Welcome to cryptocurrency
You probably already heard about Bitcoin, the first and most popular cryptocoin on the market. Bitcoin revolutionized the whole concept of currencies. Because of the blockchain technology behind Bitcoin (and every other cryptocurrency on the market), people decided to trust this open-source system. Let’s understand what cryptocurrency is:
Why is valuable to us a $20 bill?
There’s nothing inherently valuable about a $20 bill. This bill has a value because we’ve all decided it should. Money is about the exchanges and the transactions that we have with each other. Money it’s about a collective story that we tell each other about value.
We started using digital money more than 20 years ago. We get paid via direct deposit, we pay our taxes online, we buy things online, etc. All of these interactions are made with a computer coding behind. Basically there’s not anything physical like a bill or a coin, it is digital money. We can pay someone around the world in seconds.
What makes it possible is that there are large institutions underwriting the computer code behind the payment. But sometimes the system doesn’t work and it’s often the fault of those large institutions. It’s their responsibility to fix the problem. And a lot of times they don’t.
However, transferring money across borders and across currencies is really expensive. Or sometimes the system fails and your money is still in pending.
Our access to digital money is being held captive by these institutions. That’s because digital money isn’t really ours. It’s entries in databases that belong to our bank, our credit card companies. And these institutions have the right to say no.
For instance, if PayPal is accusing you wrongly for fraud, that’s it. Your account gets frozen and you can’t receive or send money.
These institutions are standing in the way of innovation.
So far we’ve been through two phases of money. The first phase we had to deal with physical objects and money moved at the speed of humans. The second phase, the digital world money can reach much faster and farther. Money now moves with the speed of banks.
At this moment we are entering a new phase of money. This phase contain programmable money. When we combine currency and software, money is becoming a static unit of value. We don’t have to rely on institutions for security. We can remove humans and institutions from the loop. Money will be directed by computers and will be safer and more secured. This phase is called cryptocurrency.
How does cryptocurrency work?
This currencies are money that can’t be controlled by an institution or any government. It is designed to work in a world without intermediaries. Bitcoins is the most popular one, but there are hundreds of them: Ethereum, Monero, Dash, Doge, Stellar, Stratis, Factom, Litecoin, etc. All of these coins are real money. You can buy them, use them, trade on them. For example, with Bitcoin you are able to buy a laptop, pizza, a vacation or even a house. Simple as that.
Cryptocurrencies are based on cryptography. Field of mathematics that are masking the information so it can be hidden in plain sight and verifying a piece of information’s source. Today, everyone who uses a modern web browser runs a sophisticated cryptosystem: interactions on the Internet, typing your password, sending financial information to websites.
In other words, what banks offered us (“trustworthy digital money”) we can now get with a clever application of cryptography. We don’t need to rely on the banks anymore to secure our transactions.
Let’s take as example Bitcoin. If you own bitcoin and want to send to someone a specific amount. The transaction between you and the other person is written and stored on the blockchain. I can look at the transaction, in fact I can look on all transactions ever made with bitcoin. The blockchain is public for everyone.
To run the blockchain (through computer code) it requires computers. These computers are connected together around the world. All of these computers are collectively confirming who owns what Bitcoin. So, the Bitcoin blockchain is core to how Bitcoin works.
Where do bitcoins come from?
The code from Bitcoin is designed to create new Bitcoin according to a schedule. In order to create bitcoin, I have to solve a puzzle, a cryptographic random puzzle. Imagine that I have a pack of 52 cards and I have to select 4 cards each time after I shuffle them. When I selected 4 Aces, I get paid. This is very similar to what computers are doing. They are constantly trying to get the right number. And when they do, they actually solved a puzzle.
The computer that solves the puzzle publishes to solution to the rest of the network and collects its reward: new bitcoins. The interesting fact about solving a puzzle is to secure the Bitcoin blockchain and add to the list of transactions.
There are actually people all over the world running this software. They are called miners. Anyone can become a Bitcoin miner. You can download the software on your computer and try collecting bitcoins. I wouldn’t recommend it because today the puzzle is very hard and the network is so powerful, that if you try to mine Bitcoins on your laptop, you probably won’t see any Bitcoin for millions of years. Professional miners use a specific hardware designed to mine and solve the puzzle very quickly. The Bitcoin network and all of it’s hardware, estimately the amount of energy it uses is equivalent to a small country.
Cryptocurrencies are the first steps to programmable money. In a world with programmable money you can pay anyone, securely without asking permissions and without worries that your account can be suspended or frozen. You can spend money anywhere in the world.
What kind of world will programmable money create?
Imagine a world where instead of signing up for streaming services and getting a cable bill, you’re TV analyses your views and watching habits and recommended well-priced content that with fit your budget the you enjoy. Imagine an Internet without ads, instead of paying our attention when we view content, we just pay an amount just to view the content.
Things like micro-payments will change the way security works in our world. Once we’re better able to allocate value, people will use their money and their energies for more constructive things.
This world is coming. We are not there yet, but it is about to happen. Today we’re in a world that seeing the first automobile. The first cryptocurrency it’s like the first car. It’s slow, hard to understand and hard to use. Digital money, like to horse and carriage, works pretty well and the whole world economy is build on it.
We are entering a new world. The world of programmable money. It is captivating, but also a little bit scary. Cryptocurrencies can be used for illegal transactions, just like cash used for crime nowadays. When all the transactions are online, what effect will have on surveillance. Who can see what we do? Who’s advantaged and who’s not? We’ll have to pay for things that we didn’t have to pay before? We all will become slaves to algorithms and utility functions?
All this technology comes with trade-offs. Internet brought us multiple ways of wasting time, but also increased productivity. Mobile phone are annoying because it makes us feel connected to work all the time, but they also help us stay connected with our loved ones. The new sharing economy will eliminate some jobs, but will also going to create new jobs.
With programmable money we eliminate the need of large, trusted institutions. And this will accelerate the innovation of money. Programmable money will democratizes money. And because of it, things are going to change.
“There are 3 eras of currency: Commodity based, politically based, and now, math based.” - Chris Dixon2016-12-06 00:59:06
Soon the math will rule the economy. The more of us are joining the crypto community the faster the change will come!2016-12-06 12:58:40