A Cryptocurrency is a new form of money that works differently from regular money. It’s a virtual currency, so there are no tangible coins or notes to carry around.
They are uniquely issued or created. Instead of being produced by a central bank or government, new cryptocurrency units enter circulation through a technological process that involves people utilizing their computers.
Decentralized describes cryptocurrency well. No single entity or government controls or operates cryptocurrencies. Cryptocurrency transactions require a global network of volunteers.
Cryptocurrencies are digital and issued digitally, but there are significant differences.
The global financial system is based on fiat currencies, and most countries have laws and best practices to control their use. Cryptocurrency is mostly unregulated, and regulations differ by jurisdiction.
Cryptocurrency transactions are faster and cheaper than traditional banking. Compared to fiat currency, cryptocurrency transactions are completed in minutes at a fraction of the cost.
Governments and central banks can print money at will during a financial crisis. Algorithms determine the supply of cryptocurrencies. Some coins are coded with a supply limit. Bitcoin, the first and largest cryptocurrency, has a maximum supply of 21 million tokens that are released at a regular rate. Once bitcoin reaches 21 million, the protocol will stop releasing new coins.
Crypto transactions are permanent and final, unlike fiat currency transactions. Once added to the ledger, crypto transactions are unable to be reversed.
What is crypto?
The word “crypto” in cryptocurrency alludes to cryptography, a technology that secures all user transactions. Cryptography allows users to freely transact tokens and currencies without a bank to track each person’s balance and assure the network’s security.
It also solves the double-spend issue, which is used to make banks important.
Cryptocurrencies employ cryptography to encrypt sensitive information, including private keys. Private keys are cryptocurrency passwords. Coins are always blockchain-based and are unable to be stored outside the blockchain. When someone says they own X coins, they mean their password may claim X coins on the blockchain.
Crypto holders store their private keys on wallets, which are specialized software or devices. The related cryptocurrency is lost forever when a crypto possessor loses their private key.
Private keys are encrypted to form wallet addresses, like bank account numbers. Digitally signing transactions requires your private key. It is like telling the network, “I’m sending X coins to this guy.” Wallet addresses represent transaction destinations.
The one-way encryptions prevent deriving private keys from wallet addresses.
Important Read: What is ApeCoin? Is It a Beneficial Investment? 2022
How does cryptocurrency work?
While cryptocurrencies operate as a means for exchanging or storing wealth, they all rely on “blockchain” to retain data and track network activity.
A blockchain is a virtual chain of blocks storing transactions and data. Once a block is added to the chain, its data can’t be modified or withdrawn.
Because cryptocurrencies are handled by a network of volunteer “nodes” and not by a single intermediary, a system must be in place to ensure everyone records and adds new data honestly to the blockchain ledger.
Nodes store all historical transactions and validate new transaction data on the network. Blockchain technology has the following advantages over traditional finance, where a single institution maintains a master copy:
If one node fails, the blockchain ledger remains unaffected.
There’s no corruptible source of truth.
Nodes manage the database and verify new transactions.
Imagine a cluster of computers updating user balance sheets like a bank. Balance sheets aren’t stored on a single server in distributed ledgers. Each node, or computer connected to the network, functions as a separate server for the balance sheets. Even if one of the machines goes offline, it won’t be as damaging as a single server-based database in traditional banking systems.
This infrastructure allows cryptocurrencies to avoid fiat security issues. Attackers must control over 50% of blockchain-connected computers to attack or alter the system. A coordinated attack can be prohibitively expensive, depending on the network’s size. If you compare the cost of attacking established cryptocurrencies like bitcoin versus what the attacker stands to gain, it’s not financially viable.
Distributed digital assets are censorship-resistant because they are decentralized. Unlike banks, cryptocurrencies have global databases. When a government takes down one or all of these computers under its jurisdiction, the network will still function because there are potentially thousands of other nodes in other nations.
We’ve explained why cryptocurrencies are secure and censorship-resistant so far. How are crypto transactions vetted?
How are cryptocurrency transactions validated?
Blockchains are distributed databases that record all crypto network transactions. Every block of authenticated transactions is linked chronologically.
Nodes confirm crypto transactions because a central authority or bank can’t administer blockchains (computers connected to a blockchain). How can networks ensure node operators participate in validation?
Incentives are the only way to ensure people always want to validate blockchains.
Validators are encouraged to participate actively and honestly to earn newly minted coins. This incentive scheme determines how validators are chosen to validate the next batch of transactions. It guarantees that validators’ activities fit with network goals. Validator nodes that undermine the crypto network’s validity might be banned from future validations or penalized. Consensus protocols are incentive infrastructures.
Blockchain networks employ many consensus protocols. The two most common ones are:
PoW is a computer-intensive consensus process that requires validators (called miners) to compete using expensive equipment to develop a winning code that earns them the privilege of adding a new block of transactions to the blockchain. Miners receive “block rewards” when they add a new block of transactions to the blockchain. Successful miners also get transaction fees from the new block. Bitcoin, Dogecoin, and Litecoin use PoW.
PoS is less energy-intensive than PoW. Node operators don’t need expensive mining equipment. To indicate their commitment to the network, users only need to deposit (or lock away) currencies on the blockchain. The protocol distributes nodes with staked funds for random tasks. Successful validators are rewarded with crypto tokens. Cardano, Ethereum 2.0, and Polkadot employ this mechanism.
What are tokens?
Blockchain-based decentralized apps issue tokens. These are apps like those on your smartphone, but they’re entirely autonomous. Imagine a free Uber app where drivers and passengers may interact without paying a commission.
Because these apps employ blockchains, token transactions incur a cost in the blockchain’s native coin.
When you send a token, like USDT, on the Ethereum blockchain, you must pay a transaction fee in ETH, the Ethereum ecosystem’s native coin.
What is the difference between cryptocurrency and digital currency?
Blockchains power cryptocurrencies. They’re how decentralized networks and apps transmit value.
Digital currencies include cryptocurrency and bank-backed virtual money.
How are cryptocurrencies valued?
The value of a cryptocurrency usually hinges on its underlying blockchain, although social media excitement and other superficial factors have inflated prices.
Blockchain cryptocurrencies with a wide range of uses are usually more valued. It depends on demand, supply, and if the buyer is ready to pay more than the seller paid.
Cryptocurrencies promote a deflationary structure, where the number of new coins released to the market is predictable and gradually diminishes over time.
The total quantity of coins in various cryptocurrencies is fixed. There will be 21 million bitcoins, and 18 million are already in circulation. This deflationary-based system is the reverse of traditional banking, where governments can print unlimited fiat notes and devalue their currencies.
Types of cryptocurrencies
Bitcoin was the first cryptocurrency. After Bitcoin’s 2009 debut, developers created alternative cryptocurrencies based on its technology. Most cryptocurrencies aim to improve on Bitcoin’s standards. Altcoins are additional cryptocurrencies that came after bitcoin. Example:
Bitcoin’s use case
Initially, cryptocurrency was touted as a portable, censorship-resistant, internationally available, and affordable alternative to fiat currency. Except for digital assets linked to fiat currencies, cryptocurrency values haven’t been stable enough to act as a medium of trade.
Most crypto holders have moved their focus to the investment potential of cryptocurrencies, birthing the speculative crypto market. Investors seem more concerned about the future price of a cryptocurrency than whether they can use it to buy products and services. Therefore crypto is increasingly considered an investment.