Cryptocurrency Explained

Cryptocurrency Explained

Cryptocurrency is a digital asset or money created to serve as an alternative to fiat currencies that are used to buy goods and services. Cryptocurrencies use an online ledger powered by cryptographic techniques that are used to secure online transactions; thus, the term “cryptocurrency” came to its essence.

The first cryptocurrency created is Bitcoin. The existence of Bitcoin gave birth to blockchain technology – a decentralized technology enabled by a disparate network of computers. Most cryptocurrencies are blockchain-enabled; hence, it is central to the appeal and functionality of most currencies.

The Early Years of Cryptocurrency: Bitcoin’s Emergence

Bitcoin’s Emergence

The clamor for creating a digital currency started in the ‘90s, with some emerging systems trying to come up with digital money but eventually failed for many reasons. Unfortunately, no digital currencies were formed for many years. Until in 2009, a person that goes by the name Satoshi Nakamoto revolutionized the digital world by introducing Bitcoin. Back then, Nakamoto described it as a peer-to-peer cash system. Bitcoin spawned from a decentralized network, being unable to control by any authority.

In its formative years, Bitcoin encountered several adversities and challenges. One of the direst problems Bitcoin and other cryptocurrencies faced is double-spending. It is the fraudulent act of spending the same (bitcoin) token twice. Initially, a central server (a third party serving as a record keeper of balances and transactions) was put in place as a solution to double-spending. However, a central server basically became a threat to security and confidentiality of transactions as it could take control of your funds and with all your personal details on hand.

Later on, cryptocurrency networks made use of the concept of mining or solving a cryptographic puzzle to confirm transactions and be broadcasted in the network. Miners take the transactions made within the network to mark them as legitimate transactions before spreading them across the network. Thereafter, each node of the network adds it to its database. When the transaction is confirmed it becomes irreversible and a miner receives a reward and gets the transaction fees.

Essentially, every network of cryptocurrencies is based on all participants’ absolute consensus on the validity of balances and transactions. The system will break, though, if nodes of the network disagree on a single balance. Nonetheless, several laws are pre-designed and configured into the network to prevent this from occurring.

The Second Generation of Cryptocurrency

The Second Generation of Cryptocurrency

With the emergence of Bitcoin and its technology, there came a lot of imitators during the early days of cryptocurrency. Most of these alternate digital coins were doing the same thing that Bitcoin did, with some nuances and new solutions. Somewhere along the line, it came to realization that the blockchain technology that led to Bitcoin’s creation could be more functional than how just it was utilized. If the blockchain could verify a financial transaction, why couldn’t it fill in as a central server and validator for other peer-to-peer transactions?

Needless to say, blockchain is capable of doing that. Hence the emanation of second generation of cryptocurrency started and rose to the occasion. While many of these coins could indeed serve as a digital currency, they also could be spun off to perform other functions. The first of these alternative coins, or altcoins, to have a widespread effect was Ethereum, which took form in 2015. Driven by its native coin called ether, the Ethereum blockchain network produces smart contracts. Smart contracts can be drawn up by two parties and come into effect automatically when conditions are met.

Another solution Ethereum brought to the table was the origination of decentralized applications or dApps. These are similar to the applications that you may find on a mobile phone or internet network, except they are entirely decentralized, which means that the developers retain full control over them rather than ceding control to a third party.

After Ethereum’s rise, several other altcoins followed suit, bringing in specialized solutions and functions, comprising the second generation of cryptocurrency that have significantly impacted the financial sector and society. With altcoins popping out of nowhere one after another, the cryptocurrency realm led to another key innovation called ICO (initial coin offering).

An ICO takes place when the creators of the cryptocurrency raise funds in order for their crypto solution to materialize. This project reaches out investors who are willing to fund the projects. Investors usually use Bitcoin to fund the projects and receive the new coins in return.

With Ethereum paving the way for ICO, many other crypto coins saw its beauty and remodeled the innovation to raise funds. Hence new coins proliferated.

Primary Functions of Cryptocurrencies

Designed to be an efficient medium of exchange, cryptocurrencies can be used in different means as fiat currencies are used for various purposes. Below are the primary ways of how you can use cryptocurrencies.

Purchase goods and pay services

In the early years of cryptocurrencies’ inception, they can be barely used as a means of purchasing goods. However, the last decade proved to be fruitful for the crypto realm as it slowly penetrated the mainstream payment systems. Today, online and offline merchants accept Bitcoin and some altcoins as payment in lieu of cash.

Investment

There are a lot of online exchanges where you can trade cryptocurrencies. Most major forex exchanges now offer cryptocurrency trading. Remain in-the-know of the crypto’s current market value to avoid high-risk investments.

Mine

The number of crypto users earning from mining Bitcoin is constantly on the rise nowadays. Only if you’re willing to invest in industrial-grade mining hardware can Bitcoin mining become profitable.

Top Crypto Tokens

Citing CoinMarketCap.com, there are over 6,500 different cryptocurrencies being publicly traded online. Wrapped Bitcoin (WBTC) is the largest crypto in the market today with a market cap of $732,789,634,295 and with a circulating supply of 11,087,166,726,911 (WBTC).

Next to Bitcoin is Ethereum with a $140,860,994,054 market cap. Its current volume is $33,023,624,764 with a circulating supply of 114,250,071 (ETH). On the third spot is Tether with a $24,245,157,922 market cap, $96,792,311,088 volume, and 24,259,223,323 (USDT) circulating supply.

XRP comes fourth with $13,647,430,663 market cap and placing fifth is Polkadot with $11,307,595,552 market cap.

Bottom Line

Cryptocurrency’s history would tell us in more ways than one that it is highly volatile as the prices of the coins fluctuate every now and then. Anyhow, the ascendancy of cryptocurrency to the mainstream financial system is undeniable and it continues to take the upward trend as time unfolds. Its future, however, remains uncertain as its proliferation in the central financial system is yet to be defined.

Article was published on: 01/18/21

Author: Viktor Nikolaev

Victor is a professional crypto investor and stockbroker, specializing in such areas as trading on the stock exchange, cryptov currencies, forex, stocks and bonds. In this blog he shares the secrets of trading, current currency indices, crypt currency rates and tells about the best forex brokers. If you have any questions, you can always contact [email protected]

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