Let's dive into a completely new world: that world of blockchain technology, cryptocurrencies, tokens, Web3 and decentralized finance.
I will open up a new world to you: a decentralized world where all financial transactions are possible without banks and central instances. A world that, thanks to decentralized databases and cryptographic keys, will in a few years change the way we use the Internet, change our value chains, and change how politics and society interact.
Bitcoin is the key to the blockchain world
To open this new world, let's go back to the year 2008. Only a few weeks after the peak of the financial crisis with the collapse of the American bank Lehman Brothers, a scientific article by a previously (and to this day) unknown person appears: Satoshi Nakamoto writes the white paper "Bitcoin: A Peer-to-Peer Electronic Cash System" and thus not only establishes blockchain technology as a decentralized database system, but also Bitcoin as the first of many cryptocurrencies to come. Through this paper, the blockchain is inextricably linked to the cryptocurrency Bitcoin.
What were Satoshi's reasons for thinking about a decentralized payment system in the first place? Since you can't pay cash in Internet commerce, and thus withdraw payments even after the service has been delivered, buyers and sellers must trust each other. This trust must be established either through third parties or by asking for personal data. Trust thus comes at a cost: involving third parties costs money, the inevitable acceptance of fraud costs money, the disclosure of personal data costs privacy.
Cryptography replaces trust
Satoshi proposes to replace mutual trust in financial transactions with cryptography, making the third party in payments obsolete. Cryptography is a technology to encrypt information so that only the intended recipient can read the transmitted message. A distributed decentralized computer network provides proof of the chronological order of transactions, confirming that a coin has not been spent twice. Reversing cryptographically secured transactions in a decentralized computer network is computationally only possible at a very high cost of computing capacity.
Cryptography thus replaces the trust we have previously placed in our currencies and our government institutions. By trusting the program code of the blockchain, we also trust the privateinstitutions that create this new money.
What are cryptocurrencies?
Today, a large number of different projects are gathered under the term cryptocurrencies, all of which have in common not to exist physically, but to store the transactions of their "coins" cryptographically on a decentralized database. They are tradable on crypto exchanges, but very few of them are designed to be used only as a means of payment. Many bring additional benefits, such as voting rights in their network, or they serve as currency for their network's transaction fees, or they even replicate real-world assets.
So far, cryptocurrencies are issued by private projects. In most of them, anyone can participate in the production of the coins (the process is called mining) by downloading the software and providing computing capacity for the decentralized network. The miner is rewarded for his efforts through payments in cryptocurrency.
In contrast, some central banks are also looking into using blockchain technology for their currencies. This digital central bank money would replace or augment cash. For me, however, digital central bank money does not qualify as a cryptocurrency, because the most important criterion, decentralization, is obviously not given with central bank money.