Our modern economy relies heavily on digital means of payments. Trade in the form of e-commerce for example necessitates the usage of digital tokens. In a digital currency system, the means of payment is simply a string of bits. This poses a problem, as these strings of bits as any other digital record can easily be copied and re-used for payment. Essentially, the digital token can be counterfeited by using it twice which is the so-called double-spending
problem.
Traditionally, this problem has been overcome by relying on a trusted third-party who manages for a fee a centralized ledger and transfers balances by crediting and debiting buyers and sellers’ accounts. This third-party is often the issuer of the digital currency itself, one prominent example being PayPal, and the value of the currency derives from the fact that users trust the third-party to prohibit double spending.
A currency without an intrinsic value, such as a cryptocurrency like bitcoin, can only function if sufficient market acceptance is present and if the belief exists that the currency has the value attributed to it. With a conventional fiat system, money has value because people trust the central bank.
For a cryptocurrency, additions to the public ledger are confirmed by a crowd of participants. There is no central bank and participants do not need to trust each other — trust only applies to the algorithm and the network that defines the particular blockchain. A transaction is only valid if the output is equal to the input, that is, the transactor actually has the funds she or he wants to transfer. The only exceptions are new issues of the cryptocurrency, which are algorithmically predetermined.
The emergence of blockchain technologies such as Bitcoin and Ethereum marks the creation of a revolutionary new asset class: digital assets. The digital assets are the foundation of the new economy. They represent stakes in services like prediction markets, micro-payments, smart contracts, remittance, green energy, music and movies industry, many different platforms and marketplaces, distributed computing and many others.
Cryptocurrencies have grown exponentially since their creation in 2009, with the total cryptocurrency market capitalization currently standing at over $1.7 Trillion. While growth has been strong, the market capitalization of cryptocurrencies as a whole is only a fraction of the global stock investment market. There is still more than enough room for considerable growth. There are now thousands of cryptocurrencies to choose from, with more appearing each day. Financial experts predict that also a significant part of a global forex market will move to cryptocurrency market as also a significant part of bank deposits.
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