The need for cryptocurrency can be understood by tracing the history of money and the need for money. Human Beings have always relied on trade or exchange to sustain themselves. This is because one person did not have everything that was needed to survive resulting in the need for a system that facilitated easier trade amongst humans. This brought about the introduction of ‘Barter’ system where humans exchanged goods or services for other goods or services without using any medium of exchange. This was purely based on wants and the needs were satisfied if they were lucky to find a person who had what they needed. This was a complex system and it failed leading to a need for medium of exchange of goods. Metals like coppers and other precious metals were used as currency. This was soon changed to coins and as time progressed people started printing paper currency and assigned value to it. Money facilitated seamless transactions between people there boosting trade. This brought about the introduction of Fiat currency — a legal tender that is issued by the respective country’s Govt. whose value is backed by the Govt. providing it and not by any precious metal such as Gold.
Why would the world need a green paper to facilitate exchange of goods? Why can’t it happen without any medium of exchange?
Let us try to understand this with an example — think of a world without money. You enter a Starbucks and ask for a Mocha. There is absolutely no incentive for the guy there to serve you with a Mocha as he is not going to be getting anything in return. Money in this case would act as a medium that creates value that would be an incentive for people to do what they are doing which we call these days as job. People are rewarded for what they do with money which helps in creating value thereby facilitating exchange of goods.
All cryptocurrency does is translates the value that the Fiat currency gives online thereby reducing the need for printing paper money. In the recent times, Computers and Technology has scaled significantly. Their rate of change has been phenomenal with respect to their applications and consumption. Abstracting the use of computers to economics and currency, it can be observed that currency as a commodity is not scalable. This is because although money as a commodity is universal, the way it is being used everywhere with respect to different currencies by different countries resulting in conversions and exchange rates make the system complex. Hence the need of a universal commodity — cryptocurrencies; addressing the complexity posed by the Fiat currency.
What is cryptocurrency?
Cryptocurrencies are digital assets that store the value that Fiat currency provided. They are not actual currencies but just value represented as a denomination. Bitcoin is one such denomination. They don’t exist as a physical commodity and they are nothing but digital book keeping — who has how much value. The invention of cryptocurrency brought about the revolution of Peer to Peer Electronic Cash System. Cryptocurrencies use cryptography to ensure the transactions are secure.
For the cryptocurrency market to work, the following are the 3 needs,
1) A market where payments are accepted in cryptocurrencies
2) Cryptocurrencies and a way for people to get their hands on them
3) Social contract of accepting this as the norm
Currently, there are numerous cryptocurrencies out there in the market which is turning out to be a problem (Covered later). The predominant ones are Bitcoin, Ether, Litecoin, Dash, Ripple etc.
<Details of these coins will be covered in the subsequent posts>
Up Next — What is a Bitcoin? How did Bitcoin originate?
Followed By — Why and What of Blockchain?