- What Is Cryptocurrency for dummies?
- What Is Blockchain?
- How Cryptocurrency Works With Blockchain
- Various Types Of Cryptocurrencies
- What Are Altcoins?
- dApps Tokens
- Will Crypto & Blockchain Take Over Banking?
When it comes to what cryptocurrency is and how it works there is much to discuss so let us do our best to explain. For starters, some people call cryptocurrency the money of the future.
Others believe it is a game-changer in the financial arena. Whatever your opinion of them is, the one thing you cannot deny is that cryptocurrencies like Bitcoin are a global phenomenon.
Hardly will a day go by without one hearing the mention of cryptocurrency. Such is their importance in the global markets that governments, businesses, and financial organizations are adopting these in droves.
If there were doubts about the potential of digital currencies to rule the world, the record highs bitcoin has constantly touched puts those to bed. You only need to look to the currency to see how widely accepted cryptocurrencies are fast becoming.
What’s more, a good number of merchants now accept digital currencies as a means of payment. Currently, digital coins are considered as some of the highest performing investments individuals and businesses could make, and for good reasons.
In many parts of the world, they are seen as an innovative technology with the potential to revolutionize the global financial systems. But while it is evident that there is a crypto craze, what exactly is the cryptocurrency, and what are the mechanisms behind it called blockchain? This cryptocurrency for dummies guide walks you through everything you need to know about cryptocurrencies, including what the future holds for them.
What Is Cryptocurrency for Dummies?
A cryptocurrency is a digital/paperless currency that is intended to serve as a medium of exchange. In other words, cryptocurrencies are a digital form of money that can be used in making transactions online.
Cryptocurrencies are designed such that they make use of cryptography to secure and validate transactions. It is also through the use of cryptography that new virtual currencies are generated.
Technically, cryptocurrencies refer to limited entries in a database that cannot be changed unless certain conditions are fulfilled. While this may sound like a funny description, it is precisely what cryptocurrencies, or even fiat currencies such as the U.S Dollar, for that matter, are.
The prefix crypto- stands for “cryptography.” Cryptography is a technology that prevents attackers from accessing information. Cryptography was used during the Second World War were the Allied Forces used it to send and receive secret messages.
Today, developers have incorporated cryptography into cryptocurrency to help safeguard information. The advent of digital currencies means that people no longer need to trust banks to handle their money and private information.
This means that you don’t need banks to process your transactions anymore. Instead, cryptocurrency transactions get processed on the blockchain, which is a shared database.
The blockchain is said to be a shared database because it is run by many different individuals and organizations, instead of just one company, as is the case with financial organizations. The benefit of this is that no single entity has power over the transactions or the virtual currencies involved. Also, users do not need to trust only one single institution, such as a bank, to handle their money.
You can own any amount of a particular cryptocurrency you like, just as you could cash. The main difference between cryptocurrencies and “real” currencies; however, is that unlike fiat currencies, cryptocurrencies are not back by any government or central authority.
Instead, they depend on complicated computer software that is used in verifying, validating, and securing their transactions between individuals who use them for making transactions online.
Cryptocurrencies like bitcoin are entirely decentralized. This means that they are run independently of any government or central authority, as mentioned above. Virtual currencies are generated through a process known as mining. The mining process involves miners solving a cryptographic puzzle to confirm transactions.
There are many things you can do with cryptocurrencies. First, you can use them to make purchases. Cryptocurrencies can be used to buy items thanks to the merchants who accept them as a form of payment. These monies have gained acceptance among small shop owners, bars, and restaurants, as well as reputable online retailers like Newegg and Overstock, among others.
This means that you can use a coin like bitcoin to purchase jewelry, book flights, buy computer parts, applications, or even pay for your certificate.
The tech giant, Apple, accepts cryptocurrency as a form of payment for downloading apps on the App Store.
Crypto users also have the option of converting the currency into Gift Cards, thanks to platforms like www.giftoff.com. There, you can exchange digital currencies for Gift Cards and use them to purchase anything you like. There are also cryptocurrency-focused markets such as Openbazaar.org and Bitify.com, which only accept virtual currencies as a form of payment.
Second, you can use cryptocurrencies as an investment vehicle.
Cryptocurrencies are some of the latest investments you can use to earn a return. A lot of people have become millionaires today through digital currencies like bitcoin.
Third, you can mine cryptocurrencies and earn a reward for solving difficult mathematical puzzles to confirm transactions and record them on the Blockchain. Also, if you are a business owner, you can accept digital currencies as a form of payment for your goods or services.
The growing interest in cryptocurrencies suggests that they will continue to rise in value. In the US, for instance, cryptocurrencies are regarded as convertible digital currency, meaning that taking them as a means of payment is the same as accepting fiat currencies like the US Dollar, Euro, or Pound Sterling.
What Is Blockchain?
The blockchain is a public ledger technology where each cryptocurrency transaction is digitally signed to confirm its authenticity and ensure that the information therein contained is not tampered with.
The blockchain technology underpins cryptocurrency, in that it is the platform on which bitcoin and all cryptocurrencies are built. The technology helps to keep cryptocurrencies secure by making sure that no one can tamper with the transaction history. It also helps to provide complete transparency.
The blockchain was initially designed as a public ledger for bitcoin transactions. However, many digital currencies are now using the technology. Governments and financial institutions are also exploring the technology to see how they can make better use of it.
The blockchain was first introduced by Satoshi Nakamoto, Bitcoin’s ever-elusive founder. Nakamoto wrote an innovative paper which he entitled, Bitcoin: A Peer-to-Peer Electronic Cash System.
In this paper, he provided comprehensive information about two significant technologies. These were: Bitcoin, a cryptocurrency, and the blockchain, the platform on which bitcoin would run.
Since bitcoin is not owned or controlled by any central authority, the transaction data and history could not be stored in a central location, server or database. This gave rise to the blockchain as a public database that is distributed to all bitcoin adopters.
Each bitcoin user has access to a copy of the data and could compare their data with other users in an effort to ensure that they had the latest version of the ledger.
This simple mechanism has since evolved into something much more significant than Bitcoin’s developer initially intended. That notwithstanding, though, the fundamental principles remain unchanged.
These principles include:
- The blockchain is not controlled by any central authority
- The technology has no single point of failure
- Cryptocurrency transactions are rooted in the network and held by everyone who uses the blockchain
- To modify data on the blockchain one would need to tamper with the entire system at once
How Cryptocurrency Works With Blockchain
Being it is a public ledger of transactions, the blockchain was initially designed to facilitate bitcoin transactions. However, the work it does today is broader than this. Here is how the blockchain technology works:
As regards transactions, whenever someone attempts to make a transaction such as sending a bill, the transaction is broadcast to the network of bitcoin users. The transaction is then validated through a process known as mining.
It is through mining that blocks are formed. These blocks are then added to the end of the existing blockchain in a manner that makes it permanent and immutable — being permanent and immutable means that the block cannot be edited or deleted.
One of the key features of the blockchain is that it is a decentralized, distributed database of transactions. The traditional means of transactions today involve using a single database stored on a central server.
For instance, all with the everyday banking system is such that banking transactions are stored in a central database on a server that belongs to individual banks. If the database ever gets hacked, the bank usually has a backup database that it uses to compare the data and goes back to the original.
However, the backup could also be hacked. This means that to be on the safe side of things, banks have to keep and maintain several backups of the database. This can be cumbersome.
Thankfully, the blockchain solves this issue by providing a copy of the data to every user of that blockchain. Consequently, each user of a particular digital currency keeps a copy of all transactions on their computer.
It is also important to note that the majority rules in this system.
For instance, if one user attempts to alter the information therein contained, all the other copies would object to the move and mark that particular copy of the ledger as corrupt. As a result, it will be ignored.
This feature of the blockchain makes it highly secure. If hackers wish to alter the information on the blockchain, they would need to hack at least half of all machines that use that blockchain at once.
As seen above, the blockchain is transparent and immutable. This helps to solve the issue of trust. You do not need to trust any third party with your data, be it the central bank, government, or business.
Rather, all cryptocurrency transactions are stored on the blockchain and disseminated to every user of the blockchain, with everyone holding a copy of the same ledger.
Various Types Of Cryptocurrencies
More than a thousand cryptocurrencies have been birthed, thanks to the blockchain. Of these currencies, Bitcoin was the first blockchain. After the introduction of bitcoin, many new blockchains followed.
These currencies are known as altcoins. Altcoins are the alternative cryptocurrencies that were created after the success of bitcoin.
The blockchain is open-source, meaning anyone can take the source code and use it to develop something new. Lots of developers have created hundreds of alternatives to bitcoin as well as different applications of blockchain technology to complement those currencies.
Bitcoin a.k.a The King
Bitcoin is a cryptocurrency that users can send to others as gifts, for services or payment for a product. This makes bitcoin just like the fiat currency we use in carrying out everyday transactions.
However, bitcoin is digital and not physical like the U.S Dollar, for instance. Bitcoin is the oldest and most reliable of all digital currencies. This makes it the ‘gold standard’ of cryptocurrency since it influences the costs of all altcoins.
Bitcoins could function just like physical cash. It is also important to bear in mind that Bitcoin transfers cannot be reversed. Once you make a payment and it’s confirmed completed, you cannot take back that payment.
Further, the currency is divisible to around eight decimal places and could be extended further if need be. In the current exchange rate of 100, this is divisible down to $0.0000001.
Unlike cash, Bitcoin is decentralized. What this means is that the coin does not rely on a bank or third party to handle it, as explained above. Instead, each transaction happens directly between users.
This is known as a peer-to-peer network. All these are made possible thanks to the blockchain. Bitcoin’s developer introduced blockchain technology to let bitcoin users send and receive a token without using a third party.
And since users do not need a third party, they do not need to identify themselves. Consequently, they can make payments without revealing who they are. It is for this reason that bitcoin is considered an anonymous currency.
When a user sends bitcoins to another, the transaction is authenticated and then stored on the blockchain. Keep in mind that the information on the blockchain is encrypted. While everyone can see it, only the owner of each bitcoin can decrypt it.
Each bitcoin owner is given a ‘private key’ with which to decrypt their Bitcoin.
However, using the bitcoin software is energy-intensive, as it requires a lot of electricity to power the network. The people and companies running the nodes pay their electricity bills using the rewards they earn from mining bitcoin.
The nodes (the computers that connect to the bitcoin network and are responsible for verifying bitcoin transactions) are rewarded for verifying transactions.
These nodes are rewarded with new bitcoin for each block mined successfully. Specifically, it is the miner that solves the puzzle that receives this payment.
It is through this method that new bitcoins are created. It works in the same way as gold mining where miners are rewarded with Gold. The nodes are the miners responsible for mining for new bitcoin.
When a new block of transactions is sent to the blockchain, the miners will confirm the block using an algorithm known as Proof of Work (PoW). It is through this PoW that the first miner to verify the block is rewarded with new tokens.
Remember that banks don’t verify or process the transactions. As blockchains are run by lots of different people and companies instead of one single entity, it is these people and companies that run the blockchain using computer power.
The nodes run special mining software on a computer that processes bitcoin transactions on the blockchain.
What Are Altcoins?
The second type of cryptocurrency is altcoins. There are more than one thousand altcoins in existence at this moment. Most of these currencies are just alternate versions of bitcoin with minor changes done to differentiate them. Hence the name “altcoins.”
Nevertheless, it is essential to understand that not all altcoins are just alternate versions of Bitcoin. Some of these currencies are very different from Bitcoin both in terms of their makeup and purposes. Some bitcoin alternatives use different algorithms for Bitcoin.
For instance, some of the most profitable altcoins like DASH use the Proof of Stake (PoS) consensus mechanism. In PoS, there are no miners; what they have are stakers.
The stakers are responsible for verifying transactions for rewards, just like miners with bitcoin. However, instead of racing to confirm a block by solving mathematical puzzles before anyone else does, stakers are selected one by one to take their turn.
This process uses much less electricity since there aren’t thousands of miners using their power to try and verify the same block. In the PoS system, there is just one staker per block. You can now see that not all altcoins are similar to bitcoin in make and goal.
Digital currencies like Ethereum and NEO are good examples of altcoins that are very different from Bitcoin in terms of purpose. While Bitcoin was designed to be used as a digital currency, Ethereum and NEO were not intended for this purpose. Instead, they were meant to serve as platforms for building applications on a blockchain.
Developers can build their own applications on Ethereum and NEO. Most digital currencies are created this way. They are developed on blockchains that support application building, such as Ethereum and Neo.
In the case of Ethereum, this is made possible thanks to the technology that it introduced to the virtual currency world when it made its debut: smart contract. As explained above, a smart contract can automatically execute transactions when certain conditions are met.
These conditions are written into the smart contract when it is being created. For instance, a condition could read “When Alvin sends 100 Ether into the smart contract, then Kelvin’s car will be sent to Alvin.”
Smart contracts help ensure that no third party is needed.
While bitcoin helps to eliminate the third party in direct payments, smart contracts eliminate the third party in many aspects, such as during the sale of a vehicle, house, stock, or electricity.
In the case of electricity, for example, since you can’t actually put electricity into a smart contract, what you put into the smart contract is a token that legally represents the electricity. It is this very characteristic that makes smart contracts such an exciting technology.
With them, users can tokenize real things and put them on the blockchain.
Here are some of the major altcoins you should know:
Litecoin is a fork of bitcoin. The currency was designed as an alternative to improve confirmation times and scalability of peer-to-peer transfers. As a result, litecoin transactions are four times faster than bitcoin’s, thanks to an easier proof-of-work system. Such quicker transaction speed help ensures that litecoin supports more operations at lower costs.
Another point of difference between Litecoin and Bitcoin is that Litecoin uses a memory-intensive proof-of-work system instead of a processing-intensive system like bitcoin does. This helps to increase the distribution of the litecoin blockchain.
Litecoin utilizes the Scrypt encryption algorithm, instead of bitcoin’s SHA-256. Litecoin also aims to make use of an algorithm that has been resistant to accelerated hardware mining technologies like ASIC.
Bitcoin Cash (BCH)
Like Litecoin, Bitcoin Cash is a bitcoin fork which was developed to correct the existing scalability problems bitcoin was facing. There’s not much difference between Bitcoin Cash and Bitcoin asides the adjustable block size in the Bitcoin Cash blockchain.
The default was set to 8 MB, which is about eight times larger than the bitcoin block size. Plans are underway to expand the BCH block size further to 1 GB. When successful, this will enable transactions to be conducted on the same level as major traditional payment networks such as VISA and MasterCard. Also, the bigger block sizes will help reduce transaction fees since more transactions fit in a block at once.
The disadvantage of this move is that by Bitcoin Cash is that bigger block sizes require more processing power to verify, meaning larger mining pools get to control the network further. Putting more control in the hands of large mining pools will put the decentralized nature of the BCH blockchain at risk. This could make BCH easier to hack.
As mentioned earlier, Ethereum is a platform that enables smart contracts and distributed applications (DApps) to be built and run without downtime, fraud, interference or control from a third party. The apps on the Ethereum platform are conducted on the network’s platform-specific cryptographic token called Ether.
This means that Ether fuels the Ethereum network.
When these bits of codes known as smart contracts are written to the blockchain, they become impossible to change. Individuals who wish to use the contract can create a new transaction on the Ethereum blockchain referencing the contract, and the network verifies the transaction.
In this manner, Ether can be likened to a vehicle that enables users to move around on the Ethereum system. This token is for developers who are looking to develop and operate programs inside the Ethereum platform.
Ethereum maintains that the Ether could be used to “codify, decentralize, trade and secure just about anything.”, Ethereum further split into Ethereum (ETH) and Ethereum Classic (ETC) due to the attack on the DAO in 2016.
Ripple is intended as a real-time worldwide settlement network that provides instant and low-cost international payments. Ripple helps to empower financial organizations like banks to repay cross-border payments in real time. It also helps ensure closing transparency, and that transactions are processed at lower costs.
Ripple does not require mining, a feature which sets it apart from bitcoin and altcoins.
The fact that the Ripple structure does not require mining helps to reduce the use of computing power and minimizes network latency. Ripple plans to distribute XRP mostly “through business development agreements, incentives to liquidity providers who offer tighter spreads for payments and selling XRP to institutional buyers interested in investing in XRP,” the company states.
Monero is an open source cryptocurrency that was introduced to help solve the privacy issues users had with bitcoin. Bitcoin uses a transparent blockchain, which allows just anyone to trace bitcoin transactions back to the source, which could be traced to a sender’s identity based on their IP address or other information provided. Monero helps to avoid this problem as it encrypts data about the sender, receiver, as well as the amount sent.
This way, nobody can trace the token back to its source.
Its secure, confidential and untraceable nature has made Monero popular among crypto enthusiasts who crave anonymity. Its development was entirely donation-based and was driven by members of the cryptocurrency community.
Monero ensures complete privacy by utilizing a unique technique known as ‘ring signatures.’ The ring signatures technique shows several cryptographic signatures that all appear valid, making it difficult for the real signature to be identified.
Zcash is a decentralized, open-source, and privacy-focused digital currency. It employs a concept known as zero-knowledge proof to secure sensitive information. Zcash also uses a view-key concept, which allows users to view information without being able to edit such information.
For instance, a user with the view key to your account could see how much Zcash you have, but could not spend the funds in your wallet.
In other words, Zcash gives extra privacy or security where all transactions are recorded and printed within a blockchain, as information about the sender, recipient, and amount involved remain private. Zcash’s method of ‘shielded’ transactions described above where content to be encrypted is made possible thanks to advanced cryptographic procedure or zero-knowledge proof structure known as zk-SNARK.
IOTA is another altcoin that interests most cryptocurrency enthusiasts due to its unique makeup. The coin was generated exclusively for the growing machine-to-machine economy of the Internet of Things (IoT). IOTA goes further outside of the blockchain technology, as it adopts a block-less distributed ledger known as the ‘Tangle.’ MIOTA, IOTA coin, isn’t mined. Instead, all units of the token have already been created.
Originally known as Darkcoin, DASH is a blend word for Digital Cash. Dash is a more secretive variant of Bitcoin. As it currently stands the coin offers more security because it runs on a decentralized masternode system which generates transactions secretly. DASH was developed by Evan Duffield and could be mined using a CPU or GPU.
Some of the unique features of DASH include:
- The currency uses a two-tier architecture to power its network.
- The bylaws of the Decentralized Autonomous Organization (DAO) are embedded into Dash’s code of smart contract.
- DASH plans to become the first privacy-centric cryptographic currency with fully encrypted transactions and anonymous block transactions. This feature is known as PrivateSend.
Tokens are another type of cryptocurrency. Unlike the other types of cryptocurrencies, tokens are unique, in that they do not have their own blockchain. Instead, they are used on decentralized applications (dApps). As mentioned earlier, dApps can be developed on blockchains such as Ethereum and NEO. These apps are designed to use smart contracts, hence the use of tokens.
However, unlike with Ethereum, the tokens being referred to here do not have to represent a physical item such as a house or vehicle. Instead, they can be used as a form of payment on the dApp. Either that or they can be used to get certain advantages such as discounted fees or voting fees.
Tokens can also be sold for a price, which is why some crypto adopters buy them. Like every other asset, tokens can be bought and sold later for a higher price, meaning you do not need to purchase them to use for use on the dApp.
Since dApps are built on other blockchains such as Ethereum and NEO, token transactions are still verified by the nodes on the Ethereum or NEO blockchain. As a result, the transaction fee is still paid with either Ether or NEO, and not with the token.
Therefore, to make a transaction on a dApp, that is, to use a token, adopters must have some Ether or whichever altcoin the dApp is built on, which they will use to pay for the transaction fees.
In conclusion, these are just some of the many types of Cryptocurrencies that are part of this new way of exchanging value. To get a full list of all the Cryptocurrencies that are out there today on the market please visit coinmarketcap.com or coingecko.com for more details.
Will Crypto & Blockchain Take Over Banking?
Lots of questions have been asked about what could happen to cryptocurrency and blockchain in the future. This is by no means an easy question to answer. Since their introduction, cryptocurrencies have been exciting, scary, and mysterious at the same time. Nevertheless, it is still hoped that they will soon become part of the mainstream financial system.
Cryptocurrencies have the potential to revolutionize the global financial system and usher in a new financial regime. Should things go according to plan, it is expected that digital currencies will:
- Be issued by central banks, considering governments in some countries are already making plans to issue coins of their own.
- Established businesses might issue virtual currencies of their own in an attempt to build trust and gain wide acceptance among the general public.
- Cryptocurrencies like bitcoin and Ethereum will become widely accepted. It is expected that as the tech literacy of the general public increases, acceptance of cryptocurrency as a legitimate store of value will increase.
No one knows what the future holds for cryptocurrencies. For now, though, it looks like there are two ways things could pan out: cryptocurrencies will either correct the deficiencies of traditional financial systems or continue to play second fiddle. For the blockchain, however, crypto enthusiasts can look to the future with excitement.
This concludes our cryptocurrency dummies guide to crypto if you have any further questions or anything you would like to add, then please drop a comment below. We love hearing from crypto enthusiasts all around the world.