A decentralized currency, the money of the future, or perhaps a distributed accounting system containing holdings in contractual units? Cryptocurrencies can be characterized in many ways. Regardless, cryptocurrencies generate a lot of excitement – and not just among investors. Here’s everything you should know about them.
Cryptocurrencies – virtual currencies
Cryptocurrencies can be most simply described as virtual currency that does not have its physical form. It can be used to pay for goods and services of your choice if the vendor accepts such payment. Cryptocurrencies therefore have their value, by which they can be called virtual money.
Many currently known cryptocurrencies function on a similar principle. They use a decentralized system, based in most cases on blockchain, or chain of blocks. We wrote more about it in a separate article on our blog.
In a nutshell, however, blockchain is a public register of transactions performed with a given cryptocurrency. It is operated and updated regularly by many people, or to be more precise – many computers. They are rewarded for their calculations in the form of cryptocurrency units or smaller parts of them. It is this activity that is commonly called digging or mining cryptocurrencies, and the very people doing it – miners.
It is worth mentioning that cryptocurrencies use cryptography technology, i.e. complex mathematical calculations aimed at encrypting information, to record and verify transactions.
The transaction through a given cryptocurrency takes place directly between its parties and only they have full access to it thanks to the appropriate encryption keys, although the accounting record itself is publicly available.
Due to the nature of how the blockchain works, cryptocurrencies or transactions using them cannot be counterfeited. Why this is the case, you will learn from the already mentioned post on our blog:
Decentralization – a fundamental feature of cryptocurrencies
One of the fundamental features of cryptocurrencies is their decentralization. Virtual money operating in a blockchain system is not dependent on a central authority. No organization has direct influence over such cryptocurrencies. It cannot decide on the size of their issuance or any other way to influence their value.
All information about cryptocurrencies is stored directly by participants in the blockchain network, in consecutive blockchains. There is no central bank in control of the cryptocurrency, making it unaffected.
The lack of issuance by official bodies guarantees – at least in theory – immunity to any kind of manipulation of the exchange rate of a given cryptocurrency, e.g. by governments of individual countries.
What does decentralization consist in anyway? In the case of the classical financial system, all transactions are carried out by individual entities – e.g. banks. If we want to send a transfer from our bank account, we have to use the offer of our bank. Without it, we would not be able to send money. So if suddenly someone cut off the system of a selected bank, its customers would be deprived of access to their funds.
In the case of decentralization, such problems do not occur, because transactions are verified by many users simultaneously. When one of them “falls out”, his place is replaced by others, guaranteeing the proper functioning of the whole system.
This, of course, carries with it some inconveniences. In the case of very popular cryptocurrencies, transactions may take a dozen or even several dozen minutes to process, as due to the number of verified transactions, the computing power offered by system participants will be insufficient to process all requests immediately.
The distributed accounting system also generates huge electricity costs. This is because a large amount of computing power is needed by the computers participating in the network to confirm transactions using complex cryptography. Data chain-based cryptocurrencies are therefore not considered to be the greenest.
How to store cryptocurrencies and pay with them?
We have already mentioned that cryptocurrencies can be obtained through mining. You can also simply buy them on one of the many cryptocurrency exchanges. But how to store virtual money and pay with it?
So-called cryptocurrency wallets are used for this. Each of them is characterized by two keys – public and private. The first one can be easily shared with other people – thanks to this they will be able to e.g. transfer cryptocurrencies to us. The second – private – remains only for our use. Thanks to it we can “log in” to our wallet and spend the cryptocurrencies there. It is also used to encrypt transactions. It can therefore be treated as a password. If someone takes over the private key from us, he will also take control over our cryptocurrency wallet. Whatch more information about bitcoin right here
The most popular cryptocurrencies
The most popular cryptocurrency is of course bitcoin, which is often called the king of cryptocurrencies. It is the one based on blockchain technology that has helped popularize this means of payment. Its creator is a person or group of people hiding under the pseudonym Satoshi Nakamoto.
Currently, in addition to bitcoin, we can distinguish thousands of other virtual currencies on the cryptocurrency market. The most popular include ethereum, XRP, tether, litecoin or monero.
Cryprocurrrencies is the future of money!