Cryptocurrency, or crypto, is a form of digital currency designed to work as a medium of exchange without the need for an intermediary, such as a bank. It makes use of cryptography to secure and verify transactions. The creation of new cryptocurrency coins or tokens is also determined by cryptographic systems.
How Does Cryptocurrency Work?
Most cryptocurrencies are built on blockchain technology, which is a distributed public ledger (a digital record of transactions) enforced by a distributed network of computers. All transactions occur independently on the blockchain network. The tasks to manage and maintain a cryptocurrency occur across the distributed network of computers. Because of this, there is no need for the authority of a central bank.
There are two main consensus mechanisms (processes) that cryptocurrencies follow to work. The two main consensus mechanisms are Proof of Work and Proof of Stake.
Proof of Work
Proof of Work (PoW) consensus mechanism is the first system in crypto history used to validate blockchain transactions.
PoW is the process of adding new blocks to a cryptocurrency’s blockchain. The “work” in PoW is achieved by generating a hash (a long string of characters) that matches the target hash for the current block. These computations are solved by devices called miners. As a reward for solving a computation, miners receive a reward in the form of cryptocurrency.
Proof of Work has strong security but consumes a lot of energy, so it has a negative environmental impact.
Proof of Stake
Proof of Stake (PoS) is a newer consensus mechanism for validating blockchain transactions. It is an alternative to Proof of Work that is much more energy efficient.
PoS allows owners of cryptocurrency to stake their crypto and create their own validator nodes. Staking is the process of ‘locking’ your cryptocurrencies, similar to a locked savings account with a bank. When a transaction is ready to be processed, the cryptocurrency’s proof-of-stake protocol will choose a validator node to review the transaction.
This process requires less computing power than solving hashes and is also, therefore, more environmentally friendly. For this reason, Proof of Stake is more scalable.
What Is Cryptocurrency Used For?
Cryptocurrency is used as a payment system between people, businesses and between people and businesses.
Like fiat money, cryptocurrency is used to pay for things such as basic needs from food and housing to recreational costs. It is also used by some companies to pay their employees’ salaries.
How Long Has Crypto Existed?
The first known crypto to exist is Bitcoin. It was created in 2008. The next cryptocurrency wasn’t revealed until 2011. Since then, over 21,000 cryptocurrencies have been created.
Why Is Crypto Controversial?
Crypto is a highly controversial subject. Legally, crypto is controversial because it challenges government authority. It cannot be regulated, it is used by criminals, and it can help citizens circumvent capital controls.
Due to its lack of regulation, crypto has very volatile price activity and so the crypto space is prone to many pyramid schemes throughout the year.
Crypto projects are also prone to poor management and security practices which lead to project collapses and people losing large amounts of money. For example, the FTX contagion and Gemini crash.
What Is The Cryptocurrency Market Cap?
The global market cap of crypto is $1 trillion. It peaked at $2.9 trillion in November 2021.
By 2030, it is expected that the global market cap will be $11.71 billion.
Types of Cryptocurrency and Crypto Tokens
- Payment Token: Payment tokens are used for buying and selling goods and services on without an intermediary. Payment tokens tend to have a limited number of tokens that can ever be created, which makes them deflationary. The value of the digital currency rises as the supply of coins that can be mined becomes less.
Examples of payment tokens are Bitcoin (BTC), Ethereum (ETH) and Monero (XMR).
- Utility Token: Utility tokens provide access to certain products or services run or operated by the issuer of the token. You can gain access to certain products by buying a specified token which can be redeemed for access. Unlike payment coins, they do not have a limited supply. Utility tokens are inflationary.
Examples of utility tokens are Decentraland (MANA), Polygon (MATIC) and Arweave (AR).
- Stablecoin: Stablecoins are a type of cryptocurrency designed to combat the volatility of crypto assets. As the name suggests, they have a stable value–this is due to the fact that they are backed by stable assets such as the US dollar, Euro or gold.
- Central Bank Digital Currency (CBDC): CBDCs are a form of cryptocurrency issued by the central banks of various countries. They are pegged to the issuing country’s national currency. Central banks maintain authority over CBDCs and they maintain a “paper trail”, meaning that transactions can be traced.
China, Australia and Russia are among the countries that have begun to pilot their CBDC.
- Privacy Token: These cryptocurrencies are often used for buying and selling goods and services on without an intermediary and with absolute anonymity. Unlike Bitcoin and other cryptocurrencies, privacy tokens do not leave a trace of transactions of identities.
Examples of privacy tokens are: Monero, Zcash and Beam.
- Security Token: Security tokens are used to provide an extra security layer to the login process of various platforms. These tokens hold information that provides a user’s identity which is used for verification for two-factor authentication (2FA).
- Non-fungible Token (NFT): A non-fungible token is a digital certificate used to certify ownership of a unique, one-of-a-kind asset on the blockchain. NFTs can be used for real-world assets such as real estate, art, collectables or digital assets such as audio, video, films and more.
- Decentralized Finance Token (DeFi Tokens): DeFi tokens power the decentralized applications which we interact with on the blockchain. They have a diverse range of use cases including exchange, investment, exercising voting rights, collateral for loans, trading and payment.
Examples of DeFi tokens are: Solana (SOL), Aave (AAVE) and Uniswap (UNI).
- Asset-backed Tokens: Asset-backed tokens are cryptocurrencies who value is is backed by a real-world asset that could be other fiat currency, precious metals, stock, bonds or real estate.
Examples of asset-backed tokens are: Digix Gold, Paxos Gold (PAXG) and Petro (PTR).
How To Buy Crypto
Cryptocurrency can be bought on traditional investment platforms and crypto exchanges. Before investing, it is important to research the risks involved. Seed phrase security breaches and market volatility are two risks involved with crypto investing.
Buying cryptocurrency involves setting up crypto wallet or an account with a crypto exchange or broker, transferring money to the account, and then buying the cryptocurrency of your choice.
Investors may prefer to buy their crypto using online brokers. The top 3 online brokers to buy crypto are:
The top 3 crypto exchanges are:
If you don’t want to buy crypto, you can earn it through bounty programs.
A bounty is a reward that a crypto startup or blockchain project grants its users for promoting their token, participating in activities or helping with the technical development of a project.
Things To Do With Your Crypto
Using crypto for your transactions is a great way to familiarize yourself with the technology.
Depending on your interests, you may want to use your crypto to try out web3 gaming, online shopping, sending money to friends and family or even buying digital art NFTs and music NFTs.
FAQs about Cryptocurrency
Is cryptocurrency legal?
Yes, cryptocurrency is legal. It is legal in the majority of countries, except for 8.
It is illegal in Algeria, Bangladesh, Egypt, Iraq, Nepal, Morocco, Qatar, and Tunisia. Some other countries only have an implicit ban on crypto.
Which crypto trading platforms can I trust?
Binance, Kraken and Gemini are amongst the most trusted and reliable crypto trading platforms.
What is the Future of Crypto?
Cryptocurrency has many brilliant use cases that can improve our lives. In the next few years, we can expect to see cryptocurrency become a part of our daily activities and transactions. It is already becoming possible with crypto bank cards like those created by Crypto.com and Coinbase.
In the future we can also expect to see more and more people receive salaries paid in crypto. This will make managing global remote work teams much easier and cost-efficient. For some people who work in the blockchain industry, it is already an option to be paid in crypto.