“Crypto,” “cryptocurrency,” “cryptocoin”—if you spend any time on the internet, you’ve probably come across these terms more times than you care to count. And there’s a good reason for that.
Cryptocurrencies are rapidly emerging as an innovation that is transforming the landscape of finance. In 2021, the words “Dogecoin” and “Ethereum” ranked among the 10 most searched terms on Google.
In recent years, this hype has extended into the commercial sphere, with businesses and even governments setting up cryptocurrency reserves. So what exactly are cryptocurrencies and how do they work?
In this article we’ll take a deep dive into what these innovative currencies are and how they are transforming finance as we know it.
What is a cryptocurrency
A cryptocurrency is a virtual currency that is issued and administered on a cryptographically secured, decentralized system. Like traditional currencies (fiat), cryptocurrencies are designed to function as both a medium of exchange and a tradable asset.
However, it’s the underlying system or framework on which these digital currencies are built (and operate) that distinguishes them from regular currencies. Cryptocurrencies utilize a fully-transparent peer-to-peer system to conduct financial transactions.
This system, which is free of control from central authorities, uses cryptographic techniques to prevent fraud and ensure a high level of security within its framework.
How do cryptocurrencies work
As discussed in the previous section, cryptocurrencies operate in a very similar fashion to regular currencies; they can easily be transferred from one party to another and are accepted as media of exchange.
What distinguishes each from the other is how they are able to carry out these operations. Traditional or fiat currencies are created, distributed, and primarily controlled by centralized systems.
These central authorities are usually responsible for securing money within their system as well as protecting the integrity of said system. The numerous moving parts within this framework create vulnerabilities that can lead to delays and expose it to malicious attacks.
Cryptocurrencies, on the other hand, utilize an autonomous and highly-impregnable network — called a Blockchain — to make the creation and distribution of assets faster and more efficient.
The Blockchain acts as a public larger on which every transaction ever carried out using a specific crypto is recorded. Copies of this ledger are held by network participants called “Nodes”.
Everytime a new transaction is initiated, details of the transaction is broadcast throughout the network and signed by these validator nodes. The transaction is then added to the ledger by miner nodes using either a proof-of-work or proof-of stake consensus mechanism.
These consensus mechanisms uphold the integrity of the blockchain by requiring participants to compete in the process of mining new blocks, thus discouraging attempts to cheat the system.
Keep in mind that these processes are completely automated and require little to no external intervention. The cryptographic techniques coded into these systems ensure that users and participants are unable to falsify records and carry out fraudulent activities.
FAQ
Is bitcoin a cryptocurrency?
Yes, Bitcoin is a cryptocurrency. It is the first successful and widely adopted digital currency to leverage cryptography in securing transactions.
How many cryptocurrencies are there
The world of cryptocurrencies is constantly growing, with new coins and tokens launching regularly. According to Tangem, a cryptocurrency wallet manufacturer, it is estimated that over 36 million cryptocurrency tokens currently exist.
