In today’s digital world, technology continues to advance at a rapid pace, particularly during the recent COVID-19 pandemic. Financial institutions are investing in technological infrastructure, such as blockchain, to make their actions digital, secure, and efficient. This investment is primarily intended to enhance security, simplify reporting to top organizations, and combat money laundering by monitoring transactions.
Since digital currencies and blockchain technologies are also developing rapidly, professionals with knowledge of blockchain are in high demand. Applying this expertise to different areas can help you unlock opportunities in your current role or start a fast-paced career working with decentralized finance (DeFi) technologies. In this article, you’ll learn deeply what the two concepts are, their advantages and disadvantages and lots more.
What is cryptocurrency?
Cryptocurrency or digital currency is an alternative form of payment which exists virtually and uses cryptography to secure payment and transactions. Cryptocurrencies do not have any central or regulatory authority like fiat currencies, instead they use a decentralized peer to peer (P2P) network to record transactions and issue new coins in the market.
Cryptocurrencies are based on a distributed public ledger which is known as blockchain. A blockchain keeps a record of all the transactions that have been held by the currency holders. These currencies are further stored in digital wallets which consist of private and public keys.
Cryptocurrency received its name because it uses encryption algorithms to verify transactions. The first and the largest cryptocurrency is Bitcoin, which was founded in 2009 and remains the best-known today.
Cryptocurrencies are not regulated by any central government authorities, making them immune to government interventions. Many cryptocurrencies are decentralized networks based on blockchain technology.
Cryptocurrencies act as a medium for value storage or exchange. All this depends on a public ledger technology called “blockchain.” It records the data and keeps track of the transactions sent via the network. Blockchain is a virtual chain of blocks, each of which contains a set of transactions and other information. The block becomes immutable, i.e., the data stored inside the block cannot be removed or replaced once it is added to the chain.
Nodes are a network of contributors by which cryptocurrencies are managed. The nodes perform diverse roles on the network, from storing to validating transactional data. They manage the database and validate the new transaction entries. The best part is that there is no single point of failure, which means if one node breaks down, it will have no impact on the blockchain ledger.
While many cryptocurrencies share a blockchain-based infrastructure, there are some striking differences between them. Generally speaking, cryptocurrency can be clustered into two distinct categories: coins and tokens.
Coins
A coin is any cryptocurrency that uses its own independent blockchain. For example, Bitcoin is considered a coin, because it runs on its own infrastructure. Similarly, Ether is operated via the Ethereum blockchain. The concept of ‘altcoin’ is used to refer to any coin other than Bitcoin. Many altcoins operate similarly to Bitcoin.
Tokens
Like coins, tokens are also digital assets that can be bought and sold. However, tokens are a non – native asset, meaning that they use another blockchain’s infrastructure. These include Tether, which is hosted on the Ethereum blockchain, and others, including Chainlink, Uniswap, and Polygon.
Types of cryptocurrency
• Bitcoin
Ticker Symbol: BTC
Market Cap: Over $435 Billion
Despite the thousands of competitors, Bitcoin—the first and largest cryptocurrency—remains the leading player in terms of volumes and economic value. Bitcoin continues to lead the crypto market in terms of market capitalization, user base, and popularity. Launched in 2009 by Satoshi Nakamoto, Bitcoin has touched its highest peak of $68,000 in 2021. Bitcoin supports both smart contracts and DApps because of its major updates like lightning network and taproot update.
• Binance Coin (BNB)
Ticker: BNB
Market Cap: Over $47 Billion
Binance coin is the native coin of Binance exchange, which is the world’s largest cryptocurrency exchange in the world. BNB was launched in 2018 which is used for several purposes such as trading, credit card payments, payment processing, loan and other transfers. To encourage its adoption, the transaction fees for Binance exchange are less for the users who pay in BNB. To make its value stable, Binance destroys or burns a fixed percentage of the coins in circulation.
• Ethereum
Ticker: ETH
Market Cap: $190 Billion
Ethereum is an open-source decentralized blockchain with smart contract functionality. Ethereum is the second largest cryptocurrency which holds a very strong and dominant position in the crypto market after Bitcoin. Ethereum operates on its blockchain and supports smart contracts which run on its own blockchain and are executed automatically when certain conditions are met. Ether is the cryptocurrency which runs on the Ethereum blockchain.
ETH, launched in 2015, currently trading around at the levels of $1,500 as of January 2023.
• Polkadot
Ticker: DOT
Market Cap: Over $7.3 Billion
Polkadot is a token which can be bought or sold via exchanges easily. It uses a nominated proof-of-stake mechanism for network security, verification of transaction and distribution of new DOT. DOT is the native cryptocurrency of Polkadot which was launched in 2016. It is a shard blockchain and thus it connects several different chains together under a single network. It allows them to process transactions in parallel and transfer data between chains without sacrificing its security. Polkadot is highly scalable as it is able to connect several blockchains in a way which was not possible before.
• Solana
Ticker: SOL
Market Cap: Over $8.8 Billion
Solana is a blockchain platform which was launched in 2017 with an aim to provide speedy execution of decentralized apps (dApps). Like Cardano, Solana is also known as Ethereum Killer, which is able to perform many more transactions per second (TPS) than Ethereum at lower transaction fees. Solana is designed to scale with the industry availability of CPU, memory and network bandwidth.
The cryptocurrency which runs on the Solana blockchain is called Solana (SOL). As of January 2023, Solana is the eleventh largest cryptocurrency in the world, trading around the levels of $24.
• Litecoin
Ticker: LTC
Market Cap: Over $6 Billion
Litecoin, launched in 2011 is known for its simplicity and utility benefits. It is known as a light version of Bitcoin but works on an entirely different algorithm known as Scrypt. Litecoin is minable and also has a faster transaction processing time compared to Bitcoin. Litecoin was launched with 150 pre-mined coins and has a maximum supply of 84 million coins. Like Bitcoin, the Litecoin supply is also designed to reduce over time to preserve the coin’s value.
As of January 2023, Litecoin is traded around at the levels of $87.84.
• Dai
Ticker: DAI
Market Cap: Over $5 Billion
Dai is a stable cryptocurrency which runs on the Ethereum blockchain. Like Tether, it is also pegged against the U.S dollar in the ratio of 1:1. The value of one DAI is the same as the value of one U.S dollar. DAI is thus a so-called stablecoin. Technically, DAI is an Ethereum-based application which is built on the same blockchain as Ethereum. However, unlike Tether, DAI is decentralized, which means that no centralized authority regulates the supply of new DAIs in circulation. Therefore, it is also widely used in services which offer decentralized loans and interest-bearing funds.
• Avalanche
Ticker: AVAX
Market Cap: Over $5 Billion
Launched in 2020, Avalanche is known in the crypto space for its fastest TPS and highly scalable blockchain solutions. It has an impressive 4,500 TPS, with a block time of one to two seconds. Avalanche uses a proof-of-stake mechanism and a unique three-layered blockchain system which makes it an ideal example for web 3.0. Its native token is AVAX, and is used widely for the platform’s payments, security, and connection functions.
• Tron
Ticker: TRX
Market Cap: Over $5 Billion
Launched in 2017, Tron is a blockchain-based project which works on delegated proof-of-stake consensus mechanisms. It is designed to support dApps and smart contract functionality with the best user experience and design. In 2018, the TRX cryptocurrency gained mainstream attention when the non-profit company, the Tron Foundation, acquired content sharing platform BitTorrent.
Advantages of cryptocurrency
Cryptocurrency has gained popularity among investors globally. With technological involvement and industrialization, digital currencies, such as Bitcoin, are gaining a satisfactory position over others. Cryptocurrency makes it easy to transfer money without any involvement of banks and other financial institutions.
Let us see a few more advantages of cryptocurrency as highlighted on Forbes website:
1) Accessibility
Investors need a computer or a smartphone with an internet connection to use cryptocurrency. There’s no identification verification, credit check, or background to open a cryptocurrency wallet. It is way faster and easier compared to old financial institutions. It also allows individuals to make internet transactions or send funds to someone effortlessly.
2) Safe and secure
No one can access your funds unless they gain access to your crypto wallet’s private key. If you forget or lose your key, you cannot recover your funds. Further, the transactions are secured by the blockchain system along with the scattered network of computers that verify them. It’s more secure if investors keep crypto assets in their own wallets. The transactions are secured by the usage of public and private keys, proof of work or proof of stake, and other various forms of incentive systems.
3) Inflation protection
Due to inflation, the value of many currencies has declined. Many folks see cryptocurrency as offering protection against inflation. Bitcoin has a hard cap on the whole number of coins that will ever be minted. For example, as the growth of the money supply overtakes the growth in the supply of Bitcoin, the price shall increase. Many other cryptocurrencies use the exact mechanism to cap supply and can act as a safeguard against inflation. In terms of quantity, only 21 million Bitcoins have been released, as specified by the ASCII computer file. All the BTCs will be mined by the year 2140. Therefore, the value will rise because of increased demand, which might keep up with the market and prevent inflation in the long run.
4) Decentralisation
Cryptocurrencies represent a brand-new decentralization model for money. They also help combat a currency’s monopoly and free cash from control. No government organizations can set the coin’s worthiness or flow, which crypto enthusiasts think makes cryptocurrencies secure and safe.
5) Diversity
Investments in cryptocurrency can generate profits. The market has extended immensely over the past decade. There is a limited history of the price activity of the cryptocurrency markets; so far, they appear unrelated to other markets like stocks or bonds. That makes cryptocurrencies an acceptable source of portfolio diversification.
Combining assets with less price correlation can give you more stable returns. For example, if your stock collection decreases, your crypto asset might rise and vice versa. However, cryptocurrency is usually very volatile and, in the end, might increase your portfolio’s volatility if your asset allocation is heavy on cryptocurrency.
6) Cost effective transactions
Cryptocurrencies can help transfer funds globally. The transactional cost with the help of cryptocurrency can be minimal or zero. It is negligible as it eliminates the need for third parties like VISA to confirm transactions.
7) Transparent
Due to blockchains’ decentralized nature, one can view money transfer transactions by simply using the platform’s blockchain explorer to track live transfers. This open and transparent system is a relief among investors and is corruption-free.
Disadvantages of cryptocurrency
1) High consumption of energy
Mining cryptocurrencies require plenty of computational power and electricity input, making it highly energy-intensive. The main culprit during this is often Bitcoin. Mining Bitcoin requires advanced computers and plenty of energy. One cannot do it on ordinary computers. Major Bitcoin miners are in countries like China that use coal to produce electricity. It has increased China’s carbon footprint tremendously.
2) Illegal transactions
Since the privacy and security of cryptocurrency transactions are high, it’s hard for the government to trace down any user by their wallet address or keep tabs on their data. Bitcoin has been used as a mode of payment (exchanging money) during many illegal deals in the past, like buying drugs on the dark web. It has also been used by some people to convert their illicitly acquired money to hide its source, through a clean intermediary.
3) Risk of data loss
The developers wanted to make virtually untraceable ASCII documents, strong hacking defenses, and impenetrable authentication protocols. It would make it safer to position money in cryptocurrencies than physical cash or bank vaults. But if any user loses the private key to their wallet, there is no getting it back. The wallet will remain locked away along with the number of coins inside it. It might result in the loss of the user.
4) No refund or cancellation
If there is a dispute between concerned parties, or if someone mistakenly sends funds to a wrong wallet address, the coin cannot be retrieved by the sender. It might be utilized by many folks to cheat others out of their money. Since there are no refunds, one can easily be created for a transaction whose product or services they never received.
5) Power lies in few hands
Although cryptocurrencies are known for their feature of being decentralized, the flow and amount of some currencies within the market are still controlled by their creators and some organizations. These holders can manipulate the coin for enormous swings in its price. Even hugely traded coins are at risk of these manipulations like Bitcoin, whose value doubled several times in 2017.
6) Vulnerable to hacks
Although cryptocurrencies are very secure, exchanges don’t seem to be that secure. Most exchanges store the wallet data of users to figure their user ID correctly. This data is often stolen by hackers, giving them access to lots of accounts.
After getting access, these hackers can efficiently transfer funds from those accounts. Some exchanges, like Bitfinex or Mt Gox, have been hacked within the past years, and Bitcoin has been stolen in thousands and countless US dollars. Most exchanges are highly secure nowadays, but there is always a possibility for a further hack.
7) Buying NFTs with other tokens
Some cryptocurrencies can only be traded in one or some fiat currencies. It forces the user to convert these currencies into one all told the most currencies, like Bitcoin or Ethereum first and then through other exchanges, to their desired currency. It can apply to just some cryptocurrencies. By doing this, the extra transaction fees are added within the method, costing unnecessary money.
What is the blockchain technology?
Blockchain technology is a revolutionary concept that extends beyond traditional database systems. While a database stores electronic information in a tabular form, a blockchain represents a decentralized and transparent ledger of transactions. Unlike conventional databases designed for simultaneous and efficient user access, blockchain offers an innovative approach to information management.
Blockchain goes beyond conventional database functionalities. It serves as a specialized database specifically designed to store financial transactions securely and immutably. With its distributed and decentralized nature, blockchain technology introduces a fresh perspective to the banking system, enabling transparency, accountability, and enhanced security in transactional processes. Blockchain entered the financial world with the emerge of cryptocurrencies. However, with its unique features, blockchain technology is rapidly expanding.
Generally, there are three central attributes of blockchain as follows:
First, a blockchain database must be cryptographically secure. That means you need two cryptographic keys to access or add data on the database: a public key, which is basically the address in the database, and the private key, which is an individualized key that must be authenticated by the network.
Secondly, blockchain is a digital log or database of transactions, meaning it happens fully online.
And finally, a blockchain is a database that is shared across a public or private network. One of the most well-known public blockchain networks is the Bitcoin blockchain. Anyone can open a Bitcoin wallet or become a node on the network.
How does blockchain work?
When data on a blockchain is accessed or altered, the record is stored in a block, alongside the records of other transactions. Stored transactions are encrypted via unique, unchangeable hashes. New data blocks don’t overwrite old ones; they are chained together so any changes can be monitored.
These blocks of encrypted data are permanently chained to one another, and transactions are recorded sequentially and indefinitely, creating a perfect audit history that allows visibility into past versions of the blockchain.
When new data is added to the network, the majority of nodes must verify and confirm the legitimacy of the new data based on permissions or economic incentives, also known as consensus mechanisms. When a consensus is reached, a new block is created and attached to the chain. All nodes are then updated to reflect the blockchain ledger.
How can businesses benefit from blockchain?
Blockchain and DLTs could create new opportunities for businesses by decreasing risk and reducing compliance costs, creating more cost-efficient transactions, driving automated and secure contract fulfillment, and increasing network transparency. Let’s break it down further:
1. Reduced risk and lower compliance costs
Banks rely on know your customer (KYC) processes to bring customers on board and retain them. But many existing KYC processes are outdated and drive costs of as much as $500 million per year, per bank. A new DLT system might require only one KYC verification per customer, driving efficiency gains, cost reduction, and improved transparency and customer experience.
2. Cost-efficient transactions
Digitizing records and issuing them on a universal ledger can help save significant time and costs, which can matter more in some trades than in others. In a letter of credit deal, for example, two companies opted for a paperless solution and used blockchain to trade nearly $100,000 worth of bags and shoes, clearly a time-sensitive transaction. By doing so, a process that previously took up to ten days was reduced to less than four hours from issuing to approving the letter of credit.
3. Automated and secure contract fulfillment
Smart contracts are sets of instructions coded into tokens issued on a blockchain that can self-execute under specific conditions. These can enable automated fulfillment of contracts. For example, one retailer wanted to streamline its supply-chain-management efforts, so it began recording all processes and actions, from vendor to customer, and coding them into smart contracts on a blockchain. This effort not only made it easier to trace the provenance of food for safer consumption but also required less human effort and improved the ability to track lost products.
How are blockchain, cryptocurrency, and decentralised finance connected?
Blockchain enables buyers and sellers to trade cryptocurrencies online without the need for banks or other intermediaries.
All digital assets, including cryptocurrencies, are based on blockchain technology. Decentralized finance (DeFi) is a group of applications in cryptocurrency or blockchain designed to replace current financial intermediaries with smart contract-based services. Like blockchain, DeFi applications are decentralized, meaning that anyone who has access to an application has control over any changes or additions made to it. This means that users potentially have more direct control over their money.
How secure is blockchain?
Blockchain has been called a ‘truth machine.’ While it does eliminate many of the issues that arose in Web 2.0, such as piracy and scamming, it’s not the be-all and end-all for digital security. The technology itself is essentially foolproof, but, ultimately, it is only as noble as the people using it and as reliable as the data they are adding to it.
A motivated group of hackers could leverage blockchain’s algorithm to their advantage by taking control of more than half of the nodes on the network. With this simple majority, the hackers have consensus and thus the power to verify fraudulent transactions.
In 2022, hackers did exactly that, stealing more than $600 million from the gaming-centered blockchain platform Ronin Network. This challenge, in addition to the obstacles regarding scalability and standardization, will need to be addressed. But there is still significant potential for blockchain, both for business and society.
Advantages of blockchain technology
1. High cost of implementation
Blockchain is a double-edged sword. Though blockchain technology reduces costs for users it requires high costs for companies to implement which can hinder mass adoption. Companies need to ensure proper planning and implementation if they wish to successfully integrate this technology into their processes.
2. Performance
Since blockchain technology carries out more operations than conventional or traditional databases it is seen to be much slower. Blockchains are also deemed inefficient, particularly those using the proof of work consensus mechanisms since that can take about 10 minutes just to add a new block. There are also redundancies that arise when it comes to every node or computer in the network being required to store each transaction.
3. Modification of data
The immutability of data on the blockchain network can also be a big obstacle when necessary modification is required or when mistakes occur. The process of rewriting the code is incredibly time-consuming and expensive.
4. High energy consumption
While blockchain technology has helped us advance in several areas in the realm of executing secure P2P transactions, one primary obstacle to using this technology is its significant energy consumption. All nodes on the blockchain need to maintain a real-time ledger every time a new node is created. The energy consumed during every one of these cycles is massive. The Bitcoin network itself has grown exponentially and so has its energy consumption. Today the network could be said to consume more energy than countries like Denmark, Ireland, and Nigeria.
5. Private keys
Blockchains are engineered to provide the highest level of security, but this can also be the technology’s Achilles heel. Each blockchain user has a private key that gives them access to their assets, funds, or data, and it must be carefully stored. Losing the private key can have severe repercussions because once misplaced, it is almost impossible to recover.
6. Prone to illegal activity
The fundamental elements of blockchain guarantee privacy and confidentiality. However, this can also make the network more susceptible to illegal trading and illicit activities. A perfect example could be ‘Silk Road’, an online dark web that operated from 2011-2013 to launder money and sell drugs.
Disadvantages of blockchain technology
While blockchain technology offers significant advantages, it is important to recognize its limitations and potential drawbacks. Let’s delve into some of the disadvantages of blockchain as outlined by Lin (2023).
1. Limited adoption and awareness
Despite the potential of blockchain technology, its adoption is still relatively limited in many industries. The complexity and technical nature of blockchain can create barriers to entry for businesses. Furthermore, a lack of awareness and understanding among stakeholders may hinder its widespread adoption and utilization.
2. Integration challenges
Integrating blockchain into existing business networks can be a complex and time-consuming process. It requires substantial planning, development, and coordination with multiple stakeholders. Adapting existing systems to work seamlessly with blockchain technology can pose technical and operational challenges.
3. Energy consumption
Certain blockchain networks, such as those using Proof of Work consensus algorithms (like Bitcoin), require extensive computational power and energy consumption. The process of mining and validating transactions involves solving complex mathematical puzzles, which consume a significant amount of electricity. This energy-intensive nature of blockchain can raise environmental concerns and increase operational costs.
4. Scalability
Blockchain technology faces scalability issues when it comes to processing a large number of transactions simultaneously. As the size of the blockchain grows, the time and resources required to validate and record transactions increase. This can result in longer processing times and slower transaction speeds, limiting its ability to handle high transaction volumes efficiently.
5. Storage and bandwidth requirements
Blockchain networks require significant storage capacity to maintain a copy of the entire transaction history. As the blockchain grows in size, the storage requirements for individual nodes increase accordingly. Additionally, blockchain networks require substantial bandwidth to communicate and synchronize data across the network, which can pose challenges in regions with limited internet connectivity.
6. Lack of governance and standards
Blockchain networks often lack a centralized governing authority, which can lead to challenges in decision-making, consensus, and resolving disputes. The absence of universally recognized standards and protocols can hinder interoperability between different blockchain networks and limit their ability to work together seamlessly.
7. Regulatory and legal uncertainty
The regulatory landscape surrounding blockchain technology is still evolving. Governments and regulatory bodies are grappling with the legal implications and frameworks needed to govern blockchain-based systems. Uncertainty in regulations and compliance requirements can hinder the widespread adoption of blockchain, especially in highly regulated industries.
8. Security concerns
While blockchain technology offers robust security features, it is not completely immune to vulnerabilities. Smart contract bugs, programming errors, and external threats targeting individual nodes or user wallets can compromise the security of blockchain systems. Additionally, the irreversible nature of blockchain transactions can make it challenging to rectify errors or fraudulent activities.
So far, this article explains almost everything related to Cryptocurrency and Blockchain technology, as they are the latest advanced technology of financial transactions which are based on the internet. This article also answers the question, “What are the advantages and disadvantages of cryptocurrency and blockchain technology?”
References
Lin, P. Y. (2023, March 9). Pros and cons of blockchain technology. CFTE.
Tambe, N. (2024, August 20). Advantages and Disadvantages of cryptocurrency in 2024. Forbes Advisor INDIA.
What is blockchain? (2024, June 6). McKinsey & Company.