What is Cryptocurrency?

A cryptocurrency is a decentralized digital currency, existing mostly on a blockchain and secured by a combination of cryptography and consensus mechanisms. Cryptocurrency allows peer-to-peer exchange of value without the need for a middleman.

It also eliminates the need for a central authority like a bank or a financial institution to validate transactions. There are several types of cryptocurrencies floating in the market today. Some popular examples include Bitcoin (BTC), Ethereum (ETH), Polygon (MATIC), Binance Coin (BNB), Hedera (HBAR).  

What is Cryptocurrency?

Cryptocurrencies like ETH, MATIC, BNB, HBAR, etc. are no longer an anomaly. They can be used to buy goods and services, play games, and buy and trade investment instruments. Thousands of cryptocurrencies worth more than a trillion dollars float in the market today.

But what is cryptocurrency? And how is it different from fiat?

A cryptocurrency is a digital or virtual currency secured by cryptography and stored and validated over a decentralized, shared ledger, i.e., blockchain. Cryptocurrencies, also known as crypto, serve as a medium of exchange in a peer-to-peer fashion.

Unlike fiat currencies like the US Dollar or the Euro, cryptocurrencies don’t require a central authority to review and manage their transactions. Instead, a network of computers or nodes validate the transactions using a consensus mechanism.
Cryptocurrencies are not issued or controlled by a government. They exist online and can be mined, purchased from a cryptocurrency exchange, or won as rewards by miners involved in the upkeep of a blockchain network.

Also Read:  Ethereum Merge

Fact Check: Given the nascency of the crypto market, the crypto prices are highly volatile and prone to market fluctuations.

Bitcoin was the first-ever first decentralized and traded cryptocurrency. Let’s give you some context.

In 2008, Satoshi Nakamoto released a whitepaper titled Bitcoin: A Peer-to-Peer Electronic Cash System, which outlined the fundamentals of the first cryptocurrency ever – Bitcoin – and the underlying infrastructure we know as blockchain today.

The paper defined the concept of a digital currency that enabled the transfer of value directly between the sender and the receiver without the involvement of any third party, like a middleman or a bank (peer-to-peer). The transfer would be validated by cryptographic proof and consensus mechanism rather than via trust (traditionally the case with bank transactions).

The transactions between the parties would be recorded and verified on a blockchain, i.e, a decentralized ledger or database spread over a network of computers or nodes. The nodes would validate the transactions using proof-of-work consensus to avoid double-spending.

Also Read: Proof of Work vs Proof of Stake

While Bitcoin wasn’t the very first attempt at a digital currency, it surely is the most secure, trustless, verifiable, and immutable mode of online payment today. It is also protected against most cyber attacks, including 51% of attacks, which is said to be the worst kind of attack, where more than half the nodes are compromised. A 51% attack occurs when more than half of miners control the Bitcoin network’s hash rate or controlling power.

Bitcoin is also the largest cryptocurrency by market cap. After Bitcoin, Litecoin, NameCoin, Ethereum, and hundreds of other cryptos were developed with multiple use cases. Today,  Stader Labs supports some of the most innovative cryptocurrencies today, including Ethereum, BNB, Polygon, Hedera, Fantom, Near, Terra, Avalanche, Solana, etc.

Before discussing the types of cryptocurrencies, let’s discuss a few basics to clarify your crypto fundamentals.

Also Read: Ethereum Gas

Basics of Cryptocurrency

There are several terms that need to be understood before we can fully grasp the concept of cryptocurrency.

Blockchain: It is a shared database across a network of computers that immutably stores and records transactions in chronological order. All the transactions stored over a blockchain are verified via consensus by the majority of the nodes, are traceable, and are open to scrutiny in the case of a public blockchain.    
Decentralization: No government or central authority controls the issuance price, and validation of cryptocurrency transactions. The network of nodes validates the transactions by confirming the transaction details against the blockchain database. Once the transaction is approved by the majority of nodes, it becomes part of the database. The more the number of nodes, the more decentralized a network is.  
Cryptography: Cryptography in crypto refers to the various algorithms and encryption techniques like elliptical curve encryption, hashing functions, and public-private key pairs that are used to secure cryptocurrency transactions.  

Consensus mechanism: This is a method used to verify transactions on a cryptocurrency network. There are many kinds of consensus mechanisms like Proof-of-Work, Proof-of-Stake, etc.

Proof-of-Work (PoW) requires nodes to solve a complex mathematical problem using powerful ASICs to verify a ‘block’ or group of transactions[1] [2] [3] . This process is also known as mining where miners compete to solve the problem and earn newly-mined cryptocurrencies as rewards.

Proof-of-Stake (PoS), on the other hand, requires the nodes to stake or deposit a fixed amount of cryptocurrency as collateral to become eligible for validating the transaction blocks. Miners earn staking rewards for validating blocks in PoS consensus. Stader Labs offers multi-chain liquid staking and DeFi (Decentralized Finance) capabilities on its platform where users can earn rewards by staking. Proof-of-Stake is less energy-intensive, scalable, efficient, and decentralized than Proof-of-Work. However, the Proof-of-work protocol is more secure than Proof-of-Stake.

Mining: The validators participating in the race to solve the mathematical problem are known as miners. The first miner solving the problem gets rewarded with ‘mined cryptocurrencies’ while the transactions become a part of the blockchain forever.

Cryptocurrency wallets: A cryptocurrency is stored in a cryptocurrency wallet like Metamask. Unlike physical wallets that store coins and notes, crypto wallets don’t store cryptocurrencies directly. They are stored on a blockchain in the form of data. Wallets store public and private keys that point to the user's crypto assets.

Fact Check: It is essential to keep your private keys safe as you can access your cryptocurrencies via your private keys only. In case you forget or lose your private keys, you lose your cryptocurrencies forever.    

How Does a Cryptocurrency Transaction Work?

Cryptocurrencies aren’t controlled by any central authority, and there’s no central mechanism running them. There are no physical tokens that would facilitate the exchange or transfer.

Then how does a cryptocurrency transaction take place between the sender and the receiver? How does a cryptocurrency network ensure that there is no double-counting or manipulation involved

The answer lies in the infrastructure underlying it – Blockchain. Let’s understand how cryptocurrency works with the help of an example.  

Suppose A sends 10 Ether (ETH)  to B.

• The blockchain is essentially a list of transactions open to anyone to view and verify. Every time someone sends or receives ether, in this case, A to B, this list is what is used to enable secure payments between people who don’t know each other without a third-party intermediary like a bank.
• The nodes or computers which are part of the Ethereum network each possess a copy of this ‘list,’ from which they confirm whether A possesses the required 10 ETH to be eligible for transfer.
• Cryptocurrencies employ the use of public-private key cryptography to transfer ownership over a blockchain. Consider public keys as your email address which you can share with everyone, and private keys as your email password, which only you are aware of.
• When it is confirmed that A’s private key and B’s public key match and A has enough crypto to make the transaction, the transaction is confirmed by the nodes.
• Once the majority of nodes confirm the transaction, it is sent as a part of the block for validation.
• The blockchain network is constantly upgraded and verified in real-time by immutably adding transactions to its database. To do so, nodes stake ether as collateral and become eligible for validating transaction blocks on the Ethereum network. In return, the nodes earn staking rewards.
• The miner re-executes the transactions in the block, checks the block signature, and sends their vote of approval. A random node is chosen by the network to build and broadcast the block which now immutably becomes a part of the blockchain transaction history.
• The transaction is complete, and A’s and B’s wallet balances would reflect the subsequent debit and credit in ether.
  

Also Read: Matic Staking Rewards

Different Types of Cryptocurrencies

Bitcoin was launched in 2009 and was the first decentralized and traded. It facilitates peer-to-peer financial transactions that are cost-effective, safe, and almost instantaneous.

After Bitcoin, numerous cryptocurrencies took the underlying idea of a decentralized token/currency and built their specific use case. For instance, Ethereum enables developers to build decentralized applications over its blockchain, while Near Protocol allows users a faster transaction rate and very high scalability.

It is worth noting here that a cryptocurrency can be a crypto coin or a crypto token. Each crypto coin has its native blockchain network, can serve as money, and can be mined. Examples include Ether (ETH), Bitcoin (BTC), Solana (SOL), etc.

Tokens, on the other hand, exist as a part of the platform built on an existing blockchain such as the ERC-20 or BEP-20 tokens that form a part of the larger Ethereum and Binance Chain ecosystem. [1] Tokens can have multiple use cases like governance, utility, securitization, DeFi, etc.

They can be used as access to certain services on a platform or to raise funds for crypto startups. Examples include Polygon (MATIC), Aave (AAVE), Balancer (BAL), etc.

There are several kinds of cryptocurrencies besides Bitcoin. Let’s discuss:

#1 Altcoins

Any cryptocurrency other than Bitcoin is described as an Altcoin. Altcoin is an umbrella term for all ‘alternative coins’ ( alt+coin) beyond Bitcoin and includes popular altcoins such as Ethereum, Solana, Hedera, Near Protocol, Aave, Fantom, Binance Coin, and hundreds of other altcoins.

#2 Stablecoins

Stablecoins are cryptocurrencies whose value is tied or pegged to fiat, precious metals, or another crypto in a 1:1 ratio. They are a great alternative to otherwise volatile cryptocurrencies, which are less suitable for everyday transactions.

A Stablecoin can be of four types:

• Fiat-backed stablecoins like Tether (USDT), Circle (USDC), etc., are pegged to the US Dollar.
• Precious metal-backed stablecoins like PAX Gold (PAXG), Tether Gold, etc., are pegged to gold.
• Crypto-backed stablecoins like WBTC, which is pegged to Bitcoin.
• Algorithmic stablecoins rely on complex algorithms to keep their value stable. An example of this could be Terra (UST) which crashed in June 2022, causing the entire crypto market to topple over.
  

Stablecoins bring in the stability of fiat currencies whose prices are controlled by central banks and government entities or real-world assets (RWAs) such as precious metals, whose price action is determined by highly liquid markets such as commodity exchanges.

#3 Security Tokens

In functionality, security tokens are the same as bonds, equities, and derivatives. They are cryptocurrencies that derive their value from an external asset that can be traded. All security token offerings (STO) are governed by Federal laws.

Security tokens represent financial privileges such as revenue sharing, governance rights, access, user rewards, etc., on a blockchain. And since they serve as digital counterparts to real-world securities like shares and bonds, they are classified as securities.
Some examples include Siafunds, Science Blockchain, Vevue, etc.  

#4 Governance Tokens

Governance tokens grant the holders the right to vote and take part in the governance and development of a blockchain project. Governance tokens help to distribute decision-making power among community members.

Some examples of governance tokens include BAL token, the governance token of the Balancer Protocol, which is a DeFi liquidity protocol that allows users to take part in liquidity pools and earn rewards; UNI token, native to the UniSwap exchange that runs on Ethereum, the governance token of UniSwap; Stader token(SD) is the native governance and value accrual token for Stader Labs.

#5 Utility Tokens

Utility tokens are cryptocurrencies that serve some specific use case within a specific ecosystem or platform. They are native to a platform/ecosystem and do not possess a use case outside the platform/network/ecosystem.

Utility tokens are usually pre-mined, i.e., they are created together and distributed among the stakeholders, team, investors, and users of the project as per a pre-decided token allocation.

Some examples of utility tokens include MATIC, which serves as a payment mode to access services on the Polygon network; Binance Coin (BNB), an exchange token that is used to pay trading fees on the Binance crypto exchange, Solana (SOL) that serves as the backbone of the economy of the Layer-1 network Solana.

Ether, which is used to pay gas fees on the Ethereum network, also belongs to the category of utility tokens.

Fact Check: A token can be both a governance and utility token. This will be the case with the Stader token (SD) once the use-case of bonding 0.4 ETH to run validators goes live since it will still retain the governance power.

How To Mine Cryptocurrency?

Mining is the process that a blockchain network uses to constantly upgrade and verify its ledger and generate new cryptocurrencies. Theoretically, anyone with a computer and a blockchain source program can become a miner. However, mining isn’t a profitable business in all cases, as much depends on the cryptocurrency you are mining and the cost of electricity.

There are mining companies that specialize in these mining processes and consist of a large number of specialized computers that contribute their computing power. The companies are called mining rigs.

Mining rigs across the globe compete with each other to solve mathematical problems while verifying and updating the blockchain with new transactions. The winner is awarded bitcoin rewards which they can sell/trade in the broader crypto marketplace.

Fact Check: The current mining reward for the Bitcoin network stands at 6.25 BTC. Every four years, this reward gets halved in a halving event. The next halving event takes place in April or May 2024.

Cryptocurrencies get their value from the forces of demand and supply at work. Therefore, the cryptocurrency which is in more demand will be more profitable to mine.

How to buy cryptocurrency?

While you can mine cryptocurrencies or win them as rewards, the easiest way is to buy them from a cryptocurrency exchange. Most centralized and decentralized crypto exchanges list hundreds of blue-chip or newly launched cryptocurrencies. These cryptocurrencies can be exchanged for fiat or crypto.

All you need is to register yourself on these exchanges and start investing in the cryptocurrency of your choice.

Centralized exchanges (CEX) like Coinbase require you to share your personal details for KYC and registration and keep your crypto in custodial wallets where your private key is held by the centralized exchanges.

Decentralized exchanges (DEX) like Uniswap, on the other hand, only require a wallet that you integrate with the DEX. DEXs do not store your private keys and are non-custodial in nature.

Both CEXs and DEXs have their own pros and cons. A beginner may opt for a CEX and start by investing small amounts. A seasoned trader can go for a DEX to have complete control over their crypto and transact with privacy.

How to earn rewards from cryptocurrencies?

Decentralized Finance (DeFi) opens up new avenues to put your idle assets to great use and earn rewards on the same. Beyond trading, platforms like Stader Labs, Aave, Balancer, Beefy Finance, etc, allow users to earn rewards on their crypto assets via staking, liquidity mining, and other DeFi capabilities. For instance, Aave is a open-source liquidity platform where users can make use of flash loans by depositing their crypto assets as collateral. Users can also invest in liquidity pools and earn interest on their assets.

Stader Labs as a mid-infrastructure layer for DeFi protocols and blockchains is a step ahead in the DeFi landscape.Users can stake supported cryptocurrencies across chains and receive a receipt called a liquid staked token (LST). These LSTs have multiple DeFi utilities in lending, borrowing, liquidity pools, etc

Also Read: BNB Auto Burn

Is it safe to invest in cryptocurrency?

The crypto market works 24/7, 365 days a year, and hence requires greater vigilance on the part of investors and traders. While the trading basics are the same for all the capital markets, including crypto, investors should conduct due diligence and sufficient research and familiarize themselves with the market dynamics before they begin investing in cryptocurrencies.

Cryptocurrency investments are high-risk investments and should not form more than a small part (say 5-10%) of your investment portfolio. Since cryptocurrencies are majorly technology products having financial use cases, it is always best to do your homework before you invest in a particular project. Read the whitepapers, research the founders or investors backing the project, and find out if the tokens you would be investing would grant you ownership of the platform or certain rights or access to services, etc.

Also Read: Ethereum Staking Rewards

Another way to manage your risks while investing in cryptos is by diversifying your investments across multiple cryptocurrencies. Cryptocurrencies still await regulations in most parts of the world, and hence crypto investors should tread the market with caution as investor protection measures are limited. Also, store your cryptos in cold wallets to keep them safe from hacks and attacks, and only move the funds to exchange wallets or hot wallets when you consider selling or trading them.  

Cryptocurrencies may offer commendable returns, but they can be highly risky, given the volatility and market fluctuations. Investment practices like dollar cost averaging (DCA) can be a reasoned move to break down your risks and spread them over a larger period of time.

Popular Searches

Crypto Token | Types Of Blockchain | Blockchain Nodes | Polygon Staking | Fantom Staking | Luna Staking | Near Staking | Liquid Staking Vs Staking | Yield Farming Vs. Staking | how to add binance smart chain to metamask | liquid staking derivatives | Proof Of Work Vs Proof Of Stake | Smart Contracts | What Is Liquid Staking | What Is Validator | Liquidity Crypto | Type Of Blockchains | Staking Pool