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The Technologies Behind Cryptocurrencies: Expectations Vs. Reality

The Technologies Behind Cryptocurrencies: Expectations Vs. Reality 1

Cryptocurrencies, despite tremendous developments, are subject to a lot of controversies. Some people claim it’s as innovative as the internet, while others see it as a dangerous invention.

They are regarded as both a technology craze and revolutionary technology that challenges civilization’s political and social foundations.

Read this article to discover the technologies behind cryptocurrencies.

What exactly is cryptocurrency?

Virtual assets that utilize cryptography (encryption) as a form of security are known as cryptocurrencies.

A few of the latest cryptocurrencies also operate to offer rules or duties for its holder and buy and sell goods and services.

They have no intrinsic value since they cannot be exchanged for another product, including gold. Also, they are not like regular cash because a government authority does not produce them.

Early users mostly use cryptocurrencies at this moment. About half of the 10 million people who own Bitcoin do so solely as an investment in digital currency.

Cryptocurrencies aren’t necessary for the long run because of the efficiency of fiat currency supported by the government. Many cryptocurrency users just consider the potential advantages of using a cryptocurrency. One of the main advantages is that it can be easily bought and sold on cryptocurrency exchange platforms like Swyftx. This makes it much more accessible than other forms of currency, and it also means that users can take advantage of swings in the market to make a profit.

As a result, mass adoption of cryptocurrencies will only occur if there is a demonstrable advantage to doing so.

Advantages of cryptocurrency

Below are some of the pros of using cryptocurrency:

Your identity remains mostly private

Using cryptocurrency to buy products and services online does not necessitate the sharing of personal information.

There’s a widespread belief in the cryptocurrency community, however unfounded, that it ensures perfect secrecy in transactions.

What they offer is online anonymity, which is a state of near anonymity or pseudo-anonymity. Purchases can be completed without revealing any personal information about the buyer.

However, transactions can be traceable from an individual or organization’s point of view by law enforcement.

On the other hand, cryptocurrencies can benefit consumers in the face of growing worries about identity theft and privacy.

Security

Alternative methods of doing financial transactions do not have the same level of security that blockchain technology and crypto, by extension, offer.

Cryptocurrencies are highly encrypted tokens, with each individual transaction needing the approval or consensus of all network members to be validated.

As far as financial technology goes, this form of decentralized encryption is the most secure and advanced. While it is not completely infallible, the security levels on offer are still unsurpassed in global fintech innovation.

Immutability

Another distinct quality of cryptocurrencies is that they are immutable on the blockchain. Once a transaction is initiated, it cannot be reversed or altered.

This adds a further layer of security to the whole thing.

But, perhaps, more importantly, it means that the distributed ledger that is the blockchain remains visible at all times. Thus, there’s no chance of the mixups that often occur with traditional methods like wire transfers.

Decentralization

This is the standout feature of cryptocurrencies and the blockchain at large. Its adoption has been so widespread because there is no middleman, so to speak.

To administer the circulation of fiat currencies, there have to be centralized institutions like central banks that make the rules and regulate the market. While it may guarantee the protection of investor rights, it does not cater to scalability issues.

That is to say that traditional financial systems are rather exclusive and highly reliant on the character and reputation of middlemen. On the other hand, cryptocurrencies offer a decentralized alternative accessible to just about anyone.

The technologies behind cryptocurrency

Since its invention, crypto has gone even further than the dreams of its inventor, with fresh limits pushed on an almost daily basis regarding innovation. Here are a few of the primary underlying technologies behind cryptocurrency:

Encryption

Cryptocurrencies are secured with high-grade encryption protocols that double the inefficiency in the decentralized ecosystem that is the blockchain.

The mode of encryption used by cryptocurrencies is private-public-key encryption. This protocol relies on the synchronization of public and private hash keys designed to work like bank account numbers and passwords.

The public key validates transactions on the chain, while the private key verifies them. The former identifies the originating node, while the latter “signs” each transaction.

So far, this technology has proved to be safe and secure, provided that the private keys are not compromised.

Consensus

To validate transactions on the blockchain, there has to be a consensus. For every cryptocurrency making the rounds on the network, every computer or node must approve and validate the transaction.

How this works is referred to as a consensus mechanism. Different cryptocurrencies use different consensus mechanisms, all of which have pros and cons.

No matter the methods, every consensus exists for the same purpose: to validate every single transaction and prevent double-spending. Without this, crypto would have no value as there would be no way to prevent individuals from spending coins previously spent.

Types of consensus mechanisms include proof-of-stake, proof-of-work, proof-of-authority, proof of burn and proof-of-activity.

The expectations and realities of cryptocurrency

With the revolutionizing effect that cryptocurrencies have had in recent years, it is no surprise that many have come to expect certain innovations. Some of these expectations and realities will be discussed below:

Energy consumption

When Bitcoin first launched, it used a consensus mechanism called proof-of-work, where miners or investors with access to sufficient computing power validated each transaction and earned rewards.

Since the development of other cryptocurrencies, there has been increased pressure from the global community to switch to alternative consensus mechanisms. Because it takes up so much power, there is genuine concern about the amount of energy that is required to power up an entire blockchain, talkless of several.

Recently, Ethereum announced that they would be switching to proof-of-stake, which is a far less energy-intensive protocol. Still, it is expected that several years will pass before cryptocurrencies and blockchain technology become data and energy-efficient.

The future of DeFi

Given just how popular it is today, one would be forgiven for thinking that DeFi was in its prime. In fact, contrary to what some people might think, blockchain technology is very much in its early days of innovation.

While many people expect decentralized finance to replace the traditional institutions of centralized finance, the truth is a different story. Many world governments are loath to legalize such a decentralized ecosystem.

Worse, the experiments of countries like El Salvador have only served to highlight deficiencies within a national system.

The stable coin debate

Cryptocurrencies are inherently volatile. For this reason, some high-profile investors prefer to distance themselves from such an asset.

Because of this, stable coins have long been touted as the answer to crypto’s volatility. Unlike regular crypto, stable coins are backed by real-world assets that have value, such as the U.S dollar. For instance, Tether is backed by the U.S dollar.

However, the reality is that stable coins are not revolutionary. In addition, they increase the chances of people committing fraud.

Conclusion

Cryptocurrencies have been making waves for years now. However, the expectations don’t necessarily match the realities. Traditional finance has been around for years, and everyone isn’t going to switch to crypto overnight.

Also, many of the projected innovations may be too early for the ecosystem, given that there are still many issues to be resolved. Nonetheless, one thing is certain- sooner or later, crypto will be the world order.

Written by Srikanth

Passionate Tech Blogger on Emerging Technologies, which brings revolutionary changes to the People life.., Interested to explore latest Gadgets, Saas Programs

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