What is Cryptocurrency?

what is cryptocurrency
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The term cryptocurrency is a fusion of two concepts: Cryptography and Currency.

Cryptography is from the Greek word “ Kryptos” which means hidden. It is the process of converting ordinary plain texts into unintelligible texts and vice versa. 

This concept has three unique characteristics which are: Confidentiality, Authentication, and Integrity. 

Currency, on the other hand, is a medium of exchange for goods and services.

Combining these two concepts. Cryptocurrency, popularly known as “Crypto” can be defined as a medium of exchange that exists virtually or digitally and leverages blockchain technology to secure online transactions.

This digital currency earned the name “ crypto” because it uses encryption algorithms and cryptographic techniques like elliptical curve encryption, hashing functions, and public-private key pairs to verify transactions. 

Over the years, crypto has evolved as a digital alternative to fiat currencies issued by the government. With crypto, you can buy and pay for goods and services and even make cross-border payments.

However, a distinguishing feature of cryptocurrencies is that they are not decentralized, which means they don’t have a central issuing or regulating authority.

They are managed by a Peer-to-Peer ( P2P) network of computers and Open-Source software. 

The evolution of crypto has made it possible to transfer value online without the need for a middleman or an intermediary ( a bank or payment processor). Interestingly, these transactions happen almost at the speed of light and with very low transfer fees.

In recent times, there has been an increase in the adoption of cryptocurrency as the future of finance. Crypto is rapidly changing the narrative in many industries.

Below are some of the key features that explain cryptocurrency

  • Immutable

Immutability is one of the key features of cryptocurrency. Immutable transactions make it impossible to manipulate, replace or reverse a transaction. Hence you need to confirm before carrying out any transaction. Once you confirm a transaction no one in the world will be able to stop that transaction, not even Satoshi Nakamoto. 

Cryptocurrency transactions are recorded on the blockchain, and for them to be reversed, means that the nodes in the blockchain need to be altered, and this is an impossible feat.

  • Privacy 

It’s a general behavior of humans to be skeptical or doubtful when asked to provide personal or financial information.

However, Crypto guarantees that transactions are done anonymously on the blockchain. You don’t need to provide unnecessary personal or financial information to a merchant or a third party to carry out any transactions. And because Crypto guarantees privacy and protection of your information, you are less likely to be a victim of fraud or cybercrime.

  • Security

Security is one of the most important features of a good cryptocurrency. Cryptocurrencies are built using blockchain technology. This technology is a medium of recording transactions in a way that makes it impossible to hack or cheat the system. Each block in the chain contains several transactions and when transactions occur on the blockchain, a record of that transaction is added to every participant’s ledger. 

Hence, if a hacker wants to corrupt a blockchain system, they would have to change every block in the chain and this is impossible to achieve.

Furthermore, every crypto wallet owner has a private key and only those who have access to this key can access a crypto wallet. Hence, to keep your crypto safe you have to be the only one who has access to this private key. Additionally, crypto transactions require a two-factor authentication process to validate online transactions.

With these in mind, you can be assured that you can use cryptocurrencies without the fear of security.

  • Transparency and Openness

Unlike the traditional financial system, every transaction on the blockchain is easily accessible to the general public. This guarantees there’s no room for manipulation or alteration of transactions.

  • Permissionless

You don’t need permission from a higher authority to use crypto. This means anyone can participate in validating, mining transactions as well as leveraging the system to buy and sell assets. All you need to use crypto is a browser, internet connection, and a crypto wallet.

Some common types of Cryptocurrencies

  • Bitcoin ( BTC)

Bitcoin was the first cryptocurrency to be created in 2009 by a person or group of persons called Satoshi Nakamoto. 

It’s a decentralized virtual currency that leverages public-key cryptography to record, sign and send transactions over its blockchain – The BitCoin blockchain.

Bitcoin was designed with the sole aim of leveraging blockchain technology to carry out transactions, hence making it independent of any authority.

Over the years, this crypto has grown to be the most popular cryptocurrency in the world. Its dominance in the crypto space has inspired the evolution of many other cryptocurrencies that aim to serve as a better alternative as a result of some of the limitations associated with Bitcoin.

Bitcoin currently ranks the first cryptocurrency based on market capitalization. 

  • Ethereum ( ETH )

Ethereum is a decentralized software platform that enables smart contracts and decentralized applications ( Dapps) to be built without any intermediaries or third parties. It’s the second most popular cryptocurrency and it was created in 2013 by Vitalik Buterin.

One of the common use cases of Ethereum is Decentralized Finance ( Defi). Ethereum powers many cryptocurrencies In the Defi space. Hence anyone with Ethereum and access to an internet connection can carry out their transactions in a trustless manner.

Some examples of Defi Platforms are MakerDAO, Compound, Uniswap, and PancakeSwap.

Other use cases are Non-Fungible Token (NFT), Enterprise Software, Permissioned Ledgers, and Contract Source Codes. 

Ether( ETH), the native Ethereum currency, is ranked second based on market capitalization.

  • Solana ( SOL)

SOL is the native currency of the Solana platform. One unique selling point of the Solana blockchain is its ability to perform up to 50,000 transactions per second and this makes it attractive to users who want to perform trade quickly.

Just like Ethereum, Solana can be used in the Defi space and Smart Contract technology.

However, the two have some differences:

Ethereum uses a proof of work ( PoW) blockchain, which means miners compete to solve complicated puzzles to validate transactions and this makes the technology more energy-intensive.

Solana on the other hand uses proof of stake (PoS), which is a cryptocurrency consensus mechanism for processing transactions and creating new blocks in a blockchain.

Solana is ranked 9th cryptocurrency based on market capitalization 

  • Tether ( USDT )

Tether is one of the first and most popular stable coin cryptocurrencies. Stable coins like Tether were to be created to eliminate the issue of Volatility associated with the dominant cryptocurrencies like Bitcoin and Ethereum.

The value of Tether’s pegged to the price of the U.S dollar, hence making it easy to make transfers from other cryptocurrencies back to the U.S dollar within a short time frame.

USDT is ranked number 3rd based on market capitalization.

  • Cardano ( ADA)

ADA is Cardano’s cryptocurrency, which is named after Ada Lovelace, a 19th-century mathematician. Just like Solana, the Cardano is a blockchain platform built on proof of stake protocol, which makes its network more sustainable and efficient.

The fast transaction speed of Cardano is one of the reasons why it has experienced increased adoption in recent times. Cardano achieves this feat by splitting its blockchain into two layers. Some of the common use cases of Cardano are Identity Management and Traceability. 

Cardano is ranked number 6 based on market capitalization.

Advantages and Disadvantages of cryptocurrency 

Below are the advantages of cryptocurrency

  • Protection from inflation 

Cryptocurrency has paved the way for people in developing and under-developing countries to escape the crippling inflations and financial insurgencies.

As the demand for crypto increases, its value increases too and this in the long run prevents inflation.

  • Cheaper and Faster mode of transaction 

People pay up to 10-30% of money sent as transfer fees. The evolution of cryptocurrency has paved the way for people to send money across borders almost at the speed of light and with very low transaction fees incurred. It does so by eliminating the need for third parties or intermediaries to verify a transaction.

  • Currency exchanges are done easily.

Converting one fiat to another can be a nightmare sometimes. However, with crypto wallets and exchanges, one currency can be converted into the other by trading in crypto, across different wallets and with low transaction fees incurred.

Disadvantages 

  • No refund or cancellation policy

If you mistakenly send funds to the wrong wallet address, the coin cannot be retrieved by the sender. 

Hence you need to be extra careful and double-check before confirming a transaction.

  • Some cryptos are not available in other fiat currencies 

Some cryptocurrencies can only be traded in a few fiat currencies. Users are forced to convert these cryptocurrencies into any of the major currencies, like Ethereum or Bitcoin, and then convert them to desired fiat currency via exchanges.

This process incurs unnecessary transaction fees.

  • Can be used for illegal transactions 

Due to the privacy and security of cryptocurrency transactions, it’s hard to track down any user by their wallet address. In recent times, Bitcoin has been used as a medium of exchange in a lot of illegal deals.

  • Vulnerable to hacks

Although cryptocurrencies are very secure, other crypto repositories like exchanges and wallets are not that secure. Many crypto wallets and exchanges have been hacked which resulted in millions of dollars worth of crypto stolen.

Conclusion

The cryptocurrency space is an exciting one and very promising at that. However, to be a beneficiary of its endless potential, you need to have the right mindset and right information.

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