Cryptocurrency Background

 

Created: 28 March 2022 – Updated: 18 December 2023

Many people are familiar with Web2 applications, although they may not know what Web2 is exactly. Web2 is the internet as we know it today. You may know some of these centralized applications that run on Web2 such as FaceBook, Amazon Web Services, Twitter, ect. What many users of these applications do not know is that these websites and applications store all of the users personal data in their centralized location. This really endangers the privacy of the individuals using these applications. A new decentralized Web called Web3 has been developed and will progressively be ushered in as the new system we use. Web3 is possible because of blockchain; this enables only the user to have access to their data since the data is stored on the blockchain instead of stored in a centralized entity where Big Tech companies have access to it. The blockchain is decentralized and we will explain exactly how it works later in the paper. We want to give you a little background on the Web in order for you to understand what you will be using in the future as we are transitioning to Web3; the web you will soon be using daily.

 

Progression in internet and decentralization:

  • Web: created in 1989 by Tim Berners-Lee as a tool for global communication that would allow different computer systems to connect easily.
    • Academic and government purposes
  • Web1: created in 1991, consisting of HTML pages which allows users to access a document through another document.
    •  Academic, government, and commercial purposes
  • Web2: created in 2006. Users can create or consume any type of content they want without restrictions; however, the users are not in control of their data and usage information. (centralized) The centralized owners of these applications hold and have access to all of the user data by collecting user generated content
    • Academic, government, commercial, media, advertising
  • Web3: emerged around 2008-2009 in order to return control of data back to the individual rather than large organizations. Allows secure, transparent, tamper-proof transactions and storage of data without the need for a third-party (such as a bank)
    • This is possible through blockchain, crypto, smart contracts, DeFi, dApps, and NFTs

Decentralization Definition:  The dispersion or distribution of functions and powers. Also known as the delegation of power from a central authority to regional and local authorities. Before we can truly understand decentralization, we will have to understand the full aspect and problems with centralization. Centralization is how our government, monetary system, and bank work today.

 

Centralization: the concentration of control of any given activity or organization under a single authority

  • There are gatekeepers that act as a middleman that each individual has to go through in order to get approval. This is where we run into problems such as censoring, frozen accounts, and being told what you can and cannot do or buy. 
  • Examples:
    • Central Banking system:
      • Can view and track all of your transactions
      • Use your money when in savings
      • Can freeze your account at any time
      • Have the power to approve your eligibility for access to their networks
    • Web 2:
      • Examples: 
        • AWS (Amazon Web Services)
        • Facebook
        • Twitter
        • Youtube
      • Control Access:
        • They have the power to approve or decline your eligibility for access to their networks.
      • Controlled Ecosystems:
        • Have control over what is being posted (censoring)
        • The centralized private companies are able to control changes in the network, creating new rules and regulations to their liking.
      • Controlled Data:
        • These websites collect content such as news stories or music files to make such material available in one place.
        • Private large tech companies collect all of your information, from every search you search on the internet to all of your personal documents that certain apps require access too. 
        • This is how you get customized searches and ads that pop up on your computer.
      • Controlled/Centralized Servers:
        • Dependent on a few centralized servers which are subject to downtime and breaches.
  • Decentralization Benefits:
    • Brings the power back into the peoples hands.
      • The user is in 100% control of their funds: by holding the responsibility of your funds, your funds are as secure as you want them to be.
    • Censorship resistance: 
      • Blockchain can not be shut down because it is run by multiple different networks/nodes. 
      • If one node goes down, the system is kept running by the other nodes.
    • Examples:
      • Be your own bank:
        • Have complete control of all of your funds without censoring or approval from a 3rd party.
        • Self-sovereignty
        • On demand liquidity
        • Equity:
        • Hedge against inflation or a failing currency
      • Web 3:
        • The web cannot access or track personal information
        • No censoring
        • System keeps running if one node goes down because it runs off multiple nodes to ensure there isn’t any downtime or breaching.
      • Blockchain:
        • Permissionless- not requiring authorization
          • Crypto Definitions, defines permissionless, as “a term used to refer to a type of blockchain system where anyone can join and interact with the network. That is, any willing participant can perform various activities on the network, such as creating an address, contributing to the network consensus by mining or staking, or creating smart contracts.”
        • Censorship Resistant
        • Cannot shut down and cannot shut you down or turn you away

Blockchain Definition:  a digital database containing information (such as records of financial transactions) that can be simultaneously used and shared within a large decentralized, publicly accessible network

  • It is a shared immutable ledger for recording transactions.
    • Shared means that the transactions are completely open to anyone for viewing.
    • Immutable means, once the data is recorded within the blockchain it becomes nearly impossible to change or erase it.
  • How does this work? (Horizontally and vertically)
    • There are individual blocks within the blockchain that record data. Let’s call this the vertical backing. Once new data is recorded, this is stored in a new block. Each block holds data of the transaction, the hash of the transaction, and the hash of the previous transaction. 
      • Data: crypto address of receiver, crypto address of deliverer, and amount transferred 
        • Ex of what a crypto address looks like: jhse76wh387e3hjioaf7w0jf93
      • Hash: unique address identifying that specific block (different than crypto address)
      • Previous hash: unique address that identifies the specific previous block
      • Ex:
    • This system creates an immutable record of information since it creates a chain of blocks containing the information from the previous blocks. If the information or blocks were to be tampered with, it would change the hash address becoming easily detectable because the previous block hash would not line up with the latter block hash.
    • This system runs in many ways: PoW (Proof of Work), PoS (Proof of Stake), and consensus. This is sometimes paired with the P2P system as well.
    • The P2P provides a horizontal backing to the blockchain. A P2P network is a decentralized network that distributes the blockchain across many nodes. This enables each node to receive a full copy of the blockchain. This creates multiple references in order to back the legitimacy of each block being created along with the history of the blockchain. 
  • As you can see, the blockchain is secured horizontally and vertically. Through the creation of blocks (vertical) and the P2P network (horizontal) the blockchain creates a safe system to transfer important transactions on. 

Cryptocurrency: is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. According to the Oxford Dictionary Online,  “Cryptocurrency is a digital currency that uses encryption techniques to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.”

  • Many people think that cryptocurrency is just a currency but it is really a form of value that is offered through utility.
  • So the real question is, what value does each specific cryptocurrency bring to the market?
  • According to XRPL.com “If the cryptocurrency or digital asset token is a train, the blockchain protocol is the track that it’s running on. In other words, the blockchain protocol is the technological and cryptographic foundation for how digital assets are built and transactions are logged.”

 

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