Let’s make it simple, you can use cryptocurrency like fiat currency to buy or sell things. But unlike fiat currency, cryptocurrency does not have any physical form or shape. Cryptocurrency only exists digitally or virtually that You can’t see or touch. It is just a number or a record that is stored in a decentralized and distributed database called the blockchain. The Blockchain system is decentralized and distributed, this means the database is stored in millions of computers and other devices from around the world which are connected to the blockchain network.
In short “Cryptocurrency is a digital or virtual currency that can be used online in exchange for goods and services”.
To make it simpler, “Cryptocurrency is a new form of currency or money”.
Why is it called Cryptocurrency?
Cryptocurrency uses cryptography to provide secure online transactions. The word “Crypto” literally means to be concealed or secret. So cryptography provides the ability to exchange messages secretly and can be read by the intended person. In the world of cryptocurrency, cryptography guarantees the security of the transactions and the participants without the need of central authority.
Cryptography is a technology that keeps information safe and hidden from attackers.
Cryptocurrency and Blockchain
Cryptocurrency uses blockchain technology which is decentralized, secure, and spread across many computers that manage and record the transactions of cryptocurrencies.
Blockchain is a decentralized and distributed database system. It is a new way to share data and make transactions more secure, transparent, and cheaper than before.
As of now you might have got the idea, by using cryptography and blockchain technology the cryptocurrency was created, which is a new form of currency or money. but you might still have a question in mind about currency or money in general, why currency exists and why we need it? So let’s briefly discuss it.
What is Currency ?
To know about the currency, first, we have to get some knowledge about what was there before the existence of currencies, so there was a system of exchange which was called the Barter System.
The Barter System
The Barter System was the exchange of goods or services in the exchange of other goods or services without using any currency or any other form of payment.
For example: If you had apples and you wanted to buy oranges. you will have to find someone who had oranges and wanted to exchange them for the apples. You both would agree on how many apples would be exchanged for how many oranges and the trade would be done between you two. The same will go for services to services and services to goods. The Barter System was not efficient, there were many problems and issues so they came with another solution, which is called metal coins.
The Metal Coins
Metal objects were introduced and used as currency or a form of exchange. Metal coins were mostly made of a mixture of silver and gold. It had different sizes and different stamps which represented its values.
As compared to the barter system, metal was a better option to use because of its availability, ease to work with, and could be stored Or recycled easily. but still, it was not the final solution, so as time passed, they came up with another better solution which is called Gold Backed Paper Currency.
Gold Backed Paper Currency
It was in the form of paper notes and was backed by the government or bank’s promise to exchange it for a certain amount of silver or gold. It was also called representative money.
For example: If you had a $100 note, the government or the bank would be responsible to give you the same amount of gold whenever you want it in return for your note. The government or bank would have to keep the same amount of gold ready for you in case you want it back. your paper currency was just representing the gold you won with the government or bank.
The Fiat Money
Gold-backed paper currency has now been replaced by fiat money. It is no longer backed by gold or silver but only by the government you trust. It is in the form of notes and coins and it’s worked so perfectly for centuries, but then the world changed with the invention and usage of the internet on a daily basis. We are now living in digital time and in a digital world, and we need digitized currency too. so they come with a solution called digital money or digital currency.
The Digital Currency
Digital Currency is only available in digital or electronic form. it does not have any physical form. For example, your credit card, debit card, or your online banking system only transfer digital data from one account to another. There is no physical transfer of money happening. it’s only the numbers decreasing in one account and increasing in another. It is also called electronic money, electronic currency, or cybercash.
Cryptocurrency comes in the category of digital currency but it is very very different from normal digital currency. Let’s see in detail the difference between cryptocurrency and normal currency.
How is cryptocurrency different from fiat currency?
- Manage: Fiat Currency is managed and issued by the central government, while cryptocurrency is issued and managed by a network of computers that run open source code.
- Supply: The central government controls the supply of fiat currency and can produce more when necessary. While cryptocurrency has limited supply.
- Physical Form: Fiat Currency has a physical form like coin or paper note, while cryptocurrency it’s not physical but digital or virtual.
- Centralized: Fiat Currency is centralized and controlled by the law and banks, while cryptocurrency is decentralized and not controlled by any single entity or government.
- Value: Fiat Currency values are determined by the market and regulation, while the cryptocurrency value is determined by the economics law of demand and supply .
- Security: Fiat Currency is secured by third parties like banks and governments, cryptocurrency is secured by the network of computers around the world that verify every transaction.
- Use: You can use Fiat Currency to buy things typically in the country that issues it, while cryptocurrency doesn’t have any border, you can use it anywhere in the world as long as the merchants accept it.
Key Features of Cryptocurrency
- Digital or Virtual: Cryptocurrencies only exist on computers and other devices which are connected to the internet. There is no real form of cryptocurrencies like metal coins or paper notes.
- Decentralized: Cryptocurrencies don’t use a central server or central system to store the record of Cryptocurrencies, but it uses a decentralized network which means the records are stored across thousands of computers on the internet.
- Peer To Peer: Cryptocurrencies users can directly send and receive cryptocurrencies online without the involvement of third parties. The users don’t need to use the services of banks, for example online payment services like PayPal etc.
- Anonymous: Cryptocurrency users don’t have to provide personal information to own and use cryptocurrencies. they don’t have to provide their real-world identities. Users only need a wallet address, which is enough for making any type of small or large transactions.
- Encrypted: Cryptocurrency uses cryptography to provide secure online transactions. Each user has special codes that secure their information, which makes it almost impossible to be hacked or to be accessed by other users.
- Immutable: cryptocurrencies transactions are immutable, which means once the transaction has been recorded on the blockchain, it is impossible for anyone to change or delete it.
- Fast: Cryptocurrencies transitions are extremely fast , once the user initiates the transaction, it is immediately shared on the network and confirmed within a couple of minutes.
- Single Spending: cryptocurrency completely eliminates the possibility of double spending. It’s impossible for the crypto user to spend one cryptocurrency with many users in an attempt to purchase goods or services.
- Global: Cryptocurrency users can send and receive cryptocurrency from any part of the world at any time. There are no limitations and no restrictions on sending or receiving cryptocurrency from other countries or continents.
Benefits of The Cryptocurrency
- No Middle Man: In our everyday business dealing, we need the help of agents, brokers and other legal representatives. We also go through complex paperwork, fees,commissions and a number of terms and conditions which make a simple task complicated and expensive. One of the benefits of cryptocurrency is cutting out the middleman. It provides one to one transaction on a peer-to-peer network. This leads to clarity, accountability, less confusion and eliminates the involvement of unnecessary third parties and unnecessary expenses.
- Accessibility: As long as you are connected to the internet, you have access to your account. Regardless of wherever you are in the world, you can spend and manage your cryptocurrency on your computer, laptop, or smartphone.
- Lower Fee: Cryptocurrency transactions fees are much lower than transaction fees of credit cards, online banking and other online services. If cryptocurrency is not exchanged or spent, there are no service charges like most banks have.
- Fraud Reduction: Once a payment is made with cryptocurrency, it cannot be reversed.This is different from credit card payments, which can be reversed using charge backs, a feature often exploited by fraudsters.
- More confidential: Each cryptocurrency transaction is a unique exchange between two parties, which protects users from issues like identity theft.
- Easier International Trade: Cryptocurrency is not subject to the exchange rates, interest rate, transactions charges, or other limitations imposed by a specific country. It can be used at an international level without experiencing any of these problems. In other words, it saves a lot of time and money which otherwise would be spent in transferring money from one country to another.
- Transparency: While the users of the cryptocurrency are anonymous, all the cryptocurrency transactions are stored on an open ledger on the blockchain. This means the data or the records of transactions are available to anyone at any time to view.
Types of Cryptocurrency
Cryptocurrency can be further divided into many categories and types but here for the sake of simplicity I would mention the two major types of Cryptocurrency; one is called coin and another is called token:
Coin refers to cryptocurrency that has its own separate, standalone blockchain. It means coins operate on their own blockchain, independently of any other platform. There are thousands of coins available, and every single day new coins have been introduced to the cryptocurrency market. Bitcoin (BTC) is the first and well-known coin around the world.
Token refers to cryptocurrency that is built on top of an existing blockchain. The token does not have its own separate, standalone blockchain but is hosted by another blockchain platform, such as Ethereum (ETH). Just like coins, there are thousands of tokens available in the cryptocurrency market today, and each day new tokens try to make their place in the cryptocurrency market.
How Cryptocurrency Works: in Simple Words
As you know there is no centralized system in the cryptocurrency world, transactions happen one-to-one directly between two parties on a peer-to-peer system and are recorded forever on a blockchain.
So the question is, how does it happen? And the answer is, through software or an app called “cryptocurrency wallet”.
Cryptocurrency Wallet is a software or an app where you store and manage your cryptocurrencies. There are many cryptocurrency wallets available, you can choose which one suits your requirements.
To send, receive, and monitor your cryptocurrencies you need to download and install a cryptocurrency wallet. Once you register and log in to the wallet for the first time, the wallet will generate a unique public address (public key) and a private key.
Note: Never ever share your wallet’s private key with anyone. Just remember who owns the private key of the wallet, s\he owns the cryptocurrency associated with that key.
So the whole transactions happen using the public address. When you want to send cryptocurrency to someone you need their public address, and if you want to receive cryptocurrency you share your public address with them. And that’s it, just enter the wallet’s public address, and the amount you want to transfer, and press the send button.
Once the transaction happens, it broadcasts to the cryptocurrency’s network and will be added to the public ledger through the process called mining. All the users of cryptocurrency can access the ledger through software and can see the amount of the transaction, but they can’t see who transferred to whom.
Brief History of Cryptocurrency
On 31st of October 2008, a man or group of people by the name of Satoshi Nakamoto published the white paper called Bitcoin: A Peer-to-Peer Electronic Cash System, describing the functionality of the Bitcoin blockchain network. Satoshi Nakamoto’s identity still remains a mystery to the present day.
On the 3rd of January 2009, Satoshi Nakamoto mined the first block of the bitcoin network. The first mined block is also known as the Genesis Block.
On the 2nd of May 2010, The first purchase with bitcoin was recorded. It was purchased for 2 pizzas for 10,000 BTC. This day is still celebrated as Bitcoin Pizza Day.
In March 2010, the first cryptocurrency exchange was introduced by the name of bitcoinmarket.com.
On the 30th of July 2015, the Ethereum network was launched. It brought smart contracts and ERC-20 Token to the cryptocurrency world. Crypto assets that are created through Ethereum’s smart contracts are known as ERC-20 tokens.
In August 2015, First Initial Offering (ICO) took place. Augur ICO used the Ethereum network’s smart contract.
From there on, the cryptocurrency has not stopped. Each and every day new crypto assets, coins, and tokens are joining the cryptocurrency market. Currently, more than 4,000 cryptocurrencies exist and are still increasing day by day.