Cryptocurrency 101
The basics of understanding cryptocurrency
The rise of cryptocurrency in the past decade has been riddled with confusion about how it works, but also quick development in the industry. We hear, so often, about people who received thousands of Bitcoin ages ago as payment, who have now become millionaires because of its meteoric rise. Cryptocurrency is called the currency of the future while others advise avoiding it due to its decentralization. But, how do these cryptocurrencies like Bitcoin and Ethereum work?
Cryptocurrencies are built on the idea that there is no centralized entity controlling each “coin” and that the different cryptocurrencies are not tied down to a physical thing. While this does cause the price of different cryptocurrencies to fluctuate constantly, it allows for further trust in the system. Cryptocurrency only truly costs money because someone has it and wants payment for giving the crypto to you.
The Technology behind Cryptocurrency
The basis of cryptocurrency is built on the blockchain (which I will explain in a moment) and cryptography, hence the name cryptocurrency. Cryptography is a method of disguising and revealing certain information, and this is why cryptocurrency has come to fame. There is a level of anonymity through using cryptocurrency that appeals to many people who do not want their transactions and payments to be discovered.
The blockchain is a essentially a digital ledger that keeps track of transactions and requires verification to complete transactions. The database is not centralized, but rather, “miners” across the world are rewarded for their efforts. These miners seek to find the key to a transaction that was requested, and whichever miner is able to solve the key (based on SHA-256 encryption) first, is rewarded with cryptocurrency. This verifies the transaction and allows for the transaction to be completed.
Why do people use cryptocurrency?
Decentralization is one of the main draws towards cryptocurrencies. The power of blockchain and cryptocurrencies is that the power lies within the peers who control the verification system. For anyone to take control of, for example, Bitcoin, they would need to control 51% of the various computer networks that mine Bitcoin. This is considered an almost impossible task, and is why many people are beginning to flock towards cryptocurrency.
Cryptocurrencies are also built on a peer-to-peer transactional basis (P2P). This removes the needs for a middle man like PayPal who takes a large transaction fee. Most cryptocurrencies charge a nominal transaction fee, but in comparison to other methods of transferring money electronically, cryptocurrencies are much less expensive.
The Different Cryptocurrencies
While there are over 2,500 different cryptocurrencies, many with different systems, there are 3 main ones that have a large portion of the cryptocurrency industry. They are: Bitcoin, Litecoin, and Ethereum.
Bitcoin is the most famous and for good reason. It is considered to be the first cryptocurrency. It was released in 2009 and has owned the majority of cryptocurrency transactions since. It is built on the blockchain and it is used as a template for many other cryptocurrencies. Recently, Bitcoin surpassed $40,000 for a single Bitcoin, and while it has fallen significantly since then, it demonstrates how significant the rise of cryptocurrency has been. For reference, in March of 2017, Bitcoin was hovering around $1,200 for a single coin.
Litecoin is actually a split from Bitcoin. It seeks to make transactions cheaper and faster than Bitcoin. It has taken a piece of the cryptocurrency market because of its ability to rival Bitcoin in scalability, however, Bitcoin still reigns supreme.
Ethereum is actually not a P2P cryptocurrency system. It was launched in 2015 as a way of implementing smart contracts into cryptocurrency. Smart contracts are agreements that require something to be done in order to receive payment in cryptocurrency.
I believe that cryptocurrency will continue to grow very quickly. There are many advantages such as decentralization that attract many users. Over the next two decades I would not be surprised if it became a main method of payment. While there are many issues that need to be worked out before this happens, such as hacks and security issues, the market has grown quickly and significantly. I hope you learned a little bit more about cryptocurrency from this article!
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