the tech of cryptocurrencies

Crypto is one of those buzzwords that keep popping up from time to time. But what exactly is cryptocurrency? And why should you care if you’re not a trader or investor?

 

Let’s take a look at how cryptocurrencies really work and why they matter.

 

How Does The Technology Of Cryptocurrencies Work?

 

Bitcoin (and other cryptocurrencies) use blockchain as its underlying foundation. This means crypto records transactions on decentralized ledgers instead of centralized servers like banks. It also means Bitcoin can’t be deleted from the network because you need to reach a consensus to do that, which is practically impossible in a large decentralized network. 

 

how important is the tech of crypto

 

This makes for an inherently trustless system. Unlike traditional banking institutions, there are no trusted third parties involved here, only the users’ computers. The same goes for Ethereum, Litecoin, etc.

 

Because of these characteristics, many people refer to crypto assets as “trustless” investments. Why? Because you don’t need to trust someone else when buying something as everything is taken care of by the codes. 

 

Crypto assets operate under these principles. Since everything runs on your computer, you don’t need to rely on any middlemen or financial institutions.

 

You send money between two accounts without having to hold anything physical in-between. In fact, you don’t even need to know where the asset is held physically. If it isn’t stored locally, you aren’t tied down by some institution or government trying to control it. The nodes are peer-to-peer and maintained by various nodes across the world.

 

 

In addition to digital currencies, blockchains also allow developers to build applications atop them. These apps could range from simple games to complex smart contracts. They often run on top of open-source software called clients, which provide functionality such as token issuance, wallet management, data validation, consensus mechanisms, etc. 

 

Most popular crypto tokens today are built on top of Ethereum’s Solidity programming language.

 

Why does cryptocurrency tech matter?

 

blockchain matters

When Satoshi Nakamoto first published his white paper detailing Bitcoin over a decade ago, he didn’t expect his creation would go viral. Nor did he anticipate the way it would disrupt finance and economics worldwide over the past decade.

 

But while the cryptocurrency space has gained significant popularity recently, it wasn’t always so. For decades, academics and technologists alike have been researching ways to make distributed systems resilient against failures. And yet, nothing came close to Bitcoin.

 

With the introduction of the Proof of Work mechanism, the concept of crypto mining was born. Miners compete with each other to solve cryptographic puzzles that add new blocks to the chain. Whoever solves the puzzle gets rewarded with newly minted coins. As the competition gets higher, the computational resources also needed consistently go higher.

 

And just like gold, the limited amount of supply increase makes it valuable in the long term.

 

Eventually, several improvements were made to the protocol itself. Rather than being limited to 21 million units per year, Bitcoin now allows for nearly 4 billion coins to enter circulation every four years. Transaction fees were reduced. Scalability problems were addressed. Hash rate increased exponentially. All of which contributed to making Bitcoin a viable alternative payment method.

 

While Bitcoin certainly changed the game, cryptos weren’t designed to replace fiat currencies overnight. Instead, they function best simply as complementary assets. While Bitcoin serves as a store of wealth, stablecoins such as USDC or Tether help ensure prices stay consistent across various markets. 

 

Other cryptos, including Ether, EOS, Cardano, etc., serve as platforms for building dApps.

 

Some crypto fanatics, however, believe they may eventually overtake existing monetary reserves. According to Bloomberg, global central bank holdings fell below $8 trillion for the first time ever last month. On the flip side, others claim Bitcoin’s share of the market is too small to affect monetary policy.

 

Regardless of whether Bitcoin will continue to dominate the space, the impact of its development cannot be denied. Even if you’ve never interacted directly with cryptocurrencies, chances are high that you still benefit indirectly from it via services offered by companies around the world.

 

ethereum illustration

 

As the price of BTC continues to rise, investors are increasingly looking beyond the coin itself to understand what drives its volatility. Some attribute recent increases in price solely to speculation rather than fundamentals. Others argue that the endgame goal is much bigger than owning actual Bitcoin.

 

Either way, understanding how the technology behind crypto assets actually functions helps us better appreciate it.

 

Will cryptocurrency tech become more mainstream in the future?

 

There’s absolutely no doubt that cryptos have taken off in terms of adoption. More businesses accept payments in bitcoin every day than ever before. Major retailers, restaurants, hotels, airlines, websites, online stores, universities, governments, etc., are adopting Bitcoin faster than you can say “blockchain.”

 

Even Elon Musk, perhaps the biggest proponent of Bitcoin, acknowledges the unstoppable growth of cryptocurrencies. He believes Bitcoin (and also Dogecoin) has the potential to go mainstream in the long term.

 

web3 will be an important part of our future

 

Despite their meteoric rises, however, most cryptos haven’t reached their full potential yet. There are numerous reasons for this, ranging from technological limitations to regulatory hurdles.

 

For example, most cryptos are slow and expensive for small transfers compared to regular methods like PayPal. Moreover, most cryptos have relatively low transaction throughput rates relative to Visa or Mastercard. Last but not least, privacy concerns remain unresolved for the mainstream crypto since the wallets are pseudonymous and not anonymous.

 

Still, there’s no denying that cryptocurrencies are gaining momentum globally, creating opportunities for entrepreneurs, investors, and consumers alike. We might not be able to predict the next big thing, but if history tells us anything, we will bet our money on crypto. 

 

After all, the cryptocurrency market nowadays follows the price action of the US stock market. And let’s be honest. If the stock market bounces one day from the current bear market, there’s a big chance that the crypto market will also bounce back and make a good comeback.

Leave a Comment

Your email address will not be published.