In recent times, digital currencies have emerged as a disruptive force, captivating the attention of investors, technologists, policymakers, and speculators. But amidst the excitement, an important question remains unanswered. Is this just another bubble? Or is this just the start of something bigger, or even revolutionary? This article navigates this debate, exploring the potential of digital currencies while addressing the challenges they face. From their rise to current trends, we dissect this complex landscape, recognizing digital currencies’ profound impact on the economy.
What is crypto?
Cryptocurrencies are digital, encrypted, and decentralized mediums of exchange that are underpinned by cryptographic systems. They have no central authority to manage and maintain their value. If you find it challenging to comprehend the technical jargon, keep in mind that cryptocurrency represents decentralized digital money that individuals can utilize over the Internet.
How does it work?
Central to the functionality of Bitcoin and other cryptocurrencies is blockchain technology. At its core, blockchain is like a digital ledger that records transactions securely and transparently. As its name indicates, a blockchain is essentially a set of connected blocks of information on an online ledger. Each block contains a set of transactions that have been independently verified by each validator on a network. Before confirming a new block, it is necessary to verify it, thereby making it nearly impossible to forge transaction histories. A network of individual nodes, or computers, that maintain the ledger must agree upon the contents of the online ledger. The entire network of blocks which contains the entire transaction history of transactions, is the basis on which cryptocurrency is built.
What sets blockchain apart is its decentralized nature- there’s no central authority controlling it. Instead, a network of computers, or nodes spread across the globe maintains it. The process of mining creates Bitcoin or any form of cryptocurrency. Mining is the process by which transactions are verified and added to the public ledger.
Here’s how it works:
- Miners compete to solve complex mathematical puzzles in order to validate and confirm transactions on the Bitcoin network.
- To keep the Bitcoin network secure, miners compete to solve complex puzzles. The winner earns a block reward – a set amount of newly minted bitcoins– for verifying transactions and adding a new block to the blockchain.
- Currently, the block reward for successfully mining a new block on the Bitcoin network is 6.25 bitcoins. However, this amount decreases over time as the halving events occur.
When you make a transaction in a blockchain network, it’s broadcast to all the nodes. These transactions are bundled together into blocks, verified and added to the blockchain.
Now, let’s talk about cryptocurrency – the digital assets that ride on blockchain technology. Cryptocurrencies are essentially entries in a database that are secured using cryptography. Each user has a pair of cryptographic keys: a public key, which serves as their address, and a private key, which allows them to access their funds.
When you want to send cryptocurrency to someone else, you sign the transaction with your private key. This signature proves that you’re the rightful owner of the funds. The transaction is then broadcast to the network, where it’s verified and added to the blockchain.
What makes cryptocurrencies so appealing is their decentralized and transparent nature. They enable peer-to-peer transactions without the need for intermediaries like banks. Plus, blockchain technology ensures that transactions are secure and tamper-proof.
The Rise of Digital Currencies
In 2009, the world’s first cryptocurrency, Bitcoin, emerged. Created by someone allegedly named Satoshi Nakamoto, It was released as open-source software alongside a white paper detailing its revolutionary concept.
Although Satoshi purportedly claimed Japanese origin and presented himself as a male in his thirties, his true identity remains mysterious due to the exclusive nature of his online interactions. Linguistic analysis suggests a penchant for British English, while his online activity patterns suggest a North American time zone, casting doubt on his claimed nationality. Wherever he is, he has about a million bitcoins, worth billions of dollars now, which he has never spent. And he has gone dark; after having invented the concept, he no longer leads it and his whereabouts and identity are unknown.
At first, Bitcoin was dismissed as a niche curiosity, the domain of tech-savvy enthusiasts and fringe libertarians. But as its value skyrocketed and mainstream media caught wind of its meteoric rise, the world took notice. Suddenly, everyone wanted a piece of the action.
But Bitcoin was just the beginning. Soon, alternative cryptocurrencies, or altcoins, emerged, each with its own unique features and use cases. Ethereum, in particular, captured imaginations with its smart contract capabilities, paving the way for a brave new world of decentralized applications (DApps) and decentralized finance (DeFi).
As digital currencies gained traction, they transcended borders and barriers, empowering people around the globe with access to financial services and opportunities previously out of reach. In regions plagued by economic instability or repressive financial systems, digital currencies offered a lifeline, providing a hedge against inflation and capital controls.
Fast forward to today, and digital currencies have gone mainstream. Institutional investors, financial institutions, and even governments are taking notice, recognizing the transformative potential of blockchain technology. The integration of cryptocurrencies into payment systems and the endorsement of blockchain by industry titans underscore a seismic shift in the financial landscape.
But the journey is far from over. The digital currency space continues to evolve at breakneck speed, with innovations like non-fungible tokens (NFTs), central bank digital currencies (CBDCs), and decentralized autonomous organizations (DAOs) reshaping the landscape in real-time.
Advantages of Cryptocurrencies
The speed at which digital currencies have gained traction came as a shock to many and even though crypto sceptics would like to chuck it up to speculative appeal, there is evidence to suggest that there are many advantages and use cases to crypto. Some of these advantages are listed below.
Decentralization
Digital currencies operate on decentralized blockchain networks, meaning there’s no central authority or intermediary controlling transactions. This decentralization fosters transparency, reduces reliance on traditional banking systems, and empowers individuals worldwide with greater financial autonomy.
Global Accessibility
One of the most remarkable features of digital currencies is their global accessibility. Unlike traditional banks tethered to geography, cryptocurrencies offer borderless access- anyone with an internet connection can join the game. This opens up new opportunities for cross-border transactions and international commerce.
Lower Transaction Fees
Say goodbye to hefty transaction fees! Digital currency transactions often involve lower fees compared to traditional banking transactions, especially for international transfers. With digital currencies, you can send money across the globe quickly and affordably without worrying about excessive fees eating into your funds.
Enhanced Security
Blockchain technology, the backbone of digital currencies, provides robust security features that safeguard transactions against tampering and fraud. Every transaction is secured with cryptography and logged on a transparent, shared ledger, ensuring immutability and eliminating the possibility of fraud. This heightened security gives users peace of mind when conducting transactions online.
Financial Inclusion
Digital currencies have the power to bank the unbanked. By providing access to basic financial services through digital wallets and mobile devices, digital currencies bridge the gap between those with traditional banking services and those without. Digital currencies open the doors to financial inclusion, empowering those previously excluded from traditional banking systems.
Privacy
While transactions on the blockchain are transparent and traceable, digital currencies also offer a level of privacy and anonymity. Users can transact pseudonymously without revealing their identities, preserving their privacy in an increasingly digital world.
Despite its potential and almost limitless use cases, it has its challenges. Despite their potential to revolutionize finance, digital currencies face a multitude of challenges that threaten their long-term viability. Wild price swings fueled by speculation, environmental concerns, and unclear regulations all pose significant challenges that cryptocurrency proponents must address for it to achieve mainstream success. In Nigeria for example, the Crypto universe recently got caught in a regulatory web when the Nigerian government accused the Crypto trading platform – Binance – of exacerbating the depreciation of the Naira. Binance is also currently facing a host of regulatory challenges in many of its operating jurisdictions.
How was Binance affecting the currency market?
Due to the historical lack of a price discovery mechanism in the Nigerian FX market, the Binance peer-to-peer (P2P) platform became the new AbokiFx where BDC operators get their current price of USD. This put too much economic power in the hands of an unregulated foreign entity. As you would expect, it wasn’t long before market manipulation became the order of the day.
This is how the manipulation works;
The first step is to open a short position (Borrow in Naira and convert to dollars) against the local currency. For the sake of this class let’s assume you borrow N1200,000 and convert to dollars at N1000/USD to $1,200.
The second step is to move the exchange rate. To do this all you need is access to the P2P market where everyone is a price maker. Assuming that the naira to $ is currently exchanged at the parallel market for N1,200. On Binance P2P, you can create ads claiming to be willing to buy USDT for N1,500. Once someone sells to you (usually your cohort) at that price, that becomes the new price and since most participants in the P2P market are long dollars (they have dollars and benefit when the naira weakens) everyone is okay with the new arrangement. Parallel market dealers with no other price discovery mechanism set that as their new price
Step 3 sell your $1,200 at the new exchange rate. It doesn’t matter where u sell it, as long as u can get your dollars to naira. At N1,500/$, your $1,200 now becomes N1,800,000. You repay your loan and any interest you accrued and you go home with N600,00 with little or no capital invested.
The problem with this arrangement is that it creates a situation where a few people benefit from economic headwinds in an entire nation and this is very unsustainable.
Current Trends and Developments
Cryptocurrency adoption is surging, pushing digital currencies from the fringes of finance into the mainstream, despite facing numerous challenges. Mainstream institutions, from financial giants to governmental bodies, are embracing digital assets like never before. Central banks around the world are exploring the potential of central bank digital currencies (CBDCs) as a means to modernize payment systems and enhance financial inclusivity. The Central Bank of Nigeria is leading the charge in Africa to become the first African central bank to launch its own CBDC.
Aside from CBDC’s, Decentralized finance, or DeFi, is taking the financial world by storm. DeFi platforms leverage blockchain technology to offer a wide range of financial services, including lending, borrowing, and trading, without the need for traditional intermediaries. Non-fungible tokens (NFTs) have also captured the imagination of creators and collectors alike. These digital assets, which represent ownership or proof of authenticity of unique items, have sparked a craze in the worlds of art, collectables, and gaming. NFT marketplaces are buzzing with activity as creators and collectors flock to buy, sell, and trade digital assets.
Going forward, the future of crypto appears both tantalizingly promising and intricately uncertain. On one side, digital currencies look set to be the future of finance, poised to disrupt traditional banking systems and foster financial inclusivity on a global scale. On the other side, sceptics caution against the volatility, regulatory uncertainty, and technological limitations that cast doubt on the long-term viability of digital currencies.
The truth in our opinion lies somewhere in the middle, amidst the uncertainty and complexity of the digital currency landscape. Time will tell if cryptocurrencies are the harbinger of a financial revolution or a short-lived fad.
