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Cryptocurrency's origin and its promise.

by Kene Ezeaputa 5 months ago in smart contract
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The future is bankless

Monet Painting

The first use of a decentralized blockchain was bitcoin, but to facilitate the network it needed a form of payment to incentivize network-supporting behaviors. The form of payment could not have been dollars because of the lack of decimal places (dollars have two decimal places compared to bitcoins' 18) and, more importantly, the negative impacts on decentralization. If dollars were the currency that powered the network, the government could suspend transactions, and the network would need a large amount of upfront money to secure the network. If the BTC network only had 10,000 dollars in reserves to pay for network supporting behaviors, the network would cease to function after the 10k was exhausted.

Therefore, a virtual currency had to be instituted to maximize the independence and longevity of the network; this is Bitcoin’s origin: a virtual currency used to support a decentralized network for payments. Bitcoin's original value was equal to the electricity it cost to produce it ($0.0000007). Miners that support the network with computational power are rewarded with Bitcoin. Miners then put a percentage of the Bitcoin on the market in order to recuperate mining costs. This is the supply of BTC in all marketplaces. The demand comes from people who want to use the Bitcoin network or want to hold Bitcoin because they believe the asset will appreciate.

This network is important because it is the first trustless, permissionless, decentralized system; trustless means the code is the law and is public, permissionless means anyone can use it, and decentralized means there is no single point of failure. Bitcoin worked great for sending money, but others saw room for improvement. Ethereum, a blockchain protocol that followed Bitcoin’s blueprint of a trustless, permissionless, decentralized network, decided that implementing smart contract functionality would unlock the full potential of a blockchain. Smart contracts are pieces of code that self-execute when conditions (set in code) are met. That is the brilliance of Ethereum: a global financial system built on an ambiguous legal system.

Finance on Ethereum is called "defi." Defi uses protocols based on smart contracts to provide financial services without intermediaries like banks. The key tenants of defi are transparency (I can see how the protocol works) and audibility (I can verify the workings of the protocol). The two most popular defi protocols are compound and Uniswap. Compound is a lending protocol that brings together lenders and borrowers. When you open the application, you can put in a request for a crypto asset you want to be lent. The protocol will then match your request with a user or group of users that will offer you the best available interest rate. If you think the interest rate is acceptable, you can submit the request.  Uniswap is similar to Compound, but instead of facilitating lending, Uniswap facilitates the swapping of tokens.

Defi will increase the number of people benefiting from financial services and the efficiency with which these people interact with financial systems. Leading to increased economic growth for developing economies that haven’t had the infrastructure to support financial institutions.

There is no question that in the last 20–40 years, the wealth gap has increased. The solutions have ranged from new taxes to increased government spending, but I believe the answer lies with the crypto-economy. Most Americans don't own assets, so as the stock market raged for its best 20-year period ever (from 2000 to 2020), many Americans didn't reap the rewards of the transformed economy. Defi and crypto bring people into the mix by simplifying finance and creating built-in protocols that turn users into stakeholders. Optimism is an EVM-based rollup that has given tokens to users who have used the network. These tokens will have monetary value and will be used as voting ballots to govern the optimism ecosystem. Uniswap collects fees from people who use the network and gives a majority of the fees back to those who support the protocol. The crypto space pushes users into stakeholders. This is why I believe Web 3.0(An internet built on blockchain technology) will play a part in closing the wealth gap on a global and local level.

In good faith

Kene Ezeaputa

smart contract

About the author

Kene Ezeaputa

Trying to do my best

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