By Will Sun
If you are an avid fan of memes or a follower of Internet culture, you may have heard of NFTs or Non-fungible tokens. Often symbolized by a cartoony and childish png image of a monkey in absurd outfits, NFTs have been ridiculed as useless, risky, and problematic. Other forms of cryptocurrency, such as the infamous Dogecoin or seemingly profitable bitcoin, have circulated the web frequently. Yet, with all these memes, jokes, and angry posts, it is hard to discern the true worth of these valuables.
In this article, we’ll go over what exactly is cryptocurrency, the different types, and common myths surrounding this mysterious new market.
What is it?
As the name suggests, cryptocurrency is a form of monetary currency that is secured by cryptography, a field of computer science with a focus on turning data, messages, and other objects into an encrypted format that can only be read by authorized users. Essentially, this simply means that this form of currency is almost immune to double-spending, counterfeiting, or other forms of monetary crimes and manipulation. Yet, at the same time, cryptocurrency is usually released by many different authorities, allowing them to be exempt from government interference, regulation, or manipulation.
Released in 2009, the first cryptocurrency was Bitcoin. By 2011, as Bitcoin’s success and popularity skyrocketed, more and more types of cryptocurrencies began to surface. Currently, with more than 1,000 types of cryptocurrency available, and the value of Bitcoin reaching $10,000, the cryptocurrency market is bigger than ever.
But how exactly does this system of cryptocurrency work and maintain its security within such a large network of computers?
Blockchains, Mining, and Crypto Exchanges
The platform on which virtually all cryptocurrencies run is a blockchain, an organized record of all updated and held transactions. In more technical terms, a blockchain operates as a distributed ledger (a database shared among multiple sites and institutions, accessible by many people) that stores its data in a digital format. As the name suggests, blockchains distribute their data into blocks- these blocks, which hold a specific storage capacity, close off when filled and link to another previously filled block, creating a blockchain. This unique manner of blocking its data in a streamlined manner shows the chronological timeline of the data transactions, as each block has its own timestamp, allowing users to easily track and monitor their transactions.
Another feature of blockchains is that each new block must have all transactions and data verified by each member of the network before being confirmed, preventing the forging of transaction histories.
While blockchains are the powerhouse that stores and organizes cryptocurrency, mining is the factory that churns out new cryptocurrencies and maintains the functionality of blockchains. An extremely complex process, mining involves the usage of advanced hardware that solves computational math problems.
Through this, new cryptocurrencies are generated that enter the market. Moreover, new transactions within blockchains are confirmed and monitored through mining. Many people find cryptocurrency mining to be a lucrative and profitable business as those who solve cryptographic puzzles receive cryptocurrency themselves. However, mining requires expensive and advanced equipment, creating environmental concerns over how much electricity is used to power such technology.
If blockchains and mining are what support and maintain the entire cryptocurrency system, then cryptocurrency exchanges are the bridge between the digital and real world, allowing cryptocurrency’s value to be accessed and used for other gains. Cryptocurrency exchanges are essentially businesses that create a way for customers to trade in cryptocurrencies for more traditional money or even other digital values. With marketplaces such as Kraken, CoinEgg, and Binance, people have a way to buy, trade, and sell cryptocurrency. In fact, you can even exchange U.S. dollars for crypto or vice versa.
Types of Crypto
Now that you understand the basic workings of how crypto works, what exactly are the various types of cryptocurrency?
Generally, cryptocurrency can be organized into two primary categories: Coins and Tokens.
Coins: Crypto coins serve as the primary form of currency that is unique to its own blockchain. For instance, while the Litecoin blockchain uses LTC, the Ethereum blockchain uses ETH. Designed to be of value and be able to be exchanged among people, this type of cryptocurrency functions very similarly to more traditional currencies. Apart from being able to pay for goods, exchange for other currencies, or transfer to others, crypto coins can offer additional features unique to the type of coin.
Notable examples of crypto coins include Bitcoin, Ether, and Cardano.
Tokens: More similar to assets and deeds, while tokens can be circulated like coins, they can not be used as a medium of exchange for real-life goods and services. Instead of being contained within blockchains, these tokens are built on top of them. This means that while coins can be mined, tokens can only be created and given out by the developer. Some uses of tokens include representing physical objects, giving services by the token issuer, or even acting as securities.
Notable examples of tokens include Cronos, Axie Infinity, and Filecoin.
Ultimately, tokens and coins can be visualized in a very simple real-world analogy- while coins represent quarters, pennies, and dollars, tokens are the coupons and vouchers that give specific and various services/goods.
In the next article, we’ll go over exactly how to invest in cryptocurrency, what to avoid, and common myths.