What Is Cryptocurrency?

Cryptocurrencies are inherently related to the blockchain. You can’t have one without the other. But before we get into cryptocurrencies, it’s important to know what a blockchain is: In simple terms, it is a digital ledger. It keeps track of value within the network and stores transactional data. But, there’s no way for us to access its services with cash in your pocket. Blockchains need their own native currency to communicate with the network.

That’s where crypto comes along. Just like there are different blockchain networks, there are different types of cryptocurrencies. In this article, Ledger Academy will explain the ins and outs of what cryptocurrency is, how it differs from fiat currencies, and its relationship with the blockchain.

What Is Cryptocurrency?

Put simply, cryptocurrency is a type of currency you use on blockchains. Similar to how we use tokens at a carnival, we need to use a different ‘type of money’ to access blockchain services. Here is where the concept of cryptocurrency fits in the blockchain ecosystem. These digital coins give us access to the blockchain world, and are called “cryptocurrency.”

Why Is It Called Cryptocurrency?

You might be wondering what could be the reason behind calling this digital money cryptocurrency. The biggest issue with creating a digital currency is the double spending problem. Without getting too technical, it’s hard to create a system that ensures you can’t spend the same funds twice. To eliminate this issue, digital money on the blockchain is secured by “Cryptography” techniques. That is why digital money is called “Cryptocurrency.”

How Does Cryptocurrency Work?

Firstly, like most currencies, cryptocurrencies are divisible. For example, 1 Bitcoin can be divided into small fractions called Satoshis in your Bitcoin wallet, just like a dollar splits into 100 cents. Each cryptocurrency works a little differently, but in essence, they are quite similar.

How Coins Come Into Existence: PoW vs PoS

Different blockchains use different consensus mechanisms which affect how the coins come into existence. For example, in a proof of work consensus, new coins are mined. This takes a lot of computational power which ensures that the means it’s pointless to try and cheat the system. This means the supply doesn’t increase too fast, which might devalue the coin. In a proof of stake consensus, the supply is usually issued at launch and then capped. This means that there will never be more than a specific number of coins.

Allocation: Who Receives The Coins and Can Control the System?

Apart from the miners or validators, there is usually an allocation model at the cryptocurrency’s launch. This will tell you exactly who gets a number of coins for doing what in the system and why. But watch out – not all cryptocurrencies are decentralized. Some cryptocurrencies allocate the majority of their coins to a foundation run by an unelected board of governors.

What Is Cryptocurrency For?

Cryptocurrency is the lifeblood of the entire blockchain ecosystem. It allows you to interact with the platforms and services of a blockchain network. Cryptocurrencies are not managed, governed, or controlled by any central authorities or institutions. Instead, they can power decentralized systems that operate autonomously.

Put together, all these features make blockchain very hard or almost impossible to alter or hack. That is what makes blockchain technology so powerful. Besides, it provides us with major revolutionary advantages for countless applications with the same core principle: fostering the decentralization of traditional systems to give power back to the people. And this is exactly what cryptocurrencies aim to do with the traditional financial system.

You might not be able to hold cryptocurrency in your hand or keep it in your pocket. But its value is as real as the notes in your wallet. In fact, you can have more control over your cryptocurrencies than you can with fiat currencies.

Trading

You can also use cryptocurrency much like a stock for trading. In fact, there are even cryptocurrencies that represent stocks. While that’s a topic for another article, trading crypto is one of the top activities users opt for. Whether you’re a day trader, or you only want to attempt it casually, make sure you read the Ledger Academy guide on how to trade crypto before you begin.

Paying For Services or Goods

Much like you can with fiat currencies, you can use cryptocurrencies as payment for goods and services. You can pay for anything with crypto, in the physical or digital world. There’s a famous example of Jeremy Strudivant, the man who paid 10,000 Bitcoin for 2 pizzas in 2010. While that may not have been the best choice for Jeremy at the time, there are now plenty of goods and services to spend your crypto on. From buying NFTs to donating to good causes, there are countless things you can buy with crypto today.

Participating in Web3 Communities Like DAOs

The blockchain is not just for moving around money. Using cryptocurrencies, you can also take part in community governance. Decentralized autonomous organizations (DAOs) use cryptocurrencies or tokens on a specific blockchain, to allow users to vote in a decentralized manner.

For Investing

Since blockchains provide entire economies for users, there are several ways in which users can invest their cryptocurrencies in the hope of seeing some returns. For example, blockchains that use a proof of stake consensus allow users to stake a certain amount of cryptocurrency to help secure the network. In return, the user, named a validator, receives cryptocurrency rewards. This is just one example of a way you can invest in cryptocurrencies in a blockchain ecosystem.

Cryptocurrencies vs Fiat Currencies: What’s The Difference?

All of those use cases might seem familiar to you. So you may be wondering; what is the difference between cryptocurrency and the money in your bank account? Well, cryptocurrencies have a few major differences from the fiat currencies you already know.

Crypto allows for Decentralized Ecosystems

Fiat currencies are issued by governments that control their supply and circulation. Crypto, on the other hand, is not issued by the government. In fact, many blockchains are governed by holders of the coins themselves. Some blockchains have an unlimited supply of coins, while others have a capped supply. But no single entity can print more coins without reason like governments can with fiat currencies.

Crypto Is Purely Digital

While your fiat currencies exist in physical form, as bills or coins, crypto is purely digital. Your cryptocurrencies exist on the blockchain on an unhackable distributed Ledger, meaning you can’t actually hold a Bitcoin in your hand.

Crypto Is Permissionless

Fiat money varies from place to place. While you may have to change your Dollars to Euros at the European border, you don’t have to do that with crypto. Crypto can cross borders without friction.  Furthermore, you don’t have to provide the blockchain with any personal data to own or use cryptocurrencies. That means every nation can use them, no matter the geoblocking issues or sanctions citizens of certain countries may have to deal with.

Using Cryptocurrencies Removes the Need for Middlemen

Using fiat currencies relies on middlemen, such as banks or payment services. These are using real people or a central entity’s computer to verify transactions. Trusting centralized entities with your funds can be risky. For example, what if the bank goes bankrupt? Or worse, what if the person who is meant to validate your request for a loan just doesn’t like the look of you? Using cryptocurrencies allows for peer-to-peer transactions, meaning users on the network can transact with each other and the system provides security.

Crypto Transactions Are Forever

To explain, crypto transactions are irreversible. Once you make a transaction,  the blockchain records it immutably and forever. There is no going back. That means if you accidentally send funds to the wrong address, there’s no customer support to help you. That’s why good crypto security practices are so important.

Crypto and Blockchain – What’s the Difference?

While cryptocurrency is like digital money, blockchain is the network on which the money transactions operate. Blockchain technology is a generic technical concept – like “the Internet” and there are several different blockchains all built on this technology. Then, each of them supports a different cryptocurrency.

What Is The Future of Cryptocurrency?

Crypto is the fuel for an entirely new system in which you, as a free individual, have more power. In which you can “be your own bank”, being the only one in control of your digital assets and the only one in charge of keeping them secure. No central authority is involved, which empowers users.

It means more freedom and independence to make your own moves. More equality, transparency, and privacy regarding all your actions. While cryptocurrencies still have a long way to go and challenges to overcome, this is what crypto is about: putting people back in the center and giving them control over their lives.