I’m sure you’ve heard of cryptocurrecy in the news, or on Facebook, even if you haven’t heard it called exactly that you’ve probably heard about one of the tokens such as Bitcoin or Etherum. For those of us that didn’t buy into Bitcoin right at the beginning we may not get uber rich off of it as an investment, so why should we care about it?
Let’s get the first thing on everybody’s mind out of the way first, how can this be worth so much if it’s just a virtual currency, it’s like using video game money right? Well step back a moment and think about the U.S. dollar, after we left the gold standard the U.S. dollar didn’t represent anything of “worth” anymore. It is just a bunch of paper, or numbers in a bank account, and the only reason it’s worth anything is because we have all agreed it is worth something and use it to tender trade. So yes, cryptocurrency can be a “real” currency globally respected for use in tendering trade. So if it is just a currency, what is the big deal and why is it so different from say the Euro or the USD?
What is truly exciting about cryptocurrency is not necessarily the token itself that is used, but the technology behind it. Tokens aren’t actually stored in any one central location, instead a blockchain stores all of the transactions between many nodes, or computers, in a decentralized network. If that sounded like Japanese let’s walk through it. If I send 5 Bitcoins to you, then that is recorded in blockchain which basically acts as a ledger of transactions. Those tokens are owned by your public key which you have control of, and the ledger reflects that transaction. So where is this ledger stored? Cryptocurrency runs on a public, decentralized, peer to peer network which means these amounts are not stored in any one place, but instead among many computers that people have offered up to use to edit and store this ledger. You may have heard of these people called ‘miners’. Why do they do this? Every time their computer calculates a hash, which lets a transaction take place and update the blockchain (ledger) they are rewarded in that cryptocurrency for their computers. Essentially paying them to use their computer as servers in this network. Since it is decentralized, one of these computers can be taken offline and the blockchain will still function.
So why should we trust cryptocurrency, don’t hacks happen all the time? Cryptocurrency is actually safer than say the USD for many reasons. It isn’t controlled by one governing body, which means it has to stick by a set of predetermined rules that can’t be changed. The U.S. Treasury for example, can print paper money on whim, but cryptocurrencies can not. Bitcoin will stop creating bitcoins after it reaches a predetermined cap, where Etherum will grow at a 8% inflation rate every year. Cryptocurrency is also smart, which means it can be programmed to act only in a certain way. For example if Bitcoin replaced food stamps it could be programmed to only allow it to be spent on food, and there would be no way to circumvent this. It could even be programmed to send any remaining balance left back to whomever it came from if not spent in an allotted amount of time. Etherum even supports joint accounts, where custom rules can be programmed in on the account. For example, say you, Jane, and I have a shared wallet. We could program in safeguards that allow it to only let money be spent from that wallet if 2 of the 3 parties agree. This drives compliance that can’t be circumvented. So what keeps people from just adding currency to their wallet or stealing currency from someone else’s wallet? Wallets consist of a public key and private key in the ledger encrypted in SHA256. The public key is used to send people coins and is public facing, but your transactions can only be added to ledger if it is signed by your private key, which is a huge random string that only you know. Cracking this private key would take billions of years, so unless you post your private key to Facebook this is much safer than using a bank of keeping cash in your real wallet.
So why would we switch to this system? Besides the fact that it is much more secure, it is much more efficient and this platform allows for massive growth. Rules can be coded into the chainblock, with If-Then logic, as well as ownership. For an example think about buying a car. A smart contract can be programmed to run on the blockchain that could say if you an alloted amount of tokens to a public address a car will be shipped to you, then the VIN could be stored in the blockchain with you as the owner, the car could then be sold again with ownership transferred automatically with no middle-man or need to register ownership of the vehicle. Another really cool platform being built on the Etherum blockchain is Decentraland. It actually spurred my research into cryptocurrency. Decentraland is a virtual reality project being built that will allow people to purchase parcels of virtual land that they can then program to do whatever they want. People can then explore this virtual world and see what you have put in your parcel of land. You could create whatever you want; rent out billboards for advertising, chat with people, create virtual poker rooms or a virtual movie theater live streaming videos you’re taking. It won’t be centralized and can never be taken down, or censored, and the rules can’t be change, nor can ownership be stolen from you.
Oh and of course, be sure to test out your wallet by shooting some ETH to 0xbb6c80fa90800602ae8514003219