What is crypto?

Crypto is an umbrella term to categorize the vast ecosystem of blockchain protocols that have emerged since the creation of BitcoinBTC
, the original cryptocurrency, in 2008. Admittedly, this term and much of the jargon used to explain the industry can be overwhelming, especially for readers with limited backgrounds in technology. But don’t worry, it’s actually quite easy to understand crypto’s basic principles and understand its long-term potential.

To begin with, it’s important to understand what separates crypto from the other forms of digital assets that we encounter in our daily lives, things like loyalty points at a local coffee shop and airline mile rewards. The big difference is that unlike these programs, which are run by centralized parties (like a company), crypto has no primary issuer. Instead, it uses a new type of database called a blockchain, which can be thought of as a spreadsheet in the sky for all to see. Transactions are added to a blockchain of computers around the world running software that ensures the network can function and remain secure without an overseer. These computers are called nodes.

Although this arrangement may seem simple, it is actually a dramatic breakthrough in computer science, providing a valuable resource for the first time in history: scarce digital assets.

What does this mean? Well, you know how easy it is for someone to right-click an image to save to a computer. It can then be copied and sent an unlimited number of times. If you were one of those recipients, would you believe someone if they told you they didn’t send it to anyone else? Even if you did it would be impossible to verify. Bitcoin makes it possible to know that a digital dollar, or bitcoin, is unique.

Crypto offers a way forward to digital assets for a 21st century economy. Let’s start with bitcoin.

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Digital currencies

The breakthrough use for crypto was peer-to-peer electronic cash transfers with bitcoin. Consider the challenges that come with sending money across borders using traditional technology. An international wire transfer takes 3-5 business days with fees as high as $70 depending on the bank. Transfer payments through money transfer companies usually take 1-5 business days and, according to the World Bank, have an average fee of 6.5%. On the bitcoin network, confirmation happens approximately every 10 minutes. Transaction fees vary with network usage but are historically in the $1-$3 range.

Stablecoins such as tether, US dollar coin and DAIDAI
was created to take advantage of peer-to-peer electronic transfers introduced by bitcoin, but with faster settlement and less volatility. These digital currencies are disrupting the remittance industry and providing a payment option to the world’s unbanked population.

Bitcoin is also becoming a reserve asset and store of value. As opposed to holding US dollars, government bonds or gold, companies like Tesla and countries including El Salvador and the Central African Republic are choosing to own bitcoin. With its limited supply and a monetary policy that cannot be changed, some view bitcoin as the 21st century equivalent of gold.

Smart contracts

EthereumETH
introduced the idea of ​​the smart contract in 2015. A smart contract is a self-executing program that works on the basis of if/then computer commands. A common example is an initial coin offering (ICO) smart contract, which automatically sends invested funds to a project and returns a newly created digital asset to the investor’s wallet, automating the fundraising process. Introducing smart contracts to a decentralized blockchain ecosystem opened up crypto to a myriad of uses. Decentralized finance (DeFi), for example, replicates banking, lending and trading on a blockchain. Using self-executing code and digital assets as collateral, crypto allows anyone to borrow without a bank and trade without a broker, saving time and fees.

Although smart contracts debuted on Ethereum, new protocols such as SolanaSUN
LandslideAVAX
and AlgorandALGO
has entered the market to offer similar capabilities and faster settlement times with lower fees during times of high network load.

Decentralized applications and organizations

There are currently over 3,000 decentralized applications using smart contracts over the Ethereum network – not all of them dealing with finance. Storj, for example, is a cloud storage service. Another example, the Basic Attention Token, uses smart contracts to direct advertising revenue to web surfers using the Brave Browser. Decentralized applications rely on the smart contract framework provided by the protocols mentioned above.

In addition to decentralized applications, decentralized autonomous organizations (DAOs) are another emerging crypto sector. These are companies that grant voting rights or special access to holders of their specific tokens. The holders make decisions by majority rather than allowing control by a small group of managers or investors. DAOs are created for all sorts of purposes, from decentralized investment clubs to managing lending protocols.

Non-fungible tokens

While cryptocurrencies are fungible, meaning that each unit is the same as every other unit, non-fungible tokens (NFTs) are unique. They can be used to represent – ​​and verify – ownership of individual assets, digitally or otherwise.

NFTs allow artists to take their digital works straight to consumers. Traditionally, art dealers, record labels, book publishers and other intermediaries have been given ownership of a work and pay royalties to the creator of as little as 15% of the proceeds. By creating a piece of digital art, stamping it as an NFT and selling it directly to consumers, an artist can relate directly to end buyers. Ownership is recorded on the blockchain and runs on its infrastructure, cutting the middlemen out of the process. NFT marketplaces like OpenSea or Blur allow the minting and sale of art, photography, collectible avatars, music, digital wallet domain names and more.

The future of crypto

Crypto has the potential to revolutionize the way we interact with the internet. This is often referred to as Web3. In Web2, as today’s iteration is known, Internet companies like Facebook and Google make money by selling advertising or user data. In Web3, the infrastructure is based on blockchain and crypto instead of enterprise systems. This allows consumers to participate in the cash flows that today go to large technology companies and better protect their personal data.

Crypto also has a role to play in the metaverse. Imagine if every property in a popular digital world like World of Warcraft was a unique NFT. For players, property and items will have market prices determined by users who want them. In-game money will be scarce and its value will appreciate as more users join a network and want the money to buy the virtual goods or services. Unlike games on a company’s server, crypto enables a true metaverse experience where users own parts of a digital world.

Although we outlined some past and potential applications of crypto, the truth is no one knows where this technology will take us. Not many would have guessed that some of the killer applications on the current web would be hailing cars or liking a stranger’s photo with your smartphone. Crypto’s first example of product market adaptation was to decentralize money and finance. The next killer app may be something completely unexpected.