Cryptocurrency
The emergence and rise of digital currencies
The first known digital currency is Bitcoin, which was established by an anonymous person (or group of people) by the name of Satoshi Nakamoto on January 3, 2009, after issuing a founding statement under the title "Bitcoin: A Peer-to-Peer Electronic Cash System."
It took several years for Bitcoin to achieve remarkable success, as it took a period until the beginning of 2011 for its value to rise above $1, then gradually escalate to reach a value of tens of thousands of dollars at the present time.
The success of Bitcoin led to the emergence of several other digital currencies that tried to clone the success of this currency and expand the uses and features of digital currencies, most notably the Ethereum currency and network, which added the feature of smart contracts, which allowed the development of decentralized applications (dApps), which have the second-largest total market value after Bitcoin.
The value of many currencies today exceeds a thousand dollars, and the total market value of digital currencies at the end of 2021 is estimated at about 2.3 trillion dollars, so they have become an integral part of the global financial system.
Many digital currencies are used today for money transfers, especially international ones. In addition to its main advantage of concealing the identity of the sender and receiver, many buy digital currencies as investments with the aim of profiting by selling them later when their price increases.
How do digital currencies work?
Most digital currencies rely on block chain technology, which is based on storing a database of ownership and currency transfers on various network members’ devices, thus eliminating the need for an intermediary or a central entity that organizes and executes transfers.
The idea of digital currencies is based on not requiring the papers or coins used in national currencies to determine the ownership or balance of each person, but rather on recording transactions and transfers between members of the network and distributing transfer information and new balances to all members of the network.
Each currency also has a method by which new blocks are validated and created (new versions of the transaction log), called a consensus mechanism, the purpose of which is to prevent the same money from being sent more than once, or double spending, to protect the currency network from hacking, and to create new coins (or mining), the most popular of which are proof of work (PoW), which relies on the need to expend significant total computing power to create blocks, and proof of stake (PoS), which relies on the need to authenticate a number of people who own a certain amount of currency for the new block before it is approved and distributed.
Types of digital currencies
There are two types of digital currencies depending on how they work, and they are:
- Coins or Coins
- Tokens or tokens
They are coins that run using smart contracts on other blockchains, such as Uniswab and Decentraland, which run on the Ethereum blockchain. In addition to these two types, an important type is
- Stablecoins,
Whether they are run on their own blockchain or not, these are currencies whose value does not change according to supply and demand, but rather has a fixed value coupled with the value of a national currency, the purpose of which is to facilitate the use of digital currencies to make payments and transfers without fear of a decrease in the value of the currency after transactions are made or its rise. Examples include Tether, USD Coin, and Dai, which are each worth 1 USD.
Controversy over digital currencies
Cryptocurrencies are subject to a lot of criticism, most of which falls into three categories:
dummy value
Many economists and influential personalities believe that most digital currencies do not have real value and that they are a bubble that will explode sooner or later, causing their owners great losses. They support this view, especially given that digital currencies, unlike national currencies, are created through operations that are not related to real economic activity on Earth, which makes them unable to expand and contract according to the state of the economy.
Lack of oversight and transparency
Governments are unable to monitor, seize, and confiscate funds transferred using digital currencies, which makes it an ideal medium for conducting illegal transactions and activities such as money laundering, drug trafficking, terrorist financing, and others.
Energy consumption and e-waste
Especially for currencies that use the proof-of-work mechanism, mining and the computing power that it requires consume a huge amount of energy, sometimes equal to the consumption of entire countries for one currency, and miners often turn to countries with cheap energy prices generated by unsustainable methods (such as coal), in addition to the fact that miners need to constantly update their equipment and get rid of old ones, which leads to the generation of significant electronic waste.
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