Every dollar printed devalues the dollar in your pocket. The United States dollar is a global or reserve currency. That means that international trade accepts it for transactions. In fact, the United States dollar is the most popular reserve currency meaning maintaining its value is important for a stable world economy. However, through inflation, it’s constantly being devalued.
The Federal Reserve, or “the Fed”, is the central bank of the United States. Although it is not officially controlled by the United States government, many people believe that the two are intertwined (whether that means the government owns the Fed or the other way around). The most important thing that the Federal Reserve controls is the supply of US dollars via its monetary policy.
Long ago, every United States dollar was just an “IOU” issued by the Fed when you gave them gold. It was the true definition of a centralized bank where you could protect your gold and valuables in a bank, and they would give you a slip of paper that proves you own that purchasing power (or the amount of “stuff” that it can buy). However, on August 15th, 1971, the United States dollar was officially taken off the gold standard by President Richard Nixon, meaning they no longer had to give you gold for your “IOU”s. They had officially removed all of the gold backing and replaced it with unbacked Federal Reserve Notes.
So why is this a problem? Why does it matter that one group of people has the power to make more money? Isn’t that a good thing? Well, printing a lot of money causes inflation. The value of the dollar dramatically decreases as the abundance goes up.
Think of it like this: there are two people: Bill and Jill. Bill is selling a chair and Jill wants to buy it. Bill knows that Jill has $50 of spending money in her pocket, so Bill prices the chair at $50. Jill buys the chair and Bill gets the money. Now, on her way home, Jill finds a $100 bill on the street. All of a sudden, 100 new dollars is now in this “chair-purchase-system”. The next day Jill goes into Bill’s store and asks for a second chair, however, Bill saw Jill pick up the $100 bill so he raises the price to $100 knowing Jill can now afford it. All of a sudden, each dollar that Jill has went from being about to buy 1/50th of a chair to 1/100th of a chair.
This being said, the Federal Reserve doesn’t say they directly pump money into the economy. Through quantitative easing, they can indirectly force inflation on the economy. Quantitative easing is a monetary policy where the Federal Reserve buys financial assets in the market with money that they print. This means, they pay companies for assets using “street-found” money therefore upping the prices.
In the real world, we’ve seen many cases of inflation ruining entire economies and currencies. In places like Zimbabwe and Venezuela, carts full of trillions of Zimbabwe dollars and Venezuelan bolivars are littering the streets as trillion dollar bills are being devalued to less than the paper they are printed on.
The Solution: Cryptocurrency
Cryptocurrency is a digital asset that is used as a medium of exchange. These transactions are recorded and stored in a universal public ledger. Cryptocurrency does not use encryption but rather uses digital signatures and public and private key pairs that are based on mathematical techniques that have been used for encryption purposes. In fact, every transaction is publicly available for inspection on any block explorer. This is where the name crypto (as in cryptography) and currency (as in unit of value) comes from.
Cryptography is the practice of writing or cracking encoded messages. For example, if I were to want to send a secret message to my friend, I would first encrypt it with some sort of secret system (such as the Caesar Cipher which shifts each letter of the alphabet over a certain amount of times) and then send the message to my friend who has the key to decode it.
There are many uses to cryptocurrency; the main one being as a money. Cryptocurrency is decentralized meaning there is no third party in the middle of you and who you are exchanging crypto with. With paper money, you can just hand it to someone and they will receive it however, as digital money becomes more and more prevalent, concerns over extensive surveillance begin to arise. When using such digital payment methods, you are dependent on a third party who interacts with your money in between a transaction.
This makes cryptocurrency the prime candidate to be the next global reserve currency. No government can censor or control the flow of transactions and no one can “print” more crypto.
That being said, the monetary aspect of cryptocurrency is just the tip of the iceberg when it comes to its uses. Cryptocurrency is simply a proof of trade. Although many people see cryptocurrencies as being worth a certain amount of dollars, the user ultimately decides what a coin represents whether that be a dollar, a euro, or a house. Bitcoin, for example, is divisible into 100 million units called Satoshis each of which is both individually identifiable and programmable. This means each unit can be programmed to be worth an hour of work, a penny, a vote during an election, or anything else the user decides.
Cryptocurrency is also really useful as a specified allowance. You can program the currency into only being able to be spent on certain things. For example if you wanted to give a friend money for healthcare, you could be certain that’s just what it will be spent on. You can also program the currency to be returned to the provider after a certain amount of time if not spent.
Through these programmable cryptocurrencies, we can rebuild our monetary system, innovate our economy, and significantly decrease bureaucracy.
How is it protected?
Private and public keys are a sophisticated form of cryptography that cryptocurrencies like Bitcoin, Litecoin, and Ethereum use as security. Although they are described as being keys, they are actually just a long string of alphanumeric characters (they do not include ambiguous characters such as an O and 0 or an I and l).
You can think of public and private keys as being the username and password to your cryptocurrency. For example, although anyone could receive crypto to their public key (username), they cannot send any of it unless they have the corresponding private key (password) as transactions must be digitally signed by the private key holder.
With Bitcoin, you have a public address (derived from the public key) that can be shared and viewed by anyone. Through this public address, people can send or request cryptocurrency.
However, if ever anyone could get hold of your private key, you would essentially lose all of your cryptocurrency if the thief decides to take it. This poses a huge problem with spyware as many trojan spyware systems are being downloaded onto devices in search for cryptocurrency. Some Bitcoin wallet apps will display your private key on screen for you to memorize and if someone is remotely watching your screen, they have access to your cryptocurrency. Spyware is being developed using artificial intelligence to detect when a private key is being displayed in order to screenshot and save it for theft or blackmail purposes.
In 2009, Bitcoin, the first decentralized digital currency, introduced a technology known as the blockchain: an enormous ledger in which every transaction is recorded making sure no one can cheat the system by spending the same money twice. Many people around the world known as “miners” verify these transactions and record them on the blockchain. It is a permissionless system meaning no one needs to ask to become a miner or to make a transaction and no one is in charge of the system.
Where does cryptocurrency come from?
Some people believe that cryptocurrency is once in a generation wealth opportunity where you buy low and sell high before it all inevitably goes away. However, many people may see cryptocurrency as the latest phase of the evolution of money. And with that, it is hard to envision anything built better for monetary use in the digital age.
Thousands of years ago, transactions took place through trade and barter where one party would offer a certain item for another. However, as time went on and people realized the difficulties of obtaining the correct items in order to persuade the other party, physical money like coins and paper emerged.
Although they still exist today, the past few decades have seen a push into the digital world of money and have made physical money more and more obsolete. One common theme that we see across all of history which is that people prefer the quickest and most convenient transaction method.
The idea of cryptocurrency has been around ever since the creation of the internet back in 1983. This is because cryptocurrencies rely on a network. However, although ahead of its time, early versions of cryptocurrency were highly centralized and therefore lacked confidence.
In 2009, Bitcoin was created by an anonymous programmer by the name of Satoshi Nakamoto. What was special about Bitcoin was that it was the first decentralized cryptocurrency ever to be invented. The Bitcoin code is completely public and can be audited by anyone. To view the original source code, you must download the Bitcoin program from a trusted source. To check if the code you have is correct, you must hash the program and make sure it matches with the hash on the Bitcoin.org website.
Now, once the program is downloaded, the user may edit the source code and begin what is called a “fork”. A fork is a new cryptocurrency based off of the source code of another cryptocurrency. For example, Bitcoin SV is a popular fork of Bitcoin. They are fundamentally different and act as two separate coins.
With a limit of 21 million Bitcoins created, the crypto craze had begun. As Bitcoin rose in price, more and more new decentralized cryptocurrencies (or alt-coins) emerged. In July of 2015, Ethereum was created. There have been countless forks of Bitcoin and countless new crypto currencies. So where can you get them?
How do you buy cryptocurrency?
To buy a cryptocurrency, you must do so via an exchange. The exchange is just a person or business who owns cryptocurrency and is willing to sell.
After a price is agreed upon by both seller and buyer (yes, the price is negotiable and always fluctuating depending on the supply and demand), the seller will send the cryptocurrency to the buyer’s public key. It will then show up in the buyer’s digital wallet.
The digital wallet stores the public and private key of the user as well as interacts with the blockchain in order to both send and receive cryptocurrency. Without a cryptocurrency wallet, you cannot own any cryptocurrency. Cryptocurrency wallets can be in many different forms. For example, it could be a program on your computer, it could be an account on a trusted website, it could be stored on a hard drive, or it could even be a code on a piece of paper. However, there have been instances on live television where paper wallets were shown causing all of the cryptocurrency in the wallet to be stolen.
How transactions are checked?
As I mentioned earlier, cryptocurrency operates via the blockchain. Every wallet is interacting with each other on the blockchain and every interaction is public. But what’s stopping someone from sending two different people the same cryptocurrency twice or from stealing mobile crypto? Well there are actually many different ways that people can verify what’s legitimate and what’s not.
For the following example, I will be talking mostly about Bitcoin and its network. Bitcoin uses a proof-of-work model to check transactions. Miners, act as nodes (a device with the entire Bitcoin ledger on it) on the Bitcoin network, start with the assumption that no other node on the network can be trusted, and that all connections must be checked. Miners will then solve a series of algorithms to come to a consensus even if some nodes are not acting up as planned. That way, if there is one bad node, it is simply marked rather than having it shut down the system completely.
Since Bitcoin is a public peer to peer network, meaning it is a network of individuals who interact with each other, the purpose of miners is not to buy or sell Bitcoin, but to verify transactions between other nodes. The mining nodes collect and aggregate new transaction data to verify and are then rewarded with Bitcoin themselves. To verify these transactions using proof of work, miners use very powerful computer chips called ASICs to make specific calculations to generate hashes. Some things the miners check are for double spendings, to see if the amount of Bitcoin sent was within the range of 0–21 million, and the source and destination of the Bitcoin.
Miners compete with each other to verify transactions in order to get block rewards comprised of coins hence adding a new block to the blockchain and new coins to the network.
The proof-of-stake algorithm was introduced back in 2011 on the BitcoinTalk forum in order to solve some problems with the proof-of-work algorithm. Although they share similar details, fundamentally they are different. Rather than discovering new blocks in the blockchain, proof of stake forges them using existing nodes. A node is selected through an election system where the node who puts the most cryptocurrency for “stake” has the highest chance of being selected while the node who puts the least amount is the least likely to be selected. That node selected will then sign the new block, add it to the blockchain, and be rewarded in the same way as proof of work.
The future of cryptocurrencies
The economy of the future has no place for paper money. Cryptocurrencies and digital wallets will be essential for day to day life as newer and larger scale technologies and transactions become commonplace.
Currently, outer space is an enormous mass of empty volume waiting to be inhabited. As colonization occurs, it’s very likely we will see a complete rebuild of the world’s economy.
As I mentioned earlier, our current monetary system is inefficient and sucks up a ton of money. It is not a desirable system to replicate. With cryptocurrencies, hundreds of millions of dollars can be exchanged with minimal transaction fees.
It would be likely that cryptocurrencies such as Bitcoin, one of its forks, or Ethereum 2.0 will be the leading currencies used in day to day trade as they allow for much more transactions per second.
As a whole, cryptocurrency is one of the most exciting new technologies. As legitimacy of government issued currency dwindles and government involvement in the economy increases, many people will seek refuge for their purchasing power. The future of money looks bright with the collapse of paper money and the rise of crypto.