What is a cryptocurrency?
There are many ways to define cryptocurrencies, but the most popular 3 definitions are as follows:
– An internet-based medium of exchange using cryptography to process and verify financial transactions through the use of blockchain technology, a decentralized, transparent, and immutable innovation.
– A digital currency not controlled by any central bank, immune from the government control, and thus from inflationary or deflationary interventions seen in fiat money.
– A digital medium of exchange working based on private and public keys, minimal processing fees, working alongside the traditional financial system.
In 2020, there are more than 5,500 different cryptocurrencies and the market continues to expand. A wide public knows about Bitcoin and how to trade Bitcoin, as well as about Ether, Litecoin, XRP, or any popular altcoins. Although a wide adoption is far from occurring, cryptocurrencies had been digital assets treated the same as stocks, ETFs, or bonds. Both retail and institutional investors use cryptocurrencies to diversify their investment portfolios. The main reason why crypto is attracting so much interest, though, has to do with how this industry works.
How does cryptocurrency work?
Cryptocurrencies would not exist without the blockchain (ledger), which is a distributed virtual network where all financial transactions are stored. All transactions are public, which ensures total visibility and transparency. The ledger is basically a list of entries in a database, that can’t be changed without fulfilling specific conditions. No single entity owns the ledger and it runs based on a self-governing mechanism.
Even though blockchain is the critical infrastructure needed to keep cryptocurrencies working, other entities are necessary to ensure smooth functioning. Cryptocurrency miners stand out in a meaningful way because they’re in charge of verifying all transactions made on the blockchain. They use computational power to verify financial transactions and for each block created on the ledger, a reward is being released in the form of newly mined tokens.
Each cryptocurrency works based on a consensus algorithm. Proof-of-Work and Proof-of-Stake are two of the most popular at the present time. These algorithms are very important because they set the “rules of the game”. How transactions are being processed, who was the ability to process them, and based on what principles the reward allocation is being done are just a few of the rules set up by the consensus algorithm.
The bottom line is that cryptocurrencies come at a time when the global financial system begins a transition period. Digital money represents a viable alternative for a world where technology looks to be the main building block. However, cryptocurrency mass adoption will be the most difficult step to do, due to reluctance from governments all around the world.