Cryptocurrency enthusiasts claim that blockchain technology is the future. Billionaire venture capitalist Tim Draper gave his remarks on Bitcoin on Benzinga’s Moon or Bust livestream, stating that Bitcoin will cause an anthropological change to society. But will the future of cryptocurrency revolve around Bitcoin, or something else?
Some see Bitcoin as antiquated technology, as its proof of work consensus model and restrictive parameters greatly limit the potential for Bitcoin. With low throughput and no smart contract capabilities, Bitcoin may have trouble scaling.
What is Blockchain Technology?
Blockchain technology is the backbone of most cryptocurrencies currently on the market. The key features of a blockchain are immutability, security and decentralization. Essentially, blockchains are decentralized databases used to keep an account of who owns the cryptocurrency on a blockchain.
Since Bitcoin’s inception, blockchain technology has taken huge strides to become more usable, scalable and secure. Since a blockchain’s ledger is decentralized, the blockchain’s code must find a way to come to consensus — essentially finding a way to verify transactions correctly. The first consensus model was proof of work, and Bitcoin still uses this model to validate transactions on its blockchain.
Since then, however, new consensus models have been developed that are much more efficient at scale. Of these, proof of stake is the most popular, and most cryptocurrencies today are proof of stake. Proof of stake consensus is not only more environmentally friendly, but it significantly increases transaction throughput while simultaneously reducing transaction fees.
While Ethereum is currently proof of work, it has plans to migrate to proof of stake with Ethereum 2.0. There is no set release date for this network upgrade, but it’s expected to launch sometime over the next 12 months. The Eth2 testnet has been live since November, and billions of dollars in Ether have been staked on this testnet to secure the network.
Why Decentralization Matters
Decentralization is arguably the most important feature of blockchains. Unlike fiat currency, there’s no entity that controls the circulating supply of Bitcoin. This gives investors the security of knowing that their funds are finitely scarce. Unlike gold which can continuously be mined, there is a set supply of bitcoin that will ever be in existence. Plus, Bitcoin can be stored and transferred much easier than gold, making it a more practical store of value for the future.
The decentralized nature of blockchains opens up endless possibilities for trustless and immutable financial functions. Projects like Ethereum are not only decentralizing the monetary system, but Ethereum is also decentralizing the underlying financial institutions that are necessary for a truly decentralized future.
Ethereum can do this through a novel technology called smart contracts. Smart contracts are code that’s uploaded to the blockchain, allowing them to benefit from the decentralized, permissionless and trustless nature of blockchains. So how are smart contracts replacing traditional financial institutions, and how are users benefiting from this new system?
The Future of Lending, Investments and Ownership
Most of the lofty goals in the cryptocurrency space are driven by Ethereum’s ecosystem. Decentralizing financial functions such as exchanges, insurance, governance and ownership are already coming to fruition through smart contract applications.
Smart contracts power decentralized exchanges (DEXs) like Uniswap, Sushiswap and 0x. These platforms let anyone swap cryptocurrency without an intermediary, creating a platform that no one controls. After centralized exchanges halted the trading of GameStop (NASDAQ: GME), more attention has been paid to the control that centralized exchanges have over their users.
Lending is another industry that’s being revolutionized by blockchain technology. Aave is the leading lending platform built on Ethereum and it has over $10 billion of funds being put to work. Those who use Aave can instantly be approved for loans and earn high interest from savings accounts, all while knowing your funds are being safely managed by autonomous code on the blockchain.
Yet another sector that’s being revolutionized by Ethereum is ownership. Nonfungible tokens (NFTs) can be minted on Ethereum’s blockchain network, allowing for verification of digital ownership. While gaming and art have been the core industries affected by NFTs so far, these tokens have the potential to verify ownership of plots of land, car deeds, business documents and so much more.
Bitcoin, Ethereum and Altcoins
When talking about the future of cryptocurrency, it’s clear that Bitcoin will play a role in this decentralized future. Many investors see Ethereum in the same light, as millions of users have already transferred trillions of dollars worth of cryptocurrency on its network. Altcoins, on the other hand, are much more of a gamble than well established cryptocurrencies.
While some altcoins will likely appreciate even more than Bitcoin and Ethereum in the future, many of these cryptocurrencies will undoubtedly fail. Before investing in altcoins, you should ask yourself a few important questions.
- Does the altcoin have a real-world use case? If so, does it actually benefit from being decentralized?
- Does this altcoin have a competitive edge over its competitors?
- How does the altcoin accrue value? Is it from smart contract revenue, speculation, governance or a mix of all 3?
- What regulations could potentially be put in place that may affect your altcoin? Does the project have any venture capital backing that may help lobby in favor of the altcoin?
Cryptocurrency Price Movements
The cryptocurrency markets have seen a sharp downturn in the past few months, with Bitcoin and Ethereum both down over 50% from their all-time highs. Most altcoins are down even more, causing some investors to panic sell their cryptocurrency positions.
However, Bitcoin and Ethereum are still up well over 100% in the past year, and experienced cryptocurrency investors are used to this kind of volatility in the markets. Buying cryptocurrencies during significant dips is often the best way to make a large return from crypto, but be sure to do your own research and only invest money that you can afford to lose.
Where to Invest In Cryptocurrency
There are plenty of U.S cryptocurrency exchanges that you can trust to invest in cryptocurrency securely. Of these, Coinbase and Gemini are the most popular among crypto investors. These apps have simple user interfaces, and they’re easy to use even if you’ve never invested before.
If you’re looking for a one-stop shop for stocks and cryptocurrency, then Robinhood and Webull are good options. These exchanges don’t support as many altcoins as cryptocurrency exchanges, but they do support Bitcoin and Ethereum.
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Threats to Cryptocurrency Adoption
When investing in any new technology, there are greater risks than most other investments. Cryptocurrencies are still speculative investments, and use cases are still being developed across the board. Decentralized protocols may see more strict regulations in the future, as most of these platforms are anonymous. Also, traditional financial institutions have huge influence over government regulations, so if cryptocurrency becomes a direct competitor to these firms, lobbyists may push for more strict regulations.
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