Cryptocurrencies are a type of digital asset that function as an alternative currency. Since their creation, they were designed to become a medium of exchange.
There are different types of digital assets, and cryptocurrencies distinguish themselves from others by using strong cryptography as the backbone of its security, hence the use of the prefix crypto.
To make this possible, cryptocurrencies use what is commonly known as digital ledger technology (DLT), with the most popular example to be blockchain technology. In fact, thousands of existing cryptocurrencies use blockchain technology.
There are some that do not use blockchain technology. One of the most popular examples is IOTA, which uses the directed acyclic graph (DAG).
The crypto community debates regarding the specific properties that a digital asset must have before it can be called a cryptocurrency. So far, one that is agreed upon by many is that aside from using DLT, they should at least be decentralized.
This means that the governing right belongs to the community — or at least a majority of it — instead of being concentrated to a select individual or group of people.
By far the most popular example of a cryptocurrency is Bitcoin. Created by an entity that used the pseudonym Satoshi Nakamoto, Bitcoin is said to be the first cryptocurrency to ever exist.
Nevertheless, the idea behind Bitcoin did not come from nowhere; the famed cryptocurrency had precursors spanning across a couple of decades.
Many cryptocurrencies have limited supply unlike physical currencies issued by their respective governments. The reason for this is that cryptocurrency creators aim to maintain the price and market capitalization.
Some popular cryptocurrency examples of these are Bitcoin, Litecoin, and Ripple (XRP).
On the other hand, some cryptocurrencies have an unlimited supply. Examples of these are Ethereum, Tezos, and NEM.
Different cryptocurrencies implement various strategies to achieve the said goal. For example, Bitcoin has a phenomenon called halving, wherein the amount of new BTC that is given as a reward for mining gets reduced in half.
For those who are asking, “What is Bitcoin halving?”, there’s another article that provides an in-depth explanation.
Cryptocurrencies are stored in cryptocurrency wallets, which come in different forms. Some exist as digital applications while some are provided by cryptocurrency-based online platforms. Others prefer to store cryptocurrency in hardware wallets, which are technically safer than the others.
Uses of Cryptocurrency
People use cryptocurrency for a number of reasons. However, some of these uses are subject to the laws and regulations of the country or territory where the cryptocurrency user resides in.
Payment for Products or Services
People use cryptocurrencies as a form of payment for products and services. Given the assets’ market value and rarity, people have begun to use it to pay for purchases they make, especially online.
In fact, many industry giants like Microsoft and Overstock accept major cryptocurrencies like Bitcoin, Ethereum, and Litecoin as payment.
Some names like Amazon do not readily accept cryptocurrency, but may do so in the form of digital gift cards. Other more flexible arrangements are now being made available so that merchants can also cater to buyers who prefer to pay using cryptocurrency.
Transfer of Value
Many people have already embraced cryptocurrency as real money. In fact, some of them even prefer cryptocurrency over fiat money for making P2P transfers. This is because cryptocurrencies have monetary value and there are now platforms that enable their transfer.
Before cryptocurrency had market value, users and advocates rallied to its side because it solves some problems that traditional money has: double-spending and hefty transaction fees.
The Bitcoin whitepaper, published in late 2008, began its summary in this way:
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution… We propose a solution to the double-spending problem using a peer-to-peer network.
Many members of the cryptocurrency community consider cryptocurrency as a viable investment option. In fact, those who have held old currencies like Bitcoin and Litecoin before they actually held any market worth have profited exponentially.
Cryptocurrencies are very volatile in terms of market price. This is due to the fact that there is no central body that dictates its price. The prime example of this is Bitcoin.
On the other hand, because cryptocurrencies are volatile, there can also be times wherein their prices can plummet. Cryptocurrencies have more erratic market fluctuations compared to other investment options.
Because of this, cryptocurrency trading and investment should be done wisely and carefully.
Read Also: How to Invest in Bitcoin?
Some blockchain ecosystems require users to stake some of their cryptocurrency to be able to mine newly-minted ones. Specifically, these are ecosystems that implement the Proof-of-Stake (PoS).
One example of a blockchain ecosystem that uses Proof-of-Stake is Ethereum. In the Ethereum blockchain, users have to stake ETH to apply to become block validators. Those who stake more ETH have more mining power than those who stake less.
Proof-of-Stake is one of the most popular consensus and mining algorithms that exist today. It is not as energy-consuming as Proof-of-Work (PoW), which relies on the node’s hashing power.
Types of Cryptocurrency
Cryptocurrencies have different types. Since people’s knowledge about blockchain technology is ever-expanding, they are coming up with different approaches to using the technology. As a result, more types and subtypes of cryptocurrency are developed and introduced.
At the moment, there are three common types of digital assets, namely payment currencies, ecosystem currencies, and crypto tokens.
Payment currencies are the most basic types of cryptocurrencies. They serve as a store of value and traded among peers, merchants, and organizations.
Cryptocurrencies that fall under this category exist to address many issues of traditional payment means such as double-spending, sluggish confirmation, and expensive fees. All transactions are stored in blocks, as is true of virtually all cryptocurrencies.
Popular examples of payment currencies are Bitcoin, Litecoin, Bitcoin Cash, and Dash.
One variant of payment currency is what many people call stablecoins. These cryptocurrencies intended to become digital money. They also use blockchain technology.
However, stablecoins are different from traditional payment currencies due to their ‘stable’ nature. Their prices are pegged to an already-existing precious commodity such as fiat currencies, stocks, or precious stones and metals.
The price of popular stablecoin Tether (USDT) depends on the price of the US dollar. Regardless of any price movements, one USDT will maintain the price of $1.
Ecosystem currencies are basically those that have specific functions to specialized blockchain systems. They still retain the function of payment currencies. However, they are necessary for a plethora of use cases that go beyond the facilitation of peer-to-peer (P2P) transactions.
Thanks to Bitcoin, many innovators learned about blockchain technology. This led to the birth of this class of cryptocurrencies. They enable the creation and execution of smart contracts and decentralized applications (DApps).
As the name suggests, smart contracts are virtual contracts that self-execute with the terms stipulated in the agreement between the contracting parties. Blockchain stores all contract details.
Read More: What is Smart Contract?
DApps are applications that have no central database. They are also open-source, which means that anyone interested enough and knowledgeable enough to understand how the DApp runs can check its code any time he or she wishes to.
Popular examples of blockchain ecosystems include Ethereum, EOS, Tron, Tezos, and Neo.
With the introduction of blockchain ecosystems came crypto tokens. These function similarly to ecosystem currencies in terms of usage. Technically speaking, they maintain the token status because they are not the official currency of the blockchain ecosystem that they belong to.
Smart contracts create crypto tokens through their respective blockchains. Some tokens exist on two or three blockchains, depending on their developers.
One of the most popular blockchains for creating crypto tokens is Ethereum. The list of tokens created on Ethereum grows every day.
Due to the number of blockchain use cases today, there is an innumerable number of crypto token uses. Some use crypto to access a particular service in a DApp, while others exist to make the selling of real estate properties faster and more liquid.
To read more about cryptocurrency, go History of Cryptocurrency.