What is Cryptocurrency?
When Satoshi Nakamoto created Bitcoin in 2009, he also created the first blockchain network. Today, there are thousands of different blockchains and cryptocurrencies in the world. So what is a blockchain and what is a cryptocurrency? In this post, we will talk about cryptocurrency.
What is Cryptocurrency?
Cryptocurrency started as a form of rewards for developers, or miners maintaining the blockchain network. It is just like real currency, or real money, except it is digital and it is based on cryptography and blockchain technology. Both also have their similarities: you can use them to trade for things you want and their value fluctuates based on economic factors. You might ask why not use real currencies, like the Dollar or Euro. Well, there are 5 main differences between a fiat currency and a digital currency: control, nature, validity, traceability, and immutability. Let us explain one by one.
Control: Fiat currencies are centralized and are usually under control of central authorities, ie the Federal Reserve. Cryptocurrencies are decentralized and are governed by majority rules. Majority rule is a decision rule that selects alternatives which have a majority, that is, more than half the votes or as in Blockchain, more than half of the users.
Nature: Fiat currencies are local and country-specific, meaning you can only use USD in the US and Euro in the EU, unless you exchange them. Same goes for international purchases; you need to pay exchange fees. However, for cryptocurrencies, it is global and borderless. You can transfer cryptocurrencies to anyone, anywhere, sometimes even instantly. The network fee or gas fee that occured with the transaction is paid towards miners on the blockchain, and it can be much lower than any foreign exchange fees.
Validity: You need an intermediary or a third party, like a bank, to verify and check your transactions for fiat currency. But for cryptocurrencies, all transactions are done peer-to-peer and all of the transactions are verified by the blockchain itself.
Traceability: One of the biggest advantages of cryptocurrency is anonymity; the only thing people will be able to see is your public address. However, fiat currency is traceable and since it’s verified by banks, transactions can be traced by your name or personal identity.
Immutability (Fixed, unchangeable): Once a cryptocurrency transaction is made, it is irreversible, thus preventing fraud. For a fiat currency transaction, you can do chargebacks by calling your bank and have them cancel a transaction.
As of 2021, there are over 10,000 different types of cryptocurrencies and they can be divided into two types: coins or tokens.