What Is Cryptocurrency and How Does It Work?

The Definition of Cryptocurrency

Cryptocurrencies are digital assets that are used for payments, storing wealth, gaming, NFTs, and transactions all around the world. All cryptocurrencies exist on a blockchain and rely on a digital public ledger to record all transactions. Due to its permissionless nature, cryptocurrency allows for financial transactions with a bank or sovereign regulation.

The History of Cryptocurrency

The history of modern cryptocurrency can be traced back to the publication of the Bitcoin white paper — Bitcoin: A Peer-to-Peer Electronic Cash System — in 2008 by an anonymous creator known as Satoshi Nakamoto. In early 2009, the genesis block of Bitcoin was mined. Since then, thousands of cryptocurrencies have been created.

Perhaps the biggest innovation since the creation of Bitcoin is the invention of the smart contract in 2014. A smart contract is a program that automatically executes, controls, or documents legally relevant events. The first cryptocurrency to successfully use smart contracts on a mass scale is Ethereum. Ethereum is currently the second-largest cryptocurrency in circulation.

Since 2017, we have seen many more cryptocurrency projects catch the attention of millions of investors. That includes inter-network cryptocurrency Polygon, gaming cryptocurrency Axie Infinity, and meme coins such as Dogecoin.

How Cryptocurrency Is Used

One of the best ways to understand what cryptocurrency is, is to see how it is used. Here is a look at three of the most common ways cryptocurrency is used in everyday life.

1. Payments

Cryptocurrencies are used as payments for goods and services, mostly online. As an example, a person can use Bitcoin to pay for a product from an online store. Also, cryptocurrencies can be used as payment without any intermediaries almost instantaneously.

2. Peer-to-Peer Transactions

Many people who live in emerging or frontier markets such as Africa and South America are using cryptocurrencies as a way to transfer money to friends and family. Using cryptocurrency for peer-to-peer transactions has a lower fee than conventional methods such as bank transfers and West Union services.

3. Store of Wealth

Cryptocurrencies are also used as a store of wealth. Due to the inherent privacy of cryptocurrency, some people prefer to keep their wealth in a portfolio or digital wallet. Also, some investors see cryptocurrency as a hedge against inflation.

How Cryptocurrency Transactions Are Performed

There are two major ways that cryptocurrency transactions are performed — proof of work (PoW) and proof of stake (PoS).

1. Proof of Work

Proof of work (PoW) involves having an anonymous third party known as a miner validate a transaction. In order to be selected as a validator, the miner will usually solve a complex mathematical problem. When selected, the miner will validate the transaction and receive mined cryptocurrency as a reward.

While PoW is considered extremely secure, some criticize this method of cryptocurrency transaction because it expends a large amount of energy. Bitcoin currency uses PoW to validate transactions.

2. Proof of Stake

Proof of stake (PoS) is a process where a validator will stake a certain amount of their cryptocurrency during a transaction. If the transaction is not valid, then the validator can lose some or all of their stake in cryptocurrency. Currently, Ethereum is moving towards a proof of stake protocol that is supposed to lower transaction fees.

Types of Cryptocurrency

While there are thousands of cryptocurrencies, you should really be familiar with some of the top names. Here's a look at some of the major cryptocurrencies in terms of market capitalization:

Bitcoin

Bitcoin is the first and the largest type of cryptocurrency. With a market cap of almost $1 trillion, Bitcoin is widely recognized around the world. This cryptocurrency uses a proof of work protocol to complete transactions.

Ethereum

Ethereum is the second-largest cryptocurrency project. The popularity of Ethereum is due to its ability to create smart contracts, which is essential in the function of NFTs. Currently, Ethereum is transferring over to a proof of stake protocol.

Solana

Solana is a fast-rising cryptocurrency that is seen as a faster and less expensive form of Ethereum. Solana used proof of stake and is popular among NFT creators and collectors who are seeking a cheap alternative to Ethereum.

Tether

Tether is a stablecoin that pegs its value to the U.S. dollar. Many crypto holders use Tether as a proxy for cash. This allows them to store money outside of a traditional cryptocurrency without having to move any money off of their crypto wallet.

Cardano

Cardano is seen as a competitor to Ethereum. Its creator, Charles Hopkins is seen as one of the central figures in the growth of cryptocurrency. Cardano is popular because of its proof of stake protocol and its quick transaction times on large transfers.

Advantages of Cryptocurrency

There are a number of reasons why many people are using cryptocurrency. Here's a look at its top three advantages:

1. The Ability to Create and Sell Digital Assets

From NFTs to games, creators and artists are able to sell their digital assets and receive their payments in cryptocurrency. This opens a market of billions for any artist from anywhere in the world.

2. Allows Easier Ways to Get Paid for Projects

Artists and creators are now able to be paid in cryptocurrency without having to deal with timely and costly foreign exchanges. This is especially true for artists and creators from countries with expensive transfer fees.

3. Provides a Way to Create Smart Contracts and NFTs

Cryptocurrency provides artists with a way to create smart contracts and NFTs, which can open up a huge potential market for their work.

Disadvantages of Cryptocurrency

There are also some downsides to cryptocurrency. Here's a look at three major disadvantages of cryptocurrency.

1. Steep Learning Curve

Some artists and creators may have a hard time understanding how cryptocurrency works, including how to purchase, store and spend the digital currency. However, this can be overcome with some education on the subject.

2. Volatility Can Negatively Affect Creator and Artist Income

Creators and artists who are paid in cryptocurrency need to understand that these assets can be extremely volatile and can lose value quickly.

3. Fraudulent Crypto Projects Abound

While there are many opportunities to work on crypto and blockchain-based projects, artists and creators should be careful not to work on any fraudulent projects.

Cryptocurrency in the Future

It is only 13 years since the creation of the first cryptocurrency. In the next few years, we can expect some major changes to the overall crypto world. Let's take a look at cryptocurrency in the future.

1. More Adoption

There are currently over one billion people who own at least some cryptocurrency. However, that number is expected to double over the next few years. That's because it is becoming easier and easier to purchase cryptocurrencies. In the next few years, you may be able to purchase crypto at your local bank or ATM.

2. More Sovereign Investment

Right now, there are a handful of countries that have Bitcoin as Legal tender, such as El Salvador. However, that number is expected to increase as crypto becomes more mainstream. As larger nations add crypto to their balance sheet, the value of certain currencies are expected to rise.

3. Applications in the Metaverse

In the past 12 months, we have seen an explosion in the size of the metaverse and web3 applications. The metaverse is a term used for a virtual world experience where people can meet, work, and play games through an online avatar. Cryptocurrencies are expected to be the main vessel for financial transactions in the metaverse.

Summary

Cryptocurrencies are digital currencies designed as a medium of exchange.
They are used for payment, stores of wealth, and peer-to-peer transfers.
Transactions are performed by proof of work or proof of stake.
The first cryptocurrency was Bitcoin, which currently has a market capitalization of nearly $1 trillion.
Top cryptocurrencies include Bitcoin, Ethereum, Solana, Cardano, and Binance Coin.
You can invest in cryptocurrency through crypto brokers, stock trading platforms, and payment platforms.
Advantages of cryptocurrency include the ability to receive payment for digital assets and easily open your market up worldwide.
Disadvantages of cryptocurrencies include a steep learning curve for artists and creators to truly understand its potential.
In the future, cryptocurrencies could see a higher adoption rate among large companies and sovereign entities. Also, cryptocurrencies will play a large role in the emerging metaverse space.

Learn More About Cryptocurrency With Daisie

The world of cryptocurrency is literally changing every day. If you want to stay ahead of the curve, then you will want to connect with a community that is learning the latest about cryptocurrencies. At Daisie, you can learn about the latest trends in cryptocurrency, including how to invest, work, and create projects in the crypto space. Visit our site today to get started for free.

What Is Cryptocurrency?

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