If you say the word cryptocurrency to someone, they may not know what you're talking about. Mentioning Bitcoin, however, may elicit a completely different response. For many people, Bitcoin and cryptocurrency are synonymous terms, which isn't the case. Keep in mind that Bitcoin is a cryptocurrency, but not all cryptocurrencies are Bitcoin. That's clear as mud, right?
If you're confused, don't worry. The guide below will allow you to better understand what cryptocurrency is, how it started, and how it works. So with that in mind, let's jump right in.
What is cryptocurrency?
The most recognizable cryptocurrency in the industry is Bitcoin — which was the first-ever digital currency. We'll talk more about the history of crypto in a moment, but for now, let's discuss what cryptocurrency is.
Defining crypto
Cryptocurrency is a virtual or digital currency designed to behave as a medium of exchange. These currencies use cryptography — which is why it's called CRYPTOcurrency — to confirm and validate transactions. Additionally, blockchain technology is leveraged to provide transparency, immutability, and decentralization. Simply put, digital assets are entries on a distributed ledger that cannot be altered unless specific conditions are fulfilled.
Arguably the most important feature of cryptocurrency is its decentralized nature. This means that there is no centralized entity — like a bank or other financial institution — controlling the cryptocurrency. Instead, the intention is to provide users with a way to perform transactions without interference from a controlling entity. As a result, there are thousands of different cryptocurrencies in the market. Still, some of the more well-known digital assets include Bitcoin (BTC) as well as altcoins such as Ethereum (ETH), Ripple (XRP), and Litecoin (LTC).
History of crypto
If you're new to crypto, it might feel like all these cryptocurrencies sprang up overnight. In reality, Bitcoin — the first cryptocurrency — has been around for over a decade. With the rise of the internet came the ability to quickly and easily perform transactions online. Payment gateways, internet banking, and credit card purchases are just a few examples of ways connectivity helped push industries forward.
However, these financial options can be censored, require the help of third parties, submit to a central authority, and often have to wait for transactions to be settled on a weekday. To remove these barriers, a person under the pseudonym Satoshi Nakamoto created and published the Bitcoin whitepaper in 2008.
Why was this paper so important? Because it solved the problem of double-spending. This is the risk that a digital asset can be spent twice. It is a problem unique to cryptocurrencies since there are those who understand blockchain technology and can easily duplicate digital information.
Centralized networks don't have this problem because they have a server that tracks accounts, transactions, and balances. Decentralized networks don't have this type of server. That means there's not a single point of failure — which is a point that will bring down the entire system if it falters — like there is with traditional financial institutions.
How does crypto work?
Let's take a quick look at how cryptocurrency works. The vast majority of virtual currencies operate on a blockchain. A blockchain is a group of computers located anywhere in the world that combine their computing power to confirm and validate transactions on the network. With the use of blockchain technology, cryptocurrencies are decentralized assets, which hold a significant security advantage over traditional, centralized entities that have a single point of failure.
Most blockchains function via either a Proof-of-Work or Proof-of-Stake consensus mechanism. Proof-of-work uses miners, who usually build specific computing machines for the process of claiming the new blocks. Proof-of-Stake, on the other hand, runs on a staking system. With this type of consensus algorithm, rewards are distributed among those who keep their assets on the network.
Think of it this way: Cryptocurrencies are made up of a network of peers. Everyone on the network has a database of all the transactions on the network, which means they have a balance of every account. A transaction occurs when Ben sends Sarah a certain amount of crypto, which is signed by Ben's private key. Once signed, the transaction is sent across the entire network so that everyone once again has the latest account information.
Properties of cryptocurrency
The majority of the most popular cryptocurrencies share similar properties. While there may be exceptions to this list, the vast majority of digital assets will offer some version of the following characteristics.
Anonymous
In a perfect crypto world, user identity wouldn't be tied to transactions or accounts. It is possible to view the traffic flow of a transaction on a blockchain, but connecting a real-world identity to a specific transaction is much more difficult. Unfortunately, unlike activities in DeFi, many centralized cryptocurrency exchanges like Binance and Coinbase do require users to confirm their identity before buying, selling, or trading digital assets.
Permissionless
There is no single gatekeeper to prevent you from using cryptocurrency. It's available to anyone, anywhere. Digital assets are ideal because users don't need permission from someone to use them.
Irreversible
Once confirmed, cryptocurrency transactions cannot be reversed. No one has the capability to change a blockchain transaction once it is verified. When the funds are sent, that's it. There's no getting them back, so be very certain that your digital assets are going where you intend for them to go.
Portable
Because cryptocurrency isn't tied to a specific financial institution or government, you can use them anywhere you go. Store your digital assets in your cryptocurrency wallet and take them with you while you travel the world. Plus, many crypto wallets have smartphone apps, so you can easily use them at retailers worldwide.
Secure
When using cryptocurrency, your funds are stored in a secure public-key system locked via cryptography. You can only send crypto if you're the owner of the private key. With this system, your digital funds have better protection than what bank accounts offer.
Global
Cryptocurrency is global. It doesn't matter where you live or where you're physically located. You can send cryptocurrency to your next-door neighbor or to someone who lives on the other side of the planet. There are no arbitrary boundaries or barriers with cryptocurrency. It's truly a global currency.
Cryptocurrency and decentralized finance
A popular trend in cryptocurrency over the past few years has been decentralized finance, or DeFi. Often described as the future of crypto, DeFi is currently one of the largest drivers behind the adoption of cryptocurrencies as a whole. However, many point to the volatility within the market as a reason to hold off on investing in decentralized finance.
DeFi takes its inspiration from Bitcoin and other blockchain projects that don't rely on a single central entity to monitor transactions and account balances. It expands on this idea by using the blockchain for more complicated financial uses.
The most popular use of DeFi is through decentralized applications, or dApps. Many of these dApps are built on top of the Ethereum or Binance blockchains that use smart contracts. These contracts execute transactions when specific conditions are met.
Composability is a feature that allows DeFi applications to communicate with one another. As a result, these apps can be in constant contact with each other, leveraging their respective code. Through the use of smart contracts, cryptocurrency programs become like building blocks — stackable and interoperable.
Here are some of the more popular types of DeFi apps and features.
Decentralized Exchanges
Often referred to as DEXs, decentralized exchanges offer users a way to exchange one type of currency for another. For example, you could trade your U.S. Dollars for Bitcoin Cash through a DEX that connects you to another user so you can make the exchange without the need for an intermediary.
Lending Platforms
There are platforms that use smart contracts to create lending options. With lending platforms, users can avoid traditional financial institutions like central banks and receive the funds they need. Plus, the protocol used for DeFi lending allows the lender to collect interest on their assets.
Yield Farming
If you're looking for something a little more challenging and rewarding, yield farming is an excellent option in the world of decentralized finance. Yield farming is done by scanning through various DeFi protocols to find the best possible returns on your funds.
Composability
The word might sound intimidating, but the idea behind it is fairly straightforward. Composability is a feature that allows DeFi applications to communicate with one another. As a result, these apps can be in constant contact with each other, leveraging their respective code. Through the use of smart contracts, cryptocurrency programs become like building blocks — stackable and interoperable.
Putting your crypto to work
Even though DeFi is considered more risky and volatile by many within the world of finance, there are plenty of opportunities to put your cryptocurrency to work for you. With staking or yield farming, users are seeing significant returns on their investments. Your traditional bank might offer you 1% if you're lucky. In DeFi, it’s possible to see returns in the 10-20% range if you know where to look.
For example, Unagii offers excellent returns on staking for Ethereum and Tendermint networks, as well as simple yield farming on base assets. The site is easy to use, and there are several digital assets to choose from, so you can choose the cryptocurrency you prefer. Watch your crypto portfolio grow with all the convenience and none of the hassles.
As a whole, cryptocurrency is an exciting, innovative, and volatile industry, subject to significant price swings. However, the market has made vast strides in the past few years alone. With more and more mainstream corporations jumping on the crypto bandwagon, the future of cryptocurrency looks bright.
