Anyone who has not been living under a rock for the past three years is familiar with the word “Bitcoin” or “Ethereum”. However, not many people know how Bitcoin works. Why is Cryptocurrency Important? In short, currencies like Bitcoin and Ethereum are decentralized currencies aimed at facilitating global online transactions propelling the world into the 21st century.
Why Do We Need Decentralized Currencies?
To put it simply, there are multiple problems with fiat currency that make crypto a viable option. Two reasons are online fraud and centralized agendas. Online fraud is a huge issue and crypto can add clarity and resolve to the online payment system. While the centralized agenda of governments and banks tend to always turn out bad for the general population. Over time, the printing of money and over leveraging of assets can be disastrous. This needs to be fixed in order to avoid another economic collapse. Let’s dig into each topic more.
Traditional centralized currencies are seeming more outdated as executing online transactions is difficult and costly with them. In addition, all traditional online methods are reversible due to the centralized nature of banking. With the buyer’s bank acting as a mediator between the buyer and seller, a buyer can dispute the payment and get the money they paid back into their account without the seller’s approval.
Though this is a feature aimed to increase buying security, malicious parties can use this practice to commit fraud. A fraudulent buyer can pay for your services online, but once you provide the services, dispute the payment and get their bank to reverse the payment. This complicates online transactions by breaking trust between buyers and sellers. This is especially difficult since online buyers are almost always anonymous. To ensure secure transactions today, a merchant needs to hassle their potential customers for more personal information.
Although, the real problem lies not in the buyers, but in the banks enabling this. Additionally, the ability to control someone’s wealth leaves the banks with a lot of responsibility. Over time, the general population has learned that banks do not always control customer’s wealth as fiduciaries. For instance, in 2008 the entire global economy collapsed due to banks over leveraging their assets. Couple this with the excessive printing of money to bail the banks out by the government, the entire financial system is set for failure.
To counter these problems, an anonymous person (or group of persons) with the pseudonym of Satoshi Nakamoto pioneered decentralized cryptocurrencies. These currencies base their payment system on cryptographic proofs, instead of trust. With no third party serving as a mediator, transactions made through crypto-currencies are permanent and irreversible. When you click the ‘pay’ button in your crypto wallet, the money is permanently gone from your metaphorical account.
How Decentralized Currencies Work
Entirely removing the third party (Banks) in online transactions is not as simple as it seems. As there is no one to witness the exchange of currency, no one can know who still should have the money and who should not. Look at it this way; if you make multiple copies of your currency file and use them to pay different people, you could spend the same amount of money multiple times. This practice is known as double-spending and it inflates the currency enormously and makes it unfeasible for use.
To make decentralized currencies work, there needed to exist a secure public record to ensure that no one could execute the problem of double-spending.
This is exactly what Satoshi Nakamoto did when he invented blockchain technology for the world’s first crypto-currency, Bitcoin. Bitcoin’s blockchain technology stored information regarding Bitcoins in circulation and all past transactions in a publicly distributed ledger. Everyone with a crypto wallet has an accurate and encrypted copy of this ledger. Whenever someone attempts to make a Bitcoin transaction, the process ensures the legitimacy of the transactions by checking all copies of the ledger online. If the majority of the ledger copies give the go-ahead, the transaction goes through. All of the online ledgers copy records of this transaction in an encrypted format to prevent double-spending.
The Benefits of Decentralized Crypto-currencies
Apart from permanent and non-reversible payments,
By cutting out the banks serving as middlemen, decentralized crypto-currencies offer a host of benefits to its vastly increasing user base:
- Online Anonymity: Anyone with a crypto-wallet can exchange crypto-currencies online easily and anonymously.
- Freedom from national monetary policies: These policies do not apply to decentralized cryptocurrencies, which means you can use them as a stabilized currency if your country’s currency is destabilized.
- Instantaneous and cheap international payments: When using traditional banking, you have to wait for a period of time before the money shows up in your account. Or you can pay extra for quicker delivery when transferring money internationally. Cryptocurrencies offers a viable alternative to traditional banking for cheap and instantaneous international payments.
- Freedom from strict bank policies and exorbitant banking fees: With no central body regulating the payment methods, you do not have to adhere to strict bank policies or pay exorbitant fees for banking services.
- Protection against bank failures and collapses: With no bank behind cryptocurrency technology, you do not have to worry about bank failures making you lose all your money.
- Immunity from inflation or deflation: The blockchain technology controls the amount of currency in rotation, so it does not experience inflation or deflation.
A New Era of Crypto-currencies
By pioneering blockchain technology, Mr. Satoshi Nakamoto was able to circumvent the need for a trusted third party to verify online transactions and bring about a revolution. Bitcoin lead the world into creating a entirely new industry by enabling solutions to a multitude of problems.
Soon after Bitcoin proved its worth, many other crypto-currencies sprang up, following the same blockchain method for decentralized and encrypted payment methods. One of the first crypt-currencies to follow in Bitcoin’s footsteps was Ethereum.
Although Ethereum utilizes the same blockchain technology used for Bitcoin, the two are quite different. Ethereum’s coin value, called “Ether,” utilizes blockchain in both the payment method and in the form of “smart contracts” that companies can use to automate tasks, whereas Bitcoin only uses blockchain for the former and leaves out the latter.
What’s exciting about this is that there is heavy support backing Ethereum’s advanced blockchain technology, in the form of The Enterprise Ethereum Alliance. This is a group of Fortune 500 companies using Ethereum’s technology to power smart contracts between themselves to automate immensely complex applications. Some companies are leveraging Ethereum’s blockchain technology to create decentralized apps (dapps) that run without any downtime, fraud, or control from a third party. Some have even gone as far as to develop smart tags for luxury goods that guarantee their authenticity!
There are further technical differences between Ether and Bitcoin. For example, you might find executable code in the transactions of Ethereum ledgers, while you can only find data affixed to Bitcoin transactions as personal notes.
Other differences are in the block time – the amount of time it takes each service to confirm transactions. While you can expect to wait minutes for your transactions to register in the Bitcoin ledgers, this is a matter of mere seconds when it comes to Ether.
Another major difference lies in the different algorithms that each of them run on. Ethereum uses ethash, while Bitcoin uses the more dominant SHA-256 for encryption.
Main Differences Between Bitcoin and Ethereum
Most importantly, however, is the difference in the aim behind these two technologies. As this article aptly summed up, “Where Bitcoin is disrupting currency, Ethereum is disrupting equity.” Furthermore, Ethereum is leading the industry to solving new and complex problems that Bitcoin neglected to address at all. Specifically, Ethereum aims to provide an application solutions for smart contracts as mentioned above.
In addition, Ethereum is hoping to enable staking which will reward miners long-term even past the final Bitcoin is mined. In summary, Ethereum is an entirely new age of crypto ever though it came out only a few years after Bitcoin’s first transaction.