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Cryptocurrencies – What Are They, How They Work And Why They’re Important

Cryptocurrencies Altcoins other Cryptos

Cryptocurrencies are widely touted as the best invention of the 21st century and the money of the future. Today, every tech-savvy individual knows about cryptos, more importantly Bitcoin and is joined by banks, governments and financial institutions in exploring its prospects. So, what are they and what makes them this important?

A cryptocurrency is a digital or virtual currency that is created as a medium of exchange or as storage or value. It is implemented on the basis of cryptographic functions to verify transactions. The complete mechanism is built and stored on the blockchain, which is a digital ledger which stores every detail of every transaction on a network permanently, immutably and for everyone to see. The biggest value that cryptocurrencies bring is decentralization. There is no commanding entity or third party that controls and oversees transactions.

The first cryptocurrency was introduced in 2009 by Satoshi Nakamoto, which was named Bitcoin. It was described as a peer-to-peer electronic cash system which required no controlling authority. Later, the space began to spread and 2011 saw the introduction of Litecoin while all other crypto tokens created came to be known as Altcoins. In 2017, Bitcoin saw its price sky rocket as it reached values of worth $20,000 for one Bitcoin.

The few most famous cryptocurrencies are as follows:

  • Bitcoin is the most famous cryptocurrency and is of the highest value. It is used as major means of global payments and is also the go-to currency for cyber-crimes and darknet markets or ransomware. Its price and status as the top cryptocurrency speak for itself. Check out our article on simple ways to get Bitcoin here.
  • Ethereum is second to Bitcoin in terms of market cap. It is a blockchain itself and numerous digital apps are built on its blockchain. This means that other than a cryptocurrency, Ethereum can also process complex contracts and programs and is more of a family than just a cryptocurrency.
  • Ripple is more famous for its innate relationship to banking. The RippleNet and the XRP currency attempt to help financial institutions and minimizes liquidity. XRP are not mined, a 100 million simply exist and promote themselves to be of faster transaction speed than Bitcoin.
  • Litecoin was tipped as the “brother of Bitcoin” in its beginning and has mostly failed to find a real use case for it. It is now presumed as a backup if Bitcoin fails.
  • Zcash is used for private transactions, in direct contrast with the blockchain transactions which are visible to everyone. Zcash allows businesses and other entities making transactions to selectively show their data on the ledger while hiding certain details. It uses special encrypting algorithms like ZK snarks and ZK starks to ensure cryptography.

Check out our guide on crypto exchange Coinbase and our guide on Ways to Earn Bitcoin in 2019.

How cryptos work

In a decentralized network, every node has a list of all transactions on the ledger and form consensus among them to validate transactions.  This consensus is achieved after all nodes participate in solving a complex mathematical problem. As whichever node formulates a solution, it is displayed to other participating nodes and the correct solution is verified by all. This solution generates a cryptographic key that is synced with the incoming transaction. Once the correct key is realized, the transaction becomes verified and is added to the blockchain. Multiple transactions in one block makes it harder to edit a single transaction; the network is constantly re-confirming the blockchain on its way to the latest block and will notice should a suspicious edit be made to one transaction in a block. The miner that solves the problem takes a reward and a small transaction fee is conducted out of the transaction.

A major problem, however, in the working model of cryptocurrencies is of scalability and transaction capacity. Blockchains when subjected to numerous incoming transactions, they become clogged and the function is not carried out properly. This has seen several attempts to increase block sizes and make the process more scalable, however the problem remains persistent.

Why are they important?

The foremost importance of cryptocurrencies comes from the fact that they omit centralization of currency value. This decentralized nature of currency system makes the transaction process swift, transparent and secure. Other than that, cryptocurrencies have several utilities in the modern world and can be used like either cash or a material of value.

Cryptocurrencies can be used to buy anything in the same way as cash. It can be used to pay for hotels, flights, apps, or anything that can be bought. Most merchants and stores accept only Bitcoin while other notable cryptocurrencies like Ethereum or Ripple aren’t too widely accepted yet. Although not completely legalized in all corners, cryptos are becoming increasingly popular. This has made law enforcement agencies, governments and tax authorities more and more aware about the concept and regulatory frameworks are being drafted to control the space.

Another important utility of cryptos is investment, which in the cryptocurrency universe is called “Hodling”. Bitcoin is the most valuable cryptocurrency and is considered as the most valuable form of investment. Bitcoin surged up to $20,000 last year and great investments were made with it. However, these currencies are high-risk investments and fluctuate with the market movement. Most cryptos are unregulated and decentralized, which makes them even riskier as forms of investment as there are now laws in practice regarding them.

The most basic form of gaining a cryptocurrency is its mining. This requires a great amount of computational power and hardware of a variety of specifications. So, the most common way of buying a cryptocurrency is via a crypto exchange. Here, cryptos are traded among themselves or among fiat currencies like USD, EUR or GBR. These cryptocurrencies are stored in a digital wallet, known as a cryptocurrency wallet. It consists of digital public and private keys that link a user to the blockchain and all transactions take place via the digital wallet.

 

Conclusion

While cryptocurrencies endorse themselves on the basis of provision of a decentralized means of currency, it has also caused a lot of concern among authorities due to its usage in money laundering, ransom and cyber hacks. Moreover, it is also pertinent in tax evasion schemes, due to which no cryptocurrencies have a sustained legal status as a currency around the world. They are considered illegal only in Bangladesh, Bolivia, Ecuador, Vietnam and Kyrgyzstan, while China, Russia and India are on the verge of banning them.

In the crypto eco-system, there are new cryptocurrencies coming up by the day and old ones keep dying, waiting for mainstream adoption. The crypto space is probably here to stay and to change the world, but that definitely seems to require time as more and more companies and industries begin to find application in digital forms of value.


References

Fiorillo, S. (2018) What is Cryptocurrence? Everything You Need to Know. Retrieved from: https://www.thestreet.com/investing/bitcoin/what-is-cryptocurrency-14679467

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