What is Cryptocurrency - All You Need to Know
Updated: Aug 15, 2022
In recent times, crypto (short for cryptocurrency) has become a popular buzzword on the streets of the internet. As of 2018, there were more than 1600 cryptocurrencies in existence and that number continues to grow even as we gradually move into the world of Web 3.0. But what exactly are they? And how do they work? We will seek to answer these questions and more within this post so keep reading!
What is cryptocurrency?
Cryptocurrency is a digital or virtual currency that uses cryptography (a method of using encryption and decryption to secure communication in the presence of third parties) for security. A cryptocurrency is difficult to counterfeit because of this security feature.
A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation. Cryptocurrencies are used primarily outside existing banking and governmental institutions and exchanged over the Internet.
While these alternative, decentralized modes of exchange are in the early stages of development, they have already sparked many innovative approaches within the financial services industry and continue to grow in popularity.
History of Cryptocurrencies
In 1980, a few years after the first mention of cryptocurrencies, American cryptographer, David Chaum created digital cash, which used cryptography to safeguard and verify transactions. However, the software and cryptographic methods that would enable the establishment of a genuinely decentralized digital currency didn't start to be developed until the early 1990s.
Bitcoin was the first cryptocurrency to be widely used and traded on a public exchange in 2009. Satoshi Nakamoto (pseudonym), is credited with creating Bitcoin, which has since become one of the most valuable cryptocurrencies in circulation.
Traditional Currencies vs. Cryptocurrencies
Traditional currencies, such as the U.S. dollar, are issued by central banks. They are backed by a government and can be used in any country that accepts them as legal tender.
Cryptocurrencies, on the other hand, are not physical and are not restricted to any particular geographic location or place of residence—they're simply digital tokens that can be traded for goods or services anywhere in the world. The blockchain technology behind Bitcoin provides a transparent, decentralized ledger to record transactions without an intermediary like a bank or other financial institution involved in the process (which can speed up transactions).
How do Cryptocurrencies Work?
Whereas government-issued currencies rely on central banks, cryptocurrencies use blockchain technology. The blockchain is an encrypted system that enables peer-to-peer transactions without using a third party (like a bank). This means that you can send money directly to another person without needing an intermediary and the record of your transaction is then stored across millions of computers worldwide rather than being stored in one location; this process is called "distributed ledger technology."
Units of cryptocurrency are created through a process known as "mining", which uses computing power to solve complex mathematical problems. Cryptocurrencies can be purchased from brokers, and then stored and spent from a digital wallet.
Examples of Cryptocurrency
Bitcoin: As previously stated, it is by far the most well-known cryptocurrency created in 2009 by an anonymous person or persons named Satoshi Nakamoto. It’s often accepted as payment for goods and services and can be purchased from nearly any exchange that deals with it.
Ethereum: Created by Vitalik Buterin in 2015, Ethereum has achieved widespread adoption among developers due to its use of smart contracts and easy integration into existing applications. Its native token (ether) acts as gas for the network; users pay fees in ether to run decentralized applications on the network.
Litecoin: Released by Charlie Lee in 2011 as an extension of Bitcoin Core, Litecoin differs from Bitcoin mainly by using a different technology for its coin mining process; this technology makes mining Litecoins easier than mining Bitcoins (though it also makes them more expensive).
Benefits of Cryptocurrencies
Transparency: Anyone can see all transactions on a blockchain when it is publicly accessible for anyone to see. This means that no one can hide their spending habits from another person or business and make them think that they are more solvent than they actually are.
Security: The security of cryptocurrencies is guaranteed by cryptography and distributed ledger technology (DLT). Other traditional currencies may involve having third parties manage some aspects of your funds but with DLT you don't have this option because it's decentralized; there's no central authority managing any aspects of its operation or keeping records on behalf of users who use it.
Decentralization: Cryptocurrencies operate without any central authority or banks regulating money flow between accounts like traditional fiat currencies require because they're managed by consensus algorithms instead - which means that every transaction must be verified by miners before being added to the public ledger known as "blockchain". This makes them harder to manipulate or commit fraud against than traditional currencies since there aren't any middlemen involved in transactions except maybe miners who earn cryptocurrency rewards while doing so.
Cost-effectiveness: There are no fees charged by governments or financial institutions involved in cryptocurrency transactions whereas credit cards often charge high fees each time someone uses one due primarily because these companies need money from somewhere else other than just charging interest rates on loans made available through banks.
Speed & flexibility: In addition to being faster than conventional payment methods such as checks/cheques issued by banks (which take up several days), cryptocurrencies allow people around the world access same-day transfer speeds across borders without having higher fees associated with international transfers.
The Future of Cryptocurrency
Cryptocurrency is still a new technology and its future is uncertain. Although there are many reasons to be optimistic about the cryptocurrency industry, it's too early to say how it will play out over time. Cryptocurrency may become widely accepted as a way of exchanging value in person-to-person payments, but we won't know until the dust settles on all the hype and speculation we're currently witnessing.
And while crypto might not become widely accepted among merchants anytime soon due to its volatility issues at present-day—we anticipate that the problem will be looked into and solved in the coming months/years!
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