What are cryptocurrencies?

The question that most people ask themselves in these last months…

First of all, let’s define it: comes from the word cryptocurrency, which is a digital environment of exchange used by cryptography to assure transactions, control the creation of additional units and verify the transfer of assets using distributed ledger technologies. One of the most frequently asked questions about Bitcoin is… “How does it get its value?” or “How much backing does it have?». In order to answer this, we must understand what «value» is. And there is no better example than money.

The money called fiduciary from the Latin “fiduciarĭus”, from fiducĭa ‘trust’ and this, in turn, from fides ‘faith’, it is which is based on the faith or trust of the community, that is it is not backed by precious metals, only in a promise of payment by the issuing entity. Historically, money was a commodity with intrinsic value and coins were worth their weight in the metal they melted down.

In a later step, the coins contained a noble metal and its value was proportional to the amount of metal they contained, then the coins were made with other metals (not noble) but which represented a certain amount of silver or gold deposited in banks. With the invention of paper money, the first forms of banknotes appeared that were certified for a certain amount of gold, calling this relationship the gold standard.

After World War II, it was agreed to use the US dollar as a global reference currency, guaranteeing its support in gold. The contemporary era of fiat money began with the Nixon Shock of 1971, and ended with the gold standard system of backing the dollar’s precious metals. Thus, no global currency could be convertible, via dollar to gold. So the dollar became a fiduciary element, thus converting it into fiat money without intrinsic value but with its own legal value.

So in short, our money has no support other than the credibility of who issues it and the agreement between the parties that use it. Ultimately, the value of money is a social relationship and hence, therefore, its inescapably political character. Money is what you exchange for products and services and its value is derived from the fact that it is the only means of paying taxes. Central banks can print paper money and the government controls them, in theory…. It can be said that the more issuance of paper money, government bonds etc. it generates more inflation and therefore loses value. The less issuance, the price usually stays or rises since less inflation is generated.

Bitcoins, on the other hand, are a type of alternative currency or digital currency. In itself it has several uses depending on which bitcoin it is, from a digital medium through which exchange transactions are carried out, through the blockchain you can also make smart contracts, identity validation, a database of an entire country or even the whole world. The potential is truly enormous and there are countless uses for real life. The history of cryptocurrency begins with the currency called bitcoin being considered the first of its kind.

Bitcoin: BTC, XBT is a protocol, open source project and peer-to-peer network that is used as a cryptocurrency, payment system, and merchandise. It was developed in 2008 by an entity known under the pseudonym Satoshi Nakamoto, whose specific identity is unknown. Its traditional unit of account is called bitcoin and is classified as a digital currency. It is used to record and transfer value. Each bitcoin is made up of 100 million satoshis, which is the minimum unit of account. The value of Bitcoin, beyond its particular characteristics such as scarcity, security, resistance to censorship, immutability and reliability, it depends on the agreement of all users.

This implies as much in Bitcoin as the other cryptocurrencies; the destruction of the money monopoly by banks and states, and the empirical demonstration that a group of people who do not know each other, who do not have contact with each other and who do not even have the same interests or ideology can generate consensus through robust enough technology and well-aligned incentives. Bitcoin is a representation of records in a global distributed and encrypted database, better known as a blockchain.

How to understand what a blockchain is? I’ll tell you a little story for your better understanding. In 1991, some researchers initially designed the chain of blocks or blockchain to authenticate digital documents, so that it would not be possible to change the date or alter it, a kind of digital notary.

The blockchain contains a lot of information, basically these 3:

1 DATA: The type of data that is stored in that block… Bitcoin’s, for example, stores the data of a transaction, for example: the sender Pepito, sends the recipient Juanita; an amount, 1 bitcoin that is exchanged.

2 HASH: A string of numbers and letters which identifies that block and its content; these letters and numbers are unique, something like a fingerprint, that is to say that each time a new block is created, a new hash is calculated, unique and specific for that block and if any data within that block changes, the data will also change.

3 HASH OF THE PREVIOUS BLOCK: It is the presence of this hash within each block, which gives rise to the chain; this is the reason why it is so secure, for example in a chain of three bitcoin’ blocks and if we know that each block basically contains the DATA, THE HASH AND THE HASH OF THE PREVIOUS BLOCK. Therefore, the HASH of block 3 will refer to the HASH of block 2 and the HASH of block 2 will refer to the HASH of block 1 so it can be said that if block 2 were hacked, the Hash of that block would be changed automatically and consequently block 3 would no longer be valid because it would no longer contain the valid hash of the previous block, thus compromising the validity of all subsequent blocks. In addition, to make the blockchain more secure, cryptographic protocols are also used either as proof of work or the proof of stake, which is essentially a request for additional calculations necessary for the creation of new blocks, which in turn makes it much more secure.

I can give several examples of use, such as person-to-person transactions or services, thus eliminating the intermediary (company or state) and thereby considerably reducing costs. If a person who is in Spain wants to send 1000€ to Argentina, taking out all the commissions and taxes, they will get about 800€ with luck.

Now using cryptocurrencies such as Cardano (ADA) with a price of 1.20€ at the time of writing this note, with those 1000€, 833 ADA are bought and sending it to the wallet or virtual ADA portfolio of the person who lives in Argentina, in a maximum of 10 minutes I would have discounting the fee 832 ADA (approximately) and to pass it back to Euros we would have 998.40€. So you clearly see a difference in what you save and in the speed of direct person-to-person exchange.

Another example could be the case of falsification from documents to works of art. If the parts were stored in a Blockchain, falsification and piracy would be things of the past. To understand it a little bit better, take the example of Vechain VET, in principle all the data is stored in a digital track called DATA, like a ledger. Each item or service is given an IDENTIFIER (this is a digital identity that is visible to all users and is connected to the actual transaction) then this identifier is stored through an NFC chip or a QR code. On the other hand, Vechain uses RFID electronic chips, which is a system that allows automatically identifying and locating items by means of radio waves. This really is a better technology against counterfeiting globally.

You can not only buy bitcoins to speculate with their value but it is also a digital world where you can get returns by making them work, in the same way that one put their savings in a fixed term but obviously much better because not only would they earn with the rise in the price of the asset itself but also for the reward that you would receive when stating your crypto in staking and there are thousands of centralized exchanges such as Binance or Coinbase but also decentralized exchanges such as Uniswap on the Ethereum network or Pankeswap on the BSC network, where any  person can delegate their crypto in exchange for a payment while another person can request a cryptocurrency loan in exchange for a commission, thus making a smart contract.

More than 1000 million people without an official proof of identity: Without being able to prove who they are. In developed markets we take identity for granted, but it is really central to accessing a series of services, for example taking out loans, insurance, opening a bank account among countless other examples, no matter what you need to have your identity. There are cryptocurrencies that are much more than simple cryptographic currencies. There are projects that seek to provide an economic identity for the millions of people who do not have it. In this way, enabling decentralized applications for identity, value and governance. Already the Ethiopian Ministry of Education is working with these projects to create the next blockchain-based identity solution, which can even track degrees and academic achievements of a professional.

There are many use cases and more and more solutions for the real world are being added. Although we will see over the years the advancement of the technology behind cryptocurrencies, this report is merely informative and without any intention of promoting its use or adoption.

Dina E. Maldonado Mendoza – for SOCINCE – News Agency for the Americas –