Over the last few years, we have witnessed the meteoric rise of crypto-currencies. It’s all over the news, and it is being talked about everywhere on the internet. And we all have that one friend that just wouldn’t shut up about it.
The word Crypto is derived from the word “Kryptos” in the Greek language. It translates to “hidden” or “secret”. We find other variations of it in terms like Cryptography and Encryption.
Throughout human history, people have sought to pass information in ways that its meanings are not easily decipherable to the general public. Hence, messages are sometimes sent through various methods of encryption. From picture writing of the ancient Egyptians, shorthand, Morse code during World War 2, and today, computer codes.
What is Cryptography?
Although Cryptography’s primary goal is literally to keep things secret, none of us can claim to be utterly oblivious to the concept.
Remember that look your mom gives you when she thinks you’re being silly. And only you and your siblings can decode that look without a guest or strangers noticing a thing? Yes, that is the perfect illustration of how cryptography works.
Cryptography ensures that only the intended party exclusively understands a piece of information. For this to happen, a system of codes, characters, symbols, or signals is created.
The science of encryption and decryption of information is known as Cryptography. Examples of cryptography mechanisms are ciphers, acronyms, stenography, mathematical sequences, and, more recently, computer codes.
The science of encryption and decryption of information is known as Cryptography. Examples of cryptography mechanisms are ciphers, acronyms, stenography, mathematical sequences, and, more recently, computer codes.
Reasons for Cryptography
- Privacy
- To simplify communication
- To remove language barriers
- Identity & Uniqueness
Cryptography in Human History
Cryptography is utilized in almost every area of human endeavour.
- Cryptography in Science
The use of the periodic table and botanical names for plants and different species of creatures are notable forms of cryptography.
They are used for the transmission of scientific knowledge among scientists and students while removing language barriers.
- Cryptography in Medicine
In medicine, experts use cryptography in areas of DNA analysis.
- Cryptography in Warfare
Cryptography was a significant feature of World War 2 as Nations sought military intelligence to gain the upper hand over the enemy.
Soldiers and spies transmitted information using various unorthodox means, such as shirts, sleeves, shoelaces, and the Morse code.
- Cryptography in Finance
It is evident that when it comes to Cryptography, the finance world is late to the party. However, we cannot comprehensively analyze cryptography in finance without talking about Information Technology (IT).
With the advent of the internet in the early 2000s, Tech gurus began to build new pathways for seamless human communications as well as equipping machines to communicate with each other autonomously over the World Wide Web. This was dubbed “the Internet of Things”
Internet of Things (IoT) is the transmission of data between inanimate objects to elicit virtual interaction.
Today, we have smart voice-controlled virtual home assistants (Alexa, Siri) connecting to other devices via the internet to carry out specific actions. e.g. weather forecast, controlling other devices like lights, doors, security cameras, etc., all seamlessly and almost autonomously.
IoT, through autonomous interaction of computer programs, is the precursor to Cryptography in finance.
In addition to collecting and processing data, IoT has seen the development of new finance equipment & tools that have now become part of our everyday life.
For example, each time someone uses an ATM or buys something online with a smartphone, data encryption protects the information being relayed exclusively between the machines and cards. This encryption ensures that the transaction is successful, and cyber-criminals do not intercept that crucial information.
Similarly, businesses are increasingly relying on encryption to protect their software applications and database of sensitive information from and financial losses and the reputation damage that may arise from a data breach.
Similarly, businesses are increasingly relying on encryption to protect their software applications and database of sensitive information from and financial losses and the reputation damage that may arise from a data breach.
What is Crypto-Currency?
Asides from facilitating our Credit card transactions, ATM withdrawals and online shopping habits, Cryptography has now moved towards taking center stage in finance to play MONEY itself.
Cryptocurrency is simply a bunch of digitally-encrypted computer codes acting as money. Computer programmers use codes, networks, and virtual ledgers to generate currency, facilitate payments, and record transactions.
The four primary functions of any currency are to serve as a medium of exchange, store of value, unit of account and standard for deferred payment. Cryptocurrencies have set out to do a perfect job at all of these.
Why was Cryptocurrency Developed?
What happens when you make a bank transfer? After you have initiated the transaction, the Bank verifies its accuracy and ascertains that your current balance is sufficient. Upon completion, the transaction is recorded in their database.
The details of each transaction are all stored in physical ledgers kept at the Bank’s offices, which you can later call up when you request your bank statements. However, the traditional banking system has flaws that Cryptocurrencies were created to fix.
What are the flaws of the Traditional Financial System?
The current traditional system of exchange is the use of fiat currencies. Fiat currencies are our regular notes & coins that have the legal backing of a country’s government to serve as a physical Legal Tender and a unit of account in wire transfers to perform transactions across the world.
The system is riddled with so many snags and loopholes that have remained unplugged. Hence the advent of Cryptocurrency.
- Phishing
Phishing is a widespread cybercrime. It is the illegal act of stealing crucial data for blackmail, fraudulent or malicious use. One key area that our traditional banking system has failed at is the Privacy and Integrity of financial data.
A prime example of this is the Panama Papers leak that happened in 2016 showing the vital financial records of many prominent people worldwide.
Similarly, JPMorganChase was hacked in 2014. Although the Bank lost no money, the Bank’s executives confirmed that the attackers stole names, Addresses and Emails and other sensitive data.
- Cyber-fraud
Just as physical bank robberies were in vogue in the 60s to early 2000s, we have seen a rise in the spate of cybercrimes over the last decade. They have exposed security flaws in the traditional financial system. Credit card fraud, Identity theft etc., has cost innocent people fortunes.
Most notably, the fact that bank records and sensitive data are all stored in a specific location makes them easy targets for hackers.
In 2016, the Bangladesh Central Bank was cyber-attacked. The hackers sent fraudulent instructions to illegally transfer $1billion from the Federal Reserve Bank of New York account belonging to the Bank.
- Pervasive Government Restrictions
Fiat currencies have no real (intrinsic) value. They only exist by law, literally because the government says so. It underlines the level of influence that the government has on the entire financial system.
By waive of hand, or at best, a fussy court order, the government can restrict access to all the money that you have worked for all your life. Worse still, many countries worldwide are ruled by oligarchs and dictators, especially in Africa and Communist Asia.
Meaning that we could all be one misstep on the wrong toes from financial exclusion and ultimate penury.
Crypto-currencies are here to fix these flaws.
How is a Crypto-Currency Created?
The core of every crypto-currency is its Distributed Ledger Technology (DLT)
Just like your mom used “the look” to eliminate the guest from communication with you earlier, a DLT is a mechanism that miners use to eliminate third parties from their dealings.
A DLT is a digital network set up to verifying transactions through cryptography, recording and transmitting the information publicly in an encoded format across thousands of computer systems in multiple locations.
All cryptocurrencies are built on a dedicated DLT system. One of the most prominent and widely used DLTs is Blockchain technology.
Blockchain is a type of DLT where transactions are stored using a cryptographic language called “Hash.”
Other DLTs include Tangle, Hashgraph, and Directed Acyclic Graph (DAG).
People can then use the DLT to pass crypto-currency units directly to one another (Peer to Peer) without any intermediary banks’ interference and without sharing any personal details like your home address, date of birth, occupation or what you had for dinner last night.
Terminologies Used in Cryptocurrency
1) Mining
This is a word that has been used in finance for centuries. Although this time it has nothing to do with shovels and mud.
Mining is a word that has been used in finance for centuries. Although this time, it has nothing to do with shovels and mud.
When you think of miners in crypto-currency, don’t think of men in rain-boots risking their lives to dig up some gold and silver. Think of a collection of thousands of computers stored in many locations worldwide, solving some complex Maths and transmitting data round the clock.
Both sound similar, right? Except one does not involve:
- The use of child labourers
- Causing 15,000 yearly deaths
- Inducing natural disasters like flooding, earthquakes and mudslides
Crypto-currency mining is simply computers performing complex mathematical computations to verify transactions on a DLT.
In return, the computer users (miners) are rewarded with an agreed quantity of the virtual coin that is being exchanged
2) Coins
A coin is the basic unit of account of a cryptocurrency just as we have different notes of cash & physical coins for our various fiat currency units.
A cryptocurrency coin is only perceptible or accessible digitally. A specified amount of value is attached to it depending on many factors. Similar to the movements in the price of Gold coins & bars fluctuate from time to time.
3) Halving
This concept is primarily associated with Bitcoin. It is the periodic reduction (by half) in the amount of coin that miners earn as rewards. Because the bitcoin has a finite number of coins, it uses the halving concept to slow down the mining process and sustain the scarcity for much longer, helping Bitcoin maintain its value.
It is estimated that at the current halving rate, the last bitcoin won’t be mineduntil the year 2140
4) Crypto-Exchanges
In simple terms is like a grocery store, but for crypto-currencies. It is a store (obviously, online) where you can buy, sell, or trade crypto-currencies for your regular fiat currency or another crypto-currency
Some exchanges charge minimal fees to facilitate these transactions. i.e. Bitcoin for A Tesla Car, A Bitcoin (BTC) for Ether (ETH), or Bitcoin for $US dollars.
5) Public and Private Keys
Cryptocurrency users access their funds using codes called public and private keys.
We can compare this concept to sending emails.
Step 1 – if you need to send an email, you would have to send them your email address. If you need someone to send you Cryptocurrency, you would have to send them your Public Key.
Step 2 – if you want to read the email sent to you, you would need to input your password. Similarly, this is what Private keys do. They are like your password. You should keep your private key safe at all times.
There is no other way to prove ownership of Cryptocurrency. Whoever has the Public and Private Keys has control of it.
Furthermore, if you lose your private key or forget it, you may never recover your your assets. It is a considerable risk, but it is also one of the system’s strengths. It is impossible to hack that if your private key is lost, no one can recover it for you.
6) Crypto-Wallets
Wallet are used to store Public & Private keys. They are software programs, apps, or websites that enable users to instantly send and receive any digital currency and monitor their available balances.
Examples of Software/Online wallets are, Coinbase, Binance, and Electrum. They are available on any internet-enabled device.
You can also purchase an encrypted physical drive for use as your wallet. Examples of Hardware Crypto-wallets are LedgerNano S, KeepKey, Trezor,
However you choose to store it, if you lose your Keys, you may lose your entire crypto-coins forever.
What are the Prominent Cryptocurrencies Today?
–Bitcoin (BTC)
- Founded: in 2009
- Original Authors: Satoshi Nakamoto
- DLT: Blockchain
- Supply Limit: 21,000,000 units
- Circulating Supply: 18.3m
- Current value: $47,000 USD approx. (Feb 2021)
–Ether (ETH)
- Founded: in 2015
- Original Author: Vitalik Buterin, Gavin Wood
- DLT: Ethereum
- Current value: $1,794 USD (Feb 2021)
–Dogecoin
- Founded: 2013
- Developers: Billy Markus
- Current Value: $0.7 (Feb 2021)
Other notable cryptocurrencies include Litecoin, Binance Coin, Cardano etc.
Key Features of Cryptocurrency
- Encryption: this where the “Crypto” in Cryptocurrency. Every user is assigned special codes which prevent their information from being accessed by other people. Cryptocurrencies use pseudonyms, signatures & hashes to identify people and transactions instead of full names, account numbers phone numbers as used by our (soon to be) primitive banks.
- Anonymity: Ever heard the phrase “the man” is watching. Well, it does not apply to the crypto-world. It guarantees unfettered anonymity. There are no bogus account opening requirements that require you to state every detail of your life, including your grandmother’s maiden name.
- Speed: Because computers perform verification of transactions on DLTs without human interference, transactions are validated, and value is received almost instantly. And one more thing? There are no holidays!
- Digital: they only exist on computers and can only be accessed on the internet. There are no physical coins, notes, no central banks, or physical vaults that can be hacked or robbed.
- Decentralization: all components of a cryptocurrency DLT are stored in separate places, eliminating the chance of data breach or hacking that can compromise the system.
- Immutability: Transactions recorded on DLTs cannot be halted, altered, edited or interfered with by any single user.
- Transparency: Every transaction that has ever been carried out using a particular cryptocurrency can be viewed on the DLT.
- Universality: today, every country has its fiat currency which makes international trade painfully difficult and imbalanced. Cryptocurrency has no such problems. Everyone with internet access can send (and receive) it from anywhere on Earth.
What are the disadvantages of Cryptocurrency?
- Dark-Web Activities: the assurance of complete anonymity can encourage negative behaviour. It makes cryptocurrencies a perfect tool to facilitate dark-web activities such as piracy, drug dealing, terrorism financing.
- Multiplicity: there is no limit to the number of accounts you can open, wallets you can own or the volume of transactions you can perform using crypto-currency. This can aid money laundering.
- Tax Evasion. Cryptocurrency transactions can be complicated for government agencies to track, making it an avenue for tax evasion.
- Intrinsic Value: Unlike physical coins like Gold and silver, which have ornamental, sentimental and industrial value, crypto-coins do not have any underlying value. They are valued solely based on public consensus and perception. This can be very tricky as the value could suddenly dwindle to zero regardless of how much you paid for it (or how much computing effort you put into mining it).
- Inheritance: Death is inevitable. Unlike the traditional banking system, in which your balances can be transferred to your next of kin upon your death or incapacity. If nobody else knows your public & private keys, your cryptocurrencies may be lost forever after your demise.
- Financial Exclusion: The crypto-currency system highly depends on using the internet, which requires at least an intermediate level of literacy. Many countries worldwide are still struggling to fix their educational system, especially in Africa, where literacy rates are as low as 20% in some countries. Even a lesser number of people have access to the internet. The crypto-currency system would effectively exclude these people from making financial transactions.
- Universal Acceptability: Crypto-coins has not been entirely accepted by everyone in the real world for basic day-to-day transactions.
- Volatility: The high volatility of crypto-coins makes it an unstable store of value. This makes it difficult to make financial projections or use crypto-currency as a reliable standard for deferred payment. High volatility is the primary reason most governments worldwide give for discouraging their citizens from trading Cryptocurrency.
The Future of Cryptocurrency.
Experts predict that despite some of its early challenges, Cryptocurrency will continue to remain on the rise for the foreseeable future. In recent times almost all areas of human endeavor are witnessing massive digitization i.e. our good old physical photo albums are now being stored in the cloud, shopping is done online, and entertainment too is largely sought online.
Hence, the full digitization of doing business is inevitable. As more people have begun to take remote jobs across continents and doing business around all hours of the day, a fully digitized global currency system is not a mere daydream anymore.
And as long as the various flaws and limitations of our government-issued fiat currencies continue to remain unsolved there will always be a role for crypto-currency.
Conclusion
Regardless of what coin experts and governments say, one sure thing however is that when crypto-currencies take center stage in global finance, there would be no more Money Heists and Jason Statham might have to quit his acting career to find a real Italian Job.
