Cryptocurrency: What is it and how does it work?

Some call it magic Internet money, some call it the money of the future, and some even credit cryptocurrency with changing their lives.
Cryptocurrency is a type of digital asset secured by cryptography. Due to their decentralized nature, cryptocurrencies are not governed by a central or regulatory authority. This means that as a form of currency, crypto can be used by anyone to send and receive payments without the need to go through a central governing body like a bank or a remittance broker.
When a cryptocurrency is transferred, the transaction is broadcast on a network where computers then start racing to solve cryptographic puzzles to approve the transaction and verify a new block on the blockchain. Once a transaction is verified, it is recorded on a public ledger where anyone can access and view the transaction.

Blockchain and cryptocurrency — what’s the difference?

Many tend to confuse these two terms or use them interchangeably but there is a difference between a blockchain and cryptocurrency.
Blockchain refers to the technology behind cryptocurrency. Essentially, a blockchain is a chain of connected blocks or an online ledger that keeps records of transactions between 2 parties. Every new block generated must be verified by nodes before being confirmed, which makes it almost impossible to forge.
Since the blockchain is near impossible to forge, it presents some potential use cases in industries like finance, preventing bad actors from being able to forge transactions. It may even be useful in voting systems as it removes the possibility of falsified votes.

Types of cryptocurrencies

Bitcoin is probably the most famous cryptocurrency — even those with limited crypto knowledge would have heard of it. It was invented by Satoshi Nakamoto back in 2008, and this single cryptocurrency has since spawned thousands of different cryptocurrencies.
Each cryptocurrency has its own function that might be unique to itself. For example, Ethereum markets Ether (ETH) as gas for smart contracts, Ripple’s XRP is used by banks to facilitate fund transfers between different geographical locations, and Solana markets itself as the “Ethereum killer” by offering lower gas fees for smart contract execution.
Since the inception of Bitcoin, the cryptocurrencies that have come after it are known as ‘altcoins’. These could be Bitcoin forks, or entirely new tokens built from scratch. Examples of altcoins include Avalanche, Solana, Ethereum, Litecoin and Bitcoin Cash, among others.

Advantages of cryptocurrency

Because cryptocurrency offers a new, decentralized form of money, there is no need for any central authority or governing body to facilitate crypto transactions. This also removes the single point of failure, such as when a bank is hacked. In such an instance, chances are that users will have their funds drained, which can lead to a cascading effect and ultimately, a financial crisis.
Since no third-party intervention is required, users can take up loans without underwriting; they simply need collateral to pledge for a loan. Compared to current banking systems, a loan can take anywhere between 3 to 7 working days to be approved before the funds are disbursed.
Lastly, cryptocurrencies allow users to save fees on remittance, which in current systems, can cost anywhere between 10% and 30% of the funds being remitted. With cryptocurrency, users must pay a gas fee that can range from $10 to $60, depending on the cryptocurrency they choose to transfer. This allows users to save on costly fees incurred by traditional remittance services, and opens doors for the unbanked and underbanked to transfer funds more easily.

Disadvantages of cryptocurrency

Since cryptocurrency allows for anonymous transactions, there are cases of crypto being used for illicit purposes, such as drug deals, murder for hire and much more on the dark web, where the main currency of transaction is cryptocurrency.
Another disadvantage is the consumption of energy. Bitcoin, for example, runs on a proof-of-work system, where computational power and energy are required to verify and generate new blocks. This consumes significant amounts of electrical energy, which can be harmful to the environment. However, tokens nowadays use more energy-efficient methods of verifying blocks.
At the end of the day, some will view cryptocurrency merely as an investment, while others view it as a technological advancement that can bring new levels of innovation to the current systems we use.
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