>> A cryptocurrency is
a digital asset with some value associated with it.
Digital assets are stored in a blockchain,
built on distributed ledger technology.
The blockchain uses cryptography to
secure transactions and ownership records.
Cryptocurrency is for the real big first use case with blockchain.
They were designed to solve some of the problems with
traditional currency like cash
and credit based systems that we're familiar with.
Let's take a look into these economic systems now and start
building more of an understanding
about how cryptocurrencies differ.
Traditional currency like cash,
is referred to as fiat money.
Fiat money is a government issued currency
that isn't backed by commodities such as gold.
Fiat money gives banks control over
the economy because they can control how much money is printed.
One problem with fiat money is that
governments can print too much of it,
which results in hyperinflation.
On the other hand, cash allows
anonymity and fast offline processing,
which is a really nice benefit,
and you could only spend how much cash currency that you have.
With fiat money, there are three questions that you have to ask;
how is it dispensed?
How do we give it a value?
How do we use it?
These are the same three questions that we have
to ask with any economic system.
Alternatives to cash-based systems are credit based systems.
Credit involves risk, but no resource allocation problems.
Credit cards have high transaction fees,
and you have to provide your details to each vendor unless you use
an intermediary like PayPal
that you can use with various merchants.
This keeps you from dealing with the merchants directly,
and requires everyone to have a centralized account,
but also ties your purchases directly to your identity.
With credit, you can potentially spend
more money than you have or able to pay back.
This is why in credit based systems,
the person assigning credit
takes the risk that they might not be paid back.
However, we can still ask
the same three questions about how credit is dispensed;
how it is assigned a value, and how we use it.
Cash has resource allocation problem,
but allows us to be precise.
Credit involves risk, but doesn't require allocation.
We generally, engage in a blended model where
people typically use both cash and credit.
Cryptocurrencies are an attempt at solving several of
the problems of cash and credit with the use of digital assets.
We have seen an explosion of
cryptocurrencies over the past decade
since Bitcoin was introduced,
and we will continue to see more cases of
blockchain technologies and cryptocurrencies
for a long time to come.
We still need to address some problems of
scarcity and resource allocation with this currency,
and how it gets built into the block chain.
We can ask the same questions about how
to give it a value and how to distribute it.
With cryptocurrency, we need
an ecosystem that allows participants who do
not trust each other to come to
consensus about the current and accurate state of the block chain.
Different platforms handle this differently,
but common solutions are proof-of-work and proof of stake,
which we'll discuss later on.
For a cryptocurrency to be successful,
three things need to happen.
First, people must believe that the coins are
valuable and likely to hold their value.
Then they must agree what the rules are
and how to enforce and verify them.
Third, they must be able to verify the state of
the block chain from the beginning of its operation of time,
to guarantee that no one is changing the rules.
This is why there have been hundreds of cryptocurrencies,
but only a handful that really stand out.
Because there is consensus about the rules, value, and history.
Now, that I've discussed the evolution of
digital assets or cryptocurrencies,
let me get into describing
the two most popular cryptocurrencies around.
Those are Bitcoin and Ethereum.
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