What is a
cryptocurrency?
Cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology — a distributed ledger enforced by a disparate network of computers.
The main point of cryptocurrencies is to fix the problems of traditional currencies by putting the power and responsibility in the currency holders’ hands. By being decentralized, cryptocurrencies are not governed by any central bank or monetary authority. They are secured, in the case of cryptocurrencies like Bitcoin, by being digitally confirmed by a process called “mining”.
Bitcoin
Bitcoin was not the first Cryptocurrency created, but it is the first that succeeded. Bitcoin was created in 2009 on the heels of the economic recession. Bitcoin was created to be an electronic peer-to-peer cash system, but has also attracted crypto-curious investors as a store-of-value currency, comparable to gold.
The concept of Bitcoin was published in a white paper written by an anonymous figure under the pseudonym Satoshi Nakamoto in 2008. No one knows the author’s true identity — or if it’s a group of people, rather than a single person. The paper outlined how Bitcoin would work, and the currency officially launched at the beginning of 2009.
ETHEREUM
In 2011, Ethereum founder Vitalik Buterin was a blockchain-intrigued, 17-year-old programmer. He co-founded Bitcoin Magazine in the same year and in 2013 released a whitepaper describing what would eventually turn into Ethereum. He used basic scripting language envisioning a platform with wider transaction capabilities than bitcoin.
Ethereum is an open-source public service that used blockchain technology to facilitate smart contracts as well as crypto trading. This is all done without third-party involvement. Ethereum differs from Bitcoin in many ways offering different methods of exchange other than crypto and faster ETH confirmations than BTC.
Ethereum’s unofficial status as the “world computer” for decentralized applications (DApps), the popularization of smart contracts and introduction of the ERC20 standard for tokens. Ethereum network currently provides the world’s leading platform for distributed computing. The ERC20 standard and smart tokens are the technological foundation of blockchain-based assets such as utility tokens, which convey holders the right to use DApps or preferential access to the services of cryptocurrency ecosystems.
NON-FUNGIBLE TOKEN
NFTs allow you to buy and sell ownership of unique digital items and keep track of who owns them using the blockchain.
NFTs are a digital asset that represents real-world objects like art, music, in-game items, videos, etc. They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying software as many cryptos.
Every minted NFT contains built-in authentication, which serves as proof of ownership. When NFT is minted from digital objects that represent both tangible items, including: Art, Videos, Collectibles, Cloths Designs, Music, etc. Linking real-world assets with NFTs can digitize the way we prove ownership. For example, in real estate, we typically deal with physical property deeds. Creating tokenized digital assets of these deeds can move highly illiquid items (like a house or land) onto the blockchain. Which can be bought by multiple investors.
STABLECOINS
Stablecoin is a cryptocurrency with a fixed price they all serve a single purpose; to provide stability. Stablecoins are most commonly used for buying and selling other cryptocurrencies on crypto exchanges, by converting fiat currency into stablecoins and using those stablecoins to buy and sell other crypto tokens.
A reliable stablecoin enables a greater number of use cases than what we see today on the blockchain. No longer do people have to worry about the daily fluctuations of their cryptocurrency when deciding to make a purchase.
CRYPTOCURRENCY VS FIAT
Unlike fiat currencies, cryptocurrencies are not issued by governments. Instead, many cryptocurrencies are decentralized, so no single authority can decide to issue more cryptocurrencies and thereby dilute its value (or otherwise change the rules). Decentralized cryptocurrencies are highly resilient and don’t require third parties to validate transactions (like a bank, for example). Because transactions are verified using blockchain technology, all transactions are permanently recorded and irreversible, making cryptocurrencies a particularly secure way to exchange value. Local and international transactions may take days to reach from one bank to another, in cryptocurrencies it depends on network speed and takes only minutes or less.
CRYPTOCURRENCY VS GOLD
If we compare Cryptocurrency with gold, there is only one at the time with whom we can compare it with and its Bitcoin. One of the key features of Bitcoin is that it has a fixed supply, which means there will only ever be a maximum of 21 million Bitcoins in circulation. Given the fixed volume of the asset, if there is continued demand for the cryptocurrency, the value of Bitcoin will increase. Bitcoin is much easier to store and move around rather than gold. It doesn’t need expensive facilities to keep it secure.
BLOCKCHAIN
Blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. Each block in the chain contains a number of transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger.
The decentralized database managed by multiple participants is known as Distributed Ledger Technology (DLT). Blockchain is a type of DLT in which transactions are recorded with an immutable cryptographic signature called a hash. This means if one block in one chain was changed, it would be immediately apparent it had been tampered with. If hackers wanted to corrupt a blockchain system, they would have to change every block in the chain, across all of the distributed versions of the chain.
Blockchains such as Bitcoin and Ethereum are constantly and continually growing as blocks are being added to the chain, which significantly adds to the security of the ledger. As Blockchain develops it can be used in many industries such as finance, supply chains, insurance, healthcare, transportation and logistics, voting, contract management, etc.
DECENTRALIZED FINANCE
Traditional financial services such as payments, lending and borrowing were only available via established financial institutes and banks. But it transformed with the introduction of blockchain technology. When the concept of cryptocurrency started expanding, the discussion has shifted to a new set of considerations i.e., Decentralized finance (DeFi) and centralized finance (CeFi).
In DeFi, there isn't third party involved in the decentralized exchange. The complete process operates via smart contracts that are developed on top of blockchain platforms. Also, decentralized finance creates a fair and transparent financial system where anyone can participate. It allows unbanked people to access financial and banking services via blockchain technology.
DeFi aims to build an open-source, permissionless and transparent financial service ecosystem. The decentralized financial system offers services, including borrowing, yield farming, crypto lending, asset storage and more.
The benefit of using DeFi over CeFi is that you have full control over your assets and be your own bank with owning full custody of your wallet's private keys. Moreover, users who want to participate in DeFi need to use decentralized applications (DApps) built on the blockchain platforms to access DeFi services.
PROOF OF WORK
The purpose of proof of work is to give miners an incentive to support and secure the Bitcoin network by making it profitable to do so and making it unprofitable to attempt to hack the network.
Proof of work is a decentralized consensus mechanism that requires members of a network to expend effort solving an arbitrary mathematical puzzle to prevent anybody from gaming the system.
The way that users detect tampering in practice is through hashes, long strings of numbers that serve as proof of work. Put a given set of data through a hash function, and it will only ever generate one hash. Due to the "avalanche effect," however, even a tiny change to any portion of the original data will result in a totally unrecognizable hash.
PROOF OF STAKE
Proof of Stake (PoS) is a consensus mechanism used in some blockchain networks to validate transactions and create new blocks. In contrast to the Proof of Work (PoW) consensus mechanism used by Bitcoin, PoS doesn't require miners to solve complex mathematical problems in order to add blocks to the blockchain.
Instead, in PoS, validators (also called "stakers") are chosen to create new blocks based on the amount of cryptocurrency they hold and are willing to "stake" or lock up as collateral. The more cryptocurrency a validator stakes, the greater their chance of being chosen to create a new block and earn rewards.
To prevent bad actors from abusing the system, validators are required to hold a certain amount of cryptocurrency as collateral, and can have their stake "slashed" or taken away if they try to act maliciously. This is designed to incentivize validators to act honestly and maintain the security and integrity of the network.
MINERS
Miners also known as ‘’nodes’’ are the owners of high-speed computers which independently confirm each transaction, and add a completed "block" of transactions to the ever-growing blockchain, which has a complete, public and permanent record of every transaction.
Miners are paid in cryptocurrency as reward for their efforts, which incentivizes the decentralized network to independently verify each transaction. This independent network of miners also decreases the chance for fraud or false information to be recorded, as the majority of miners need to confirm the authenticity of each block of data before it's added to the blockchain, in a process known as proof of work or proof of stake.
SMART CONTRACT
A smart contract is an agreement between two people in the form of computer code. They run on the blockchain, so they are stored on a public database and cannot be changed. The transactions that happen in a smart contract are processed by the blockchain, which means they can be sent automatically without a third party.
Smart contracts were first proposed in 1994 by Nick Szabo, an American computer scientist who invented a virtual currency called "Bit Gold" in 1998, fully 10 years before the invention of bitcoin. Szabo defined smart contracts as computerized transaction protocols that execute terms of a contract.
This major upgrade to the blockchain has opened up new possibilities of Blockchain use cases and Ethereum is a really good example.