What is cryptocurrency?

Category

Blog

Published

Jun 8, 2022

Author

nbx.com

Cryptocurrency is a type of digital asset - a digital currency based on blockchain technology with the main purpose of serving as “money”.

A digital asset, generally speaking, describes any asset in digital form. In the cryptocurrency community it mostly refers to tokenised assets that are stored on a decentralised network (a shared ledger). Digital assets have shared characteristics and operate in similar ways.

All cryptocurrencies and digital assets share the following characteristics:Digital: Cryptocurrency only exists in digital form on a shared network. There is no physical form for cryptocurrency.

Decentralised: Cryptocurrencies are not stored on a central computer. Instead they are stored on a network which is shared among a large number of users.

Peer-to-peer: To transfer cryptocurrencies to another person you do not need a central authority or a trusted third party (such as a bank) to confirm and secure your transactions. The transfer is made directly from one person’s wallet to another.

Pseudonymous: When transferring funds in cryptocurrency, the only thing that the sender needs is the counterparty’s receiving address (a long string of numbers and letters). There is no need to give out any personal information.

Control: There is no third party that controls the system behind a cryptocurrency exchange. This allows users to be fully in control of their funds and personal information. This also removes the need for establishing trust with the third party.

Cryptography:To ensure that no one else on the network can access and see your personal information, cryptography is used. Cryptography ensures that your information is “hidden” with special codes that are highly secure and can be decoded only by you. When information is “hidden” with cryptography, it is considered “encrypted”.

Borderless: It does not matter if you send cryptocurrency to your neighbour or to a person on the other side of the world. The costs and speed are the same, whereas fiat currencies (government-issued currencies) take more time and incur more costs, since the conversion of fiat currencies and intermediaries (banks, payment providers, etc.) are involved.

Consensus mechanism: A mechanism which ensures that all nodes (devices on the blockchain that maintains the blockchain) are synchronised with each other and are reaching an agreement about which transactions are legitimate in order to be added to blockchain (known as Proof-of-Work and Proof-of-Stake consensus mechanisms).

What is an "altcoin"?

An alternative coin or “altcoin” is any cryptocurrency other than Bitcoin.

Generally, altcoins fall into two categories: those which are largely based on Bitcoin’s code (Bitcoin forks) and those which are standalone projects which were created from scratch. Today, most altcoins are hosted on the Ethereum network as ERC-20 tokens and therefore, depend on Ethereum to stay functional.

How to store cryptocurrency?

To buy and sell cryptocurrencies, you need what is called a cryptocurrency wallet. Basically, this is nothing more than a bank account for your cryptocurrencies with a twist. Instead of entrusting your funds to some other organization, you own them or "have custody of them" at all times.

How does a cryptocurrency wallet work?

A cryptocurrency wallet is made up of a public and private key, which are two long strings of letters and numbers that give you the ability to store, buy and sell cryptocurrencies from your own dedicated database. The public key is the secret code that identifies you as the owner of the wallet and its funds, while the private key is the secret code that allows you to spend the funds the wallet holds.

With this in mind, never disclose either to anyone or you'll risk losing access to your wallet forever.

Think of your cryptocurrency wallet as your bank account, except in this case, you're the bank and the account holder because you always own your funds. Therefore, the private key is like the password to your account and the public key is akin to something like your passport number or social security number in that it identifies you in connection with the wallet. When you want to buy, sell, or move the funds in your cryptocurrency wallet, all you need to use is your public address, which is also often called a "receiving address". Like your public and private keys, this is also a randomized string of letters and numbers, which in this case, allows you to transact with your crypto funds without revealing your keys to anyone.

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