What is cryptocurrency?
Cryptocurrencies are digital coins and tokens that represent real-world value without relying on a central issuer. Instead of going through a bank or a government, cryptocurrencies rely on cryptography, public ledgers, and blockchain technology to verify ownership. If people can access the internet, they can send these digital tokens to each other at any time for minimal fees without the threat of censorship or having their funds seized.
The revolution of cryptocurrency is that it offers a way for people to transact value without the need for a government or bank. Indeed, the central goal of Bitcoin's (BTC) 2008 whitepaper was to create internet-based peer-to-peer money without a central third party.
Since Bitcoin’s inception in 2009, cryptocurrencies have developed more functionality due to innovations such as smart contracts. Thanks to blockchains like Ethereum, it's possible to automate many traditional financial services such as trading, lending, and borrowing and also reimagine many platforms and business models that have come to dominate the current internet.
How does cryptocurrency work?
Every cryptocurrency works uniquely, but all rely on computerized consensus mechanisms to validate transactions.
Initially, Bitcoin's proof-of-work (PoW) was the only consensus mechanism in cryptocurrency. PoW requires miners to use computing power to solve a large puzzle where the reward is to get the chance to validate a new transaction. Whichever computer solves a complex algorithmic puzzle gets to add a new block to the public ledger of crypto transactions. To incentivize these miners, PoW blockchains like Bitcoin reward successful miners with BTC rewards and transaction fees.
However, other consensus mechanisms such as proof-of-stake (PoS) have emerged since then. PoS requires network participants to lock the blockchain's native digital token on-chain to get the chance to validate transactions. The more tokens people stake, the greater their chance of adding blocks and receiving rewards.
These consensus mechanisms have technical tradeoffs, but they’re the key reason cryptocurrencies work without a central authority.
Why is cryptocurrency important?
People without access to banking institutions––or those who don't trust their leaders––can use cryptocurrencies without the fear of censorship or confiscation. The key to crypto's significance is its decentralization, meaning users don’t have to rely on their local institutions and governments to interact with money. This decentralized nature makes cryptocurrencies an incredible financial tool for much of the world's population, especially those in less developed or authoritarian financial environments.
It's also impossible to tamper with cryptocurrencies like Bitcoin since they don’t have central authorities like the Federal Reserve calling the shots. People who hold crypto in a wallet enjoy the benefits (and responsibility) of self-custody and censorship resistance. These features can potentially give millions of people access to capital that's difficult to inflate or confiscate.
Benefits of cryptocurrency
Cryptocurrency offers a unique opportunity in the history of finance. Thanks to the power of the internet and blockchain technology, it's now possible to send direct and secure payments globally.
But the benefits of crypto go far beyond its borderless and decentralized nature. Here are a few other potential positives:
- Universal access: People with a mobile phone and an internet connection can participate in the crypto economy. This unleashes unprecedented financial freedom in countries with unreliable governments or a nascent banking infrastructure.
- Censorship resistance: Without a central authority, it's more difficult for institutions to censor people from sending transactions on a blockchain like Bitcoin. People who use cryptocurrencies don't have to worry about where they send funds.
- Self-custody: When people have access to their private keys, they fully own their coins and tokens. While self-custody requires more responsibility, it also eliminates the risk of entrusting funds to an unknown authority.
- Pseudonymity: People who hold crypto enjoy relative privacy when interacting with crypto-related services like lending, trading, or borrowing in Web3. No credit checks or ID requirements exist for use across decentralized crypto exchanges (DEXs) or lending platforms. Also, unless people already know the address attached to a user, it's challenging to figure out who's holding tokens on the blockchain.
- Transparency: Transactions on a blockchain are recorded on an immutable and public ledger. Also, most crypto projects have an open-source code. This gives token holders a greater sense of ease when dealing with crypto assets.
- Rigidity: Code is inflexible. Unless developers on a crypto project agree to change a protocol, it's difficult for outsiders to tamper with the functioning of a blockchain. Again, this gives token holders a greater sense of reliability in their digital assets.
What are the benefits of cryptocurrency in business?
Crypto isn't just a revolutionary invention for consumers. These digital currencies may also positively affect companies.
Cryptocurrencies can serve as a means of payment acceptance. Recent data suggests that businesses that offer a crypto payment option have a greater chance of attracting new clients than those that don't. Interestingly, many merchants who installed crypto payment services saw a 40% increase in new traffic. Especially in countries with high inflation, accepting cryptocurrencies, mainly stablecoins, instead of a local currency can help money maintain its value.
Cryptocurrencies also offer businesses more flexibility in their treasury planning. Companies can diversify their holdings with currencies like Bitcoin to potentially fend off inflation. Many DeFi applications provide the possibility of automated and trustless payment options.
Cryptocurrencies, and the use of smart contracts, can also help fundamentally change how businesses monetize. With NFTs, artists can gain a far higher percentage of their sales than auction houses. DApps and corresponding tokens allow for new platform designs that better align users with incentives that benefit them.
What is the importance of cryptocurrency in the economy?
Cryptocurrency has many attractive features that complement the global economy. Since these digital currencies are borderless and decentralized, they offer a fast and frictionless way to send value across countries. The hope is that this ease of access and speed can spur innovation, growth, and connections in developing and developed countries.
Crypto also gives people previously shut out of the global banking system a way to participate in the economy. Some countries are already experimenting with "leapfrogging" banking infrastructure by relying on blockchain technology. Instead of investing time and energy creating traditional financial institutions, citizens can elect to "be their own bank" by storing and using crypto in a private wallet.
The more people adopt crypto as a viable currency, the greater the odds citizens will feel confident in their purchasing power, which may drive economic growth. Indeed, many early investors in crypto have already put their capital into building more user-friendly applications and services in the crypto industry. As more people reinvest in crypto innovation, it can create economic possibilities for countless citizens.
Are there disadvantages to cryptocurrency?
Although crypto has many attractive features, there are some areas of concern. Ironically, some of crypto's positives can be viewed as negatives, depending on a person's perspective.
For instance, since no bank is involved in issuing crypto, citizens are responsible for self-custodying their coins. If someone loses their private key––as has often happened in Bitcoin's history––those coins are irrecoverable.
A few other significant disadvantages related to crypto include:
- Price volatility: Cryptocurrency is well-known for its erratic price movements. This is arguably the top reason people don't want to buy crypto. At this point, people can't plan their financial future around Bitcoin because nobody knows which way its price will go.
- Risk of hacks and scams: Stories of crypto hacks and scams aren't unheard of. Plenty of crypto exchanges, digital wallets, and cross-chain bridges have suffered multi-million-dollar attacks in recent years. Also, due to a lack of regulations, phishing attacks are rife in the current cryptocurrency market.
- Censorship resistance may fuel criminal activity: While crypto's resistance to censorship helps give power to law-abiding people, it can provide criminal organizations more clout. There are significant questions over when and how law enforcement should step in to prevent crypto from being used for illegal activities like money laundering.
- Unclear legal status: Just as there's no certainty on the price of cryptocurrencies, we still don't have clear legal guidelines on these tokens. Every country has unique laws governing crypto, and some still don't have a coherent legal framework.
- Higher learning curve: Crypto requires that people have certain technical knowledge and education. It could prove difficult to teach the intricacies of using a crypto wallet and buying digital assets to people who aren't already tech-savvy.
- Little insurance protections: When people hold Bitcoin or altcoins in a private crypto wallet, they must recognize these tokens are totally within their control. If someone loses their private keys, nobody can recover their lost funds. Crypto assets also don’t qualify for protections fiat currencies enjoy like Federal Deposit Insurance Corporation (FDIC) for the U.S. dollar.
Is cryptocurrency the future?
No crystal ball can show us the future direction of the crypto industry. However, more people are gravitating toward digital currencies as they learn their unique value propositions. With all the capital, talent, and innovation entering the crypto space, it's hard to imagine global adoption will decrease in the ensuing years.
However, as crypto becomes more widely adopted, there's also a greater chance crypto will face increased regulations from governments and global institutions. The prevalence of hacks in the crypto space has already drawn criticism from many lawmakers. Many governments are working on Central Bank Digital Currencies (CBDCs) to compete with the growing popularity of centralized stablecoins like USDT.
Since the crypto industry surpassed the $1 trillion mark in 2021, most economists expect it’ll become a significant feature of the future financial system. More companies are developing ways to bring digital assets to the masses, further increasing global adoption. Even if governments aren't keen on crypto, they’ll likely be forced to craft clear Web3 policies and regulations in the future.
At Worldcoin, we believe crypto is far more than a "good investment." We believe that cryptocurrency can revolutionize how people transact value and conduct business. They deserve access to this financial revolution, which is why we're developing our free and universal cryptocurrency. We aim to give them a share of our crypto for free and are airdropping free BTC, ETH, and DAI to anyone who downloads our app.
Subscribe to our blog to learn more about virtual currency.