What are Cryptocurrencies?

Cryptocurrencies… you have seen them in the news, on the internet and you have even heard your friends talk about them; however, he's still not quite sure what they are. Do not worry, in this article we will explain everything you need to know about cryptocurrencies or "crypto".

 

1.What are cryptocurrencies?

In very general terms, cryptocurrencies are digital cash. These digital assets are created using cryptographic techniques that allow people to securely buy, sell, or trade them.

In other words, cryptocurrencies are a safe way to transfer “value”, in this case money, between people without having to go through a bank or some other financial intermediary.

2.How do cryptocurrencies work?

Note: If you don't have a basic understanding of how Blockchain technology works, I recommend reading our What is Blockchain article first?

To allow the transfer of value between different people and/or entities without the need for an intermediary, cryptocurrencies use a blockchain network or Blockchain network .

Think of the blockchain as a database, that is, a place where information is stored. Unlike a regular database, this one does it in a decentralized way .

Blockchain technology is a Distributed Ledger Technology or better known in English as Distributed Ledger Technology since its ledger or ledger is maintained by thousands of computers (nodes ).

In this database or chain of blocks, information is stored such as who initiated the transaction, to whom the transaction was made and for how much it was. This information is then added to the blockchain and distributed to all nodes .

That is, all these computers or nodes keep an identical copy of the information contained in the chain of blocks. Every time a new block is added to the chain, or a modification is made, it has to be “approved” by all the nodes before it becomes official in the chain of blocks. That is why a central authority is not needed to manage the information, since it is managed and validated by the thousands of computers that hold it.

Very good, so cryptocurrencies exist thanks to Blockchain technology , which is a way of storing information, such as our transactions, in a safe way, since it is supported by thousands of computers that are validating the authenticity of the information. But why are they called “crypto” currencies?

Cryptocurrencies use cryptography to allow transactions to be anonymous and secure, which means you don't need to know anything about a person to safely transact with them. To transfer cryptocurrencies, users obtain a private key ( private key ) which acts as the password of their account and through cryptography this generates another key, the public key ( public key ). The public key is used as the “address” to which people can transfer cryptocurrency to you.

3.Categories and types of cryptocurrencies

Digital Assets, Cryptocurrencies, and Tokens: These terms are sometimes used interchangeably to refer to cryptocurrencies. However, it is important to note that these are three different categories.

Digital assets is a general term that includes everything from stablecoins (cryptocurrencies backed by fiat money and other assets), crypto tokens , cryptocurrencies, and NFTs.

On the other hand, cryptocurrencies are cryptocurrencies with a native Blockchain network. For example, the cryptocurrency of the Ethereum network is Ether , or more commonly known as “ETH”. The native cryptocurrency of the Bitcoin network is Bitcoin or “BTC”. Finally, cryptocurrencies that live on a blockchain, but are not its native currency such as Shiba Inu or “SHIB” are called cryptographic tokens or crypto tokens .

So now that we understand the different categories of cryptocurrencies, let's go over the different types of cryptocurrencies:

Bitcoin

Launched in 2009, Bitcoin (BTC) is the first cryptocurrency. In the Bitcoin whitepaper , BTC was described as a peer-to-peer version of electronic money. Since its launch, Bitcoin has dominated the cryptocurrency market and has retained its position as the most valuable cryptocurrency. 1 BTC is worth over $20,000 as of this writing.

Altcoins (Alternative Cryptocurrencies)

Bitcoin is an open source network. Which means that the code that was used to create Bitcoin is available to the public. Many Blockchain projects have taken the Bitcoin code, made some advancements or upgrades, and launched their own cryptocurrency.

Every cryptocurrency released after Bitcoin is known as an 'altcoin' . Major altcoins include Ethereum, Doge Coin, and Cardano to name a few.

Stablecoins (Stable Cryptocurrencies)

Cryptocurrencies are a volatile asset and therefore not suitable for day trading. To combat this, stablecoins were born. Stablecoins are fiat-backed cryptocurrencies like USD, gold, government bonds, etc. This collateral backing makes stablecoins immune to volatility. Tether (USDT) and USD Coin (USDC) are dollar-pegged stablecoins.

Crypto Tokens

As mentioned, cryptocurrency tokens are assets on a Blockchain that are not its native currency. Most crypto tokens “live” on the Ethereum or Binance Blockchain . These tokens are known as the ERC-20 and BEP type respectively.

As with other cryptocurrencies, you can trade crypto tokens freely. However, tokens are used for specific purposes within your native application.

For example, do you remember coin-based arcade games? Where you needed to buy game coins to be able to play those games. You can think of crypto tokens as arcade game coins that have a specific utility within their application. For example, Chainlink (LINK) is used to provide real-world data to blockchain applications, and the Basic Attention Token (BAT) is used to distribute ad money on the Brave Browser.

Conclution: What are Cryptocurrencies

Cryptocurrencies made it possible for everyone to exchange value directly without intermediaries. They combine all the properties of a traditional currency with the power of Blockchain to solve all the problems of money that we all know.

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