The past few years have witnessed a sharp hike in interest surrounding cryptocurrencies ranging from Bitcoin and Ethereum to the more modest Dogecoin which coincidently began as a joke. This article seeks to shed light on what cryptocurrency is and provides a brief overview of all that it entails.
What is Cryptocurrency?
Also referred to as coins on occasion, cryptocurrency serves as a form of digital currency which is secured with the aid of cryptography which enables messages in secret code to enciphered and deciphered. This means that cryptocurrency is almost impossible to forge and can almost never be double-spent. One of the characteristic features of all cryptocurrencies is that they are ordinarily not issued by a central authority. As a result, they are technically and theoretically immune to manipulations and interferences run by a government.
In the case of some forms of cryptocurrency, additional, new stock of coins is controlled by what is known as mining which serves as a computationally-intensive process. Under this process computers or mining nodes are pitted against one another in order to secure the network. This is done by solving varied mathematical equations wherein bitcoins are collected as a reward provided, they first create a new valid block. This block is then broadcast to the rest of the network in place and then added to the existing blockchain.
Other forms of cryptocurrency are pre-mined which means that the mining occurs prior to the coin in question being launched to the public.
What is the Role Played by Blockchain?
Cryptocurrencies operate with the aid of decentralized networks which are often based on blockchain technology. With the aid of this technology, a distributed ledger is held in place which is enforced by making use of a disparate network of varied computers. Blockchains, which provide multiple organizational methods that ensure the integrity of data that has been transacted, serve as a stalwart for several cryptocurrencies.
How Do Coins and Tokens Differ?
Although the terms coins and tokens may on occasion be used interchangeably, they each refer to varied concepts that exist within the cryptocurrency ecosystem.
As established earlier, coins refer to cryptocurrencies. These are built on an independent blockchain network and serve the same purpose as their physical counterparts i.e., they allow for a transfer in value. In the case of digital coins, the transfer of payments is made possible. Values are stored and are directly linked to the supply and demand for digital coins. Owing to this factor, the value of these coins is often subjected to volatility. The most popular forms of digital coins include Bitcoin (BTC), Dogecoin (DOGE), and Ethereum (ETH).
Similar to coins, tokens also allow for the transfer of value. However, most tokens also come equipped with additional powers that surpass being a mere medium of payment alone. Anyone is capable to create digital tokens to fulfill specified functions. Digital tokens, therefore, exist to fulfill a wide variety of purposes. This includes acting as proof of investments in real-world assets ranging from equities to fixed income in the case of security tokens. Utility tokens in contrast are designed to offer access to a specified service or product. Other manners in which tokens can exist include asset tokens, non-fungible tokens, and payment tokens.
Some services may make use of payment tokens in order to remove the presence of intermediaries. In most cases, customers would be rewarded for using tokens as opposed to partaking in a traditional form of payment.
To sum up, what makes coins differ from coins is that that the former and based on their own native blockchain network whereas the latter are built on a preexisting blockchain. While coins are used to process payments, tokens can fulfill multiple purposes. Digital coins are harder to create in comparison to tokens that are capable of being built based on existing blockchains.
Decoding the Types of Coins
There exist a wide variety of coins within the realm of cryptocurrencies the more prominent of which have been examined below.
Stablecoins – This form of cryptocurrency seeks to align its market value to an external reference. This may range from the value of a currency like the US dollar to the value of a commodity’s price such as gold. With the aid of collateralization or via algorithmic mechanisms which buy and sell the reference asset if not its derivatives, Stablecoins are able to acquire price stability.
Altcoins – These refer to all other currencies other than Bitcoin which account for 40 percent of the total cryptocurrency market as of March this year.
Exploring The Varied Applications of Cryptocurrencies
Cryptocurrencies are made use of for a wide variety of reasons some of which have been briefly touched on below.
- They allow for low-cost money transfers
- With the aid of ‘yield farming’ it is possible for users to earn an interest on Bitcoin in addition to other cryptocurrencies
- They allow for investments to be made in innovative startups still in their early stages.
- Private transactions can be made with ease in addition to non-cash remittances.
Cryptocurrencies as a Form of Investment
Investors are eager to invest in cryptocurrency today as they hold the appeal of easy transfers which occur directly between two parties without the aid of a trusted third party who may be a bank or credit card company. Instead, transfers are made secure with the aid of public keys and private keys.
Fund transfers incur minimal processing fees thereby allowing users to avoid having to incur steep fees outlined by banks and financial institutions in order to carry out wire transfers.
The future of cryptocurrency remains strong however the technology implemented in order to make them a possibility has the potential to disrupt many industries including finance and law.