September 18, 2020

What is cryptocurrency for dummies

What is cryptocurrency for dummies

Cryptocurrency is a very popular topic among people around the world. Some of them say that this is the biggest technological breakthrough since the internet. Others believe that cryptocurrency is a fraud. However, the number of people who can explain this term is very small. What is it?

What is cryptocurrency?

This word consists of two parts: crypto and currency. First points to cryptography – the data encryption practice. Only a person who receives this data can decrypt this code.

The second part is the word «currency». We traditionally associate it with money printed by the government. Yet, the currency is any accepted payment method no matter who makes this money.

If we connect the meanings of these words, we get cryptocurrency. Like any other emergent system, it is significantly more than money with encryption.

That’s why this isn’t the first form of digital money. The first attempts to create a digital currency were in the beginning of the 90s, but all of them weren’t full competitors to classic money or electronic payment systems such as PayPal.

The first anonymous digital currency was named DigiCash. It was created in 1989. E-gold and Liberty Reserve had been created 10 years later, but this idea seemed to be too idealistic and not so important.

The first successful attempt was in 2008. At that time, Satoshi Nakamoto managed to explain the reason their payment systems failed. They were too centralized, and that’s why only trust could maintain their price. He explained that any fiat currency makes us depend on the government. Previously, money had an equivalent of a real worth but now only trust can maintain the value of any currency printed by the state. That’s why any government can control your finances and affect your life.

Any centralized system has these problems:

  1. High transaction fees
  2. Scammers
  3. Only trust is a real asset. You trust that bank or service acts honestly, transparently, and your money is safe.

However, wrong actions of the government can leave you without money even if it is the most reliable government in the world. You can now understand that a decentralized system is protected from these disadvantages.

Three key characteristics of cryptocurrency

  1. Cryptocurrencies aren’t based on trust. There are no intermediates. All transactions are always checked by every member of this network and occur without control of regulatory authority or bank.
  2. Every cryptocurrency transaction is unchangeable. You cannot undo, delay, duplicate, hide or change it. Anyone can steal your regular money using the classic methods while cryptocurrency is protected from people’s factor. That’s why the cryptocurrency is significantly more clear and transparent than any other money, even the most reliable.
  3. Cryptocurrency is decentralized. New coins are regularly created by this system. For example, the infrastructure of Bitcoin guarantees that 21 million of this cryptocurrency will ever be emitted. It protects this currency from inflation, which cannot be said about the fiat money that can be printed in any quantity. The government can make people poor just printing the money in any second.

What is cryptocurrency for dummies

How does cryptocurrency work?

Cryptocurrency is a great and very promising asset, but how does it work? Cryptocurrency is based on blockchain technology. This is a network that consists of several thousand nodes. They keep the information together. Every time when a transaction occurs, the majority of nodes has to accept this transaction. A consensus is achieved this way. Then, every block records information about it.

While 51% of nodes are legitimate, you have a system that records the transactions without any dishonesty. There are a lot of methods that allow blockchain networks to stimulate their users to protect the system.

For example, Bitcoin gives a portion of coins created to the miners. Their computers calculate the hashes and if they find some, the owner gets a reward.

This is one of the methods to achieve a consensus. Some other approaches have been developed recently.

Cryptocurrency evolution

Satoshi Nakamoto became the founding father of cryptocurrency. He created Bitcoin. The mining of the first block took place in January 2009. Now, there are more than 1500 different cryptocurrencies. Their total capitalization is about 500 billion dollars. All of them are competitors.

Now, the most famous cryptocurrencies are Bitcoin, Ethereum, Ripple, Bitcoin Cash and Litecoin. These five giants make up the biggest part of the market. You can trade without hesitation about 50 cryptocurrencies that are placed on the top of the rating list.

Bitcoin has a very simple main idea because this is a payment method. However, there are a lot of other features that are typical for other cryptocurrencies. Not so long ago, new spheres have been created. Most of them were impossible for Satoshi to imagine in the bravest dreams.

For example, the second by popularity cryptocurrency is Ethereum. It was created in 2013. Unlike Bitcoin, it is built in such a way that creators can develop dApp based on it as well as smart contracts.

Actually, Bitcoin also was a dApp designed to fulfill a certain goal. There are significantly more dApps that have been developed to achieve other purposes. Instead of creating a new blockchain every time you want to create your own dApp, you can develop it using an existing Ethereum infrastructure.

For example, compare building a home by yourself in an open field with the hiring of professionals that think through all details. Ethereum allows everyone to create their own cryptocurrencies and dApps without any problems.

It isn’t surprising that there are hundreds of cryptocurrencies that are built on the Ethereum platform. This is the path of least resistance. However, there are a lot of developers that have created their own blockchains. The most famous of them is Litecoin.

Why? Despite the easiness of creating coins on the existing platform, you will always be limited by its rules. That’s why serious projects prefer their own blockchains instead of Ethereum.

How can you use cryptocurrency?

Not an ability to make purchases with it makes cryptocurrency useful, but the fact that it eliminates many problems. This is the main advantage. That’s why the most valuable tokens are so innovative.

For instance, Bitcoin revolutionized the payment sphere. It allows us to send money to everyone and anytime without any limits.

Like any great idea, Bitcoin has given birth to many interesting projects that set a goal to improve it. Cryptocurrencies like Dash, IOTA and Ripple stepped up very fast and propose faster transactions at a lower price, improved scaling and efficiency.