What Is a Cryptocurrency & How Does It Work?
CyStack Editor
Although the cryptocurrency market has witnessed a downtrend since late 2021, people’s interest in this new currency remains high all the while. When your eyes land on this article, you might be among those.
It is good to know that experts in different aspects are still optimistic about the growth in crypto, and it is not too late to learn more about this new currency. A proper understanding of cryptocurrency allows you to make wise investments and decisions through the ups and downs of the market.
Our article will be very helpful!
What Is Cryptocurrency?
The biggest misconception about blockchain and cryptocurrency: bitcoin is blockchain, blockchain is a cryptocurrency, or cryptocurrency is bitcoin.
Let us correct you. Bitcoin is only one type of cryptocurrency, and cryptocurrency is also one among blockchain applications. Accordingly, cryptocurrency is a new virtual or digital asset for the financial industry.
The “crypto” part refers to using encrypted algorithms of blockchain technology to verify and execute transactions automatically. As a result, cryptocurrency can work without monetary authorities such as governments, banks or financial institutions. This is the key difference between crypto and traditional currencies.
Meanwhile, the “currency” part has the same meaning as before – a cryptocurrency can be used as a medium exchange for products, services, loans, investments, etc.
Ideally, the aim is to create a new paradigm for money so that transactions are faster and cheaper. Security is also expected since all transactions are recorded and visible to all participants. At the same time, the decentralized network will not be damaged in case of a single failure point.
Still, there are many disadvantages to completing the above mission. A cryptocurrency’s value is often much volatile due to the lack of authorization. While many cryptocurrencies reached their gloriest days last year, making 2021 the year of cryptocurrencies, their prices are significantly down in 2022. Even worse, criminals use blockchain-based currencies for nefarious hacking, data exploitation, money laundering, or illicit purchases.
How Does a Cryptocurrency Work?
To begin with, a cryptocurrency is created by computer code. The development company, working with stakeholders, defines programmed smart contracts to decide how new crypto comes into being.
The company will spread its coins and attract potential investors or traders to join the network. Involved participants can buy cryptocurrencies with traditional fiats, exchange cryptocurrencies with each other, or mine the new coins by getting transaction rewards.
Every transaction of cryptocurrencies is digitalized and automated. For example, a participant enters a new transaction with his cryptocurrencies. The information will be transmitted into the network of nodes for further validation. Only if the transaction meets pre-defined conditions of smart contracts will it be complete. Otherwise, the transaction is rejected. Accepted cryptocurrency transactions are chained together to link and record their history permanently.
The above flow remains for every cryptocurrency. Nonetheless, the algorithms of work and utility often divide these currencies into four main types:
- Utility tokens
Think of utility tokens as traditional vouchers or coupons since they represent a value in the chain. In addition, the utility tokens provide access to certain products and services of the token issuer.
- Government tokens
This type of cryptocurrency is used as a share of equity, voting rights, or a right to the dividend in the asset represented. The owner of security tokens usually holds advantages of profit or managerial actions, for instance, proposing or voting for changes in smart contracts.
- Non-fungible tokens
A non-fungible token is a blockchain-based digital certificate of ownership for a singular, non-replaceable item or one that cannot be traded with another asset – common for art, photographs, movies, audios, collectibles, real estate, virtual worlds, memes, GIFs, digital material like posts and tweets, music, paintings, drawings, fashion, and more.
Check later: How NFT And Tokenization Will Disrupt The Economy?
- Stablecoins
These tokens are of a stable value in nature, as their name implies, meaning that their value is reasonably predictable in that it essentially never changes. Typically, they are backed by a reliable or largely reliable asset, such as cash. Stable tokens assist in eradicating asset or even other digital currency volatility.
Top 3+ Cryptocurrencies You Should Know!
There are now over 12,000 cryptocurrencies on the market. Such astonishing is the growth rate despite the reduction in cryptocurrencies’ value! However, not all of them are secure and well-worth investing in. You had better research carefully in advance to minimize the chances of scams.
Here we reveal the top three cryptocurrencies.
Bitcoin
It is undeniable that bitcoin brought the spotlight to blockchain and cryptocurrencies. Thus, this oldest and largest cryptocurrency still dominates the market – even when its price dropped from a peak of $70,000 in 2021 to under $20,000 after a year.
It is regarded as the industry standard for the cryptocurrency market, not as lucrative as some other coins but also not as risky. In a way, Bitcoin serves as the crypto market’s reserve currency or a cryptocurrency index fund in your mind. When you are not making any specific investments, it’s an excellent place to save money in a creditable fund.
Ether (Ethereum)
Ether serves as the medium for transactions made possible by the Ethereum platform, which was developed to support contracts and applications.
Although it was never intended, Ether has evolved into a form of alternative money that can be used in place of conventional forms of payment. Its original objective was to make the Ethereum platform’s operations easier and more profitable.
Good overall for those joining Ethereum to pay transaction fees and hold collateral privileges in the chain.
Tether
Investors that want to avoid the volatility common of cryptocurrencies while maintaining funds within the cryptosystem prefer Tether (USDT), a stablecoin, a form of cryptocurrency chasing a consistent valuation.
The value of the cryptocurrency is pegged to a traditional currency, which is frequently supported by collateral reserves of the pegged currency.
In addition, this coin supports a variety of blockchains, such as making adoption and integration simple.
The Future of Cryptocurrency
We and many other financial and technological experts are optimistic about the future of cryptocurrencies, particularly the top three. Although their recent value loss, the success of cryptos has proved their benefits in various fields. 100% sure: Cryptocurrencies aspire to become part of the mainstream financial system soon!
