What is cryptocurrency simply and briefly? A digital, encrypted, and decentralized medium of exchange based on blockchain technology. The first one ever known to man is Bitcoin which was invented back in 2009 by the pseudonymous Satoshi Nakamoto.
What is Cryptocurrency?
Cryptocurrency is a digital currency that uses cryptography to secure and verify transactions. It is based on blockchain technology which facilitates the recording and authentication of transactions.
What makes cryptocurrency special is its decentralization and independency from any intermediaries. Unlike the Dollar, there is no central authority that manages and maintains the value of a cryptocurrency. Instead, these tasks are broadly distributed among a cryptocurrency’s users via the internet. This makes them virtually impenetrable by government intervention or manipulation.
You may have heard of Bitcoin and Ethereum, but what you may not know is that there are over 9,000 different cryptocurrencies in circulation.
Contrary to popular belief, digital wallets don’t store cryptocurrencies. But in reality, they are always stored on the blockchain. However, wallets hold the private keys that allow access to those funds, in order for crypto to be exchanged.
Like traditional fiat currencies, individuals can use cryptocurrencies as a medium of exchange or invest in them like stocks. However, the use cases for cryptocurrencies have greatly expanded over the years to include smart contracts, decentralized finance (DeFi), and non-fungible tokens (NFTs).
How Does Cryptocurrency Work?
Let’s begin by understanding what cryptography is. Cryptography is the mechanism that secures transactions and protects data from unauthorized access and manipulation. It serves two primary functions: maintaining the privacy of user identities and verifying the authenticity of transactions. While transactions are visible on the blockchain, the users behind them are almost unidentifiable.
- How does cryptocurrency achieve self-government? Through a distributed network of computers called a blockchain. A blockchain is a decentralized digital ledger that stores transaction data across many specialized computers on the network. Each of these computers (aka odes) keeps a copy of the ledger and rejects fake or inconsistent copies.
- How does a crypto transfer take place? Cryptocurrencies allow users to transfer funds directly to one another. Typically, the sender begins the transfer by creating a digital signature using their private key. Then, the transaction moves to the network where nodes verify the digital signature and ensure the sender has sufficient funds. After verification, the transaction is added to a new block on the existing blockchain.
Types of Cryptocurrency
Cryptocurrencies are classified into two main groups: cryptocurrencies and tokens.
Altcoins (or alternative to Bitcoin) are any blockchain-based cryptocurrencies that aren’t Bitcoin. Most altcoins came to life as a type of improvement to Bitcoin. Namecoin, Peercoin, Litecoin, Ethereum, and USD Coin are examples of altcoins.
Tokens live on existing blockchains and are used to facilitate transactions on them. Tokens are used to represent units of value such as money, coins, and digital assets, and can also be sent and received. Chainlink, Tether, and Shiba Inu are examples of tokens and all three operate on the Ethereum blockchain.
Over the last decade, cryptocurrency has advanced at lightning speed. It has brought many solutions to storing, transferring, and spending of various assets. while DeFi has pioneered the way for new borrowing and lending avenues. However, the future of this technology depends on whom you ask.
Some believe Bitcoin will replace gold and disrupt the existing financial system, while others argue that cryptocurrency will always be a secondary system and niche market.
Still, there’s no denying that cryptocurrency’s impact on many major industries is likely to develop further in the future.