Basics of Cryptocurrency: Definition and Resources
What is the current state of cryptocurrency?
Cryptocurrencies, such as Bitcoin, Ethereum and Tether, are digital assets that use cryptographic techniques to buy, sell or trade securely.
Unlike traditional currencies issued by national governments, cryptocurrencies themselves don’t depend on a central bank for circulation. To get a better understanding of the cryptocurrency world, it can be helpful to familiarize yourself with the most commonly traded crypt
What are the reasons for such a wide variety of cryptocurrencies?
Bitcoin is often the first that comes to mind in the cryptocurrency space, and it is known to be highly valuable. However, statistics from CoinMarketCap.com show that there are over 22,000 different kinds of cryptocurrency being traded publicly.
While some of them may have significant market values in the hundreds of billions of dollars, others might be harder to come by and largely valueless. If you're considering investing in cryptocurrency, it can be helpful to start with one that is well established and actively traded on the market.
Carefully choosing your cryptocurrency is no sure path to success in the erratic world of digital currency. Problems arising from the closely-linked crypto sector can have a wide-reaching effect on asset worth. For example, in November 2022, the market experienced a major setback as FTX, a virtual currency exchange, had difficulty handling liquidity due to an upsurge in cash withdrawals. The ensuing chaos caused values of both large and small cryptocurrencies to drop drastically.
What is cryptocurrency and how does it work?
Cryptocurrencies are digital assets that are supported by technology known as blockchain. This system keeps track of transactions and who owns what, making it difficult to tamper with or duplicate holdings. Units of cryptocurrencies can be referred to as coins or tokens, depending on their usage. They can be used for exchange, as a store of value, or to access specific software programs like games or financial products. Cryptocurrency creation often involves mining, an energy-intensive process in which computers solve complex puzzles to verify the authenticity of transactions on the network.
What is the purpose of blockchain technology and how does it work?
Blockchain is a networking protocol that allows computers to collaborate in order to keep an up-to-date and secure record of transactions.
To ensure that all participants agree on the same ledger, there must be a recognized way to verify and validate transactions; this is where "consensus" comes into play. The two most popular methods for achieving consensus on a blockchain network are "proof of work" and "proof of stake."
What is "proof of work"?
Proof of work is a system used by blockchain networks to incentivize users to help record and maintain the network's records of who owns what. Bitcoin uses this system as part of its crypto protocol, rewarding users that successfully submit new blocks of transactions with rewards.
This process is known as mining, and it involves solving a difficult puzzle requiring a great deal of energy and computing power. This challenge is referred to as the 'work' in proof of work, and successful miners can receive rewards that more than make up for the costs involved. The obstacles posed by proof of work also act as a deterrent for potential dishonest players.
What is "proof of stake"?
Another method of reaching agreement on the validity of the historical record of transactions on a blockchain is through proof of stake. It does away with mining in favor of a method called staking, where users stake some of their own cryptocurrency holdings to guarantee the accuracy of their work while verifying new transactions.
Cardano, Solana, and Ethereum are a few cryptocurrencies that employ proof of stake (which is in the process of converting from proof of work). In that users must gather and submit fresh transactions, proof of stake systems and proof of work protocols share some similarities. However, they use a different strategy to reward participants in that process who act honorably. In essence, those who suggest new data blocks to be added to the record are required to risk some money.
In many circumstances, increasing your bet will increase your chances of getting a new block and the goodies that come with it. People that provide false information risk losing some of the money they have risked.
Therefore, cryptocurrencies are digital assets that use cryptographic techniques for secure buying, selling, or trading. They are supported by blockchain technology - a chain list of all transactions that have taken place within a single currency.
The two most popular methods for achieving consensus on the blockchain network are "proof of work" and "proof of stake".