Crypto Academy Season 2 Week 6 - Homework Post for @levycore || Learning About Cryptocurrency

Hi Prof. @levycore
What is the fundamental difference between Cryptocurrency and the conventional financial system?

Cryptocurrencies are digital or virtual currencies that are based on blockchain technology. In simple terms, they are monies spent on the internet, it is virtual and therefore cannot be felt or touched. Some examples are, Bitcoin, Tron, etc.

Conventional financial system involves the use of physical currency (fiat) in its transactions. It is controlled by banks and the government.

Differences

• Currencies in the conventional financial system exist physically and can be seen felt and touched. They include papers, coins, etc.
Cryptocurrencies exist in the digital space. They are virtual and can only be accessed and used digitally.

• Activities in conventional financial systems pass through a central authority which makes it very decentralized but in crypto, it is purely based on decentralized networks that do not require a central authority.

• The centralized financial system is very prone to hacks due to their single server system.
Cryptocurrencies are decentralized which makes them impossible to hack.

• The conventional financial system makes use of a central server for its transactions.
Cryptocurrency on the other side uses decentralized applications which carry out transactions.

• In conventional financial systems, banks serve as middlemen during transactions. Financial activities are carried out through the banks.
Cryptocurrency transactions do not involve intermediaries or third parties of any kind.

• Fees charged on transactions in the conventional financial system are very high.
There is little or no transaction fee charged on crypto transactions.

Why is a decentralized system needed?

A decentralized system is needed for a lot of reasons, some of which are;

No supreme authority controls the system. There is no central unit that controls user’s assets or commands users on how transactions should be made. Users are not required to follow some rules and regulations and they are given full control of their accounts.

more secured financial system. Assets on this system are kept on blockchain networks that are impossible to hack. Hacking is only possible when passwords or keys are compromised.

high scalability. A decentralized system can handle large volumes of transactions within a specified time

transparent transactions. Transactions on the decentralized system are stored on all blockchain nodes which are made available for everyone to see.

security of the user’s sensitive data. Users are not required to follow unnecessary and stressful processes such as know your customer process (KYC) before joining the platform

No loss of data as transaction data is stored on different nodes that can be reconciled and collated in case of any situation.

What affects the value of cryptocurrencies?

Some factors that affect the value of cryptocurrencies are;

• news and media. Sentimental news or comments from crypto analysts and high-profile personalities or cryptocurrency holders can affect the value of cryptocurrencies. An example is when the price of Dogecoin rose when the CEO of Tesla Motors, Elon Musk claimed to be the Doge father.

The chart below shows how the value of Dogecoin rose in 2021 following his comment.

Another example is Shina Inu Coin (SHIB) whose value rose following an announcement that the asset will be listed on the innovation zone of Binance.

• demand and supply

Cryptocurrencies have a predetermined or limited coin supply. When most coins are mined, the mining rate reduces in a way that the total supply is only replaced to account for lost units. When the demand for the crypto decreases, the price of the underlying asset falls.

• hack and loss of coin

When a cryptocurrency exchange is hacked and users lose their assets the value of the cryptocurrency drops. These hacks are mostly from third parties. An instance of this is the 6% price drop of Bitcoin when $31 million worth of Tether tokens were hacked and stolen in 2017.

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• Cryptocurrency production cost

The cost of creating or producing a cryptocurrency is a determinant of the value of the asset. If the cost of production is high, the value will be high, if the cost of production is low the value of the cryptocurrency will also be low.

Why can't everyone be a miner?

Mining is a process in which tokens or cryptocurrencies are gained by solving cryptographic equations or puzzles using high-powered computers. It includes validating data blocks and adding transaction record to a blockchain. Some kind of mining requires the use of space on hard drives (proof of capacity) some other kind requires the use of high-powered computers that consumes a high amount of energy (PoW). Proof of stake (PoS) is also a different type of mining, validators (miners) bet their assets on the next block that will be added on the blockchain and gain crypto if the block is added.

The following are some reasons why everyone cannot be a miner.

• Mining requires some level of expertise. Miners should be fast in solving these computer puzzles. They need this skill coupled with some others for successful mining. It will be difficult to be a miner without this level of expertise.

• The king of computer equipment needed is very expensive, such as high-capacity hard drive in PoC, and may also require high energy consumption, such as in PoW, which may also be expensive to function.

• Cryptocurrency is not generally accepted as a legal activity in some areas and people in these areas are not allowed to be miners.

• High cost of system maintenance also does not allow people who cannot afford it to be miners.

Why can cryptocurrency transactions be called more transparent?

Cryptocurrency transactions are processed on decentralized platforms that run on blockchain systems. In the decentralized blockchain, every information regarding a transaction is stored on every computer (node) on the blockchain which is made available in the public domain.

The stored data cannot be manipulated or deleted. And every transaction in the blockchain can be traced.
Every device connected to the blockchain can access the stored data on the blockchain

Explain how the development of cryptocurrency in your country?

Ghana is a country that has many of its youth engaged in crypto activity with rising peer-to-peer crypto trade volumes. The youth earn from it but as of now, the government is against it.

The government issued a warning to Ghanaians to so stay away from cryptocurrency transactions. It asserted that there are risks associated with cryptocurrency transactions and people lose funds in such transactions.

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Conclusion
A decentralized financial system if its limitations are corrected and regulated could make it the financial system of the future.