What is Cryptocurrency? A Beginner’s Guide by Kris-Anita Enyinnaya

There’s hardly anyone in the 21st century who isn’t familiar with words like “Crypto,” “Bitcoin,” and “Ethereum.” They’ve littered the Internet streets and have become more popular in the past decade and more. In fact, research shows that 300 million people worldwide owned some kind of cryptocurrency as of the end of 2021.

But what exactly is Cryptocurrency? While almost everyone earnestly seeks to hop on the digitalization wagon and invest in crypto, it’s important you first understand what it’s all about. This will help you decide whether it’s worth the hype.

In its simplest form, Cryptocurrency is digital money. One striking characteristic of this currency is that it is decentralized, meaning that it has no central regulating authority, unlike conventional money, thereby promoting transparency. In this article, you’ll learn all you need to know about cryptocurrency. If you’re considering a crypto investment, this beginner’s guide will give you a heads-up on the subject to help you embrace cryptocurrency benefits.

What is Cryptocurrency?

Cryptocurrency is a digital currency built and operated on blockchain technology. Blockchain is a public ledger that uses encryption to record and store transactions. 

Blockchain is also called a distributed ledger technology (DLT) and this is because it adopts a decentralized approach. There is no single governing body that regulates transactions or serves as a gatekeeper for the network. This is contrary to other forms of money that are regulated by the central banks.

In an encrypted public ledger (blockchain), transactions are recorded in “blocks,” which are linked together on a “chain” of previous cryptocurrency transactions. Hence, the name blockchain.

Each new transaction that takes place is logged, and the blockchain is updated simultaneously, keeping all records identical. The computers participating in the network are tasked with verifying and facilitating transactions (represented by blocks) within the chain. In some cases, all the computers work together to verify and facilitate each block action. In other cases, a group of computers is selected at random.

This is what makes blockchain transactions highly secure and nearly impossible to manipulate. Think of tens of thousands of computers verifying a single entry or transaction. The chances of error are very low, and if any disagreement among computers is noticed, the transaction will be voided.

This thorough verification process can also slow down blockchain transactions. Nonetheless, encryption technology is solely designed to ensure the immutability of all transactions, limiting counterfeits and making the network secure. 

In summary, here are the key characteristics of cryptocurrency (or “Crypto” for short);

• Cryptocurrency is a digital asset. It has no tangible form. In essence, if you own any kind of crypto, you don’t own anything tangible, but rather, a key. This key lets you move a record or a unit of measure from one person to another without third-party interference.
• Crypto is a form of money. Cryptocurrencies are used to facilitate exchanges and transactions on the network on which they’re built. Although it is not yet widely accepted as a medium of exchange, they’re used for many online purchases.
• Cryptocurrencies are decentralized currencies, meaning they’re neither governed nor issued by a central bank.
• Cryptocurrencies exist and run on a public ledger called a blockchain, which stores all crypto transactions in codes.
• Blockchain encryption is designed to make all transactions immutable and check all forms of fraudulent transactions on the blockchain network.

How Does Cryptocurrency Work? Proof of Work vs. Proof of Stake

Cryptocurrencies exist on a distributed public ledger called blockchain, where all records of transactions are updated by the network participants.

Units of cryptocurrencies are created through a process called mining. Through mining, individuals can verify transactions and generate new coins by using special hardware to solve complicated mathematical problems. 

These users simply contribute their computer’s computational power and energy to the network, for which they are rewarded with a specific amount of newly minted coins. This reward-based consensus mechanism is called Proof of work, meaning miners are issued units of cryptocurrencies as proof/reward for their efforts.

In Bitcoin mining, for instance, mining computers, called nodes, need to prove that they have spent energy in the mining process, which is the transaction validation process. Practically, miners’ computers collect individual transactions from the past ten minutes into blocks. Whenever transactions are performed on the network, a new block is opened. The details of the transaction are entered then the block closes and creates a hash number containing the encoded details from the transaction.

Each new block contains information from the previous block to create a chain to avoid any form of manipulation, leading to spending the same unit of the currency twice. The mining computers then race to be the first to solve a complex cryptographic puzzle and verify the new block for the blockchain. 

When a miner finds the correct solution to the mathematical puzzle, they broadcast the solution (block) to the network for review by the other nodes. Once the other nodes ascertain everything in the block to be correct, the validated block is added to the blockchain. The cycle continues.

As a reward for their efforts, the miner gets a specific amount of newly minted Bitcoins, called a block reward. Ultimately, these rewards are important as they incentivize everyone in the network to participate in the verification process and keep the network running smoothly.

However, not all blockchains use the mining method for verification. Proof of stake is an alternative consensus mechanism to Proof of work, which was criticized for the costs of power and computing resources.

Proof of stake requires that network participants temporarily lock up (stake) their cryptocurrency funds as collateral to be part of the verification process. Here, the number of transactions you can verify depends on the amount of crypto you’re willing to stake. 

Proof-of-stake (POS) uses randomly selected validators to confirm transactions and create new blocks. As such, whereas you stake crypto to be eligible to verify transactions, the odds you’ll be chosen typically increase with the amount you stake.

Once a block of transactions is ready to be processed, the cryptocurrency’s proof-of-stake protocol will choose a validator node to review the block. The validator checks to confirm the accuracy of the transactions in the block. If accurate, they add the block to the blockchain and receive crypto coins as rewards for their contribution. However, if the validator proposes adding a block with incorrect information, they lose some of their staked holdings as a penalty.

Proof of work and proof of stake are the two most widely used consensus mechanisms to verify transactions in a blockchain.

History of Cryptocurrency

Contrary to popular belief, Bitcoin is not the first digital currency. It is not the first use of public key cryptography to secure data (blockchain technology). 

The blockchain distributed database structure was first conceived and described by American cryptography David Chaum in his 1982 doctoral dissertation. In 1983, he invented a type of cryptographic electronic money, which he called ecash. 

Later, in 1989, he implemented his idea through Digicash, a company that facilitated cryptographic electronic payments. Digicash required user software to withdraw notes from a bank and designate specific encrypted keys before they could be sent to a recipient. This mirrored the idea of decentralization which is the hallmark of the cryptography concept. The idea however failed as it couldn’t attract many users and the company was dissolved in 1998. Chaum’s paper laid the foundation for future developments in the blockchain space.

Many developers soon tried to create a digital token that would imitate gold in terms of price stability. Digital tokens like EGold and Bit Gold, which emerged in the late 1990s, were such examples. Nick Szabo came up with Bit Gold, which he described as an electronic currency system that required users to complete a proof of work function with solutions that were cryptographically formulated and published.

Bitcoin, however, became the first modern cryptocurrency; the first truly decentralized cryptocurrency. Bitcoin was created by an anonymous computer programmer or group of programmers called Satoshi Nakamoto in 2009. This group sought to address the shortcomings of the traditional currencies, which included reliance on government institutions and policies. Ethereum and a host of other cryptocurrencies followed suit after Bitcoin set the pace.

As of 2022, the market capitalization of cryptocurrencies was about $1.8 trillion, with Bitcoin and Ethereum pulling significant sums, with market capitalizations of nearly $750 billion and $350 billion, respectively. The rapid growth in the crypto space has attracted the attention of more investors in the last two years.

Types of cryptocurrency 

There are two major types of cryptocurrency: tokens and coins. Tokens are a type of cryptocurrency or asset that is built on an existing blockchain, while coins have their own blockchain. Coins are more like traditional money, although they are digital. Conversely, tokens can be used as currency or to represent asset ownership. Find out more about cryptocurrency coins vs tokens. 

Conclusion 

If you’re looking to explore the crypto world, one question you must find an answer to is, what is cryptocurrency? Understanding what cryptocurrency is and how it works sets the foundation for your success in your investment journey. Think of cryptocurrency as a form of money that’s intangible and isn’t controlled by the central. 

While many think crypto investment to be risky and not worthwhile, others have benefited from it. However, ensure to know all there is to crypto investment and seek expert guidance as you prepare to start your investment journey. 

Zypto seeks to build the tools that are needed to enable the crypto enthusiast to use their currencies efficiently. Check out our extensive suite of products that makes it easy to spend your crypto anywhere in the globe. 

Did our beginner’s guide help demystify the crypto concept? Do you have a better understanding of the crypto subject? Let us know in the comments!

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