What is Cryptocurrency in Simple Words
Cryptocurrency. You’ve definitely heard the term before. And even roughly imagine what it is.
Electronic money? Yes. But cryptocurrency can’t be equated with money in Web Money, PayPal or funds on cards. Currency? Yes. But cryptocurrency is not regulated by the Central Banks of countries, and its rate is not tied to the economy of any country directly.
Cryptocurrencies are a special kind of financial and payment asset designed to revolutionize the financial sphere.
And someone is sure that cryptocurrency is nothing more than another “bubble”. In this guide to cryptocurrency for beginners we will get acquainted with the crypto, try to determine its status and tell what are cryptocurrencies.
What is cryptocurrency?
Cryptocurrency is a kind of digital money based on the technology of cryptography, that is, data encryption. It has no physical appearance, and exists only electronically. Its main features are anonymity, decentralization and security.
Cryptocurrency circulation within the system occurs directly (P2P) – without the participation of a third party. Each of the participants is absolutely equal. No one has privileges, regardless of his social and financial status. At the heart of this virtual money is a decentralized open database – blockchain.
Most cryptocurrencies have an emission ceiling (issue of new coins). So, in Bitcoin it is 21 million “coins.” And in such currencies PPC and NVC there are no restrictions on emission.
Intro to cryptocurrency
Why would anyone want to create a cryptocurrency? The answer to this question remains open. This is partly due to the characteristics of the cryptocurrency. Previously, there was no convenient and quick way to make anonymous payments with a high level of security. With the advent of Bitcoin and other crypts, this task has become solvable.
The official year of the birth of cryptocurrencies is 2009, when the Bitcoin network began to function. The “father” of bitcoin and other cryptographic currencies is Satoshi Nakamoto, a mythologized character or even a group of people. The Bitcoin protocol was first published on this name. The first transaction was made by him.
It is obvious that Satoshi Nakamoto and KO have implemented many years of developments of specialists in the field of cryptography and IT technologies. It is not known exactly how many years the development and research has been carried out.
But it is known that the term cryptocurrency was first used in Forbes material about Bitcoin in 2011.
Term liked both readers and fans of the new virtual currency so much that he soon began to characterize this whole niche.
Crypto vs Fiat money
When the word “currency” is mentioned, images of banknotes and banks pop up in your mind. We are used to fiat in financial systems. Fiat is a standard, regulated currency. Like a dollar or a euro. The main differences between cryptocurrency and fiat currencies are as follows:
- Cryptocurrency has no physical appearance. Yes, fiat also exists electronically, but banknotes or cryptocurrency coins do not exist. Don’t confuse the physical coins, hoard wallets, and zR codes you use to work with crypto.
- Cryptocurrency is not issued by the central bank and is not tied to the economy of any country. The issue and issue of cryptocurrency is not controlled by one. No one can limit these processes. Only the features of the system itself. The rate is formed by market and has nothing to do with the economy of any country.
- It’s anonymous. To work with the bank, payment systems, WebMoney, PayPal, you need to specify at least a part of personal data. Cryptocurrency is not necessary. Each participant is anonymous. All information about it is a set of signs in the address of the wallet.
- Direct transactions. There are no processing centers, intermediaries, issuers and third parties in this virtual currency system. There is a simple transfer of funds between network members directly.
How cryptocurrency works?
Most cryptocurrencies operate and circulate in the blockchain. It is an open decentralized database where all transactions are recorded and stored. It is not placed on any separate server or hard drive, but is broken down into nodes. It is supported by active members of the network – ordinary users of full-fledged wallets.
Individual cells with recorded data are blocks. At the same time, all the blocks are connected. It turns out the chain – from this comes the name Blockchain. The connection is established through the hash-sum of the previous block in the new blocks. Because of this, it is almost impossible to change a separate block – it will have to “break” all the blocks in the chain.
The “crypto” prefix is due to the fact that Bitcoin and other currencies use encryption and cryptographic hash functions. Every member of the network has a private or private key and a public key. A private one is used to sign a “letter of transfer of ownership.” This is the basis of all transactions and ensures the transfer of cryptocurrency from one participant to another. A public open key is already used to verify other people’s transactions in the blockchain.
Why you need cryptocurrency?
Cryptocurrency can be useful for a variety of purposes, from shopping to saving money. Let’s list the main options for using cryptocurrency:
Payments. And not just transactions, but anonymous, fast and direct transactions. They are carried out both between individuals and for the purchase of goods or services on the Internet.
Storage of money. It is almost impossible to “steal” cryptocurrency from your wallet. Since all operations are irreversible and use private keys, it is unrealistic to intercept them or hack them. Provided that you have not given your private key to anyone, your cryptocurrency will always be safe.
Investment. Bitcoin and other cryptocurrencies are considered as an investment asset due to fluctuations in the exchange rate and general growth in popularity. Moreover, the cryptocurrency is suitable both for short-term earnings by trading on the stock exchange, and for long-term, as the rate demonstrates a tendency to increase.
Business. More and more companies and services connect payments in cryptocurrency. Cryptocurrency start-ups, collecting funds through ICO (crowdfunding) have become commonplace. If you personally have a business idea related to blockchain or virtual currency, then you can initiate a fundraiser through ICO.
Where does cryptocurrency come from?
The most common way of mining cryptocurrencies is mining (from mining – mining). Mining is a solution to cryptographic problems of varying complexity using equipment capacity. There is also forging – a special form of mining with voting and primary emission (ICO).
Why do we need it at all and why do miners get rewarded? This process is somewhat reminiscent of the work of a torrent track. The track members are engaged in file distribution and for this receive a rating, which is then used to download new data. Miners, using computing power, maintain the health of the network.
The ultimate goal of mining is to select a digital signature that closes the block. As soon as this happens, the block closes, the miner gets rewarded and a new block begins to form. CPU, graphics cards (GPU) or specialized equipment (ASIC, FPGA) are used to mine different cryptocurrencies. Mining is one way to earn cryptocurrencies.
Protocols are used to determine the method of mining:
- Proof-of-Work (PoW) — is “proof of work.” This is a protection algorithm in which the authenticity of transactions is confirmed through certain tasks. In PoW, the higher the performance of the equipment, the more coins are mined.
- Proof-of-Stake (PoS) — is “proof of share.” As a protection resource, a share is already used, that is, the cryptocurrency itself. PoS is “credit” mining. The more coins on the wallet, the greater the reward.
- Proof-of-Activity (PoA) — is “proof of activity.” Hybrid option between PoS and PoW.
Other less common protocols: Proof-of-Capacity, Proof-of-Burn, Proof-of-Storage.
The choice of equipment and its power depends on the hashing algorithm. Bitcoin has a SHA-256. This algorithm is tied to hardware performance. Litecoin has Script, a modified SHA-256, with a great emphasis on RAM.
The most popular cryptocurrencies
Bitcoin is the first, most popular and expensive cryptocurrency. It has the unofficial status of “crypto-gold.” For the first few years, all new currencies were based on the bitcoin blockchain. That is, they were the fork (branch) of the world’s first cryptocurrency.
All cryptocurrencies except bitcoin are also called altcoins.
In 2011, the Ripple coin appeared with its own handshake system and lack of mining. It was the first “non-fork bitcoin” in the cryptocurrency world. In 2013, the first ICO projects appeared: Omni and NXT. NXT is notable for the fact that the entire cryptocurrency issue was initially divided among 73 investors.
In 2015, Ethereum was launched. It is an environment for the creation of decentralized blockchain-based projects using “smart contracts.” Subsequently, this cryptocurrency became the second most powerful after BTC. Also notable for the fact that she plans to use the proof-of-Stake protocol.
How does cryptocurrency have value?
How well-founded is the cryptocurrency exchange rate and how is it backed up? There are different opinions on this. U.S. IT mogul and billionaire Mark Cuban lashed out at Bitcoin and the crypt in general on Twitter in the summer of 2017:
It’s more like a cult and a religion than a real asset. Only in this case of gold you can make good jewelry, and from virtual coins nothing. It’s a bubble.
After that, the rate went down, and Mark added:
You realize it’s a bubble when a random Twitter post can force the currency to lower the price.
However, then Cuban himself began to invest in ICO and even advises people to keep 1/10 of their own funds in cryptocurrency.
What is the back-up of the course?
First, the cryptocurrency mining requires powerful equipment that consumes a lot of electricity and gradually loses its productivity. It turns out that partially and depreciation is transferred to the value of coins.
Second, blockchain. This is something that no other payment system has. Blockchain is universal, reliable, decentralized. At the same time, it guarantees anonymity and high transaction speed. And it is used in different spheres. Starting from the financial sector, ending with alternative energy. These are the obvious advantages that determine the value of cryptocurrencies.
The value of these virtual coins is set by market. The greater the demand for a particular cryptocurrency, the higher its rate. Demand, in turn, depends on the advantages that the coin offers. If tomorrow THE BTC will make the official currency in China, its value will “rise to the skies.” Demand is formed against the background of news, new developments, announcements of companies.
There are speculative jumps in the course. They are provoked by large traders on the exchanges for the purpose of earning. They are not particularly interested in how much the coin costs. Due to a large number of assets, they are able to have a short-term impact on the exchange rate.
The pros and cons of cryptocurrency
The advantages of cryptocurrency are really a lot, but do not forget about the disadvantages to know in advance what you can expect from this type of money.
Instability of the exchange rate is one of the shortcomings of cryptocurrencies and a reason for distrust of them. And what are the other downsides of the digital currency? For example, regulation. Initially, BTC was a fully decentralized and independent currency. This meant that a member of the network in the United States and a member of the network in Burkina Faso were equal. However, more and more countries are thinking about regulating cryptocurrency. And in some parts of the world (Bolivia, Indonesia, Thailand) it is forbidden.
The disadvantages still include reputation. Cryptocurrency due to its anonymity has become a payment tool in black markets.
The potential downside is “Attack 51%”. A situation where 51% of the capacity or 51% of all coins (in the case of ether) will be in the hands of one participant. Then this participant will be in full control of the blockchain and will be able to duplicate transactions. Roughly speaking, all your savings on your wallets will be stolen.
Is there a future for cryptocurrencies? It is difficult to answer this question unequivocally. At least because everyone lays their terms in the word “future.”
However, the present is precisely closely related to digital currencies. Since its introduction in 2009, the opportunities and popularity of cryptocurrency are only growing. Therefore, in the first quarter of the 21st century we should expect a period of intense crypto revolution. The sooner you join it, the better.