What are cryptocurrencies?

What is cryptocurrency?
Cryptocurrency is digital currency that exists on a decentralized system called blockchain. Cryptocurrency is a general term for all digital currencies. It can be accessed by using a crypto wallet.

What is the relationship between cryptocurrency and blockchain?

In 2016, Fabricio Santos described the concept of blockchain as a bank vault filled with rows of glass safes, where anyone can see the contents but cannot access them. He continued with this metaphor, explaining that when a person opens a new safe, he receives a key that is unique to that safe, but copying the key does not copy the contents of the safe; copying the key does not copy the contents of the safe; it only provides access.

Blockchain technology is unique in that all transactions are permanently recorded on the blockchain and can be viewed by anyone at any time: blockchain records can only be added, and the recorded history cannot be changed. Cryptocurrencies rely on the decentralized computer network of the blockchain to verify and authenticate their ownership.

Advantages of Cryptocurrency
Secure, Instant Transactions

Cryptocurrency is rooted in privacy. This means that you do not have to provide your personal information to every entity you transact with. Using crypto protects your financial and personal data because it is not shared with other parties who may want access to your information (think: advertisers and other entities you don’t interact with). Cryptocurrencies also allow for near-instant transactions. Since users can instantly access the contents of their crypto wallets, they can cut down on the typical 3-4 day wait time for traditional bank transfers.

Choose to store your own crypto

Traditional banking requires you to trust an entity that holds your funds. Whether it’s a bank or another payment service, these centralized entities hold and protect your money, but they can also use it in other ways. They may also close, change rules, or change policies that affect your ability to use or access your funds.

One of the advantages of cryptocurrency is that it allows you to eliminate middlemen by using decentralized finance. In decentralized finance, transactions are “trustless,” meaning that transactions do not require trusting someone to take place. Likewise, because transactions are conducted over a network of computers, they are “permissionless,” because they do not require authorization from a third party.

Non-custodial wallets allow users to self-custody their crypto and have given rise to DeFi, which forces owners to protect their funds but also allows them to access them at any time.

But cryptocurrency is not completely free of intermediaries. Cryptocurrencies purchased and stored on centralized exchanges like Coinbase and Binance are subject to a system that is more similar to the traditional centralized banking system. These organizations act as intermediaries while also providing additional convenience for customers who don’t want the responsibility of a non-custodial wallet.

Anonymity and Privacy

Privacy is often considered one of the most important features of cryptocurrency. Transactions using cryptocurrency are considered “pseudonymous.” They are not completely anonymous, but they do not require the use of government names or other identifying information. Instead, all transactions are closely tied to your wallet address. Having private and confidential access to your cryptocurrency wallet is a useful tool, especially for those who belong to historically marginalized groups.

Things to Remember When Using Cryptocurrency
New and Evolving

While blockchain technology was developed in the 1990s, Bitcoin (the first cryptocurrency) was not first launched until 2009. The nascent stage of the technology means that everyone is learning to use it at the same time (which can be a balancing factor), but it also means that everyone is experiencing growing pains at the same time.

It’s Decentralized

Due to the decentralized nature of blockchain technology, you can’t call a central bank to resolve any issues that may arise. This is especially true if you choose a non-custodial wallet over a custodial one. In summary, there are two types of crypto wallets: custodial and non-custodial. Custodial wallets are managed by a third-party company, while non-custodial wallets are not. Non-custodial wallets give you full control and responsibility, which is why it is even more important to protect your access keys.

How are cryptocurrencies used today?

Since the launch of Bitcoin in 2009, the scope and use of cryptocurrencies has grown significantly. Cryptocurrencies can now be used to purchase everything from NFTs (non-fungible tokens) on OpenSea to physical goods or real-world services (McDonalds now accepts Bitcoin). In some regions, Google Cloud also accepts Bitcoin and Ethereum as payment for cloud infrastructure. )

How will cryptocurrencies be used in the future?

More and more merchants (and industries) seem ready to start accepting cryptocurrencies as a form of payment for any purchase. Blockchain technology as a whole is also being adopted by other industries, with potential future applications ranging from medical records to mortgages.

Types of Cryptocurrencies

Coins and tokens are two types of cryptocurrencies with some key differences between them.

Minting
Currencies are tied to a specific blockchain and operate solely outside of the blockchain's decentralized system, and can be more volatile in nature. (This is different from stablecoins, where the amount is set more fixed, more on that below.)

Here are some of the most commonly used coins:

Bitcoin (BTC) – The first cryptocurrency and the largest by market cap of all cryptocurrencies today. Available for purchases at select retail stores, car dealerships, or through PayPal.

Ethereum (ETH) – This decentralized, open-source blockchain is known for its smart contract capabilities, which has led to the popularity of NFTs.

Polygon (MATIC) – As an EVM-compatible Ethereum sidechain, Polygon enables developers to build scalable dApps with low transaction fees.

Solana (SOL) – With low gas fees and fast transaction speeds, Solana also supports developers building dApps. Solana takes a historically proven approach.

Avalanche (AVAX) – An eco-friendly cryptocurrency focused on smart contracts.

Tokens
Tokens are built on a blockchain. Stablecoins are a popular type of token that differs from regular currencies in that they are pegged to an external reference to reduce the volatility of the cryptocurrency.

Tether (USDT) – The third largest cryptocurrency and the largest stablecoin, pegged to the US dollar.

USD Coin (USDC) – USDC is available on multiple blockchains and is a native online digital dollar. USDC can be exchanged for USD at a 1:1 exchange rate.

Dai (DAI) – A stablecoin that runs on the Ethereum blockchain, similar to USDC, DAI can be easily exchanged for USD.

What are the advantages of decentralization?

Blockchain technology is not controlled by a single entity (such as a central bank); instead, it is supported by numerous computer systems (“nodes”) that support the blockchain (which gives it the “decentralized” nature). Therefore, the responsibility for ensuring the security of the blockchain falls on those who validate or mine the blockchain itself through what is called a “consensus mechanism”, where nodes in the blockchain must agree that a transaction is valid before it is written to the blockchain. (This is usually a proof-of-work or proof-of-stake system.)

While cryptocurrencies are often described as secure, it is still important to follow best practices to ensure their security. Never share your wallet seed phrase, be cautious when using wallet transactions, and make sure to carefully evaluate NFTs before purchasing them. If something looks too good to be true, it probably is.

How do I access my cryptocurrency?

You can use a crypto wallet to access your cryptocurrency. One important thing to remember here: your cryptocurrency does not live in your wallet (just like your cash lives in your wallet); instead, your wallet unlocks the keys to your crypto funds stored on the blockchain (just like you use a debit card to withdraw cash from an ATM).

When you add cryptocurrency to your cryptocurrency wallet, you can buy it through an exchange like Binance or Coinbase, but many NFT-compatible wallets support adding cryptocurrency directly from your wallet through services like Moonpay or Wyre. They integrate into the wallet and allow you to buy cryptocurrency with a credit or debit card without going through the process of a cryptocurrency exchange. During this process, you may be asked to verify your identity.

What is the relationship between cryptocurrency and NFTs?

Both cryptocurrencies and NFTs are based on blockchain technology. The key difference is that cryptocurrencies are "fungible" (interchangeable) tokens, while NFTs are "non-fungible" (unique and non-interchangeable) tokens. For example, one Bitcoin is the same as another Bitcoin, but each NFT is unique by definition.

To buy NFTs, you need cryptocurrency and a crypto wallet. Your crypto wallet gives you access to your cryptocurrency and NFTs, so it is important to make sure your wallet is compatible with both. NFT transactions are made using cryptocurrency, although many NFTs on OpenSea can be purchased using a credit or debit card. You can read more about how to buy NFTs here.