What is Cryptocurrency?
In recent times, you may have heard terms such as digital currencies and cryptocurrencies. With the growth of the digital economy, the use of digital currencies is rapidly increasing, and slowly it is expected to replace physical currencies or fiat currencies.
In this article, we will comprehensively discuss the concept, history, applications, and types of digital currencies.
What is a Digital Currency?
A digital currency is a type of money that does not have any physical form, and transactions related to it are conducted using a computer or an electronic wallet connected to the internet or specific networks.
In contrast, regular currencies like banknotes printed by governments are tangible and have specific physical characteristics.
Digital currencies have similar uses to physical currencies and can be used for buying goods and paying for services. In addition to these general features, they also have some unique characteristics such as usage in specific networks, facilitating the transfer of value, and more.
Features of Digital Currencies
As mentioned earlier, digital currencies only exist in digital form and do not have a physical equivalent. These types of currencies can be created in two ways: centralized and decentralized.
Using digital currencies requires a shift in collective thinking about currencies (not just buying and selling). However, digital currencies expand this concept. For example, spending a type of digital currency in a game can increase a player’s life or provide them with extraordinary powers. This action, in essence, is not a transaction or sale, but rather a transfer of value.
History of Digital Currency
The origins of digital currencies can be traced back to the 1980s when they were referred to as cyber currencies.
However, cryptocurrencies officially began in 2008 with the introduction of Bitcoin (created by an anonymous programmer or group of programmers under the name Satoshi Nakamoto).
Since the launch of Bitcoin in 2009, cryptocurrencies have gained significant popularity, and many individuals have invested in them.
The first Bitcoin transaction, as the first cryptocurrency transaction, took place on January 12, 2009, between Satoshi Nakamoto and Hal Finney.
Types of Digital Currencies
Digital currency is a general term that can be used to describe different types of electronic currencies. Generally, there are three main types of digital currencies: cryptocurrency, virtual currency, and central bank digital currencies (CBDCs).
Virtual Currencies
These are digital currencies that are not regulated by any government or political authority and are created and controlled by a team of developers.
They can also be algorithmically controlled by a defined network protocol.
For example, the gems in the game Clash of Clans are a type of virtual currency created and controlled by the project developers.
Cryptocurrencies
Cryptocurrencies are digital currencies that use cryptography for creating, storing, securing, and verifying transactions on a specific network. Bitcoin and Ethereum are examples of cryptocurrencies.
Central Bank Digital Currencies (CBDC)
Central Bank Digital Currencies are government-regulated digital currencies issued by the central bank of a country. A CBDC can complement or replace traditional fiat currency. Unlike fiat money, which exists in both physical and digital forms, CBDCs exist only in digital form.
What is Cryptocurrency?
Cryptocurrency is a digital payment system that does not rely on a bank or a central entity to verify transactions.
Cryptocurrencies operate as a peer-to-peer system, enabling anyone, anywhere, to send and receive specific value.
Instead of carrying physical money and exchanging it in the real world, digital data is transferred between users, making financial exchanges much simpler and faster.
The term “crypto” refers to the encryption that allows the creation and processing of cryptocurrencies and the verification of their transactions in decentralized systems.
In addition to cryptography, which is one of the most important features of cryptocurrencies, they are all created with the aim of decentralization.
Cryptocurrencies are designed so that governments cannot manipulate or control them.
Bitcoin is the first cryptocurrency and holds the largest market share.
As of early January 2022, more than 14,000 cryptocurrencies have been recorded in the cryptocurrency market. While many of these cryptocurrencies have very low transaction volumes or followers, others have specific supporters and investors.
Differences and Similarities between Cryptocurrencies and Fiat Money
Differences
Unlike fiat currencies, cryptocurrencies are not created or regulated by central authorities and are not backed by governments (though recently, some countries, such as El Salvador, have officially supported Bitcoin).
This feature leads many people to view cryptocurrencies as having less credibility compared to fiat currencies.
Another notable difference is the volatility and price fluctuations of cryptocurrencies compared to fiat currencies, which are primarily caused by the speculative nature of the market.
The verification of cryptocurrency transactions does not require an intermediary like a bank, unlike fiat currencies. These transactions are verified using the innovative blockchain technology, which ensures that all transactions are permanently recorded and significantly increases the security of each exchange.
Similarities
Both types of currencies gain value through widespread global acceptance (greater acceptance means more credibility).
Another similarity is their divisibility. For instance, each dollar can be divided into one hundredth, or a cent, and each Bitcoin can be divided into 0.00000001 Bitcoin, known as a Satoshi.
They also share the ability to store value or serve as an asset that can be exchanged.
Types of Cryptocurrencies
The categorization of cryptocurrencies is vast, ranging from the type of network to the type of application or infrastructure. Broadly speaking, cryptocurrencies can be divided into two main categories: coins and tokens, with each cryptocurrency falling under one of these two based on its characteristics. There is also a subcategory called Altcoins.
Additionally, another categorization exists based on the application, where currencies are divided into payment currencies, infrastructure or blockchain currencies, privacy coins, utility coins, stablecoins, and meme coins.
Coin vs. Token: What’s the Difference?
Unfortunately, many users use the terms “coin” and “token” interchangeably, but in fact, they are technically quite different, and the difference between them is significant.
A coin is a cryptocurrency that is created and hosted on its own native blockchain. For example, digital currencies like Bitcoin, Ethereum, and Binance Coin are coins because each has its own specific blockchain.
On the other hand, a token is a cryptocurrency that does not have its own blockchain and operates on a different blockchain network. These assets typically use a standard ecosystem from a specific network such as Ethereum, Polkadot, or Solana. Cryptocurrencies like AAVE, UNI, USDT, CAKE, YFI, etc., fall into this category.
Most cryptocurrencies in the market are tokens since they are hosted on one of the major blockchains.
What is an Altcoin?
Altcoins are alternative digital currencies that were launched after the success of Bitcoin. These cryptocurrencies generally consider themselves a better alternative to Bitcoin!
The emergence of Bitcoin as the first peer-to-peer cryptocurrency paved the way for many other projects to follow in its footsteps. Most altcoins attempt to find flaws in Bitcoin and solve them with new structures.
The term “Altcoin” is a combination of two words: “alt” (alternative) and “coin” (currency), meaning “alternative coin.”
Since more than 60% of the cryptocurrency market’s value is held by Bitcoin and Ethereum, the term “alternative coins” is fitting for the approximately 14,000 cryptocurrencies that account for only about 40% of the market.
