Crypto Academy Week 14 - Homework Post for @levycore

INTRODUCTION

Cryptocurrencies have grown from an abstract concept to a widely accepted part of life. The market has grown greater than anyone could have speculated with over 10,000 coins currently in existence. But what are these cryptocurrencies and how do they function? Well, we’re going to find out today.

What is a cryptocurrency?

In a general sense, cryptocurrencies are digital currencies that are decentralized by the use of cryptography. Cryptocurrencies are not controlled by a government or central entity. Rather they are based on blockchain technology controlled by a distributed ledger.

Bitcoin is regarded as the first successful cryptocurrency. Created in 2009, Bitcoin(BTC) has seen major success over the years. Thanks to Bitcoin, cryptocurrencies have gained strong grounds in our lives.

There are generally two types of cryptocurrencies;
a) bitcoin
b) alternative to bitcoin (Altcoins)

Fundamental difference between Cryptocurrency and the conventional financial system

Cryptocurrencies were built to tackle the flaws of the conventional financial system and are slowly doing so. Here are some of the differences between the two concepts:

Cryptocurrencies	Conventional financial system
They are decentralized and not controlled by a central entity	They are controlled by a central entity(centralized)
They cannot be counterfeited	They can be counterfeited
They are not tangible	They are tangible. Can be seen and felt
They are highly volatile	They are not prone to high volatility
They cannot be tracked	They can be tracked
There are no real restrictions to their operations	They are subjected to laws and restrictions for regulatory purposes

Why is a decentralized system needed?

The world is rapidly moving to decentralized systems in different aspects like social media, finance, apps and so on. Decentralization is necessary for a number of reasons of which I would mention a few below:

Control: The main reason for decentralization is the issue of control. For years, people have sought full control due to the incompetence of central governments. Decentralization has helped people have total control over whatever they do.
Equality: In decentralized systems, there is no bias or favoritism. Everyone has the same amount of rights and is treated equally.
Hack proof: A major characteristic of decentralized systems is that they are hack proof. This is unlike centralized systems that are constantly hacked and stolen from.
Transparency: Centralized systems have always been known for shady activities by higher-ups. Well, in decentralized systems there are no higher-ups so shady activities cannot take place.
Originality: Thanks to their decentralized nature, cryptocurrencies cannot be counterfeited thanks to the cryptography. One bitcoin is the same everywhere and it can’t be different.
Failure proof: Decentralized systems cannot fail thanks to their distributed state. The failure of one node cannot affect the whole system. The network is always live.

What affects the value of cryptocurrencies?

The crypto market have been known to be very volatile. There are always sharp changes in prices within the blink of an eye. Apart from this, cryptocurrencies go lower or higher in price over time or in the long term. There are various factors that cause these changes

Use cases: This factor moves the price of cryptocurrencies very fast. A coin that becomes generally accepted will for sure see major price increase as trading volume increases. This is because the demand of the coin would rise. Bitcoin, for example, has seen great heights between last year and this year because a lot of investors and companies have endorsed the concept.
Sentiments: Sentiments are the combined emotions of traders towards a cryptocurrency. The two emotions move the markets are fear and greed basically. If traders are bullish about a coin, that coin will see major growth. However, if traders are bearish about a coin, the coins will see major decline.
Scarcity: One characteristic of money is that it is relatively scarce. Low supply coins are generally worth more than coins with higher supple. Deflationary coins also get worth more overtime as investors rush to gather them before they are all gone.
Activities of whales: Whales are accounts with huge holdings of a particular crypto. Whales can move markets with just words. This is because people tend to follow these whales and react to what they say or do. Sometimes whales use strategies like this to move the markets their way.

Why can't everyone be a miner?

Miners are people that validate transactions on the ledger and get rewarded with commission. Mining bitcoin is a tiresome process that not everyone might be ready for. Bitcoin uses the proof-of-work consensus which requires actual work for rewards.
These are some reasons why everyone can’t be a miner:

Cost of setup and maintenance: First of all, the cost of setting up a mining ring is a lot. The hardware costs so much that a lot of people are discouraged from mining at all. Also maintaining the ring will take a lot of money. In the end, the cost of setup and maintenance might greatly surpass the rewards gotten if any.
Complexity: Everyone has their capacity. Some people are just generally good at solving complex problems than others. Well, bitcoin mining is a different type of complexity that a lot of people might just not be ready for. The complexity explains the proof-of-work consensus algorithm that Bitcoin operates on.
High energy consumption: The energy needed to begin to mine bitcoin is way more than most people anticipate. This energy is another cost that most people cannot maintain. A single bitcoin mining transaction can serve about two households for two weeks. Considering the cost of energy, a lot of people realize they would be hitting losses if the try to me miners.
Not environmentally friendly: Bitcoin mining emits a lot of carbon that is really not good for the earth. This flaw alone makes it very unattractive people including me.

Why can cryptocurrency transactions be called more transparent?

Transparency has been a major issue in centralized transaction systems since the dawn of civilization. Cryptocurrencies don’t have this problem because of their decentralized state.

Cryptocurrencies are built with blockchain technology. Blockchain technology is a type of system where transactions are stored in a distributed ledger in a decentralized network of nodes. The transaction records (blocks) are identified by hashes that are very distinct. Each block is the rearranged and stored somewhere in the blockchain.

The thing about a blockchain transaction is that it has been verified and is everywhere. Once verified, the system recognizes the transaction in long strings of characters called hashes. No hash is the same with another. A simple alteration in a hash will make it invalid. This system makes it impossible for data to be manipulated by anyone.

Development of Cryptocurrency in Nigeria

Nigeria is a huge marketplace for cryptocurrencies. According to statista, over 30% of Nigerians operate with cryptocurrencies.

In the beginning of February, 2021, the Central Bank of Nigeria decided to take a really impromptu move by banning cryptocurrencies stating that its anonymity made it a subject of scrutiny. This caused a lot of exchanges to delist the Naira and also to suspend deposits in Naira. Accounts that had crypto related activities were also blocked.

A lot of people believe that the move was due to the role cryptocurrencies played in the EndSARS movement back in 2020. Well, whatever the reason, it is clear that the ban has really done nothing. More and more people are getting into the crypto business as they realize how lucrative it is especially in a country with a failing economy.

CONCLUSION

Cryptocurrencies have really revolutionized the world financial system. Their decentralized nature have been really changed the way we work and think on a daily basis. These digital currencies have also brought a lot of people out of poverty. It is still wise to note how volatile these currencies are and to take caution before investing in them.

Special thanks to @levycore