The outstanding development cryptographic forms of money, most commonly called and referred to as Cryptocurrency, is a phenomenon that has attracted significant consideration in recent years. However, it is based on a fundamentally new technology, the potential of which is not completely grasped and still it fulfils similar functions as other, more traditional assets.
There are a lot of questions asked, among others, on the cryptocurrency phenomenon namely: “What is cryptocurrency?”, “Is it a form of currency, a commodity, a stake of technology breakthrough or something completely different?” “Which industries may benefit or be affected by the development of such technologies?”
- What is cryptocurrency?
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. The first cryptocurrency was bitcoin, created in 2009. There has been a major spread of cryptocurrencies in the past decade and there are now more than 1,000 available on the internet.
- How does cryptocurrency works?
Cryptocurrencies use decentralized technology to let users initiate secure payments and accumulate money without the need to use their name or through the means of a bank. They run on a distributed public ledger called blockchain, which is a record of all transactions updated and held by currency holders. A defining highlighy of cryptocurrencies is that they are generally not issued by any central authority, rendering them hypothetically immune to government inpedance or control.
- What is Blockchain technology?
This term seems complicated, and it definitely can be, but its core concept is really quite simple. Broadly speaking, a blockchain is a type of database (a collection of information that is stored electronically on a computer system). A blockchain gathers information together in groups, also known as blocks, that hold sets of information. A blockchain, like its name infers, structures its data into chunks (blocks) that are chained together.
Features of Blockchain Technology
Blockchain technology is immutable, meaning, it cannot be changed or altered. Instead of relying on centralized authorities, blockchain features are ensured through a collection of nodes. Every node on the system has a copy of the digital ledger. To add a transaction, every node needs to check its validity. If the majority thinks it’s valid, then it’s added to the ledger. This promotes transparency and makes it corruption-proof.
- Blockchain network is decentralized; instead of having a governing authority of individual looking after the framework, a group of nodes maintains the network, making it decentralized. This allows for the storage of anything starting from cryptocurrencies, important documents, contracts or other valuable digital assets and with the direct control over these using a private key.
- Blockchain technology benefits from enhanced security. By means of encryption which adds a supplementary layer of security and as their is no central authority to govern it, no one can just simply change any characteristics of the network for their benefit. Furthermore, the fact that blockchain makes uses of cryptography, which is a rather complex mathematical algorithm that acts as a firewall, this provides another layer of protection.
- Every information on the blockchain is hashed cryptographically and as such, every data comes with a unique identification; all the blocks in the ledger come with a unique hash of its own and contain the hash of the previous block.
- The hashing process is complex and impossible to alter or reverse; no one can take a public key and come up with a private key.
- In a case where an individual would want to corrupt the network, he/she would have to alter every data stored on every node in the network where there could be millions and millions of people, having the same copy of the ledger; thus hacking is quite impossible and extremely costly.
- Consensus: Every blockchain has a consensus to help in the process of decision making; it acts as a decision-making process for the group of nodes active on the network. Nodes only trust the algorithms that run at the core of it making every decision on the network win-win situations for the blockchain.
- Unlike public ledgers, who openly provide information on transactions and participants, blockchain technology is more private or federated; many people still can see the information and what is going on in the the ledger but not just any; the ledger on the network is maintained by all other users on the system giving them access. But the purpose behind this distributed computational power across computers is to ensure better outcomes. As such there are no malicious charges, no extra favours. If a user wants to add a new block others would have to verify the transaction before validating it.
- Most common cryptocurrencies
The following cryptocurrencies represent the most widely popular industry projects (so far):
- Bitcoin: Bitcoin is considered by many as the most revolutionary breakthrough of the 21st century after the internet. The first and most commonly traded cryptocurrency, it was developed by Satoshi Nakamoto in 2009. Bitcoins come in a limited amount of 21 million, with 16 million in circulation.
- Ethereum: The second most popular and valuable cryptocurrency, developed in 2015, Ethereum is the most actively used blockchain in the world.
- Litecoin: This currency is most similar in form to bitcoin, but has moved more quickly to develop new innovations, including faster payments and processes to allow many more transactions.
- Ripple: Ripple is a type of cryptocurrency, but it is not Blockchain-based. It can be used to track more kinds of transactions, not just of the cryptocurrency.
- Benefits of cryptocurrencies
As previously mentioned, cryptocurrencies are known for being secure and providing the element of anonymity. Transactions in them cannot be tampered with, reversed and there tends to be low fees, making it more reliable than conventional currency. They are accessible to anyone, although they can be complicated to set up and few stores acknowledge them for spending.
Cryptocurrencies are typically thought of as high-risk investments. Nonetheless, the digital currencies have been created with specific purposes, and if applied properly, have a potential of high yields and returns. Some uses of cryptocurrencies are as follows:
- Reduced costs for money transfers: Cryptocurrency can be used for sending and receiving payments at low cost and high speed. The low fees associated with transactions using digital currencies make them excellent payment systems for international money transfers.
- Confidential transactions: Using cryptocurrency enables their users to carry out every transaction with a unique recipient; exchange information based on push concept, sharing wanted information only to the recipient, ample privacy on financial history and constant protection of one’s identity.
- Decentralization: The blockchain technology will manage the database that has the cryptocurrency transaction records. Normal transactions usually require three parties; in the process of decentralization, only two parties are involved in any transaction (the sender and the receiver). As such, there is no unwanted monitoring in the transactions.
- Credit access through the Internet: Cryptocurrency service can be used by anyone who has access to the internet. All that is required is to have a required knowledge of the cryptocurrency network to be able to carry out transactions and asset transfers using the cryptocurrency ecosystem for interested customers.
- Weaknesses of Cryptocurrencies
Nowadays, cryptocurrencies are associated to “electronic money” and are an encrypted business network line that is completely free from any type of government supervision, several shortcomings are associated to it.
- A difficult concept to grasp: Cryptocurrency is a digital currency based on a rather complex blockchain technology. These technologies are still developing and to fully grasp cryptocurrency or blockchain one needs to know a lot of tweaks and curves of bends. Without understanding the details of cryptocurrency, it is unsafe to deal with it.
- “Cybersecurity” issues: Although cryptocurrencies are very secure, the same cannot be applied to exchanges. As a digital technology, cryptocurrencies can be subject to cybersecurity breaches, and may fall into the hands of hackers. Mitigating security risks require continuous upkeep of security infrastructure.
- Volatility: Cryptocurrencies are subject to wild fluctuations in value, which is one of their greatest drawback to becoming an established method of payment or rival to traditional forms of currencies. Investors would expect a commodity to increase in value over time so that they could collect a return/profit on their investment. However, to function as a currency, the token must be sufficiently stable so that businesses can calculate their revenue stream and likewise consumers have confidence in its value.
- No Refund or cancellation policies: In any case of dispute between the two concerned parties or sending funds to a wrong wallet address, the coin sent cannot be retrieved by the sender. Since there are no refunds, one can easily be created for a transaction whose product or services they never received.
- How can we help?
Since this digital currency is considered one of the most popular fiscal operations in the near future, it is extremely important to know its pros and cons; knowledge of the benefits helps to use their best leverage while knowledge of the disadvantages will help you to avoid traps. Cykra Ltd act as guides or advisors especially for matters concerning new technologies, like cryptocurrency or blockchain, that can be implemented into businesses. Though these concepts have not yet been accepted worldwide, we makes ourselves present for our clients to empower them and provide the required knowledge to safely navigate the cryptocurrency industry and invest in one of the most disruptive technology since the internet.
Depending on us how we use a means of technology, it can make our life better and easier, and this can be applied also in the life of a business or organisation.