Cryptocurrencies (or crypto) are a type of digital asset. If a merchant accepts cryptocurrency as a form of payment, someone can use it in the same way as cash to buy a pair of shoes or order takeout. People can also trade, invest and speculate in cryptocurrency, which is its most popular use.
In addition to enabling payments and investment opportunities, new uses for cryptos and blockchain technology are continually being explored—such as non-fungible tokens (NFTs) and decentralized finance (DeFi) projects. But understanding the fundamentals can be important for people who want to keep up with the ever-changing crypto landscape.
The history of cryptocurrency
Although precursors to crypto date back to the mid-1980s, it wasn’t until 2008, when an unidentified person, or perhaps a group of people, using the alias Satoshi Nakamoto, published a white paper laying the foundation for Bitcoin. Nakamoto’s white paper introduced the idea of a peer-to-peer electronic cash system outside the banking system. In January 2009, Nakamoto “mined,” or created, the first Bitcoin.
How cryptocurrency works
Most cryptocurrencies rely on decentralized, distributed networks that use blockchain technology, an online ledger spread among a worldwide network of computers.
With a traditional ledger, a person or organization, like a bank, records transactions. On the blockchain, no individual or entity has that responsibility.
Once someone makes a crypto transaction using a digital wallet, it's sent to a peer-to-peer network of independently run computers. These validate a user's status and verify the transaction.
Transactions on the blockchain are duplicated and spread out, and each block of data in the chain holds a set number of transactions. When a new user appears on the blockchain, a record of that transaction goes on the ledger. It’s nearly impossible to alter these transactions once they become part of the blockchain.
Each user gets a copy of every transaction to boost security. So if someone wants to corrupt the blockchain, they have to alter every single block on the chain, not just one. Every transaction is time-stamped and all records are encrypted.
Cryptocurrency mining also involves computers solving complex math equations and recording data on the blockchain. By solving these puzzles, called proof of work, the computers make the blockchain more secure.
Whoever finds a solution shares their proof across the blockchain, and other miners confirm its accuracy. Once a consensus is reached, transactions are clustered into digital blocks and added to the blockchain.
Miners earn cryptocurrency in the form of tokens and a share of transaction fees.
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Types of cryptocurrency
There are many different cryptocurrencies, and among the most widely used based on market value are:
The first cryptocurrency—decentralized, peer-to-peer crypto—launched in 2009. Although it’s the oldest crypto, bitcoin’s price remains highly volatile. In 2020 alone, the price dropped below $5,000 and jumped to over $63,000 per coin.
Ethereum is similar to Bitcoin in that it runs on a blockchain, but there's a key difference: Users can program it and use it to build apps. Etheruem has persistently had the second-highest market cap of any crypto, behind Bitcoin.
Ethereum also uses smart contracts, which are essentially collections of code and data that live at a specific address (or location) on the Ethereum blockchain. These smart contracts are designed to self-execute without human intervention when certain conditions are met. They can be used for decentralized financial services, apps, and games.
A crypto developed by Ethereum co-founder Charles Hoskinson, Cardano was built on a “scientific philosophy” and dozens of peer-reviewed research papers. Cardano uses its own internal crypto, called ADA, to let users send and receive funds. It’s also a different type of blockchain technology, with the goal of being “greener” and more scalable than other platforms. As Cardano evolves, its researchers use evidence-based approaches and continue to solicit peer insights before implementing each new phase of development—including a recent update to allow smart contracts, like Ethereum. It’s currently the third-largest crypto.
According to CoinMarketCap, there are over 6,000 different types of cryptocurrencies, and more are always being created. In addition to cryptocurrencies, which rely on their own blockchain, there are also crypto tokens that are built on top of an existing blockchain. Ethereum is a popular platform, in part, because it lets users create tokens that can be used and traded like a cryptocurrency.
What is cryptocurrency used for?
You could in theory use crypto to buy goods and services, but most retailers don't accept cryptocurrency as a form of payment. And since its value fluctuates greatly, unlike dollars, its use as a medium for exchange is limited.
However, cryptocurrency is a popular investment; it's relatively easy to buy and the value of some cryptocurrencies, such as Bitcoin, have skyrocketed. That, in turn, has produced huge returns for some investors, though gyrations in the prices cost others.
Beyond its role in the financial industry, there's also buzz around the potential for cryptocurrency's other uses, and its new technology could disrupt everything from the auto industry to cargo shipping to voting.
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