What are Cryptocurrencies?
A brief introduction to cryptocurrencies
Posted by
Joao Teixeira
Cryptocurrencies, also called crypto-currencies or cryptos, are a form of digital or virtual currency that use cryptographic techniques to secure transactions, control the creation of new units, and verify the transfer of assets. Unlike traditional currencies issued by governments (such as dollars or euros), cryptocurrencies operate on decentralized networks based on blockchain technology.
First descriptions of cryptocurrencies inclue a 1996 paper by NASA and posts by Wei Dai and Nick Szabo on the cypherpunk mailing list, in 1998. A major difference between NASA and Wei and Szabo, is that while the first saw electronic cash managed by banks the seconds suggested a new form of money that uses cryptography to control its creation and transactions, rather than a central authority.
Units of cryptocurrency are created through a process called mining, which involves using computer power to solve puzzles to generate coins. This puzzles are complex mathematical problems that when solved reward the miner with an unit of cryptocurrency (for instance a bitcoin) . Cryptocurrencies can also be bought from brokers, then they are stored in cryptographic wallets.
Key Features of Cryptocurrencies:
- Decentralization: Cryptocurrencies are typically not controlled by any central authority, such as a government or financial institution. Instead, they rely on a distributed network of computers (nodes) to maintain a public ledger of all transactions.
- Blockchain Technology: Transactions are recorded on a blockchain, which is a tamper-resistant and transparent digital ledger. This ensures security and prevents double-spending.
- Cryptography: Advanced encryption techniques secure transactions and control the creation of new coins or tokens, ensuring integrity and anonymity.
- Limited Supply: Many cryptocurrencies, like bitcoin, have a fixed supply, making them resistant to inflation caused by overproduction.
- Peer-to-Peer Transactions: Cryptocurrencies allow users to send and receive payments directly without intermediaries, enabling faster and often cheaper transactions compared to traditional systems.
At the date of writing this article the 5 top cryptocurrencies by market capitalization were:
- Bitcoin (BTC): The first and most widely recognized cryptocurrency, launched in 2009 by an anonymous entity known as Satoshi Nakamoto.
- Ethereum (ETH): Launched in 2015, it is known for its smart contract functionality, enabling decentralized applications (dApps) and services.
- Ripple (XRP): Launched in 2012, it is the native cryptocurrency from the XRP Ledger (Ripple protocol)
- Tether (USDT): Launched in 2014, it is a cryptocurrency stablecoin, that is a cryptocurrency pegged to a reference asset. USDT is pegged to the dollar.
- Solana (SOL): Launched in 2017 and run by the Solana Foundation, is designed to host decentralized, scalable applications.
Uses of Cryptocurrencies:
- Digital payments and remittances.
- Investment and speculation.
- Decentralized finance (DeFi) applications.
- Non-fungible tokens (NFTs) and tokenized assets.
Cryptocurrencies are transforming the financial landscape, but they also come with challenges, such as price volatility, regulatory concerns, and the potential for misuse. Despite this, they represent a growing and innovative sector in the global economy.