Evolution of Cryptocurrency
The evolution of cryptocurrencies is a two-fold story. It starts with how the world evolved from a primitive society using rudimentary forms of trade to the more advanced financial system of the present day.
This part is about the evolution of money and the methods of trade. The second part focuses on the evolution of cryptocurrencies as a subset of other forms of currency such as digital, alternative, and virtual currency.
We also have to take a look at some of the most important factors that necessitate an evolution in general. Is it a natural process or an artificial process inspired by the generational need for change, identity, and an immortal place in the precious pages, chapters, and books of history? This is what this article tries to answer and perhaps unveil an interesting intersection point of facts, theories, myths, and hidden mysteries of the financial world.
What is money?
This is probably one of the simplest and most difficult questions in life. It is logical to expect that each one of us has seen, touched, and used money at some point in our lives. Money is just a paper or coin that allows us to buy goods or services. This is exactly what money is, a precious and scarce commodity that allows us to exchange goods and services.
Knowing what money is one side of the equation that should be balanced out by knowing where its value comes from. The value of money simply lies in the value that we attach to it. We cannot measure or weigh its value. Some of the other factors that govern the value of money include:
The road to the current monetary system
During the infancy and early development of the world, people knew a little about the environment around them. They spent most of their time moving from place to place in search of better living conditions. They did not even have the time to discover the world around them or the natural resources hidden from them in plain sight.
The only form of trade was barter exchange. Barter exchanger is simply a form of trade where people would exchange goods or services using other goods or services. It was not a system based on fairness but mutual agreement. Barter trade had major flaws and it was apparent in the way that people were not amused by it.
A few centuries later, mankind became a little more advanced and they discovered gold, a precious mineral that was used as a currency. Gold is the world’s first currency. Gold became a standard and was used for many years until the Chinese started making paper money and coins. Along the way, the Chinese system of trade was adopted by many civilizations because it had several advantages over the gold currency.
Slowly, the use of money gained momentum. Civilization brought the use of money to the forefront. As order began to take shape and political boundaries demarcated, each country adopted its own currency. Banks were established. Governments and central banks became the de facto custodians to the monetary system.
The emergence of computers and the internet in the 20th century facilitated the possibility of making cross-border payments. Money could be exchanged or even traded from one currency to other. The natural process of evolution and change did not stop because the monetary system seemed like a good one.
People began the quest to create digital cash or money. They wanted to create a monetary system that flowed through the computer, a wonderful invention by all standards. As good as the monetary system was, there were still so many flaws in the system. Mankind’s first option was to move from paper money to a digitally inspired one.
Unfortunately, the technology was not ripe enough to make that dream a possibility. Many prominent figures in computer science and cryptography played a crucial role in laying down the foundation for the present blockchain technology.
The white paper that changed it all
Just a like a ghost from the shadows, the anonymous Satoshi Nakamoto announced the possibility of a new currency through a white paper. Moreso, it was not the currency that Satoshi announced but the necessary technology required to make digital currency possible. A few months later, Satoshi launched the Bitcoin network and a new era in digital money had just arrived. The new currency was known as a cryptocurrency due to its reliance on cryptography.
This was probably the most complicated currency system that the world had ever known. It was not a currency that the ordinary man would understand in the blink of an eye. Some called it a ‘geek playground’ due to its complex nature. Bitcoin struggled a bit to take off as it had no value in its early months.
More people from the financial world began to learn about the currency and what it meant to the world. It was depicted as the new currency that would streamline the modern world ruled by mobile devices and their connectedness.
The new currency further exposed the flaws that existed in the fiat money system.
It became obvious that people migrated from barter trade to gold currency due to flaws in the former. A few centuries later, the world migrated to the fiat money system due to flaws in the gold currency. Bitcoin promised to solve some of the problems associated with fiat money. However, one unique feature about Bitcoin is that it was not fighting to completely obliterate fiat money, but rather co-exist with it. After all, Bitcoin is the money that people cannot touch. What would happen to that ecstatic feeling associated with touching money? Sir Richard Branson is on record for saying:
“It feels strange to think of a world without cash, no more notes or coins to find down the back of the sofa, but it appears that’s the way things are heading.”
- Richard Branson
Bitcoin has its own flaws
Fortunately, many people saw the potential that Bitcoin had. However, they also saw that Bitcoin had flaws that needed to be fixed. Some of the flaws could not be fixed because they were built and embedded at the currency’s core. The only way to circumvent this was to create new currencies similar to Bitcoin but without the mistakes. A new range of coins known as alternative coins was introduced to the world.
A fork is a process by which a new cryptocurrency is created but based on the features and technologies of an existing cryptocurrency. A fork always results in a breakaway cryptocurrency.
A fork is necessitated by many factors including:
The resulting cryptocurrency from Bitcoin’ first fork is known as Litecoin. Litecoin is very identical to Bitcoin except for a few cosmetic changes and upgrades. Litecoin was the first currency to deviate from the SHA-256 algorithm used by Bitcoin. The forked currency adopted the Scrypt algorithm. The algorithm is the work of Colin Percival, who designed it with the idea to make brute force attacks on computer hardware impossible and pointless. After modifying Scrypt’s code and using it as proof-of-work for mining Litecoin, the new cryptocurrency had a few advantages over Bitcoin:
In the following years, a number of cryptocurrencies emerged from several corners in the world. They were all based on the structure of Bitcoin but with minor differences. The new coins were collectively called “alternative coins” because they were simply an alternative to the Bitcoin. To give you a clear idea of the differences between Bitcoin and Altcoins, think of the US$ and the British pound. The US$ is used in the U.S. while the British pound is used in Britain. They are both fiat money but with different official jurisdictions and value.
In 2013, Vitalik Buterin, then a 19-year old Russian-Canadian programmer, presented a white paper announcing a new cryptocurrency. Known as Ethereum, the currency was backed by promising technology. Among its important features was the smart contracts feature. The new cryptocurrency was well-received and in no time, Ethereum raised a lot of money during its ICO. Unfortunately, Ethereum was forced to endure and survive three forks. Currently, it is the second-best performing cryptocurrency by market capitalization.
To learn more about Ethereum, listen to what Vitalik has to say:
Over 1,000 alternative coins in existence
According to CoinMarketCap, there are over 1,300 cryptocurrencies in existence today. There are no rules regarding who and when can create a new currency. Some of the currencies are backed by groundbreaking technology with a lot of potential of bringing new solutions to world problems. Some of the coins are not really worth much as they are just a complete copy of other coins in existence. In order for a new currency to quickly gain traction,
How governments and central banks
responded to cryptocurrencies
Governments are known for their affinity for control and centralizing power. At first, many Western and European governments didn’t know what to do with the new wave of currency. They played the waiting game. However, Asian governments, particularly the Chinese government, did not take kindly to the currencies.
Fast-forward to the present day and the events are changing. Venezuela wants to have its own cryptocurrency backed by oil and gas. This sounds exciting although many cryptocurrency evangelists would argue that governments should stay away from cryptocurrencies. It seems that some governments are slowly smelling the coffee and realizing that cryptocurrencies are here to stay.
Cryptocurrency trading and investing
Cryptocurrency trading and investing have churned out many millionaires. The people who adopted Bitcoin early saw a lot of return on their investments. This is not yet history as people can still invest in the currencies and make huge returns. However, people don’t have to blindly invest in their favorite coin. They have to understand the underlying technology and the challenges it tries to solve. This is what gives the future value of the currencies.
The journey goes on
Some believe that the cryptocurrency market will crash the same way the housing and dot.com bubbles crashed. Whether true or not, the cryptocurrency is only less than a decade old but is already in a period where it is enjoying accelerated growth. Of the thousands of coins that are in existence, only a handful are relevant and necessary. Some currencies will be exposed as scams. In future, there won’t be as many crypto-currencies as we have at the present moment.
Are you interested in crypto? Read our guide to cryptocurrencies.