What is Cryptocurrency? – All you Need to Know

Beginner’s Guide / 10.12.2019

Highlights:

  • Cryptocurrencies are a new technology that decentralizes medium of transfer, i.e., currency
  • Cryptocurrency is different from Blockchain. A Blockchain is a protocol, one of the applications of which is a cryptocurrency
  • Blockchain is a decentralized network of nodes, that have various applications in daily life
  • Cryptocurrencies use decentralized control as opposed to centralized digital currency and central banking systems
  • One can buy and sell cryptocurrencies in a Cryptocurrency Exchange

Introduction

Satoshi Nakamoto, a pseudonym on the internet borrowed from several ideas and he/she/they posted a paper to a cryptography mailing list in 2008 with the title “Bitcoin: A Peer-to-Peer Electronic Cash System”. This paper laid out the inner workings for a peer-to-peer network that would enable a “system for electronic transactions without relying on trust”. The underlying message was the elements of trust, accountability, or oversight, that had characterized commerce and exchange throughout history would be replaced by a system that would simply not need transacting agents to know one another.

“With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless.”

Cryptocurrency -The Latest Buzz

Cryptocurrencies are entries about token in decentralized consensus-databases. The technology is called “Crypto” currencies because the consensus-keeping process is secured by strong cryptography, that has been proven to be secure. They are not secured by people or by trust, but by math. To put that into perspective, it is more probable that an asteroid falls on your house than that a bitcoin address is compromised.

Cryptocurrencies are stored in a mechanism called Wallets. Cryptocurrency Wallets are derived from a private key, from which public key(s) can be continually generated. The private key allows the user to control and spend the value stored, while the public key allows for receiving value from other wallets. The public keys are usually represented as a hexadecimal code, that can be distributed through any medium to receive funds. The public key cannot be traced back to a private key, but a single private key can be used to generate an almost innumerable amount of public keys.

But then what is the difference between a cryptocurrency and a Blockchain? Are both the same or different and can they be used interchangeably?

Cryptocurrency vs. Blockchain

Cryptocurrencies are an added, non-mandatory application that forms a sub-set of Blockchains. A cryptocurrency is a cryptographically-secured digital currency that is stored and transacted through a base layer blockchain. Often times, both Blockchain and cryptocurrencies are perceived to be synonymous, one and the same, but that is not usually the case. Though cryptocurrencies provide and determine the value of their base layer Blockchains, they are not the most integral part of the Blockchain. It is possible for a Blockchain to function with issuing its own cryptocurrency, just like it is possible for a company to function without issuing shares.

The Bitcoin blockchain became the first and most famous form of Blockchain mechanism since it was introduced in 2009. It solved the problem of consensus and paved the way for a whole new range of applications that fall under the title of Blockchain.

The Bitcoin network uses a Proof-of-Work (POW) protocol that allows transactions between two untrusted parties. The POW algorithm does this by using cryptographic methods to validate the transaction, that is run on computers that continually engage in solving the cryptographic puzzle. As the traffic within the network grows, the difficulty of the puzzle also rises, to account for the increase in competition. This increase leads to the increase in the usage of resources that are required to solve the puzzle, that ultimately leads to an increase in consumption of electricity.

A pubic blockchain, such as bitcoin, makes use of POW to provide a way through which untrusted parties can exchange value without the need for an intermediary. The resources that are put to verify a transaction, prove its validity and authenticity.

Blockchain has a wide scope, as it forms the base layer for other sophisticated application to be built upon, some of them being:

  • Decentralized Market place
  • Digital reputation based identity
  • Smart Contracts and Ricardian Contracts
  • Cryptocurrencies
  • Distributed applications
  • Governance models
  • Medical advancements

Most famous Cryptocurrencies

  • Bitcoin – The first Cryptocurrency to come into existence
  • Ethereum – The biggest blockchain application for contracts
  • Litecoin – Also known as the silver to Bitcoin’s Gold
  • Ripple – Recognized as the Banker friendly Cryptocurrency

Where to Buy?

Cryptocurrencies exchanges are platforms where one can engage in the buying and selling of cryptocurrencies. Exchanges are all the craze in FinTech right now. Since 2017, hundreds of exchanges have been established and crumbled. Some outright scammed its customers by running away with the funds, and then some transformed into cryptocurrency unicorns boasting valuation in the billions. Then there’s regulatory uncertainty, scams, outside hacks and so on.

To help the readers balance the task of finding a good cryptocurrency exchange that satisfies their needs and at the same time doesn’t fall back on its promises, we hereby list a few top exchanges for buying Cryptocurrencies.

There is a huge List of Countries Experimenting with Blockchain, with more on the way as they realize the potential of the technology.

Featured image courtesy of Shutterstock.

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Sudarshan M is a long time crypto-enthusiast. Pulled in by bitcoin early on, it did not take long for Sudarshan to divert all of his academic attention from business studies to blockchain by doing his Masters and eventually pursuing his PhD in the subject.