Cryptocurrencies have taken our society by storm, and the number of people who have heard of them is constantly on the rise. By early 2017, interest over these digital currencies experienced a significant growth; this is something that is reflected in the graph below, where we can see the amount of money currently invested across all virtual currencies:
How many cryptocurrencies are there?Bitcoin can be defined as the original cryptocurrency , since practically every cryptocurrencies that emerged since then have been programed using the Bitcoin code as a basis. These new currencies are known as “altcoins” or alternative currencies, and at the time over 2,000 different currencies have been created.
If you are wondering why there are so many cryptocurrencies, the answer is easy. This new digital gold rush has drawn hundreds of new investors, and there are hundreds of entrepreneurs who have seen an easy way to raise funds and put their ideas into practice.
That is the reason why each week you see new ICOs being announced, which will ultimately release new digital currencies on the market.
What are cryptocurrencies?
Cryptocurrencies intend to substitute traditional – fiat – money, and even though each day currencies with specific uses emerge, all of them fulfil the requirement of having the intention of substituting money.
In order for this system to work, it was necessary to create a new technology known as blockchain. This chain is like a large, public, distributed accounting journal where all transactions, account numbers and balances of those accounts are recorded. Once the transaction has been confirmed by the network, that operation cannot be altered, which ensures that when you send money to someone, it is subtracted from you and added to the other person.
How do cryptocurrencies work?
Without going into the technical specifications, everything comes down to the accounting journal, consensus on the network and decentralization. But even further, I will explain to you the main items you should know in order to understand how cryptocurrencies work:
Miners: creation of currencies and network security
Using Bitcoin as an example, we find that there are hundreds of miners and major companies that dedicate their full computing power to the Bitcoin network. These miners are in charge of confirming transactions so that they can be added to the blockchain, and for that work they are rewarded in Bitcoins.
This same example also applies to other cryptocurrencies that use the PoW mining system. There are basically two mining methods:
This mining method is defined as a proof of stake, and in order to track it we will only need to keep currencies stored in their corresponding wallet. It is used, for example, by currencies such as NEO and Waves.
This is the proof of work method, which requires that you put your computer to work in solving mathematical problems that will help confirm the transactions. Miners receive a reward in that currency each time they create a new “hash” and complete a transaction block.
Why is a cryptocurrency safe?
- The network supporting a cryptocurrency is formed by thousands of computers which contain a real-time copy of all transactions performed, all accounts and all balances. The Bitcoin network is said to be even more powerful than that of Google or even the NSA.
- With his new peer payment system (Bitcoin), Satoshi Nakamoto solved the problem of double expenditure; now no one can spend their cryptocurrencies twice. When you send coins to someone, they will be subtracted from your account and added to that of the receiver – this is one of the reasons to trust these digital assets, and it is immutable.
- These currencies are open source, which means anyone with sufficient knowledge may study and audit their code.
- The entire consensus model is encoded and protected by cryptography. The safety of our cryptocurrencies has a basis in mathematics, not in the trust we may have on certain persons, entities or governments.
- You have a name and some personal data in your everyday life. In the crypto world, you just need an address which is created randomly and in no way relates to your identity.
- Our cryptocurrencies are blocked under a public key cryptographic system. Everyone can see the amount of coins in that account, but they cannot know who they belong to, and only we will be able to move them by using our cryptography-based private key. A system that has proven to be impossible to hack.
- Once a transaction is confirmed, there is no way to undo it.
- No one can prevent you from moving your money as long as you keep your cryptocurrency in your wallet; no one will be able to restrict your accounts or freeze your assets.
The future of cryptocurrencies
Bitcoin is the first digital currency project that has managed to earn the trust of a majority of people, and continues increasing its user base since 2009. This trust and growing interest for cryptocurrencies will rise in the following years, and draw more people as they become aware of their advantages.
Cryptocurrencies have already proven to be a fast and safe payment method, in addition to promising that our money will increase its value over time.
At the time, most currencies, and some as well-known as Bitcoin, Ethereum and Litecoin, are undergoing a merely speculative stage and are seen as a store of value rather than as payment methods. But this may change in the future, and in fact, I am confident it will.
The large ICO collections will diminish and the significant volatility of cryptocurrencies will stabilize as a large mass of informed users become part of the ecosystem.
Cryptocurrencies are here to stay. As in every new market, there are doubts and speculators at every step, but just like what happened with the dotcom bubble, only truly useful projects will remain. So before investing, you should study the project in-depth.
Things will change
- The decentralization of these currencies is currently more theoretical than practical. When speaking of Bitcoin, we find large companies that hoard most of the hash rate, and that needs to change. The future will involve redistributing the power toward individual miners.
- Decentralized exchangers are the future, and the path to follow will be that of token exchange between users themselves.
- The blockchain and even smart contracts are groundbreaking. These innovations will bring significant change to our society, and many companies have already understood that.