Cryptocurrency has become a buzzword lately. The industry has attracted some of the smartest minds from tech.
Bitcoin has received endorsement from Elon Musk, the richest man in the world, and Jack Dorsey, the founder of Twitter. Despite the price volatility and a few bad actors in the industry, crypto has managed to grab a dedicated audience. It tries to right the wrongs of the banking system as well as the Internet industry.
If you are someone who just heard about crypto, here are a few things you need to know about this $2 trillion industry.
Many people think only of Bitcoin when they hear the word Crypto However, the industry is much bigger than that. It comprises Blockchain technologies, NFTs, and DeFi.
All of these technologies together create a decentralized internet finance universe that is run by a token economy, more about that is in the latter part of this guide. Now let’s look at all these technologies one by one.
What is Bitcoin?
Bitcoin is also termed “digital gold.” It is the parent cryptocurrency considered an alternative to fiat currency by the proponents. But, we are yet to see some real use cases of Bitcoin. You would hardly see anyone pay for their food using bitcoin. There are only s few merchants that accept bitcoin as payment.
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Bitcoin was the first-ever cryptocurrency released in 2009. Its primary use case was to record transactions on a distributed, decentralized ledger. People could send and receive money without paying a mediator such as banks etc.
The value of Bitcoin has increased enormously over the last decade. It from merely worth pennies to $67K within13 years. The price of BTC is attached to both speculation and utility.
Despite large-scale institutional adoption, bitcoin remains a speculative asset. Its price is tied to market sentiments. Critics often call BTC a bubble because of its volatile price movements.
Positive news regarding bitcoin attracts a large number of investors who purchase it with the hopes of selling it at a higher price later on. Increasing demand pulls the price up but once whales sell their holdings, the market goes all red. This speculative behavior causes harm to small investments.
Utility of Bitcoin
The speculations may have impacted the price but overall bitcoin has seen a growing price trend. This is because of the utility of bitcoin and blockchain. BTC allows fast transactions across borders with a minimal fee.
Unlike fiat currency, Bitcoin has a limited supply. There can only be 21 million bitcoin ever. As a result, bitcoin can provide a hedge against inflation.
Decentralization and limited supply of bitcoin make it an attractive method of payment. Once it is widely accepted, we might see stability in its price.
What is Blockchain?
Blockchain is a decentralized, distributed ledger that keeps a record of all transactions. All the nodes on the blockchain have to agree on certain sets of terms of conditions. Nodes are basically computers distributed around the globe. All of the computers contain a copy of blockchain data.
Every piece of information is verifiable on the blockchain. It’s nearly impossible to hack into the blockchain and alter data at nodes at the same time. Moreover, all the data is permanent and can never be deleted.
Blockchain is like an open-source google spreadsheet. Anyone can check it at their own convenience. Nevertheless, it is append-only which means the added information can’t be changed.
What are the NFTs?
NFTs are non-fungible tokens that represent a unique product. NFTs saw a boom in 2021 after an artist Beeple sold his paintings for over 60 million dollars.
For many people, NFTs make no sense. How can an image have so much worth when you can download it from the internet for free? But like ‘beauty’ the value of NFTs lies in the eyes of the beholder.
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NFTs are minted on the Ethereum blockchain. They grant a unique ownership right to the creator. An NFT is not interchangeable or broken down into smaller pieces. It has to be bought as a whole. Digital artist can monetize their work using NFTs.
What is DeFi?
DeFi or Decentralized Finance is the world of smart contracts, stablecoin, and decentralized autonomous organizations (DAO). DeFi aims to create a decentralized version of the banking system. It allows participants to trade cryptocurrency in an unregulated environment without a middleman.
Smart contracts are a piece of code that define terms and conditions for operations. It is based on the ‘if this, then this’ rule. A smart contract executes itself when certain conditions are met. It reduces costs with negligible chances of error.
As discussed earlier, cryptocurrencies are highly volatile. Hence DeFi presents an alternative in the form of stablecoin. A stablecoin’s value is pegged to fiat currency. For example, Tether (USDT) is pegged to USD. The idea is that you can sell USDT for $1 whenever you want.
DAOs are usually created with a certain ‘crowdfunding goal. The participants of DAOs have voting rights granted as a result of holding tokens. They can govern DAO and decide which projects to be added and where the money will go.
Growth of DeFi
DeFi sector is exponentially growing with some of the best minds of silicon valley entering the arena. It offers an opportunity to build projects from scratch. According to DeFi pulse, the total value locked (T.V.L) in DeFi is around $67 Billion. Which is significantly lower than November last year, when the TVL reached an all-time high of $110 billion.
Despite criticism of non-regularization, Defi has become too big of a sector to ignore. It is like the wall street of the crypto industry.
Cryptocurrency has been in the news for the past 5 years since the boom of bitcoin in 2016-17. Some people compare the rise of crypto to the rise of the Internet back in the 1990s. The technology might be complex but it is here to stay. Hence the earlier you get in the more fun you will have.