. First, there was “physical” money – banknotes and coins. Then came e-Money – the numbers that appear in your e-banking apps. Both are government-issued.
And then came cryptocurrency, a type of electronic money that is not issued by any government. It’s also called Math Money because it’s created and managed using blockchains, which are computer networks powered by advanced math. Today, the use case for cryptocurrency is primarily its value as an asset, while the underlying blockchain technology is already fueling a number of applications. But the future of money can be very different.
1. What is blockchain?
Let’s say Svetlana borrows 10,000 rupees from me. She should return it in a week, but she doesn’t. I remind her, but she conveniently “forgot” about it. What can I do? Nothing, except never lend you anything again! Real story.
Now, suppose that when you lend the money some friends are present. They all clicked on a photo or filmed me lending the money to Svetlana and her promising to pay it back within a week. And each of these friends posts the photo / video on Instagram, Facebook, etc. This is solid evidence. And Svetlana cannot delete all these videos/photos from the Internet.
Now this is something like a blockchain.
A blockchain is usually a group of computers (nodes) connected to each other. All these computers contain the same information (for example, a transaction ledger). To “hack” this information, you will need to “hack” most of these computers at the same time. And this is a very difficult thing to do!
There are many blockchains in the world. Blockchain Bitcoin is the first and oldest. It records all bitcoin cryptocurrency transactions. Anyone can run a node from this blockchain. All you need is a computer with enough storage space and a strong Internet connection.
2. How are cryptocurrencies created?
There are 2 common ways to create cryptocurrencies. One is the style used by Bitcoin and the other is the style used by Ethereum.
Bitcoin-style, there are a lot of computers called miners that are constantly trying to solve math puzzles. Approximately every 10 minutes, one of these miners wins the race to solve the puzzle. This miner earns a reward that is currently 6.25 bitcoins. That’s about Rs. 2 crores. Yes, you read that right. Every 10 minutes, someone receives 2 Crores of bitcoin.
But don’t be too jealous of these miners. They have to spend a lot of money on computers and electricity. And they can never be sure how much they’re actually going to make.
Many years ago, anyone could mine or create bitcoins using a laptop! Well not anymore. Today you need a lot of computing power for that. If you want to understand this concept of mining in all its complicated technological glory, you can download the Future Money Playbook I wrote for free.
Ethereum-style, you can create your own encryption in minutes. My daughters were sick of hearing about Dogecoin. So they decided to create their own cat-based cryptocurrency. All they needed to do was customize a “smart contract” and publish it on the Ethereum blockchain. That’s it! Within minutes, they created a new cryptocurrency with a supply of 7 billion tokens – one for every human on Earth. Real story.
3. What are the types of cryptocurrencies?
There are 3 common types of cryptocurrencies – medium of exchange, utility currency and stable currency.
A means of exchange encryption can be used to buy and sell things. Examples are Bitcoin, Dogecoin, Litecoin and Monero. These are the types that governments hate. That’s because they can be used by criminals. But hey, criminals can use money too! So it’s a little unfair to blame these poor cryptus.
Then there are utility coins. Just as oil “fuels” the global economy, utility currencies such as Ether “fuel” blockchain-based businesses.
And finally there are stablecoins. These are backed by normal fiat currencies such as the US Dollar or 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 encryption with a total value of over $880 billion. And the world’s biggest bank, JP Morgan Chase, is worth $470 billion.
The most popular utility currency in the world is Ether (ETH), with a total value of $377 billion. India’s biggest bank, HDFC Bank, pales in comparison to 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 a lot? Well, that’s the size of the ICICI Bank too!
(Note: numbers are as of August 20, 2021)
Rohas Nagpal is the author of the Future Money Playbook and Chief Blockchain Architect of the Wrapped Asset Project. He is also an amateur boxer and a retired hacker. You can follow him on LinkedIn.