The invention of bitcoin, the first cryptocurrency, in 2008 was a response to the property bubble in the United States (US) which had triggered a worldwide financial meltdown. The invention has boosted public enthusiasm on the great promises that decentralized finance can fulfil in terms of improving welfare while closing the socioeconomic gap. Currently, we have several types of cryptocurrencies, including Litecoin, Dogecoin and Ether.
To understand how many people have come to see cryptocurrencies as a potential remedy to socioeconomic inequality, we will first reexamine the historical context of the 2008 US financial meltdown.
At that time, the US government decided to bail out financial institutions they deemed “too big to fail” (such as the Wall Street and the big lenders) using taxpayers money; as a consequence, the middle class population, already burdened by various financial strains and stresses, has to bear the brunt of the financial crisis.
As an alternative to this unjust centralized system, cryptocurrency was invented to enable peer-to-peer transactions among individuals, removing the elite central authority (or the one percent as Joseph Stiglitz calls it) which controlled a disproportionately large amount of resources, with privileges which shielded them from economic fallouts. The remaining 99 percent without such privilege and access to resources, meanwhile, usually get more impoverished and deprived as a consequence of the market machinations of the elite.
Since its inception, bitcoin has shown its prowess in facilitating peer-to-peer transactions, allowing people to buy and sell things directly without having a big chunk of their income sucked by corporate middlemen which usually stand in the way of buyers and sellers to facilitate transactions. Bitcoin has also provided financial access to unbanked population segments, a trend which is continued by the new cryptocurrencies which come after bitcoin, which are grouped under a general category called altcoins.
Transactions in cryptocurrency are done over the decentralized exchange (DEX).
Why should cryptocurrencies come in many different types?
Similar to fiat currency, cryptocurrencies are issued only in limited amounts to maintain supply balance. Also, the value of cryptocurrencies declines over time to prevent speculative and hype-based market manipulations. To circumvent this limitation, several programmers have invented new cryptocurrencies under the same framework in which bitcoin operates. These cryptocurrencies also facilitate specific functionalities which might not be covered by all the cryptocurrencies available out there. As we all know, beyond its financial uses, cryptocurrencies are also used to cater to different functionalities in the blockchain, such as supply chain and document management, as well as managing the non-fungible tokens (NFTs).
As of April 2020, there had been over 10,000 different types of cryptocurrencies in operation. The most popular names mentioned at the article’s opening are but just a few of them.
Cryptocurrency coins vs. tokens: what’s the difference?
So, this is where a lot of people get confused when learning about blockchain technology. What is the difference between cryptocurrency coins and tokens?
Basically, the two of them are not essentially different. Because some countries, including the US, ban the use of cryptocurrencies, the decentralized finance operators have to use a different term in order to continue their operations without being too obvious about it.
Similar to cryptocurrency coins, people use tokens in decentralized systems to manage transactions and functions. Specifically, different tokens cover different encryption types involved in different blockchain functionalities such as supply chain and document management as well as NFTs, for instance.
The reason why different blockchain platforms use different tokens on top of coins from their native cryptocurrencies is because these tokens and coins complement each other in facilitating some really complex transactions.
What the future holds for cryptocurrencies
The decentralized finance technology is still in its infancy. Thus, it still has plenty of “rooms for improvement”, as they say, in order to tap into the potentials it has in redistributing access to wealth and resources among people, including giving financial service access to the unbankable.
We all know that currently, the decentralized finance system still has limitations in terms of transaction speed, efficiency and scalability. It also has some security loopholes, as well as low application interface readability. Yet, the highly efficient Ethereum Classic has set an example of what the future holds for cryptocurrencies and that they can get better in these aspects.
Although the activities of crypto traders who would like to get rich by using the digital currency are not the best examples of how people use decentralized finance technology, it is exciting to see what the future holds for it.