Cryptocurrency is a decentralised medium of exchange with a distributed type of emission. Cryptocurrencies work through blockchain technology and are protected by special encryption. Breaking down the definition into its components will help describe a complex term in simple words.
Cryptocurrency is a medium of exchange. That is, money that is not recognised as being traditionally stored at banks and is not regulated, therefore, not subject to manipulation.
Distributed emission allows network members to generate coins by performing certain actions or meeting conditions. There are two main types of issue: Proof of Work and Proof of Stake.
Proof of Work is creation and receipt of crypto coins for work performed. Mining cryptocurrencies is called mining and involves the provision of computing power to decrypt the blocks of the network. The miner receives a reward for successful decryption.
Computational complexity for Bitcoin is constantly growing. To keep the mining and network working, miners united in pools and share the reward in proportion to the resources spent.
Proof of Stake is the second method for the controlled generation of new coins. The reward for a new block is distributed proportionally among all owners of the cryptocurrency and not among miners who are engaged in calculations. Both emission methods ensure the security of the Blockchain network. Cryptocurrencies cannot be counterfeited or duplicated.
Cryptocurrencies work through the blockchain. It is a distributed database with a sequential record type. All transactions and records are placed in a new block of the chain and remain there forever. This makes it easier to verify, validate, and honestly use the cryptocurrency.
Thus, cryptocurrency is electronic money that is not generated by banks, but by all users at the same time. They are encrypted, cannot be faked, and all operations are recorded in a database that cannot be hacked or erased.
From a technical point of view, many forms of electronic money can be called cryptocurrencies.
These include the following:
All of these currencies fit the basic definition of electronic money protected by cryptographic encryption.
There are a number of criteria that prevent electronic money from being called a cryptocurrency:
Linking to a payment system.
Centralisation. Electronic money is highly centralised and managed by banks. The owner of the company can influence the exchange rate, emission and exchange rate.
Link to the payment system. All electronic money is tied to the exchange system. PayPal Dollars have no financial strength outside dedicated wallets.
Mandatory security. The emission of electronic money is limited by the amount of fiat money invested in the payment system. Such funds can be exchanged for a similar amount of paper currency at the request of the bank.
Cryptocurrency pricing is different due to the lack of mandatory dollar backing. The value of an asset is determined by two factors: technical and fundamental.
Fundamental pricing consists of two metrics. The resources spent decrypting and keeping the price working.
Resources involved as follows:
The amount of electricity spent on mining.
Cost and depreciation of equipment.
Funds invested in the development of new miners.
The second factor is the capitalisation of an asset or its real collateral. Capitalisation shows how much paper money was exchanged for cryptocurrency and how much can be withdrawn upon a one-time request.
The technical factor is of a psychological nature. The definition is as follows:
Cryptocurrency costs exactly as much as one is willing to pay for it
Proportionally, both factors affect the price of Bitcoin and altcoins. Technical pricing, as opposed to fundamental pricing, is officially accepted by the community.
Cryptocurrencies have gained popularity due to the following advantages:
Fast operational speed. Transaction time depends on the load on the network and is most often only a few seconds.
Anonymity. The blockchain records addresses and facts of money transfer, but not real names, surnames and wallet numbers.
Lack of intermediaries. Banks do not control and charge a service fee.
The disadvantages of cryptocurrencies include technical aspects such as the following:
The increasing complexity of mining.
The problem of network scalability. The more participants there are, the longer the transactions take and the higher the transfer fees.
Increased responsibility on the part of the user. Any erroneous transaction, hacking or loss of a wallet leads to a loss of funds.
Cryptocurrencies are a new tool that is driving the fiat and electronic economy. They provide convenience and ease of use, and have proposed new methods of interacting with large financial institutions.