What is Cryptocurrency?
Cryptocurrency is a digital currency that works as an exchange medium on a computer network and is not dependent on a central authority (such as a government or bank) to maintain or regulate it. It is a decentralized system for verifying that the parties in a transaction have the funds they claim to have, and eliminates the need for traditional intermediaries like banks when transferring funds between two parties.
A cryptocurrency consists of tokens and a protocol (blockchain technology). Tokens are the currency units and value that you can store, send, or sell. Tokens are stored in digital wallets that have a public address. To trade cryptocurrency, you need a wallet for it. When you become a customer of a marketplace, the marketplace provides you with a wallet so you can start trading.
The biggest cryptocurrency is Bitcoin, and it is used as “digital gold”. Ethereum is the second largest cryptocurrency. Developers can create smart contracts on Ethereum’s blockchain to create decentralized alternatives to traditional banking functions, such as lending and trading.
How Cryptocurrency Works
Although there are many different types of cryptocurrencies, they all have one thing in common: they operate on blockchain technology, which makes them decentralized. The decentralization of financial operations through cryptocurrencies has several efficiency gains compared to the traditional financial system.
The Advantages of Cryptocurrency
- Cryptocurrency eliminates almost all fixed costs associated with banks
- Transactions become cheaper and can be sent and received internationally
- Inflation or limited supply that is written into code – no need to rely on the Federal Reserve
- Financial derivatives such as trading strategies and loans can be coded directly on certain cryptocurrency blockchains, replacing the need for financial intermediaries.
The Most Popular Cryptocurrencies
There are many popular cryptocurrencies. Some of the biggest and most popular cryptocurrencies are Bitcoin, Ethereum, Tether, USD Coin, XRP, Binance Coin BNB, Cardano, Solana, Dogecoin, Litecoin, Polygon, Polkadot, Tron TRX, and Shiba Inu.
Tokens, cryptocurrencies, and other digital assets besides Bitcoin are called Altcoins. Altcoins are known as alternative cryptocurrencies.
The protocol (blockchain technology) is a distributed ledger that maintains the balance for all token trading. Each transaction made is stored on thousands of computers around the world. The network records every single transaction on the ledgers and then shares them with all the other ledgers on the network. When the entire network agrees that the information is recorded correctly, the transaction becomes permanent.
Bitcoin and cryptocurrency can be used as a means of exchange and payment if both parties agree. A cryptocurrency is not dependent on a centralized banking system. Because each node in the network is owned by a private entity, the entire network is collectively responsible for maintaining the accuracy of the ledger. When you send cryptocurrency to another person, the transaction is approved by the entire network. Transactions are approved collectively by everyone in the network and not centrally, as is done in a traditional bank, so this system can manage without central control. Because there is no central entity that approves the transactions, users do not need to identify themselves when they send bitcoin or other cryptocurrency. The protocol checks that the user has enough virtual currency and sends it to another desired wallet.
The networks are transparent, and the status of transactions is therefore available to everyone. Cryptocurrency trading cannot be reversed or manipulated by hackers. However, wallets can be hacked, so you must be careful with your private keys to your own wallet.
Is It Safe to Buy Cryptocurrency?
There are many cryptocurrencies, and there are currently about 10,000 different currencies on the market. Many wonder how safe it is to buy cryptocurrency. To understand the security, it is important to understand how it works.
Security on Two Levels
- How secure is a blockchain?
- How secure is your wallet?
How Secure Is Your Wallet?
You can store your cryptocurrency in many ways. Today, most wallets are very secure. It is important to understand that if you store your cryptocurrency on a wallet that you can disconnect from the internet, it cannot be hacked. But if you disconnect it from the internet, you must keep track of your wallet. You must know where it is and how to access it to get hold of your own cryptocurrency. Hypothetically, you can lose it or someone can steal it. Find out which solution is best for you.
How Secure Are the Different Blockchains?
The security of the blockchain depends on the system it is built around. This factor is not under your control as a user. There are essentially two different types of blockchains, Proof-of-Work and Proof-of-Stake. Proof-of-Stake is much more flexible because it can use Smart Contracts, DeFi, it needs much less energy, it can do many more transactions per second, and so on. But even though Proof-of-Work is also very secure, it is not as well proven as Proof-of-Stake.
Proof of Work (PoW)
Proof of work (PoW) is a system that requires a significant but feasible amount of effort to discourage fraudulent or malicious use of computing power, such as sending spam emails or starting a DoS (Denial of Service Attack). The concept was adapted to secure digital money (cryptocurrency) by Hal Finney in 2004 through the idea of “reusable Proof of Work” using the SHA-256 hashing algorithm. Bitcoin was the first application to use Finney’s PoW idea. Proof of Work is the base for Bitcoin and several other cryptocurrencies since it can ensure a secure and decentralized consensus.
Proof of Stake (PoS)
Proof-of-Stake is an alternative consensus mechanism for a blockchain to Proof of Work. Proof-of-Stake or PoS reduces the amount of computational work required to verify blocks and transactions compared to Proof-of-Work. This model is significantly less energy-consuming than Proof-of-Work. In addition to being less energy-consuming, Proof of Stake is cheaper and much faster than Proof of Work. It can process many more transactions per second at a reasonable cost. The advantage of staking is that anyone can participate in staking; all you need to stake is coins. To mine coins in PoW, you need expensive hardware. PoS is more accessible to everyone.
One of the disadvantages of PoS is that the more coins you hold, the greater your chances of becoming a validator. This means that those with the most coins or tokens have greater control over the network. Those with the most money can therefore control a larger part of the network. The reward for staking is relatively lower than mining rewards.
Most newer cryptocurrencies run on PoS, such as Ethereum, Solana, Cardano, and Polkadot.
How to Use Your Cryptocurrency
You can pay, exchange, or speculate in cryptocurrency just like you can with physical currencies such as Norwegian kroner or US dollars.
In summary, cryptocurrency is a digital currency that operates on a decentralized system called blockchain technology. The biggest cryptocurrency is Bitcoin, and there are many other popular cryptocurrencies such as Ethereum, Tether, and XRP. Cryptocurrency eliminates most fixed costs associated with banks, makes transactions cheaper and more efficient, and is not dependent on a centralized banking system.