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- 1 Cryptocurrency is prevalent now, but still, many people are unaware of it.
- 2 It is a must that the knowledge about digital assets is made more far-reaching.
Besides the ones living under a rock, everyone knows about cryptocurrency today. It’s one of the most trailblazing technologies that change the way one lives their lives. Essentially, it is a medium of exchange like the money one already uses. But cryptocurrency works in a different way than fiat or regular currency. So, let’s get into the basics of digital assets and see what’s there to learn.
Understand the Mechanism of Cryptocurrency
Cryptocurrency doesn’t require a bank or a centralized organization to work. It works on an open-source system called the decentralized distributed ledger or blockchain. This ecosystem is managed by a group of people. These digital assets can’t be represented through coins or notes.
They only exist over the internet and are transferred using crypto wallets. Beginners can equate them with money that exists only in the bank account. To answer the canonical question, cryptocurrencies are created mainly in two methods. These methods are consensus mechanisms.
Proof-of-Work (PoW)
Proof-of-Stake (PoS)
Newbies must know that the first cryptocurrency was Bitcoin. It was created using the PoW consensus and the process is called “mining”. Under this process, the creators of the crypto are miners. They solve mathematical equations and create blocks that ultimately become crypto.
Notably, Bitcoin is the only cryptocurrency that is created with this method. The rest are created using the PoS mechanism that works differently from the PoW. In the former, the blockchain members have to stake or accumulate tokens in the blockchain.
By doing that, they get the rights to validate new blocks that become tokens. The learners must also know many people in the crypto domain consider only Bitcoin a cryptocurrency. They call the rest of the crypto altcoins.
However, today all digital assets are called crypto regardless of their consensus algorithm.
One can delve deeper into the technicalities and find many fascinating aspects of this technology. Nonetheless, that could be a lot to take for people new to this concept. Thus, let’s obtain a fundamental understanding and see what it offers.
What Makes Cryptocurrencies So Valuable?
To understand that, one needs to be familiar with the concept of money. Printed money wasn’t always the means of exchange for humans. Humans established that after years of using other commodities as means of exchange. The early civilizations used the barter system to get something in exchange for the other.
As the civilization evolved, human beings established some principles around it.
As per the standard definition, any means of exchange has to meet the following criteria.
- Scarcity
- Divisibility
- Acceptability
- Portability
- Durability
- Uniformity
Now Bitcoin and other crypto fit this criteria and let’s see how.
Scarcity– Traditional currency cannot be printed limitlessly, countries have to provide something in return. In the same way, Bitcoin has a limited supply. Only 21 million Bitcoins can be mined, after that, no new coins will be generated.
Divisibility– A currency should be divisible into many units. It is applicable in fiat currency as well as digital assets. A Bitcoin consists of up to eight decimal places.
Acceptability– Though cryptos aren’t as ubiquitous as fiat, they can be. Shortly, people might find themselves making payments using state-sanctioned cryptos.
Portability– Like fiat, cryptos can be used internationally. In this concept, the latter is more useful. Fiat currency of one country has to be exchanged in one or another country for proper usage. Cryptos can be used everywhere in the same form.
Durability– Cryptocurrencies exist in the digital realm only. They are way more durable than their fiat counterparts.
Uniformity– Cryptocurrencies maintain uniformity as they don’t have any appearance. Unlike the fiat, they cannot be copied.
Benefits and Drawbacks of Crypto Everyone Should Know
The biggest USP of crypto is that it works anonymously. Blockchain is a network of encrypted pieces of information. It eliminates intermediaries from the process and makes the transactions faster and cheaper. The system deploys public and private keys to safeguard the payments.
Only the blockchain members with access to these keys can see the data. While bringing safety, the public ledger or blockchain amps up the transparency level as well. Notably, anything recorded in this system cannot be deleted or altered. So, it rules out any chances of manipulation as well.
However, that doesn’t mean that cryptos are invulnerable to scams or cyber-attacks. Crypto networks have suffered massive thefts by hackers. The amount of digital assets lost in these incidents is in billions. Moreover, the lack of regulations makes it a preferred means for illegal activities.
Final Thoughts
In the beginning, many people called crypto a mere fad. But those critics have been silenced by its growing acceptance. In the next few years, most governments will regulate it. They will also roll out Central Bank Digital Currency (CBDC); a government-owned crypto.
Hence, it’s safe to say that crypto is very much an indispensable part of the future. But when it comes to using it as an investment, beginners have to be very careful.
Adarsh Singh is a true connoisseur of Defi and Blockchain technologies, who left his job at a “Big 4” multinational finance firm to pursue crypto and NFT trading full-time. He has a strong background in finance, with MBA from a prestigious B-school. He delves deep into these innovative fields, unraveling their intricacies. Uncovering hidden gems, be it coins, tokens or NFTs, is his expertise. NFTs drive deep interest for him, and his creative analysis of NFTs opens up engaging narratives. He strives to bring decentralized digital assets accessible to the masses.
