Cryptocurrencies
What are cryptocurrencies?
Cryptocurrencies are a form of digital asset and a decentralized currency whose value is based on a system governed by a set of regulations based on complex mathematical algorithms and cryptography. This framework forms a monetary ecosystem without direct human control, allowing transactions without intermediaries, thanks to the implementation of cryptographic code in a computer program or protocol that acts as a universal ledger of all transactions and assets in circulation.
The blockchain protocol, a cryptographic computer program that validates or invalidates transactions based on unique mathematical codes known as hashes. This technology stands as an impenetrable infrastructure, immutable to alterations or external intrusions, giving it its own independent value, distinct from conventional centralized fiat money. In this context, the records of individual assets and transactions are immutable, executed by computer programs without requiring human intervention. This singularity is the basis of its decentralization and consolidates its reputation as a secure and disruptive technology, overcoming the limitations of the traditional monetary system.
These cryptocurrencies, unlike fiat currencies backed by governments or central financial entities, operate in a decentralized environment. This decentralized system eliminates the need for a central authority to regulate or validate transactions, meaning they are not subject to traditional monetary policies or the influence of financial institutions.
Furthermore, the issuance and regulation of cryptocurrencies are governed by predefined algorithms, limiting the total amount of coins in circulation and establishing clear rules on how new units are created. This approach creates a transparent and predictable issuance and distribution system, often in contrast to traditional currencies that may be subject to excessive printing (inflation) or manipulation by governments.
This decentralized structure also promotes security and transparency. The immutable record of transactions on the blockchain ensures the integrity of the network and prevents manipulation or fraud, as each transaction is cryptographically linked to previous ones.
Additionally, cryptocurrencies are not limited by national borders and offer a globalized financial system, allowing faster and cheaper cross-border transactions compared to traditional financial systems, which often involve intermediaries and can take days to complete.
This combination of characteristics—decentralization, supply limitation, transparency, and global reach—has driven interest and adoption of cryptocurrencies, transforming them into a superior counterpart to the traditional banking system.
Storage of cryptocurrencies
Cryptocurrency wallets are like digital wallets that allow you to store, manage, and transact with cryptocurrencies. But here's the key: cryptocurrencies themselves are not stored within the wallet. Instead, the wallet stores cryptographic keys that confirm ownership and the amount of cryptocurrencies associated with that address.
Security in storage and transactions
When you receive cryptocurrencies, you are actually receiving a confirmation generated by a protocol of unique mathematical algorithms. This validation must be in accordance with all nodes in the network, meaning you get a validated record from the program showing how many cryptocurrencies you have associated with your wallet address. It's like getting a stamp of approval from the network confirming your balance through a secure and precise mathematical process.
To send cryptocurrencies from your wallet, you need to interact with the blockchain of that cryptocurrency. This involves sending a transaction through the network using nodes that verify and validate that transaction.
Now, if you don't want to install and maintain a node of that particular cryptocurrency, you can turn to third-party applications. These applications facilitate the sending and receiving of cryptocurrencies without the need to install a node, as they themselves have nodes built into their platform.
Protocol and transaction security (unhackable)
A transaction begins when it is sent from a node to the blockchain, where the request is validated or invalidated. The authenticity of the transaction is determined through cryptography, represented by a mathematical hash, which must match the consensus of the majority of nodes in the network to be accepted. This hash is a unique digital signature that verifies the authenticity and validity of the transaction.
The security lies in the fact that to falsify a transaction, an attacker would have to alter the hash of 90% of the nodes in the network for that transaction, which would require incredible computational power to solve that hash and match the consensus of the network. Since the blockchain is based on decentralization and the majority of nodes must agree to validate a transaction, it is extremely unlikely, as it would require controlling a large number of nodes simultaneously, making it easier to hack an entire continent at the same time. It is this inherent security that makes the blockchain reliable for transaction recording.
Asset transfer
Cryptocurrencies allow ultra-fast transactions anywhere in the world without requiring the approval of any human intermediary. This speed is possible thanks to the decentralized nature of these digital currencies. Transfers are executed in minutes, sometimes seconds, without relying on manual approval from centralized entities, as is the case in the traditional banking system. This agility is a radical change from conventional banking processes, where international transfers can take business days and involve multiple manual approvals. In the case of cryptocurrencies, the speed and autonomy of these transactions are a clear example of their efficiency and global reach, giving users the ability to send funds instantly and without borders.
Transfer fees
Cryptocurrencies have almost negligible fees, much lower than those of traditional banking. There are no human intermediaries, only algorithms that verify transactions without the need for human approval. These fees go to validator nodes, adjusted for the number of nodes connected to the network, but the incentive for node owners is minimal due to the oversupply of nodes. Cryptocurrency fees are insignificant compared to traditional banking.
Bitcoin and the origin of cryptocurrencies
Satoshi Nakamoto, a pseudonym used by the creator of Bitcoin, introduced this cryptocurrency in 2009 as an alternative to the traditional financial system. The main purpose was to create a secure and digital exchange method that did not depend on corrupt governments, financial institutions, or central banks, inflation. Nakamoto devised Bitcoin as a response to the global financial crisis and as a means to eliminate intermediaries and corruption in financial transactions.
Different types of cryptocurrencies
The diversity in cryptocurrencies is because anyone can create one. This is achieved by programming a protocol with specific rules using programming languages. In fact, the first cryptocurrency, Bitcoin, laid the groundwork and many others emerged as modifications of its original code.
Bitcoin is the primary cryptocurrency, while others are called altcoins. However, some of these alternative coins or "shitcoins" lack innovation or significant added value, being seen as irrelevant coins.
This ease of creating new cryptocurrencies has generated a diverse market, but Bitcoin remains the most relevant and stable, setting the standard for all others.
Excessive volatility of cryptocurrencies and their solution for safe use (stablecoins without volatility)
Volatility is a distinctive feature of cryptocurrencies, making them high-risk investments. Their price fluctuations can be significant in short periods, making their value unpredictable. This makes investing in cryptocurrencies risky and not recommended for all investment profiles. However, it is expected that in the future, some strategies and technological developments will reduce this volatility, making cryptocurrencies more stable and predictable.
The existing solution is a specific type of cryptocurrency called stablecoins, which fundamentally solve the challenge of volatility in cryptocurrencies. They are designed to maintain a stable value associated with an asset, such as the US dollar, meaning they will have the same value as the dollar or another stable asset.
Compared to purchasing dollars with fiat money, acquiring stablecoins is more accessible and economical. Buying dollars is often costly and complex due to intermediaries and regulations, while stablecoins have no associated fees due to regulation being of decentralized nature, they are easy to buy on an Exchange.
Stablecoins maintain the price stability of conventional fiat money, but retain the advantages of cryptocurrencies, such as transaction speed, security, and decentralization. This makes them an attractive option for those seeking stable value without sacrificing the benefits associated with digital currencies.
Ethereum and smart contracts
Ethereum is a computer program developed in the Solidity language. It uses Bitcoin technology (blockchain) to establish a new computer protocol capable of generating autonomous and decentralized smart contracts.
This innovation enables the creation of various decentralized computer systems within its blockchain network. These systems range from cryptocurrencies (called tokens) circulating on the Ethereum network to applications and decentralized autonomous organizations (DAOs) operating under protocols and smart contracts, without the need for human intervention.
Ether, the primary cryptocurrency on the Ethereum network, is used to pay for network upgrades.
