A couple of years back, no one would have ever imagined that with an internet connection and the click of a few buttons, you would be able to make transactions worth millions.
Before that, we all depended on the traditional versions of money like dollars and Euro which are restricted and controlled by a central authority.
All that changed when a mysterious man named Satoshi Nakamoto invented something we would later know to be Bitcoin.
That thing was called cryptocurrency and it would eventually give birth to a plethora of other cryptocurrencies like Ethereum, Dogecoin, Lite coin, and so many more.
Why am I telling you a story about an anonymous guy whose revolutionary creation earned him a statue in Budapest? I’m doing that because you deserve to know everything about crypto, including how it came into existence. But if I’m being completely honest, it just seemed like the perfect intro.
Without dabbling too much, let’s dive right into what you are here for: what is cryptocurrency?
Cryptocurrency is a type of currency.
It works just like any currency. You can use it to buy anything from your dream home to a hot cup of coffee. So why isn’t it called currency instead of cryptocurrency? What’s the deal with the “crypto” anyway?
That’s the sweet part.
It’s called a cryptocurrency because it is a digital kind of currency. It exists only online, in the digital space. You cannot physically dig it out of your purse to buy groceries just like you can do with your $10 or $100 bills depending on how rich you are.
Sounds magical, doesn’t it?
It’s amazing how you can do anything with crypto when you can’t even see it. How is that even possible? How do you trust the fact that your crypto is even there to start with/
Don’t send your head spinning with all these questions. This is how it works:
How do Cryptocurrencies work?
By now you understand that cryptocurrencies are pretty awesome (please allow me to toot their horn). You are also probably curious to know how it is possible to use something you cannot see to buy anything you want both in the digital and real world.
I’m here to satisfy your curiosity
Two factors make cryptos work the way they do. They are blockchain and digital wallets.
1. Blockchain technology
Cryptocurrency work through something called blockchain
Did that ring a bell?
Well blockchain has been around for some time now
Blockchain is a digital ledger that holds a record of all transactions distributed across the network. It’s the reason why it is so difficult to manipulate the system.
Because of blockchain technology, you can trust a stranger you have never met and conduct a digital transaction with that person because you know that the blockchain is transparent and secure.
2. Digital wallets
Cryptos also need digital wallets to work. This is common sense. Think about it. You keep your physical money somewhere, don’t you?
Whether it is in your purse or wallet, in the bank, in a piggy box, or even under your pillow (yes, some people have trust issues). The point is you store it somewhere. That is exactly how it works with cryptocurrency. In this case, you store it with a digital wallet.
A digital wallet is an electronic version of your physical wallet. It helps users to store and manage their digital assets like cryptocurrency and non-fungible tokens. It keeps all these in one nice, organized place. A cryptocurrency wallet provides a unique address that you can use to send and receive funds.
You can store both crypto coins and tokens. You thought they are the same thing? Well, they are not. Here’s the difference:
Coins Vs. Tokens: Understanding the Difference
You might have heard the words coins and tokens being used interchangeably, but the truth is they are distinct. The distinguishing factor is the platform on which they exist. All coins are tokens, but not all tokens can be called coins. How is that?
Coins are those cryptocurrencies that exist on their independent blockchain. For example, Bitcoin has its blockchain and so does ethereum. ETH is the native coin of ethereum. It can be used to pay gas fees and manage assets as well as perform a whole lot of other functions on the network.
Crypto coins can be mined through two methods. They are proof-of-work and proof-of-stake.
Proof-of-work is the oldest technique used to mine a crypto coin. It is a way of adding new blocks of a transaction to the blockchain and crypt experts use it to get more crypto for themselves. The proof of work method is quite energy-consuming and that is why a newer method of mining crypto coins was introduced.
The proof-of-stake is a more efficient way to mine crypto coins. It is a type of consensus mechanism used to validate cryptocurrency transactions. It works by randomly selecting miners to validate transactions. These miners have to stake a certain number of coins (32 ETH in the case of ethereum) before they have the right to begin checking new blocks of transactions and adding them to the blockchain. After successful validation, they are given crypto coins as a reward.
Tokens are derivatives of the primary blockchain. This means they don’t have an independent blockchain but they exist on the blockchain of another coin. They are simply extensions of smart contact platforms like ethereum for example. Tokens like Basic attentions token (BAT), status (SNT), civic (CVC), and Augur (REP) all exist on the ethereum blockchain.
Tokens are easier to create since what it requires is just building it on top of an already existing blockchain.
Another big difference in how the two types of cryptocurrencies work are in utility. Coins and tokens serve different functions. For a particular purchase, only coins may be accepted by the supplier, while others would accept tokens. Experts generally believe that for products, coins are preferable, while for services, utility tokens would be your best bet.
|1||Ethereum (ETH)||Uniswap (UNI)|
|2||Bitcoin (BTC)||Binance USD (BUSD)|
|3||Cardano (ADA)||Tether USD (USDT)|
|4||Litecoin (LTC)||Dai stable (DAI)|
|5||Dogecoin (DOGE)||Shiba Inu (SHIB)|
The system through which cryptocurrencies work makes them truly special. But it’s not only how it works that distinguishes it from the average traditional currency.
Certain features give crypto an advantage over the typical traditional currency. These 3 features of cryptocurrency will help you understand the clear difference between cryptocurrencies and traditional currencies.
Features of Cryptocurrency
Certain features distinguish cryptocurrency from any other kind of traditional currency. Cryptos are:
It’s okay. I know what you are thinking. It should be something like “What does decentralized even mean?” I’ll explain.
You know how the government controls your local currency. Do you know how financial institutions determine the value of money? Yeah, right, that does not happen with cryptocurrency.
Okay, you might also be wondering “centralized money like dollars or pounds aren’t so bad, what is so special about decentralized currency”
The reason why centralized money isn’t the best is simple.
Absolute power corrupts the system
When a currency is centralized it can be a problem because a single group of people has the power to control it. most times they don’t use that power so well.
Decentralized means not controlled by one entity. It also means everyone that owns that particular crypto has control over the system, which is a good thing because it means that everyone has a say.
With crypto, the value of the currency isn’t decided by an individual or a central body. Rather, it depends on factors like supply, demand, and competition with other cryptos.
Cryptos are transparent because of blockchain technology. We’ve already gone into much detail about how the blockchain works so I won’t bother you with all of the technicalities. The blockchain is open and transparent and it allows anyone to view its code.
This means that since cryptocurrencies work on a transparent platform, no one can cheat or manipulate the system. Cryptocurrency transactions are open so it is impossible to even lie for example about a transaction that never happened.
Aha! Immutable, that’s another big word with a very simple meaning.
Cryptocurrency is immutable and that means it cannot be changed.
Now, hold up.
I don’t mean that the 0.005 eth in your digital wallet will stay that way forever. No, far from it. You can breathe a sigh of relief. Please stop screaming in horror.
When I say “it cannot be changed”, I’m referring to crypto transactions.
Once a transaction is made, it cannot be reversed, changed, or manipulated. This is because it is already stored on the open blockchain network. Criminals generally would love a platform where they can easily falsify data by, you know, changing a few figures. The crypto space is not it.
Fortunately, the immutable feature of cryptocurrencies does not give room for such activities.
These features are the reason why cryptocurrencies are going mainstream today. People love the idea of a valuable asset that no one controls and cannot be manipulated by criminals and crypto offers just that.
Sure, it’s not perfect yet and a lot can be improved in terms of speed and security but one thing we can be sure of is that cryptocurrency has opened up a new world of opportunities that was completely unavailable to us before now. So, I guess Satoshi deserved that statue, after all, didn’t he?