Estimated reading time: 4 minutes, 15 seconds
In this video, we will explain all the essential notes and components you should understand about cryptocurrency. Because it’s here to stay, we’ll walk you through the ins-and-outs of this digital phenomenon. Be sure to head over to our WTF is Cryptocurrency Guide, also, to make sure you got it all down.
What is it? A simple explanation
Cryptocurrency at it’s core is mathematics; a digital currency formed from cryptography. Cryptography is by definition, “the art of solving or writing codes.” But in terms of mathematics and computer coding, cryptography uses algorithms and protocols to secure and scramble information into an encrypted format.
Cryptography is all that crypto actually is. It’s an encrypted string of data that’s been encoded to signify a single, specific unit of currency. Solving mathematical problems, based specifically on cryptography produces cryptocurrency.
Cryptocurrency & Blockchain Technology (BCT)
Unlike fiat currencies, cryptocurrency is totally digital, and there is no physical form of it. Other names for cryptocurrencies include digital currencies, virtual currencies, and crypto.
Crypto uses peer-to-peer networks that distribute information and transaction data throughout nodes on the network, which makes it decentralized and allows transaction of this cryptocurrency to take place in a different manner than traditional systems.
Cryptocurrency is not backed by a banking institution or any other centralized financial institution. Rather, because it runs on a decentralized network, such as a blockchain, it is backed by the protocols and cryptography the network calls for & users of the network give value to that.
You could say that these cryptocurrencies are a type of resource or digital asset that provides value because of it’s function (for example, transferring value or validating transactions, transaction fees, etc.).
Some could argue that part of the value of cryptocurrencies sprouts from trust in the system’s protocols which is what is relied on for transparency and trust, rather than in a third party or institution.
This is because protocols like smart contracts or mathematical codes are used to govern certain actions. And these actions are held accountable by the code, which is typically available for inspection.
They are also recorded on the ledger that is a blockchain, making it immutable. Therefore, a recorded transaction cannot be changed, revoked, or lied about, without there being record of that change happening on the ledger. This can prevent bad actors or untrusted third parties from taking advantage of transactions and value within these systems.
Another aspect of trust that is integrated into cryptocurrencies is that responsibility is primarily in control of the owner of those funds. There is no third party holding your money, or in charge of it. You are the only one responsible for transferring, securing, and transacting with your cryptocurrency. And if you lose your keys or pass-phrase then you are out of luck for getting your tokens back!
While some may argue that this makes you less inclined to participate in cryptocurrencies, but when you look at economic crashes like the great depression or the housing market crash of 2008, having complete control over your finances and cryptocurrencies may seem more trustworthy than having third parties like banks hold your money in checking and savings accounts.
Understanding different tokens & types of cryptocurrencies
There are different types of tokens that serve different functions in blockchain technologies.
The first is native tokens, which serve as an intrinsic utility and resource within the network protocol. Examples of this include Ethereum and Bitcoin. Native tokens are a necessary component of the blockchain, and form it’s core. These types of tokens are often used to incentivize block creation or, in other words, validation of transactions.
The second type of token is an asset-backed token. This is somewhat equivalent to the gold standard on the US dollar. These tokens are backed by a user claiming an underlying asset, such as a car or house. In these token classes, you are pretty much digitizing the value of a hard, in-hand asset, and receiving a digital voucher for it’s value, in the form of a token.
Wallets, like with cold, hard cash, are used to secure your cryptocurrency as well. There are different types of wallets that will serve different purposes depending on what you are doing with your crypto. There are many other factors that come into play with a digital wallet, so be sure to check out the link below for a guide to different wallets you can use to store and secure your cryptocurrency, and the different features used to do so, such as public and private keys.
Other information resources for you to expand your blockchain & crypto knowledge:
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