Chapter Two
: Genesis Crypto
Currency, What Is Money?
What Is cryptocurrency?
Ok, here’s the definition. I’ll explain in a
minute:
Cryptocurrency is a digital asset designed
to work as a medium of exchange. Individual coin ownership records
are stored in a digital ledger (computerized database) using strong
cryptography to secure individual transaction entries, to control
the creation of additional digital coin records, and to verify the
transfer of coin ownership.
So, let’s define some of these words:
Cryptocurrency: Shortened to “crypto”. Any
digital “money”. It’s sometimes called a token, shell, shard, or
simply by its name, like “bitcoin”.
Ledger: If you think back to the days before
computers, (you have to be 55 or older…) Accountants used long
yellow pads or books that held records of transactions. That’s a
ledger. When we moved to computers, it became a spreadsheet, then a
database. A digital ledger for crypto is secured by cryptography so
people can’t hack it.
Cryptography: the science of secret writing.
Ok, joking a little. But only a little. It’s the way that you can
send information in public (yes, the internet is public) so that
only you and the person you sent it to can read it. Really, think
of it as secret writing using a computer.
The original Cryptocurrency was created by
American cryptographer David Chaum. He called it ecash.
After the invention of the ecash, he
programmed it and called it Digicash. It was an early form of
cryptographic electronic payments. It was hard to use. It didn’t
catch on.
Bit, this transfer method allowed the
digital currency to be untraceable by the bank, the government, or
any third party.
Then quickly on its heels, in 1998, Wei Dai
published a description of “b-money”, and called it an anonymous,
distributed electronic cash system.
Shortly thereafter, Nick Szabo described BitGold.
Like bitcoin and other cryptocurrencies that
would follow it, bit gold (not to be confused with the later
gold-based exchange, BitGold) was described as an electronic
currency system which required users to complete a proof of work cryptographic function. That
means, it’s hard and takes a long time. That didn’t catch on
either.
The first decentralized crypto currency, Bitcoin was
created in 2009 by Satoshi Nakamoto. Thereafter, he used a computer
program and a special cryptographic function (SHA-256 if you care),
as its proof of work scheme. Then the race was on.
People started thinking about what something
like this could be used for. One of the first “new” ones was called
Namecoin.
The Namecoin was created to make the
internet completely decentralized. That would make internet
censorship almost impossible. Soon after that, Litecoin was
released and it became the first successful crypto currency to use
scrypt instead of the SHA-256 used by bitcoin.
To understand the meaning of cryptocurrency
well, take a look at some of the qualities below. Keep in mind that
not every crypto follows all of these qualities. The better ones
do, the ones created by governments or corporations generally do
not.
● Cryptocurrency is a
system that does not require a central authority. It is run through
a network of computers connected through the internet
● The system keeps a
ledger of every token/coin and who owns them. (by the way in good
crypto, only the owner knows they own them. Their account id is
like the old swiss bank accounts. Only the people with the number,
password and a special code can open the door to the account.
● Ownership of crypto
currency units can be proven without any doubt.
● It allows
transferring ownership from you to anyone you choose. But you must
own it to transfer it.
● Your money can’t be
confiscated or stolen. (unless you let it be).
What Is Money {Evolution of Money}
Now, before we go any further, you have a
vague idea of what crypto is. What do you actually know about what
Money is and the definition of Currency? I think we need to talk
about that for a minute.
According to general definition, money is
anything that is generally acceptable as a means of payment. Money
can be a coin, a shell, or a piece of paper with an historic image
on it, but the value that people place on it has nothing to do with
the physical value of the item.
Money derives its value by being something
that people trust to have a value. It’s a unit of measurement and a
storehouse for wealth. Money allows people to trade goods and
services without having to be “face to face”. Understanding that
the price of goods (written in your favorite currency) correspond
with an amount in your wallet. It gives us all a way to save for
larger purchases in the future.
Additionally, money is valuable merely
because everyone knows everyone else will accept it as a form of
payment – so let’s take a look at where it has been, how it evolved
and how it is used in today’s world.
The World Without Money
Money, in some form, has been part of human
history for at least the last 4,000 years. Before that time, it is
assumed that a system of bartering was likely used. Bartering is
defined as a direct trade of goods and services – “I’ll give you a
stone axe if you help me kill a mammoth” – but such arrangements
take time.
This is because you have to find someone who
thinks an axe is a fair trade for having to face the 12-foot tusks
on a beast that doesn’t take kindly to being hunted. If that didn’t
work, you would have to alter the deal until someone agreed to the
terms. One of the great achievements of money was increasing the
speed at which business, whether mammoth slaying or wheat buying,
could be done.
Slowly, with a steady movement, a type of
prehistoric currency involving easily traded goods like animal
skins, salt and weapons developed over the centuries. These traded
goods served as the medium of exchange
even though the unit values were still negotiable.
This system of trade-by-barter and trade
itself spread across the world, and it still survives today in some
parts of the world.
The first iteration of metal as money was
thought to be the use of silver and gold about 7,000 years ago.
This eventually evolved into measured weights (for instance a
talent. That weighs about 75 pounds or 35 kilograms).
Beginning of Coins and Currency
In 600 B.C., Lydia’s King Alyattes minted
the first official currency. The coins were created from something
called the electrum, which is a mixture of silver and gold that
occurs naturally and stamped with pictures that acted as
denominations.
During this period in the streets of Sardis,
circa 600 B.C., a clay jar might cost you two owls and a snake.
Lydia’s currency helped the country increase both its internal and
external trade, making it one of the richest empires in Asia Minor.
It is interesting that when some says, “as rich as Croesus”, they
simply mean the last Lydian king who minted the first gold
coin.
In this regard, minting the first coins and
developing a strong trading economy couldn’t protect Lydia from the
swords of the Persian army
Money Is Not Just A Piece of Paper
Lydia was taking the lead in currency
developments, and around 700 B.C., the Chinese moved from coins to
paper money. By the time Marco Polo visited in 1271 A.D., the
emperor had a good handle on both money supply and various
denominations. And, BTW, the emperor owned all the money…
Meanwhile, Europeans were still using coins
all the way up to the 16th century,
which helped along by acquisitions of precious metals from colonies
to keep minting more and more cash. After a while, Banks came into
being and they started using bank notes for depositors and
borrowers to carry around instead of coins.
Thereafter, the notes were taken to the bank
at any time to exchange for their face values in silver or gold
coins. More so, the paper money could be
used to buy goods and operated much like currency today. But the
notes were issued by individual banks and private institutions, not
the government. That hasn’t changed, except that the central bank
is the only one who can “print” money. Other bankers go to jail for
making their own money – it’s called counterfeiting.
Control of Currency
As we mentioned in the last chapter, the
Central Banks now have the sole right to create money for the
country. Currency always loses value over time. Part of the central
banking agreement with the government is that they will keep
inflation to 1%-2% per year. BTW, that has actually happened – wait
for it – Never in the history of a central bank.
When you were 10 years old, how much did a
bottle of Coca-Cola cost? For me it was 5 cents. Today, that same
12 ounces of Coke, wrapped in a much cheaper imitation of a plastic
bottle costs between about $3. That’s inflation’s downside. Think
of it this way. Your $3 today could have bought 60 bottles of that
Coke in the 1960’s. Or the other way around. Your dollar has lost
6000% of its value over the last 60 years. Yes, gas was 12 cents a
gallon and you could buy a new VW bug for $995…
Definition you need
to know: Fiat (Fee-Ought) – This is simply the currency of a
country. It’s called “fiat” because the country issues a “fiat”
that it is the currency that is acceptable for use to buy and sell.
So, a US Dollar is the US fiat currency. So is a $10, $20, $50… you
get the idea.
Differences Between Fiat Money and
Cryptocurrencies
As mentioned above, cryptocurrencies are
becoming a global phenomenon along with talk that they could
possibly replace the fiat currencies. Also, the adoption of
cryptocurrencies continues to gain momentum towards a cashless
society.
Even as the world moves towards a cashless
society, very few people understand the core concepts of
cryptocurrencies and fiat currencies. Let’s take a quick
look.
Understanding Fiat Currency
Basically, fiat is currency
issued by the government and regulated by a central authority such
as a central bank. In this sense, such currencies are legal tender
and are not backed by a physical commodity. Instead, they are based
on the credit of the economy and the faith of the people and of
other nations.
Fiat currencies such as Naira, US Dollar,
Pound or Euro derive their value from the forces of supply and
demand in the market and the power of the country. Such currencies
are always at risk of becoming worth less due to the threat of
mismanagement and of hyperinflation when the world loses faith in
the country. They are not linked to any physical reserves such as
commodities or metals.
The fiat currency first came into being at
around 1000 AD in China before spreading to other parts of the
world. Initially, currencies were based on physical commodities
such as gold. It is only in the 20th
century that President Richard Nixon stopped the U.S dollar from
being equated to gold in any fashion. No longer could anyone
“demand” gold by turning in dollars.
Understanding Cryptocurrency
A crypto currency, as said earlier is a form
of digital currency that can be used to buy and sell things. Being
“virtual” in nature, computers use cryptography to process, secure
and verify transactions. Unlike Fiat currencies, many
cryptocurrencies are distributed and are not controlled by any
central authority like a company, central bank or government.
Instead, they are entries in a database such
as a blockchain that no one can change or manipulate, unless the
rules are followed.
Differences
While both fiat currencies and
cryptocurrencies can be used as a means of payment, there are some
things that differentiate one from another. The differences are
highlighted below.
● Payment Legality: From inception, government
issue fiat currencies, which are in return regulated by the central
bank. Fiat is deemed legal tender in that it is the official means
of finalizing transactions in the country. Governments control fiat
money supply and issues policies from time to time which later
affect their value.
● Exchange Perspective:
Cryptocurrencies were created in a digital form through the use of
computers and operate as private pieces of code. The means of
exchange is thus purely digital. In contrast, fiat can exist in
both digital and physical form. Electronic payment services allow
people to transfer fiat digitally.
● Currency Tangibility (look and feel): Since
cryptocurrencies are virtual, it is not possible to have physical
crypto. It’s simply a set of numbers on a computer screen, in a
database. Fiat, on the other hand, is physical and virtual. So, it
can exist as coins and notes or simply numbers in an account.
Fiat’s physical form can present a lot of challenges. It can be
hidden, moved without trace, used to fund illegal activities, but
it can be a nuisance to move around vast chunks of currency.
● Currency Supply : One of the major differences
between fiat and crypto is the supply mechanism. Fiat has, by
definition, an unlimited supply. That means the central authorities
have no cap to the extent in which they can print more. In
contrast, most cryptocurrencies have a cap when it comes to supply,
which means there is a limited number of coins that will ever be
created. For instance, the total number of Bitcoin coins that will
ever be in created is limited to 21 million.
● Storage Means: Cryptocurrency’s virtual nature
means they can only exist online. They are stored in digital
“wallets” commonly referred to as crypto
wallets . While most digital wallets claim to offer secure
storage, some of them have been hacked resulting in people losing a
substantial amount of their holdings. In future books, I’ll spend
most of the book explaining your options and suggesting the best
options for your crypto wallet.
The versatility of fiat money, on the other
hand, means it can be stored in various forms. For instance, there
are payment providers such as PayPal or Venmo that allow people to
store fiat in digital form. Banks also act as custodians of hard
currencies or other valuables either in accounts or “safety deposit
boxes”.
Regardless of the two definitions, some
crypto and fiat comes with attributes that make them stand out as a
means of legal tender despite the location or country. However,
they also come with defects that have
seen them continue to divide opinion around the world.
While there are many advantages of crypto
over fiat, it seems that crypto are quickly maturing to replace the
current standard payment methods in today’s digital age. In my
opinion, it is only a matter of time. The real question is what the
preferred coin in 10 years will be. Bitcoin, Ethereum, LTC,
Stellar, Cardano or any of the other 5,000 versions of
cryptocurrency.
The crypto market is evolving to create
several positive products that will inevitably change the current
monetary and economic system as time goes on.