How cryptocurrency can be worthwhile without real collateral


Warren Buffett, a prominent major global investor, often says that bitcoin has no value because the coin does not produce anything. He has long criticized the first-ever crypto, calling it a “mirage” rather than a means of payment. Nevertheless, Bitcoin and other digital assets are growing, meaning that the significance of cryptocurrency is impossible to deny.

Why cryptocurrency appeared

Bitcoin originated in 2009 as an alternative to fiat money. But despite the advancement of digital assets, society still relies on national currencies to make payments. State monetary units have value only because they are issued by the central bank and used in the economy.

Bitcoin was designed to conduct transactions without a third party. Neither the central bank nor any other financial institution is involved in the transfers. Cryptocurrencies system lets you perform transactions thanks to encryption algorithms. You only need to verify the transaction, secured by a digital signature, for the payment to be completed.

Crypto assets offer you a cheaper and faster peer-to-peer (no intermediaries) solution. Unlike the classic monetary system, no personal information needs to be provided when making transactions with virtual assets. This is how you get to be anonymous – it is another feature of decentralized payments.

Blockchain is the registry that stores information about digital asset transactions in a decentralized (non-intermediary) way. Numerous different computers (nodes) contain identical copies of a given cryptocurrency transaction log and perform their verification by running complex calculations. They write information in blocks of limited memory size, then form a chain (called blockchain) out of all these repositories of information.

As soon as a user understands the basic benefits of blockchain, they will understand the true value of crypto.

Transactions

Cryptocurrencies are kept open thanks to a public registry of transactions. When payments are made, the corresponding records of the transaction remain in the data chain. You cannot modify or delete an online transaction you have made. With this independent transaction log, your transactions are much more secure than paper records or a centralized database that can be hacked and rewritten.

This distributed registry platform encrypts information about both the buyer and seller of cryptoassets and records it as a hash (a string of letters and numbers). The latter is generated by performing a complex mathematical function. Each hash is directly related to the identifier that comes before it. Hence, unauthorized modifications in the block will immediately become evident if new transaction details appear in the registry.

As the structure achieves a certain number of hashes, it is converted into a block and associated with other elements in the chain. Bitcoin’s blockchain is updated every 10 minutes and stored on multiple servers hosted by thousands and millions of users in different countries.

Issuance of new coins

Some cryptocurrencies work in a closed system (BTC, ADA, XRP and others). In this sense, the number of such assets is limited, and new units are created according to a strict set of rules. Given that digital currencies are produced according to pre-selected algorithms, the time required for the full issuance of these units may be predictable. For example, the limit of issuance for bitcoins is 21 million coins. Most (~90%) of the possible Bitcoin supply in 2022 is already mined and in circulation. It is assumed that the very last coin will appear on the market in 2140. Being limited in the number of coins creates the value of a cryptocurrency.

There are digital assets with infinite issue (Ethereum, Dogecoin and others). In the last month, Ethereum had a turnover of ~121 million ETH Coins. The unlimited supply of the asset is evidence of its inflationary nature. However, this factor is controlled by burning a certain amount of coins to reduce their supply and increase the value of digital currency.

The actual value of crypto

A lot of digital assets have a limited supply. Therefore, it generates a higher demand and increases their price. It is the limited issuance of virtual currencies that distinguishes the digital asset market from the global financial system, where central banks can mint endless amounts of money. Even though coins (tokens) are volatile, the progression of promising projects can make your investments much more worthwhile.

Conclusion

Certain projects adopt a special system of economics to avoid speculation. The dual token model allows one digital unit to be used to fund the ecosystem and the other to maintain the blockchain (e.g., MKR and DAI). It was created during the ICO Boom of 2017. The dual token model boosted trust and curiosity in the project on the part of more cautious investors.

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