How much control do you really have over your money?
Unless you’re hiding all your money under a mattress, you probably use a bank account as a means of storing wealth. And banks are great - they give you access to loans, credit, online purchases, and so much more. And generally, these institutions are considered reliable due to all the regulations in place to protect consumers. But when it comes to banks, most people forget the obvious truth: your money isn’t really there.
The number you see on your bank balance is just a representation of the money that’s supposed to be there in your account, but in reality, it’s just a number that is kept track of by a bank database.Banks have created an illusion of control. They are using your money to make more money for themselves while making it seem as if it has never left your account.
Unfortunately, that’s how business works. The only way for you to truly have all your money is to have it in physical form, hidden in a safe. Most people today will not choose that option for the sake of convenience; it’s much easier to buy goods online using a credit card and have them delivered straight to your door, versus going to a store and buying them yourself using cash.
In a world driven by e-commerce and digital financial transactions, it seems like the only way to participate is by having a bank account that is capable of executing all of these online purchases.
But what if there was a way to have a digital financial presence without having to rely on banks?
What if you could have complete self-custody over all of your money in a permissionless environment that does not rely on any third party to approve or deny the validity of your assets?
What if the unbanked populations who are unable to open a bank account due to financial, geographical, or even political restrictions could have access to digital money in a world where everything is moving online?
That is the power of cryptocurrency.
Introduction to Cryptocurrencies
Bitcoin, the first true cryptocurrency, emerged in 2009. Developed by a mysterious developer (or group of developers) under the pseudonym Satoshi Nakamoto, it gained significant prominence in the years following its release because of its amazing capabilities. The concept of Bitcoin is derived from the simplicity of cash transactions. In what used to be the norm only a few decades ago, transactions were handled through an exchange of currency directly from one party to another. The person buying a good paid the seller with cash, the ownership of that good was transferred onto the person that bought it, and the transaction was complete.
The rise of the Internet made this process much messier; you can’t use physical cash when buying something off a website. Companies that realized the need for a digital exchange medium created a system of payment that started to involve middlemen: credit cards.
With credit card transactions, the transaction first needs to go through multiple security checks to be proven legitimate, an exchange of data between banks needs to occur, and then the bank has to approve and settle the transaction. This not only creates tons of processing and transactional fees that cause the purchase price to go up, but the transaction is then not settled for days while the bank processes all of the payment information.
This system is slow, expensive, and burdensome to both producers and consumers. Bitcoin showed it doesn’t have to be this way.
Instead of relying on existing fiat currency to transact on the Internet, Bitcoin flipped the script and created an entirely new digital asset to bring back the peer-to-peer nature of cash transactions and cut out all the extra noise of online monetary transactions that we have to deal with today. It did so by cutting out one major component: Trust. Bitcoin removed all trust assumptions that we have today with banks and credit.
- We trust that our money is safe inside a big bank vault.
- We trust that credit card companies will complete our transactions as requested.
- We trust that the government will maintain the value of the dollar and not let it collapse.
Bitcoin removes all of these assumptions by operating in a completely trustless manner that does not rely on any person or entity to make any decisions about its state. No external party can exert any control over the supply, value, or who gets to hold Bitcoin and what they can and can’t do with it.
Bitcoin created a unique currency that did not belong to any one government. It created a truly global online payment method that could be used and accessed by anyone. The only thing you need to tap into its network is an Internet connection. No ID, citizenship, or even name is required. This makes it truly decentralized and fair, marking a new wave of finance that opens the door for anyone to take control over their financial assets.
The Bitcoin Creation Process
Bitcoin is a token with a fixed supply. Only 21 million BTC will ever exist, and they are getting distributed into the network at a fixed rate. There is currently ~19 million in circulation, with the rest still not available on the network.
New Bitcoin is added to the network through a process called mining which, as mentioned earlier, really just means operating the Bitcoin network in exchange for an incentive. This incentive is called a block reward, which is newly minted Bitcoin that is rewarded to the miner and added into circulation. As of June 2024, each new block added to the network mints 3.125 Bitcoin, and with a rate of mining one block approximately every 10 minutes, it means that approximately 450 new Bitcoin are added to the network every day.
The block reward wasn’t always 3.125 Bitcoin, however. Every four years, Bitcoin undergoes an event called halving, with the most recent one occurring in April 2024. The halving occurs as a way to turn Bitcoin into a deflationary asset by cutting the block reward in half. This means that from May 2020 (the last halving date) up until April 2024, the block reward was 6.25 Bitcoin. The first halving occurred in November of 2012, when the block reward got halved from 50 Bitcoin per block to 25.
Mining Bitcoin is extremely compute intensive as it requires a computer to solve a complex cryptographic hash in order to receive the block reward. Therefore, there is a direct correlation between how much compute power a miner has and the amount of Bitcoin they will mine. Companies such as Marathon Digital, CleanSpark, and Phoenix Group have become prominent Bitcoin miners by building warehouses full of computers to more effectively mine this asset and as a result have achieved market caps of $5 billion, $3.2 billion, and $2.7 billion respectively as of June 2024.
Operating Blockchain Networks
The process of minting, or creating, new cryptocurrency varies from network to network because not every network utilizes mining as the way to validate transactions. The actual term for mining is Proof of Work, or proving the validity of transactions through computing power; on the Bitcoin network, the more computing power you have, the more money you make.
A network such as Ethereum utilizes a completely different mechanism for verifying blocks called Proof of Stake, or staking. Instead of delegating computing power, node operators delegate at least 32 ETH to become a transaction validator. A validator is then chosen at random to approve a block instead of everyone competing to mine it first; the more money a validator has staked, the more likely they are to be picked to propose a new block and get the block reward. Since not everyone is attempting to mine a block at the same time, Proof of Stake is much less compute intensive and requires around 99% less energy to upkeep the network, making it significantly more environmentally friendly than Proof of Work where everyone is trying to use as much computing power as possible.
If you are a malicious validator and attempt to submit a false transaction or bring harm to the network, the violation will be detected by the other validators and your stake will be slashed. Slashing means that a portion of your staked ETH will be permanently taken away, with the amount being determined by the severity of the action. Slashing is critical for system integrity and is what keeps bad actors from submitting false data and manipulating the network.
It is important to note that Ethereum is the name of the network, while ETH is the name of the token. Similarly, BTC is the token for the Bitcoin network, and SOL is the token for the Solana network.
The Ethereum network does not have a fixed token supply, a halving, or a fixed block reward. Instead, it has a fluid block reward amount that is calculated based on how busy the network is. Ethereum is significantly faster than Bitcoin, with the time to create a new block only being around 12 seconds. When an Ethereum validator proposes a new block and it gets approved, they get a base reward for submitting a correct block plus a portion of the transaction fees that the users paid to use the network.
While it does not have a fixed supply, ETH is still deflationary thanks to EIP-1559. This was a proposal (EIP is short for Ethereum Improvement Proposal) implemented in August of 2021 that created a burn mechanism that is responsible for removing, or burning, a fixed supply of tokens from circulation for every transaction that occurs. It split a transaction fee into 2 parts: a base fee, and a priority fee. The base fee is a fixed amount that is determined based on how busy the network is, and it is removed from circulation once the transaction is complete. The priority fee acts as a tip to the validator, where the higher the fee, the more likely your transaction is to be processed faster. The gas fee is shown in Gwei, which is a small fraction of ETH (think a fraction of a cent compared to a dollar).
Imagine you are calling an Uber. There is a fixed amount you must pay the driver (the base fee), but you can also offer a large tip (the priority fee) to make sure you get chosen over other riders.
Source: International Business Times
Let’s compare some popular blockchain networks.
Different networks offer varying pros and cons, which can attract different clientele. Let’s take a look at how 4 different blockchain networks stack up against one another:
Feature | Bitcoin | Ethereum | Solana | Avalanche |
Transactions Per Second (TPS) | ~7 TPS | 15-30 TPS | Up to 65,000 TPS | 4,500 TPS |
Block Time | ~10 minutes | ~13-15 seconds | ~400 milliseconds | ~1-2 seconds |
Security Model | High security via PoW | High security via PoS | High security via PoH | High security via PoS |
Consensus Mechanism | Proof of Work (PoW) | Proof of Stake (PoS) | Proof of History (PoH) | Avalanche Consensus Protocol |
Transaction Fees | $1 to $20+ | $1 to $40+ | =< $0.01 | $1 to $5 |
Ideal Client | Secure value storage | DApps and DeFi developers | High-speed applications | Customizable enterprise solutions |
Attraction | Proven security | Rich ecosystem, DeFi | Fast, low-cost transactions | Flexibility, high throughput |
Bitcoin Network
Bitcoin is generally considered the most trusted network since it is the original cryptocurrency. Its beauty is in its simplicity, where users are only able to complete peer-to-peer transactions. It is truly completely decentralized, making it an ideal store of wealth for its users. Many people today call it ‘digital gold’ because it’s an asset that’s capable of beating inflation and cannot be manipulated by external forces such as governments. Its native currency is BTC and is the only cryptocurrency that can be used on the network. While it’s ideal for storing wealth and conducting peer-to-peer transactions, Bitcoin’s high fees and slow block time make it less ideal for more advanced function.
Ethereum Network
The Ethereum network truly gave birth to the world of decentralized finance. It has an extensive ecosystem that has a strong developer community that has created tons of robust smart contract applications that cater to investors. While it is not as decentralized as Bitcoin, its PoS mechanism gives it enhanced security and network support. Most other chains are built to be compatible with Ethereum in order to have access to its liquidity, ecosystem, and community. While its native currency is ETH, the Ethereum network’s smart contract capabilities allow it to support tons of other cryptocurrencies that can be deployed on the network. While its PoS mechanism makes the network secure, it’s currently not as ideal for applications that rely on a high TPS rate to conduct fast transactions.
Solana Network
The Solana network is capable of reaching blazing fast speeds, making it ideal for applications that need super fast and super cheap transactions. It’s able to reach such high speeds due to its Proof of History consensus method, which works by creating a unique timestamp for every single transaction that has occurred, giving it verifiable proof of the history of events on the chain (more on this in the 5. Blockchain Ecosystem Infrastructure section). This system also allows users to essentially pre-order transactions that can be quickly validated in sequence since the chain knows exactly when each one occurred. Its native currency is SOL, and like the Ethereum network, it is capable of supporting other currencies. This system is ideal for applications with high frequency transactions, including gaming and trading but its high throughput speed sometimes causes complications on the network resulting in outages.
Avalanche Network
Avalanche works in a unique way using something called a Directed Acyclic Graph (DAG) structure. This DAG structure lets the network organize all incoming transactions in a way where they can be processed in parallel to one another instead of one at a time. This process greatly increases the efficiency of the chain and makes it ideal for enterprise level applications that need a high throughput (transaction rate). Avalanche allows developers to create more customizable experiences that are ideal for bigger businesses that want to develop a wide range of applications. Its native currency is AVAX, and like Ethereum and Solana, it can also support other currencies.
Source (for all network icons): CoinMarketCap
The Role of Cryptocurrency in a Blockchain Ecosystem
With all these different networks come different requirements for each token, but at the end of the day they all do the same thing: crypto creates a self-sustaining ecosystem that creates an incentive mechanism for both its operators and its users.
Users are able to use crypto to transact on the blockchain network and pay for any transactions they would like to create.
- Ethereum users use ETH to pay for transactions
- Bitcoin users use BTC to pay for transactions
- Solana users use SOL to pay for transactions
- Avalanche users use AVAX to pay for transactions
…and so on. These fees go to the network miners and validators that are responsible for operating the network and processing all of the transactions, incentivizing them to keep doing so in order to make more money. With each new block minted, new tokens are added into circulation.
Source: Science Soft
While each network generally has its own main cryptocurrency, some networks support the ability to create new tokens. Networks such as Ethereum, Solana, Avalanche, Polygon, and more all let users create their own cryptocurrencies that can exist on-chain. However, whenever you complete a transaction on any of these networks, the transaction fee must always be paid using that network’s main token - for example on Ethereum, the fee for any transaction that occurs must always be paid in ETH.
Different chains often have different token standards, which can make them directly incompatible with one another. For example, the Ethereum and Solana networks follow different standards for their cryptocurrencies, with Ethereum tokens following the ERC (Ethereum Request for Comments) standard while Solana tokens use the SPL (Solana Primary Library) standard. Here are some key differences between the two:
ERC: Ethereum’s ERC standard is the most common standard for cryptocurrencies because Ethereum is the most popular DeFi network. Any token that follows this standard can interact with and be deployed on the Ethereum chain. ERC also contains different standards for different types of tokens - for example cryptocurrencies are defined as being ERC-20 tokens while NFTs are defined as ERC-721 tokens. For a more in-depth explanation, check out the Ethereum documentation on token standards.
SPL: Solana’s SPL standard creates a uniform token system for all cryptocurrencies on the Solana network, where any token that wants to be deployed on Solana needs to use this standard. It operates fairly similarly to ERC, but uses a different code template to create the tokens. SPL tokens are not compatible with the Ethereum network, and ERC tokens are not compatible with the Ethereum network. For a more detailed explanation of SPL, check out this article on SPL by CoinGecko.
To better understand the idea of different tokens on a network, let’s present the idea of blockchain networks as countries. In this scenario, the Bitcoin network would be the USA and BTC would be the US Dollar. The Bitcoin network itself only supports BTC; no other tokens can exist on the network. This is similar to how in the US, the only currency that is accepted is USD. All transactions can only occur in and must be settled as BTC, just like how any purchase in the US generally must be made in USD.
The Ethereum network would be represented as Europe, with ETH being the Euro. While ETH is the main currency of the network, other cryptocurrencies exist on Ethereum. Similarly, while the Euro is the main currency of the EU, individual countries can have their own currencies. In the case of Ethereum, while other currencies do exist on the network, all users pay fees in ETH and the validators operating the network receive only ETH. This would be the equivalent of Europeans using their local currencies for general transactions but then paying all of their taxes in Euros and all EU government officials only being paid in Euros. Just like how EU residents are able to convert their Euros into local currencies, Ethereum users are able to convert their ETH into any other token on the network, as long as they continue to pay all transaction fees in ETH.
The real value of cryptocurrency aligns with the core idea of blockchain: independent asset ownership. These assets are all decentralized. No government can control them. There are no middlemen that are responsible for storing and managing all your money. In the world of crypto, your money belongs to you.
Because it is not controlled by any external entity, cryptocurrency creates a store of value that can be used to beat inflation.
Countries such as Turkey are experiencing massive inflation, with their inflation rate being over 75% in May of 2024. As a result, many of its residents have abandoned the Turkish Lira and turned to Bitcoin as a means of preserving their wealth as the value of their currency plummets.
Amid the conflict in Ukraine, Russia cut off access to banks for Ukrainian residents, limiting the supply of fiat currency in the country. As a result, stores have turned to taking Bitcoin as a form of payment. The country even takes donations in the form of crypto.
El Salvador became the first country to adopt Bitcoin as legal tender. This allowed thousands of residents access digital assets they could then use online. A large portion of the country is unbanked and rely on physical cash to pay for goods and services. With the introduction of Bitcoin and digital wallets, anyone can create a wallet in minutes and begin transacting online, making the Internet truly accessible to all residents of the country.
All of this is possible because of the decentralized nature of blockchain technology that empowers users to take control of their digital assets in a way never possible before.
Works Consulted on this page:
Avalanche. (n.d.). Avalanche. Retrieved from https://www.avax.network/
Bitcoin. (n.d.). Bitcoin. Retrieved from https://bitcoin.org/en/
CleanSpark. (n.d.). CleanSpark. Retrieved from https://www.cleanspark.com/
CoinGecko. (2023). SPL Token Standards on Solana. Retrieved from https://www.coingecko.com/learn/spl-solana-token-standards
Ethereum. (n.d.). Ethereum. Retrieved from https://ethereum.org/en/
Ethereum. (2024). Token Standards - Ethereum Documentation. Retrieved from https://ethereum.org/en/developers/docs/standards/tokens/
Mara. (n.d.). Mara. Retrieved from https://www.mara.com/
Phoenix Group. (n.d.). Phoenix Group. Retrieved from https://phoenixgroupuae.com/
Solana. (n.d.). Solana. Retrieved from https://solana.com/