Cryptocurrency is a buzzword these days and on popular demand we will bring to you a series of articles on Cryptocurrency going forward. In today’s article, we will cover What is the basic Cryptocurrency meaning, What are the different Cryptocurrency types and why is there all the Cryptocurrency criticism around.
A cryptocurrency is digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.
The prefix crypto- stands for “cryptography,” which is a technology that keeps information safe and hidden from attackers. You may have heard of cryptography in history class — it was used to send and receive secret messages by the Allied Forces in World War II.
In present day, computer technicians put cryptography to use in many different ways. One of those ways is cryptocurrency!
Decryptionary.com defines cryptocurrency as “an electronic money created with technology controlling its creation and protecting transactions, while hiding the identities of its users.”
Thanks to cryptocurrency, people no longer need to trust banks to handle their money and private information (that’s the same for credit card companies, too).
We don’t need banks to process our transactions anymore. Instead, transactions in cryptocurrency are processed on the blockchain. The blockchain is a shared database.
It is shared because it is run by lots of different people and companies, instead of just one company, like the banks are. This way, nobody has power over the transactions or the cryptocurrencies involved, and you don’t need to trust one single company (like a bank) to handle your money.
Key Features of Cryptocurrency
- Does not require a central authority, distributed achieve consensus on its state from regulatory bodies
- Ownership of cryptocurrency units can be proved exclusively cryptographically.
- A cryptocurrency transaction statement can only be issued by an entity proving the current ownership of cryptocurrency units.
Three Main Cryptocurrency Types
It is a digital currency that you can send to other people. This may be as a gift, for services or for a product. You get the idea — it’s just like the money we use in our bank accounts (USD, EUR etc.). But it’s digital; it isn’t physical.
However, that isn’t all that makes it different. It’s also decentralized, meaning it doesn’t rely on a bank or third party to handle it — which I explained earlier in my definition of a cryptocurrency.
With Bitcoin, each transaction happens directly between users — it’s called a peer-to-peer network. This is all possible thanks to the blockchain. Bitcoin introduced blockchain technology to allow users to send and receive Bitcoin without using a third party.
Because you don’t need a third party, you don’t need to identify yourself. You can make payments without revealing who you are etc.
Majority of altcoins are just alternate versions of Bitcoin with minor changes. That’s how they got the name ‘altcoins’.
It’s important to understand, though, that not all altcoins are just alternate versions of Bitcoin. There are some that are very, very different to Bitcoin and have very different goals/purposes.
Some altcoins use different algorithms to Bitcoin. For example, Factom is an altcoin that uses PoS (Proof of Stake). In PoS, there are no miners. Instead, there are stakers.
Stakers are people that verify transactions for rewards, just like miners. But instead of racing to verify a block before anyone else does, they are selected one by one to take their turn. This uses much less electricity because their aren’t thousands of miners using their electricity to try and verify the same block. Instead, there is just one ‘staker’ per block.
You see? Not all altcoins are super similar to Bitcoin.
In fact, Ethereum and NEO are examples of altcoins that are super, super different to Bitcoin. You know that Bitcoin is used as a digital currency, right? Well, Ethereum and NEO were not designed to be used as a digital currency. Instead, they were designed as huge platforms for building apps on a blockchain.
That’s right — on Ethereum and NEO, you can actually build your own applications. This is the most common way that new cryptocurrencies are created; they are made on blockchains that allow app building, like Ethereum and NEO.
This is all possible because Ethereum introduced a new technology to the crypto world when it launched in 2015. This technology is called a smart contract. A smart contract can automatically execute transactions when certain things happen.
These ‘things’ (also called conditions) are written into the smart contract when it is created. For example, a condition could be something like “WHEN Peter sends 120 Ether into the smart contract, THEN John’s house will be sent to Peter”.
Because of smart contracts, no third party is needed. Bitcoin means there is no third party needed in direct payments, but smart contracts mean there is no third party needed in lots of things — like the sale of a house, the sale of electricity or the sale of a stock on the stock market.
Of course, you can’t actually put electricity into a smart contract, can you? So, instead, you put a token into the smart contract that legally represents the electricity. This is one of the best things about smart contracts on Ethereum and NEO etc. — you can tokenize real things and put them on the blockchain.
Tokens (for dApps)
The third main type of cryptocurrency is a token — the same kind we’ve just been talking about! Out of the three main types of cryptocurrency, these are the ones I find most interesting. Compared to the other two main types of cryptocurrency, they are completely unique in the fact that they do not have their own blockchain.
They are used on dApps (decentralized applications); these are the apps I told you about that can be built on blockchains like Ethereum and NEO. The dApps are built to use smart contracts, which is why they use tokens.
Their tokens don’t have to represent a physical thing like electricity or a house, though. They can instead be used to purchase things on the dApp. Either that or they can be used to get certain advantages — things like discounted fees and voting fees.
Tokens always have a price that they can be sold for, which is why some people buy them. Some people buy tokens to sell them later for a higher price, instead of buying them to use them on the dApp.
Because dApps are built on other blockchains (like Ethereum and NEO), a token transaction is still verified by the nodes on the Ethereum or NEO blockchain. This means the transaction fee is still paid with Ether or NEO, and not with the token.
So, to make a transaction on a dApp (i.e. to use a token), you must have some Ether or NEO (or whichever altcoin the dApp is built on) to pay for the transaction fees.
Cryptocurrencies can be lost and then it’s gone forever. Malware or data loss can cause the loss of your cryptocurrency. Once you lose a wallet, that currency is gone forever with no way to get it back. If someone else were to find it, they won’t be able to use it either.
Some people have called cryptocurrencies pyramid schemes. One of the big criticisms is that cryptocurrencies like Bitcoin is like a pyramid scheme or a bubble. This is based on the fact that this type of currency is invisible and actually has no value. The only value it has is that which a person is willing to give it.
Bitcoin is not accepted as a mainstream currency. More and more businesses are accepting Bitcoin as a payment method, but it is a far way from being mainstream. There are several criteria that it must meet before it can become mainstream. With the limit of 21 million Bitcoins, it may not even be worth the effort.
National governments are cautious. The reason for the caution is the lack of centralization and control. The system was built with the purpose of being decentralised. However, this is a criticism for some because there is no control and it could influence financial security. It is just a bit too mysterious to trust.