I think we all understand what money is and why its important. I'm not sure how many chickens a dodge ram is worth, but I have a pretty good idea how many dollars its worth, you get the idea. Well one of the main problems with traditional currencies is how they are created and issued. Currently some governing body just arbitrarily decides when and how much to create, and thus has the majority control of its value. This makes the currency vulnerable to hyper inflation, as said governing body could just decide to print unlimited funds and thus several debasing their original value. Imagine overnight your life savings now are only worth a few cents, and there is nothing you can do about it. Well surely that would never happen right? Well it happens more then you'd think. One example would be the German mark. After their defeat in World War I, the Germans were forced to pay reparations to the allied power for damage caused during the war. Of course their economy was also damaged from the war and so they were forced to print money to maintain payments and thus the value of their own currency plummeted. At its height they were printing bills as large as 100 trillion marks. Of course this is not sustainable, and lead to the complete collapse of the German economy, the great depression, and eventually the rise to power of the Nazi party.
This possibility is a consequence of how our money works, and is really a modern problem. Before our money's value was directly tied to gold, aka 'the gold standard', but this just isn't economically feasible anymore. Frankly the price of gold is fairly arbitrarily set as well, a simple supply and demand economy.
Well sometime in the early 2000's, someone thought of a new way to issue currencies using computers, and that is via cool math games. Okay maybe not exactly cool math games, but by solving arbitrary math problems. By creating a currency that isn't issued by a single governing body, and instead as a reward given out at a set rate to the first person to solve said problems, they have essentially eliminated the possibility of hyper inflation. But why math problems? Well one problem with currency, and digital currency is no different is forgery. In paper currencies we use fancy printing techniques to make reproducing fake bills incredibly difficult and easily spotted when compared to the real deal. I realize now is a very poor time to be talking about counterfeit bills, but I will continue. How do you make something that has no physical properties difficult to copy then? Well you make it computationally difficult to replicate. The above mentioned math problems are so difficult that no one person has a strong enough computer to make counterfeit currency. By having multiple people with multiple computers running these calculations, we essentially build a consensus on who has what and no one person can over rule the rest. It honestly sounds pretty sketchy, but it has worked now successfully for over 10 years without any major incidents in many cryptocurrencies.
This is the system used by most cryptocurrencies including all of the major ones, bitcoin, litecoin, etherum etc. It is fundamental to their function but it is also their Achilles heal. It turns out tying all the transactions of your currency to arbitrarily complex math problems is an effective security feature, it also uses a tremendous amount of computer resources. So much so infarct that it puts a very severe strain on the capacity of transactions it can support. We call this the scaling problem. For any of you familiar with bitcoin, when its price peaked in 2018, the transaction cost also peaked at around $20. Imagining trying to buy something for $5 and then having to pay a transaction fee of $20, it just doesn't make sense. Since then the adoption of bitcoin was repealed in many high profile retailers as it was no longer economical to accept it.
Well then how do we fix it? The community is actually quite divided over that, and have basically split into two camps, side chains vs bigger blocks. As you may have heard one of the fundamental technologies of cryptocurrencies is the block chain. Its the fundamental data structure of bitcoin and other cryptocurrencies where transactions are grouped together in blocks and then the blocks are chained together. Each block has its own solved math problem and then is linked to its previous block forming a chain. That way once a block is accepted as valid by the majority of people on the network, it is impossible to change later as it is already embedded in the chain.
The bitcoin community decided that the solution they would go with is side chains, where a lot of the smaller transaction load would be moved of the main bitcoin block chain onto other more efficient chains. The problem with this solution is that the programming required to do this is very complex and is still in its infancy. The first major side chain called 'segwit' for example has been out for 2 years and is only at 60% adoption by bitcoin users.
Some people opted for the bigger blocks solution, where the blocks that contain transactions are made larger so they can contain more transactions. Instead of adopting segwit, they opted to split the bitcoin block chain in whats called a 'hard fork' and start development of their own coin. Technically this is a much simpler solution and has already been successfully deployed for a few different spin off coins. The main technical downside is that bigger blocks require more storage space and thus makes it require much more complex (and thus expensive) computer hardware to run the bitcoin software. One of the fundamental mission goals of the bitcoin community is to provide access to basic banking services to people who do not have access to traditional banking services, most likely due to endemic poverty in their nations. Increasing the hardware complexity requirements of bitcoin makes this goal unnecessarily more difficult, hence why the majority of the bitcoin community decided not to adopt it. The reason why the major people who did decide to adopt it is actually quite self-serving, but that's a story for another time.
I have quite a bit more to share on this topic but I think this post is already probably too long so Ill call it here.
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