Everyone wants to talk about it, but no one truly understands how it works.
Hi! So, I am assuming that Elon Musk’s “obsession” with cryptocurrency, particularly Dogecoin, piqued your curiosity. Or maybe the memes you see on Instagram sent you here. Or you don’t have a boyfriend to explain to you what cryptocurrency is. Whatever the reason may be, allow me to walk you through the hot topic :D
Contents of this article:
I. What is Cryptocurrency?
II. What is the difference between Cryptocurrency and Digital Currency?
III. Types of Cryptocurrencies
IV. The Technicalities: Blockchain and Cryptography
V. Future of Cryptocurrency: Is it worth investing?
WHAT IS CRYPTOCURRENCY?
Simply put, cryptocurrency is digital currency designed as an online medium of exchange and is stored in a digital wallet.
Unlike physical currency, payments made using cryptocurrencies are only digital entries in an online database that records individual transactions, and it works without a central authority such as banks.
‘Crypto’ in cryptocurrency stands for Cryptography — a method of using encryption and decryption algorithms for secure communication, transactions, etc. In the presence of malevolent third parties, cryptography ensures safe communication. We will dive into the technical deets a little later.
Yes, cryptocurrency does sound similar to digital currency. In the digital wallet, however, there are significant distinctions between these two currencies.
This brings to our second section…
WHAT IS THE DIFFERENCE BETWEEN CRYPTOCURRENCY AND DIGITAL CURRENCY?
The key differences between the two are:
- Decentralized structure:
Digital currencies are centralized, so all network transactions are regulated in a single location, such as a bank. Cryptocurrencies are largely decentralized, which means they operate without a central authority and are controlled by their respective crypto communities. This makes them free of any issues which can be faced by digital currencies.
2. Security provided by Encryption:
The digital currency less secure in terms of encryption. Whereas the cryptocurrency is heavily encrypted, hence making it more secure compared to digital currency. What makes cryptocurrency so secure is the technology behind it — Blockchain. I will discuss that in later sections.
3. Transparency of Information:
With digital currency, the users cannot view a wallet’s address or observe all money transfers done in the past. This information is kept private and confidential. But cryptocurrency is transparent. Users’ transactions are recorded on a public blockchain. The entire line of communication between the two parties regarding all transactions, including the previous ones, is stored in blockchain technology.
4. Exclusion of Transaction fee:
The substantial amount of fee payment with every transaction using a digital wallet is absent in cryptocurrency transactions. For investors dealing with large deals involving valuable assets, cryptocurrency is extremely handy.
TYPES OF CRYPTOCURRENCIES.
There are tons and tons of cryptocurrencies, like Bitcoin and Dogecoin, which might be a tad bit different from each other, but have a common underlying system.
Bitcoin is the first cryptocurrency, and all other cryptocurrencies are referred to as “altcoins.” While it’s impossible to tell which cryptos are the greatest; scalability, privacy, and the breadth of functionality that they support make Bitcoin, Ethreum, and some of the larger altcoins top the list.
All of the cryptocurrencies, like tons and thousands of them, along with their current market cap, price etc. can be found on https://coinmarketcap.com/all/views/all/. But, I will list out top 10 of them down here anyway:
- Bitcoin- Although the identity of the person who created Bitcoin is not public, the term “Satoshi Nakamoto” is connected with the person or group of persons that released the first bitcoin whitepaper in 2008 and worked on the first bitcoin software in 2009.
- Ethereum- A Russian-Canadian programmer, Vitalik Buterin, co-founded the second largest cryptocurrency with Dr. Gavin Wood, Charles Hoskinson and Joseph Lubin.
- Tether- Founded in July 2014 by Brock Pierce, Craig Sellars, and Reeve Collins; Tether (USDT) is a stablecoin, a type of cryptocurrency which is used to keep cryptocurrency valuations stable.
- Binance Coin- Changpeng Zhao, also known as CZ, is the founder and CEO of Binance, which became the world’s largest cryptocurrency exchange in just under 180 days.
- Cardano- Cardano is a blockchain project started by Charles Hoskinson, the co-founder of Ethereum, with the goal of “providing a more balanced and sustainable ecosystem” for cryptocurrencies.
- Dogecoin- Here is the cryptocurrency immensely supported by Tesla CEO Elon Musk. It was called after the ‘doge’ meme, which displays a Shiba Inu, a Japanese dog breed. The word ‘dog’ purposefully misspelt as ‘doge.’ It was created in 2013 as a joke by software programmers Billy Markus and Jackson Palmer.
- XRP- XRP is owned by Ripple, which is a digital payment network and system based on the blockchain. It was first released in 2012; it was co-founded by Chris Larsen and Jed McCaleb.
- USD Coin- The Centre Consortium, a collaborative effort between Circle and Coinbase, established USD Coin (USDC), a dollar-pegged stablecoin. Circle released it in 2018.
- Polkadot- Dr. Gavin Wood, the co-founder of Ethreum, developed Polkadot with Thiel Fellow Robert Habermeier and Peter Czaban.
- Uniswap- Uniswap, is the leading decentralized exchange protocol (DEX) built on Ethereum. It was developed by Hayden Adams and was released in 2018.
The Technicalities: Blockchain and Cryptography.
Blockchain and Cryptography play a crucial role in the functioning of cryptocurrency. But you may skip this part if you are not in the technical details ;)
A blockchain is a digital log/ledger of transactions that is duplicated and distributed across the blockchain’s complete network of computer systems. In simpler words, it is a type of database.
Each block on the chain contains several transactions, and whenever a new transaction occurs on the blockchain, a record of that transaction is added to the ledger of each participant. This decentralized database, called Distributed Ledger Technology (DLT), is administered by various people.
How does Blockchain work?
Once data is recorded in the blockchain, it becomes very hard to change it. The records are protected through cryptography decentralization to ensure the foolproof blockchain security of the blocks. Data blocks in the chain are given unique identities that refer to the block preceding them. These data blocks are dispersed and validated among a network of users. As a result, if the data within a block changes, the cryptographic hash changes as well. Since each block contains the hash of the previous block, if one block is tampered with, all following blocks are rendered invalid, adding a layer of permanence and security.
Blockchain uses two types of Cryptographic algorithms:
- Asymmetric Key algorithms
- Hash functions
The study of secure communications techniques that allow only the sender and intended recipient of a message, securing it from the third parties with ill-intent, to read its contents is known as Cryptography.
Multiple computational algorithms are used in cryptography. An algorithm — SHA256 — is one such algorithm. It’s a mathematical procedure that turns any input into a 256-bit (64-character long) random sequence of letters and numbers (hash).
Sounds complicated, because it is!
I randomly stumbled upon this cool website which calculates hash values of any data you put in. You might want to check it out!
Cryptography consists of 3 main entities:
- Computational Algorithm: Hashing algorithm, such as SHA256, used by cryptocurrencies.
- Private Key: It is the digital identity of the user which is kept hidden
- Public Key: It is the digital identity of the user which is shared with everyone.
How does cryptography works?
The amount of currency you want to send along with the details of the recipient are passed through the hashing algorithm. The generated output is then passed through a signature algorithm with the user’s private key. The output is digitally signed, which is used to identify the user. It is then distributed with the public key of the sender. The transaction is verified and added to the blockchain where it cannot be changed.
You can read in-depth about Private and Public keys here:
Public and private encryption keys | PreVeil
At PreVeil we often find ourselves explaining to our customers the concepts of how public and private keys work. We…
Future of Cryptocurrency: is it worth investing?
Several considerations make cryptocurrencies unsafe, at least for the time being, while other signals indicate that it is here to stay.
Cryptocurrency has a volatile nature. It always has, it always will. From the standpoint of pure investment, the risks connected with Bitcoin, Ethereum, or any other cryptocurrency are no different from those involved with other traditional assets, with the exception that the virtual coin market is more volatile.
Many eager investors are put off by the lack of governmental protection when it comes to cryptocurrency. But then again, cryptocurrency emphasizes the anonymity of the users. Aside from that, cryptocurrencies face other threats like hacking, permanent loss in the event of a forgotten password, virus assaults, and scams.
A lot of cryptocurrencies are founded with ambitious goals that can be accomplished over long periods. While the success of any cryptocurrency initiative is not guaranteed, if it meets its objectives, early investors may be well rewarded in the long run.
Will I ever invest in cryptocurrency?… I guess I will :P
With this comes the end of the article. I really hope I could put it in plain words for you.
Thank you! :)