Why crypto? What is the point?

2 August 2023

Welcome, and thank you for being part of the MyZucoins community! We're jumping into some big questions in this one, so buckle up!

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We had a great suggestion from MyZucoins reader Craig, raising the point "can you go back and cover the absolute fundamentals and philosophies of why cryptocurrencies exist?"

Great idea—it's something we haven't covered here yet.

The philosophy behind cryptocurrencies stems from the ability to create a decentralized, peer-to-peer transaction system that operates independently of central banks and governments. Here are a few key principles of what cryptos like Bitcoin originally set out to do:

• Decentralization: Cryptocurrencies like Bitcoin were created as a reaction to centralized financial systems and intermediaries, such as banks and governments, which have almost full control over the financial system. Decentralization is meant to distribute power amongst the network's participants and prevent any single entity from having complete control over the entire system.
  
• Privacy and Anonymity: Satoshi Nakamoto, the pseudonymous creator of Bitcoin, designed it to offer more privacy than traditional banking systems. Although all transactions are transparent and visible on the blockchain, the identities of the parties involved are by default unknown, as addresses do not necessarily need to be tied to individual identities. Different cryptocurrencies offer different levels of privacy, with some like Monero focusing specifically on advanced privacy features at the risk of failing compliance in various jurisdictions
  
• Trustless System: The idea here is to remove the necessity for trust in financial institutions. Traditionally, we trust banks to keep track of our money, confirm transactions, etc. In contrast, cryptocurrencies operate on a "trustless" model where trust is placed in the technology (blockchain, Splitchain and cryptographic proofs), rather than individuals or institutions.
  
• More Security and Less Censorship: Once a transaction has been confirmed and added to the public ledger, it's extremely difficult to be reversed or altered. This means more protection against this kind of fraud (although it can make other kinds of fraud easier, hence where Zucoins comes in with in-built two-factor authentication (2FA)). Moreover, the decentralized nature of cryptocurrencies makes it very difficult for any single entity to censor or control transactions.
  
• Inflation Control: Most cryptocurrencies have a defined total supply. For example, only 21 million Bitcoins will ever exist. This controlled supply is programmed into the cryptocurrency and can't be changed. It's a direct response to central banks' ability to print money at will, potentially leading to inflation. Zucoins are capped at 100 million coins.
  
• Inclusion: Cryptocurrencies can be seen as a way to increase participation, providing services to the unbanked or underbanked populations who might not have access to traditional banking infrastructure.

While these are some of the common philosophies behind many cryptocurrencies, it's worth noting that not all cryptocurrencies adhere to all these principles. Some are more centralized, some focus more on privacy, and so forth. The specifics can vary widely between different cryptocurrencies.

Trust In Systems

One of the biggest points compared to traditional transaction systems, we believe, comes from decentralization and inherent trust in systems.

Peeling back the layers, why are concepts like decentralization important?

At the heart of any transaction is trust.

We’ve seen in the news recently, trust in existing financial institutions is becoming increasingly problematic.

Events like this cause people to trust existing institutions less and less.

The effect of this has caused an increasing number of people to look for alternatives.

This leads us down a slightly philosophical road, but we'll swing back to crypto afterward.

The question is: Why is this kind of trust important?

Let's try to nail that down.

What's The Nature Of "Trust"?

If a plane or a car was constantly having serious issues, you wouldn’t trust it to get its job done. This doubt grows stronger during times you really need it to do its job.

As the stakes get higher, the margin for error drops.

So that brings us to the first point in "What is trust?"

It's clear that reliability and consistency is a key factor.

If we consider the growing situation with banks, where people find their accounts closed purely because of their political beliefs or perceived "brand image", we can see the sudden drop in reliability and consistency is causing a growing distrust in traditional institutions, amongst many other reasons.

But there's also another interesting and rarely considered angle that decentralized systems need to combat: The more centralized something is, the more efficient it becomes, as the distance between two points shrink.

Take this example. Two systems, both well designed, but one is decentralized and the other is centralized. The decentralized system must be slower, to some degree, than the centralized system, as it is assuming less and so has to consider more variables—more sources of truth. That is, there is less implied or outsourced truth to a single third-party middleman. It means the decentralized system has to do more work to get to the same answer. So long as you give a decentralized system enough time, it should be able to do so.

So, why would you do this? The huge upside is the decentralized system has a higher guard against centralized control, which often leads to censorship and corruption. It counters the effects of an excessively concentrated system, on purpose.

Centralized systems also have the negative effect of making it easier for bad actors to gain control of those systems and create their own dominating rules. There's a lot more to this topic, so we've broken it into two parts. In our next newsletter, we'll get into what this means. Make sure you've subscribed to get our next newsletter if you haven't already.

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All the best,
Peter & Rob
MyZucoins

Disclaimer: Of course, this is not advice, financial or otherwise. It's also important to consider the risks and challenges associated with these potential benefits.

Disclaimer: Of course, this is not advice, financial or otherwise. It’s also important to consider the risks and challenges associated with any potential benefits.