TL: DR: In layman’s terms, cryptocurrencies can simply be explained as digital or virtual currencies based on distributed ledger technology (DLT) in blockchain. A few of the household names in cryptocurrency are Bitcoin, Ethereum, XRP. And depending on whether you follow Twitter memes, Dogecoin as well. Secured by cryptography and backed by decentralized public ledgers. Cryptocurrencies are near. If not entirely, impossible to counterfeit or double-spend, can be transferred without an intermediary, and are immensely reliable and secure,. Even more than traditional fiat currencies. Enough of an explanation? Of course, not! If you are interested in cryptocurrency and wanna learn how it works, don’t miss this guide.
Especially during this pandemic year. The value and public exposure of cryptocurrency have surged significantly. Flooding every other news headline every other day. Once you start reading through this detailed guide on cryptocurrency. You will come across complex terminology and concepts. But don’t worry. I will link our previous articles for reference purposes. Where you find an elaborate explanation on such terms. For now, let’s start with the simplest definition of cryptocurrency.
The Simplest Definition of Cryptocurrency:
While we could just say. “Cryptocurrencies are digital currencies” and conclude this article. The technology and concept are more profound. In theory, cryptocurrencies are digital or virtual mediums for financial ownership where individuals can transfer assets using strong cryptographic principles. Unlike traditional fiat currencies. Users also have full control over their authority, ownership, supply, and market value while controlling the creation of additional coins and even currencies.
The majority of cryptocurrencies do not exist in physical form and are far from the authorization. Jurisdictions, and taxation of centralized authorities and even governments. Cryptocurrencies operate blockchain technology which is decentralized in nature and works via Distributed Public Ledgers (DLT). Where each transaction is linked to the previous one and gets added as blocks in the blockchain. Now, this definition is bookish. So let’s understand everything I just said comprehensively.
How It Came Into Existence:
If you have ever scratched the surface of cryptocurrency, notably Bitcoin. You might have heard about Satoshi Nakamoto. The mysterious creator (or creators; nobody knows for sure) of Bitcoin under the alias Satoshi Nakamoto is considered being the father of cryptocurrency when he introduced the White Paperback in 2008.
Yes, Nakamoto indeed laid out the foundations for Bitcoin. Paving the way for thousands of cryptocurrencies that followed. But if you rewind your clock by 25 years. You will come across an American cryptographer. David Chaum, who developed anonymous cryptographic money, eCash which later in 1995, was implemented through DigiCash. An early cryptographic electronic payment system.
Later down the road, following more events such as The National Security Agency publishing How To Make Mint: The Cryptography of Anonymous Electronic Cash in 1996, and Wei Dai publishing his description of B-Money. The practical and first implementation of cryptocurrency. Bitcoin was brought forward in 2008 by Nakamoto, 25 years after the concept of cryptocurrency was introduced. But you can’t just bring forward an entirely new concept without its core terms, rights?
The Technology That Went Into Creating Cryptocurrency:
While its answer would be as simple as saying that cryptocurrency is backed by Blockchain Technology. The implications penetrate much deeper. Ever since cryptocurrency went public in 2014. We have indeed over-hyped this concept. However, its backbone, which is blockchain technology, remains as an understated champ. Not just for cryptocurrencies and the whole Decentralized Finance, but blockchain plays, or should I say will play. An integral role for future advancements.
Understanding Blockchain Technology:
Let’s start with the definition of blockchain technology first. Blockchain currently serves as the decentralized distributed public ledger. Or tech-savvies would prefer it calling distributed ledger technology (DLT) for cryptocurrencies. Although blockchain was initially developed for permanently logging every Bitcoin transaction ever made, it now serves even more industries, notably FinTech, and will gradually be implemented in sectors where DLT would be more efficient and secure.
The blockchain is an ever-growing catalog of public records where every execution, primarily crypto transactions, are remains recorded in blocks. Each block contains a cryptographic hash of the previous block, transactional data, and timestamp, all of which are secured by cryptography. And as every block includes the hash of its previous block, it forms chains of blocks, which we collectively call blockchain. What makes blockchain unique as compared to traditional ledgers is that once each block is recorded, its data cannot be counterfeited or modified without altering subsequent blocks preceding it. And as blockchain is distributed in nature, it’s practically impossible to sabotage every byte of data at once.
Decentralized” and “Distributed:
Alright, so the first two terms we came across are “Decentralized” and “Distributed” which might be arduous for many of our readers. Before defining what decentralized and distributed means in blockchain, we must understand Centralization. Any organization or network, from multinational companies and even central governments, where decisions and opinions regarding the organization are made and taken into account by selected individuals is known as centralized systems.
From buying groceries to booking your cab ride, to even purchasing the device on which you are reading this article, you are fundamentally going through an intermediary. This intermediary has complete power over its rules and policies and can modify them freely. Decentralized networks, on the other hand, are entirely the opposite where the service isn’t controlled or ruled by any authority. You would be surprised after knowing that you are using one decentralized network right now.
The Internet Where you Found This Detailed Guide on Cryptocurrency:
Yes, the internet where you found this detailed guide on cryptocurrency. Nobody owns the internet; neither anyone is supervising what website can so, nor anyone can authorize this global network. Only participants can contribute to the system and improve it. Okay, so that was pretty easy to understand. But what does it mean to be distributed?
For now, let’s focus on how each block is added and validated in a blockchain. As I said earlier, ledgers of blockchain are public. But what does it exactly mean? When it comes to blockchain. Its participants are responsible for an integral role in the system; that is, validation. Every time one of the participants sends or receives money in form of cryptocurrencies. The transaction gets broadcasted on the network. But how do other participants make sure that the transaction is authentic?
Unique Method of Block Validation:
This is handled by blockchain’s unique method of block validation, consensus, surrounding which consensus algorithms are developed. This means every participant in the blockchain network must agree on the validity of each transaction. Every network has its unique way of achieving consensus. The majority including Bitcoin, uses the Proof of Work (PoW) concept, while similar concepts have also emerged, like Proof of Stake (PoS) and Proof of Elapsed Time (PoET).
Now let’s assume that the first transaction ever made on blockchain had already been validated. So how will the following transactions be validated and daisy-chained on the blockchain? Every time new transactions are executed in blockchain, one block is generated that contains a cryptographic hash of the previous block, transactional data, and timestamp. All of which are secured by cryptography. Okay, now we got another term in cryptocurrency, “hash” which might be untold for many.
To answer it simply, “hashing” is the process of converting long strings into an unused and unique string of shorter and fixed length. Now here’s why blockchain is immutable. Every validated hash on blockchain solely depends on the input or the previously generated hash. Even if any block is counterfeited in blockchain, it will spark an “Uh, that’s not right!” situation, and by comparing which hashes are not linked to its previous hash. The block can quickly be flagged as invalid.
How To Buy, Sell And Store Cryptocurrencies?
Well, the answer is simple; via cryptocurrency exchanges! With advancements made for both managing the hardware and software aspects of cryptocurrency. The actual process of owning, safekeeping, and transferring assets has been drastically simplified, with a suite of features accessible to the users depending on individual exchanges. Oh, speaking of exchanges. If you have been following crypto headlines, you might have come across names like Coinbase, Binance, and Kraken. So what are these? These platforms are cryptocurrency exchanges that specialize in transactions and trading of cryptos and offer professional investors as well and beginners an efficient and secure platform for buying and selling cryptocurrencies.
“Did You Know That Though Only Found Last Year, Currently There Are Around 400 Trillion Shiba Inu Coins In Circulation?”
How To Buy Cryptocurrencies?
As with any platform or exchange service, the first step associated with buying or selling cryptocurrencies will be creating an account. Depending on your platform of choice. You may or may not need private keys for conducting your trades. For example, you don’t need your private keys for buying, selling, or even storing your assets in the Hot Wallets provided by exchanges. You just need your account credentials for the exchange and you can instantly start buying cryptocurrencies.
How To Store Cryptocurrencies?
Even for safekeeping your crypto possessions, exchanges provide you with software-based Hot Wallets, where you can instantly deposit or withdraw coins. If you ever plan on keeping your assets completely under your custody, you will need hardware-based Cold Wallets, which further require your private keys. For making any transaction directly from your cold wallet. You will require both private keys for authorizing your cold wallet and public keys for processing your transaction.
How To Sell Cryptocurrencies?
Alright, now assume that your assets have inflated, and you wanna sell part of your assets and pocket its profit. Depending on whether you have your assets stored inside your hot wallet or cold wallet, you will either need your public keys or both public and private keys respectively. While managing your hardware-based cold wallet is hectic and expensive as well, it offers protection against security risks, while keeping your possessions under your custody, literally in your pocket!
Another two unknown terms from the above paragraph are Hot Wallet and Cold Wallet, right? The software-based wallets provided by the crypto exchange are usually regarded as hot wallets as they are actively linked to your exchange account and the internet. Or, more specifically, they have an intermediary, letting it become more prone to cyber-attacks. On the other hand, Cold Wallets are encrypted hardware-based wallets that store your cryptocurrency assets in either USB drives or hard drives. Cold wallets are more appealing to seasoned investors as these are detached from any intermediary or even the internet, making authorizing your crypto assets nearly impossible unless any hardware failure.
Everything Remaining is the Transaction Fees:
Now, everything remaining is the transaction fees, and it wildly varies from one exchange to another, from one crypto to another as well! Depending on your exchange of choice, you may either pay variable fees depending on the number of your assets or depending on the volatility of your assets’ price across different exchanges. And quite recently, exchanges have also implemented another fee structure depending on the number of transactions already being handled on the platform at any given moment. More transactions queued on the network would simply translate to more fees. This uneven curve of fluctuating fees, however, have also limited transactions of more volatile assets other than the mainstream ones.
Finally, everything comes down to your personal preference. Before signing up with any crypto exchange, never miss on in-depth research about its transaction fees against multiple tokens, especially the one you are interested in, and whether it’s profitable on your returns; go ahead. As more exchanges follow transactional and trading protocols of legacy trading platforms. You can initiate your transaction by just entering the recipients’ address, type of asset, and quantity of assets.
The Use-Cases and Applications In Modern Finance:
Ask just about anyone on the possibilities of cryptocurrency in modern finance, and you might get answers which involve Bitcoin, Ethereum, investments, and that’s pretty much it! For the majority of people, cryptocurrencies typically are risky investments, best-suited for Silicon Valley and Wall Street insiders. However, what often gets lost amid the hype, is that most decentralized cryptocurrencies, notably Bitcoin, were developed for solving certain shortcomings and loopholes that traditional fiat currencies had. The question is not about who will win the “Crypto vs Fiat” war but about how both can be implemented in modern and future financial systems, making transactions and asset possession more efficient and secure.
To answer where cryptocurrencies and blockchain are heading towards, I have highlighted few practical applications and what you can do with cryptocurrency. For now, its implications seem limited only in finance; but as more and more sectors will start adopting cryptocurrencies, it could revolutionize more industries while making it more efficient, secure, transparent, and overall accessible. Even today, cryptocurrencies and blockchain assist many services we benefit from.
Financial Transactions With Fewer Fees:
Let’s explain one of the best-known possibilities of cryptocurrencies with an example. Back in April 2018, a whopping $99 million worth in Litecoin (LTC) transaction took less than three minutes and cost the sender just $0.40 in transaction fees. Now assume. If you were to send such a chunky amount through traditional institutions such as national banks. How much would it cost? Not to mention how much hassle and time would be wasted if it was an international transaction. Low transaction fees and lightning-fast processing are what make cryptocurrencies like Litecoin and Bitcoin Cash more appealing for quick cross-border transactions.
Earn Interest on Bitcoin and Other Assets with Yield Farming:
Traditionally, you earn rewards in the forms of interest by keeping your money in banks. But have you ever wondered how exactly banking systems do so? Simply enough, banks lend or stake your money and share an interest over your amount. Similarly, in blockchain, when you lend, stake, or, more specifically, lock your crypto assets, you may receive interest. When a new protocol provides you high volumes of freshly mined cryptocurrencies in return. And users keep switching between different protocols for maximizing their return. This is termed as Yield Farming. Or investors prefer referring to it as Liquidity Mining.
Censorship-Resistant Alternative To Store Wealth:
This is by far the most prominent use-case for cryptocurrency. Being decentralized and partly anonymous. Cryptocurrencies like Bitcoin can be used as censorship-resistant assets for storing an immense chunk of wealth that cannot be accessed without the private keys for its wallet. In a traditional finance system. Such wealth possession with fiat currency is called frozen assets which are often limited by laws and jurisdictions of many governments. Hence, investors and capitalists are slowly converting their frozen assets into cryptocurrencies for avoiding taxes and eliminating intermediaries. Even governments, from authorizing it.
Investments in Start-Ups and ICOs:
Now that digital investments and fund-raising have been gaining traction in the finance industry. Anyone with crypto assets and, funnily enough. An active internet connection can become an investor. Such fund-raising initiatives not just popularize investment funding but also provide innovative start-ups with enough capital for kicking-off. Initial Coin Offerings or ICOs have also significantly evolved since 2014. In which blockchain-backed start-ups can raise capital by offering their newly-developed digital tokens. Early backers of the project are rewarded with newly issued coins in exchange for established ones like Bitcoin and Ethereum.
For Making Private Transactions and Remittances: While cryptocurrency transactions cannot be termed as fully anonymous, which we discussed in the article, privacy-oriented cryptocurrencies such as Monero (MXR), and Zcash (ZEC) are encouraging users towards their anonymous financial transactions. While it still can’t bypass the legislations of blockchain. It significantly reduces delays in money transfers without going through any bureaucratic processes. Or explaining to an intermediary the purpose of the transaction and sources of the transferred funds. However, it still records every transactional data in the blockchain, not making it anonymous.
Cryptocurrencies are Applicable in Our Daily Lives:
Speaking of where cryptocurrencies are applicable in our daily lives. It’s worth pointing out that 2013-2014 was about the period when cryptocurrency surged in popularity. Following the development of Ethereum. The reason Ethereum gained so much traction in the crypto space was because it introduced an efficient platform for other services and technologies to emerge from while addressing major drawbacks Bitcoin currently had back then. Following this cryptocurrency evolution, hundreds of altcoins, Hyperledger, and alternate consensus algorithms emerged as well, with major platforms and services promising better immutability, faster transactions, and lower fees. Making the landscape more appealing to new investors.
Distributed; Decentralised; Immutable. These three terms define cryptocurrencies and how they can impact finance sectors with improved transaction facilities. Allowing not just investors but commoners as well to directly utilize cryptocurrencies. While cryptocurrency will still be evolving throughout the next decade or more. It still assists your everyday life. Even if you never knew about it. As Chris Skinner, an avid cryptocurrency author, journalist. And influencer pointed out recently.
“This will be the reality in just 15 years; we no longer talk about computers, internet, mobile, or anything like such. They all will just be part of life. You won’t think about Googling something, you will just imagine, and the answer will instantly materialize in your head. You won’t consciously separate life and technology, and it will become an irreplaceable part!”
While there are hell-and-heaven differences between cryptocurrency and traditional fiat currencies. Centralized financial systems will gradually start implementing cryptocurrency and blockchain in their core. Since the value and market cap of certain cryptocurrencies can fluctuate wildly depending on supply and demand. Even well-established industries hesitate in implementing cryptocurrency in their operations. Thus raising its criticism.
Economists have also speculated cryptos like Bitcoin and Ethereum being an incredible fad bubble. Regardless of whether this bubble pops or not and which side you will take in this debate. Cryptocurrency and its backbone blockchain are highly secure and immutable compared to fiat.
But an “intermediary” still comes in between; every cryptocurrency exchange! Indeed, blockchain provides cryptos with significant immutability, efficiency, and anonymity to an extent. But other aspects of this ecosystem, including exchanges and wallets, are still not immune to cyber-attacks.
Nonetheless, economists still see potential advantages of crypto. Such as preserving value in one asset while the other fluctuates. Transferring vast sums of assets quickly without an intermediary or hefty fees, and most importantly. Keeping your assets far from the authorization of banks and governments. And if you ask for my opinion, of course. I foresee cryptocurrencies being impactful on future industries, even non-financial sectors.
Please remember, your financial decisions shouldn’t be constituted by any information contained in this article. And you should treat this article as the supplementary source for adding to your existing knowledge. The information provided here and the opinion of its author are for reference and informational purposes only. This information is not intended as financial advice. And the readers understand that all risks associated with blockchain and cryptocurrency are taken on by themselves.