What is Cryptocurrency?

In the immediate aftermath of the stock market and housing market crash of 2008, Satoshi Nakamoto introduced Bitcoin in the 2009 whitepaper, an individual or group who to this day has remained unidentified. Since the introduction of Bitcoin in 2009, cryptocurrencies have come a long way and the number of cryptocurrency traders continues to increase every year. However, the cryptocurrency community has not yet achieved mass adoption by the majority of the world’s population. This leaves most people still asking the question,

What is cryptocurrency?

What is cryptocurrency? An Introduction

Investopedia describes cryptocurrency as “a digital or virtual currency that is secured by cryptography.” The definition continues by explaining that “a defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.” In other words, there is no intermediary that controls the transactions.

Surprisingly, cryptocurrencies are not the first instances of non-FIAT currencies. Some digital currencies were developed in the 90s. What makes cryptocurrencies different is that cryptocurrencies use cryptography to secure and verify transactions. Cryptocurrencies are also decentralized, meaning there is no central controlling authority in the transaction process. Satoshi Nakamoto first described Bitcoin as a “peer-to-peer electronic cash system”.

Cryptocurrency can be traded without a centralized authority controlling the process, while remaining secure. But how? Well, when a cryptocurrency trade is made, the transaction is verified by everyone on the blockchain, a public record of every transaction that has taken place within the network with extensive computing power. In this way, cryptocurrency trades are legitimized by the community, rather than just one powerful central individual or organization.

Each transaction includes the public keys/wallet addresses of the people involved in the transaction (the sender and recipient), and the sender signs off on the transaction with their private key, which acts like a password for their cryptocurrency wallet.

Miners confirm transactions by solving a cryptographic puzzle. After each node in the network adds the transaction to their database. The miner then receives a reward after the transaction has been verified. Each confirmed transaction is then registered on a chain of digital ledgers. Advantages of doing so include the following:

• traceable and audible
• tamper proof and irrefutable
• cryptographically secure against counterfeiting and double spending

pseudo-anonymous

The system is based on consensus between the different nodes, which also provides an added layer of security and helps to ensure that each transaction is legitimate.

Beyond Bitcoin

Indeed, Bitcoin was the original cryptocurrency and remains the most popular and valuable cryptocurrency, representing approximately 68.3%of the market capitalization of cryptocurrencies at the time of writing. However, over the past decade thousands of other cryptocurrencies have been introduced (called Altcoins) and are traded on cryptocurrency exchanges.

The Ethereum blockchain and its cryptocurrency Ether (ETH) were introduced in 2015 to improve on the shortcomings of the blockchain built for Bitcoin. Like Bitcoin, ETH is a virtual currency used as a means to transact and a store of value.

In an effort to become more than “digital gold,” Ethereum was designed to run applications by distributing computing power. These apps issue their own crypto assets. Crypto assets issued on Ethereum or another existing blockchain are called tokens. Ethereum ERC token standards have become the standard for business on the blockchain.

ERC20

ERC20 tokens activate any action programmed into a smart contract. Thousands of platforms operate on the Ethereum blockchain each with their own tokens to activate functions. Examples include:

The Sandbox — play games with the SAND token

Polkadot — transfer data and assets across different blockchain platforms with DOT

Monero — make anonymous and private transactions with XMR

Huobi — trade cryptocurrencies on the Huobi Exchange using HT

Like FIAT currencies and Bitcoin, these tokens are fungible. In other words, they can be interchanged for other goods or assets. All Monero tokens, for example, share the same market price. The overall supply and demand determine the token price.

ERC721

The ERC721 standard represents non-fungible tokens (NFTs). NFTs represent individual digital assets. Each NFT has a unique and fixed identifier. NFTs are applied in The Sandbox and are known as LANDS NFTs — the top traded NFTs — which are issued for each game asset. Each parcel of land, character, and other digital assets has its own unique NFT. The art world is widely using NFTs to track the provenance of art works and eliminate forgeries.

Conclusion

Blockchain technology’s basis in cryptography and security sets cryptocurrency apart from the digital currencies of the past and makes it such an innovative invention.

Considering how much cryptocurrency use has increased over the past decade, it will be intriguing to see what the next decade brings.

Have more questions about cryptocurrency? The CryptoLocally team would be happy to answer them. You can reach us by joining our telegram group!