Bitcoin was the first cryptocurrency to make a splash in the financial world and the minds of the general public, but it won’t be the last. As cryptocurrency continues to evolve, you don’t have to be in the dark when the next big thing hits.
Cryptocurrencies are a form of digital currency that are designed to be fully public (accessible by anyone on the internet without restrictions) and decentralized (saved on several different computers across the internet).
This can happen because of “blockchains.” A blockchain is a huge digital record that tracks transactions. The “block” is the current chunk of transactions being processed. Blocks are added to the “chain,” which is the long list of blocks going back to the first transaction.
Every transaction on the blockchain can be seen by anyone, but they don’t contain identifying information. A cryptocurrency blockchain is saved on thousands of computers, called “nodes,” spread across the world. These nodes continuously verify, add to, and record the blockchain for that cryptocurrency.
Though nothing is certain and the economy may shift away from crypto, the trends to look out for in crypto are the Ethereum Blockchain, NFTs, decentralized applications, and stablecoins. We’ll look at each of these topics to help paint and overall picture of where crypto is heading.
The first major cryptocurrency to use a blockchain was Bitcoin (learn more about Bitcoin and the basics of cryptocurrency ). Bitcoin is still the most popular and one of the most basic cryptocurrencies, but many programmers have used the basics of bitcoin to create more advanced uses of the blockchain. This advancement has led to the second biggest cryptocurrency, Ethereum.
Ethereum is a lot like Bitcoin:
- It is a decentralized blockchain which means there is no single location where the record of transactions is kept.
- It has its own name for the cryptocurrency that is traded on the blockchain. In the same way the US trades in dollars and England trades in pounds, Bitcoin trades in bitcoin and Ethereum trades in ether.
- Several different computers keep track and update the record and all transactions are available to be viewed by anyone.
- It can run “smart contracts” which are used to automate transactions.
But it has some key differences:
- Ethereum allows NFTs to be traded along with ether. NFTs (non-fungible tokens) are unique lines of code that can represent digital items like images or videos (learn more about NFTs).
- Ethereum also allows more complex applications than just smart contracts. These applications can run on the blockchain without needing a central computer to process and are often used to provide the functions of a bank while remaining fully public without middlemen.
What does Ethereum mean to me right now?
Ethereum was designed to be the next evolution of cryptocurrency. It took the successful aspects of Bitcoin and added more functionality. While Bitcoin is used to only trade virtual currency in a decentralized and public way, Ethereum uses decentralized tokens and applications in addition to currency. This added functionality allows Ethereum to have uses beyond trading speculative currency. But most of this world is still decided by speculative investors and not its utility.
A popular feature of cryptocurrency are NFTs. NFTs, or non-fungible tokens, are unique lines of code that can be traded on a cryptocurrency blockchain (Here is a more in depth look at NFTs).
NFTs often represent digital artwork and are traded online in communities similar to trading baseball cards or other collectibles.
The technology behind NFTs could eventually be used to store medical, government, or other personal records to provide a safe place for those records to be accessed, but there are currently major concerns over privacy and reliability. While blockchains could solve a lot of problems with how personal data is handled and distributed in theory, there has yet to be a widespread solution implemented for general use by any large government or organization.
What do NFTs mean to me right now?
NFTs have a lot of buzz around them, but like cryptocurrency in general, they haven't evolved beyond being a fad into something more stable. There is a possibility that they could become a common way we trade digital items or handle records in the future, but that is still many years down the road if at all.
Decentralized applications or DApps are another key feature of Ethereum and several other cryptocurrencies. These are complex applications that run using the blockchain.
Decentralized Applications vs. Smart Contracts
DApps combine several smart contracts to create more complex programs. For instance, a smart contract might automatically make a transaction when an account drops below a certain limit, while a DApp uses several smart contracts to create anything from social media platforms, to money management user interfaces, to fully-fledged games.
Because DApps take processing power to run, people using the application can offer payment for more processing power to run the applications faster. This payment can provide a way to pay for running and maintaining the blockchain.
Advantages of Decentralized Applications
- Because the DApp is on the blockchain, it’s easy to accept payment from that blockchain’s cryptocurrency without having to use a third-party bank to process and verify the payment.
- DApps can be verified publicly so they can be trusted to not be tampered with and that the information is secure.
- DApps can be used with varying levels of anonymity and don't have to rely on making an account and providing identifying information.
- DApps are difficult for outside sources such as governments or corporations to censor or manipulate.
Disadvantages of Decentralized Applications
- Because blockchains are public, the code for a DApp is open source, which means it can be copied and modified by anyone for free.
- They are difficult to update and bug fix.
- If the blockchain fails, the DApp fails.
- Their processing power relies on the blockchain, meaning complex DApps are difficult to sustain and that they slow the entire blockchain.
The most common types of DApps are those that mimic the banking system. These DApps value transparency and allow for bank-like functionality without centralized banks.
What do Decentralized Applications mean to me right now?
DApps provide a service that can pay for running the blockchain. This could technically allow blockchains like Etherium to gain value based on the services it provides in addition to the value of its currency. DApps could eventually be the main way that cryptocurrency are valued. That said, DApps have struggled to gain traction, and they still remain an investment with high volatility.
Stablecoins are a form of cryptocurrency that's backed by other currencies. Being backed means each unit of cryptocurrency corresponds to the same unit of another more stable currency. For instance, “Tether” is backed by the US dollar. So one unit of Tether is worth one US dollar. Having the cryptocurrency backed by actual currency helps stabilize the price of the crypto coin (hence the name) and allows for some regulation.
The price of stablecoins is controlled by whatever is used to back them. If they are backed by a stable currency it is easy to make trades on the blockchain without prices fluctuating wildly over a long period of time, but it also means that investments in stablecoins could suffer from inflation over time rather than grow in value.
What do Stablecoins mean to me right now?
Stablecoins can remove one of the most difficult problems with using cryptocurrency, the widely fluctuating prices, but come with their own drawbacks. Even if a stablecoin is currently backed by a stable commodity, there is no guarantee it will continue to be backed in the future, and there are not currently a lot of benefits of trading with stablecoins that you wouldn’t get from just using the currency that backs the coins.
The most important thing to understand when looking at crypto and its various alternatives and technology is that, for most people and in most circumstances, it should be treated like a regular form of investment, not a miracle cure to easily make you vast amounts of money.
While crypto may feel like the hot topic right now, it’s possible that it may prove to be a fad. As with any investment, it can be very dangerous to jump on fads without proper understanding, so think carefully and do your research if you’d like to get involved.
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