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What are Cryptocurrencies?

Cryptocurrency Explained?

Cryptocurrency is a digital asset built on distributed ledgers that is secured by cryptography. Most cryptocurrencies are built on a blockchain, which is a type of distributed ledger. Cryptocurrencies are not issued by any central authority, government, or financial institution.

The best and most secure cryptocurrencies are on decentralized blockchains and have a limited supply that is set in the code, many having a set release schedule. Cryptocurrencies allow the ability to send currency as a content type without the fear of being blocked, hacked, and the technology prevents the ability to double spend, which was an issue with early attempts at digital currency.

Cryptocurrency is peer to peer and permissionless which means there is no bank, credit card company, or any other middleman that has to approve your transaction and they cannot block it either. Permissionless means that you do not need any kind of approval to use the network. It is open to anyone and everyone.

Beginning with Bitcoin

The first successful launch of a cryptocurrency was Bitcoin. In October, 2008, an anonymous figure known as Satoshi Nakamoto released the Bitcoin whitepaper. You can read that whitepaper here,

One of the best statements Satoshi has used to describe the reason for Bitcoin is “The root problem with conventional currencies is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust."

Satoshi Nakamoto’s identity still remains a mystery today and could be a man, woman, or group of people. There is plenty of speculation as to who that could be. You may hear the term Satoshi or Sats used to describe the smallest unit of account in Bitcoin, which is 0.00000001 BTC.

In January, 2009, Satoshi Nakamoto mined the first block of Bitcoin. Embedded in the coinbase of this block was the text: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” Many feel the creation of Bitcoin was in response to the financial crisis of 2008 and to highlight all the flaws in current financial systems around the globe. Satoshi began to solicit others to run the network as well. The first known person to help with this is Hal Finney who received the first Bitcoin transaction and helped to contribute to Bitcoin development in the early stages. Some people believe that Hal Finney is a candidate to potentially be Satoshi Nakamoto, but it is near impossible to confirm as Hal Finney passed away in 2014 after a battle with ALS.

Bitcoin started with no value, but as the network grew and early adopters helped push the movement forward and Bitcoin began to grow in value and in network size. Bitcoin creates digital scarcity with only a total of 21 million Bitcoins that will ever be created. The Bitcoin code releases new Bitcoin on every block that is created (roughly every 10 minutes). Initially it was 50 Bitcoin per block, but every 4 years that is cut in half in an event called the halving. As of this time, 6.25 Bitcoin are released every block and that will be cut in half again in 2024.

Today, Bitcoin is the most secure network in the world. There are thousands of cryptocurrencies that have been created since Bitcoin. Bitcoin has evolved into a current use case where it is used by many as a store of value and a hedge against the inflation of fiat currency. There are many places that accept Bitcoin as payment but we still have a ways to go. All other cryptocurrencies created since Bitcoin, which are called Altcoins (any cryptocurrency other than Bitcoin), have been created with variations to Bitcoin with intentions of other uses or improvements.

Difference Between a Coin and a Token

Many times in cryptocurrency you will hear cryptocurrencies referred to as coins or tokens and in many cases those speaking of them are using the terms incorrectly. It is not a major detriment, but understanding the difference will give you better insight into a project and potential use cases.

A coin is any cryptocurrency that is built on its own native blockchain or decentralized ledger system. Typically these will mainly be used as currency or as gas fees for utilizing the network. They are not limited to these uses but that is typically what we have seen. Examples of coins are Bitcoin and Ethereum as they both have their own native blockchain.

A token is a cryptocurrency that is built on and resides on top of another blockchain and does not have its native chain. Many of these function as utility tokens meaning they are designed for a specific utility. Tokens are easier to build and launch than a coin due to the network infrastructure being created already and many networks have simplified the process to mint tokens. Examples of tokens are Chainlink and Uniswap. While tokens can be used as currency also, these two mentioned have specific use cases as an oracle service and a decentralized exchange governance token respectively. Tokens fueled the ICO (initial coin offering) craze of 2017 with many tokens launching on the Ethereum blockchain. The standard for issuing tokens on Ethereum is ERC20. Some projects choose to launch as a token while their native mainnet is being built and tested and allow them to fund development. They will then switch to a coin when they swap over all the tokens and issue coins. The most well known one to do this was EOS which was an ERC20 token and then swapped to their own mainnet after a year plus ICO raise.

Tokens are at the mercy of the governance of the network they reside on. Due to this, we have seen many projects develop their token on multiple platforms and creating a system to swap between the tokens. Newscrypto incorporated this feature with the NWC token which you can switch between the Stellar, Ethereum, and Binance Smart Chain blockchains. This also gives more utility to the token and also make the token more accessible to people globally.

Proof of Work and Proof of Stake

In a decentralized ecosystem, the process by which a network achieves consensus from all those running the network is a vital process to the security and the operation of the network to run. These consensus methods are also vital to prevent double spend, which was a main fault of many early digital currencies before the creation of Bitcoin. There are currently two main consensus methods, proof of work(PoW) and proof of stake(PoS).

Proof of Work was the first consensus method that appeared, and for now remains the dominant one. It was introduced by Satoshi Nakamoto in the 2008 Bitcoin white paper, but the technology itself was conceived long before then in pre-cryptocurrency digital currencies. By requiring senders to perform computing before sending a transaction, the network can mitigate spam. This computation would cost virtually nothing to a legitimate sender, but quickly add up for malicious senders trying to spam the network. It also gamifies the network as the computers globally that are running a proof of work blockchain are competing to solve an equation which will win them the reward of each new block created and simultaneously verifying transactions and the validity of the network data. For someone to maliciously try to take over a proof of work network, they would need to control more than 51% of the networks computational power, or hashing power, to even begin to make changes to previously completed blocks. The cost to do so is a huge deterrent from anyone wasting their time and effort as the cost is much more than the reward for doing so. The media narrative will portray that proof of work is bad for the environment, but a recent study showed that 75%+ of the Bitcoin mining is done with renewable energy, and in some cases even uses energy that would be wasted if not used. The cost to run the network challenges those mining Bitcoin to find the most efficient ways to run the network to maximize profits.

Now, we will take a look at proof of stake. Proof of stake has the same goal of achieving consensus in the network but operates completely different. It uses a random election process to select a node to be the validator of the next block, based on a combination of factors that could include the staking age, randomization, and the node’s wealth, which is the amount of the native coin staked by a user or users for a particular network node. The selected node wins the block reward similarly to how proof of work validators claim block rewards. There is a large variety of ways a proof of stake network can select the block producer so there is still even more debate as to what type of proof of stake method is the best. Users looking to stake are required to lock a certain amount of coins into the network as their stake. Attempts to maliciously attack the network by those Staking could see their stake forfeited in many proof of stake networks. Therefore there is financial motivation to not validate or create fraudulent transactions. Each cryptocurrency using the proof of stake algorithm has their own set of rules and methods combined for what they think is the best possible combination for them and their users. Projects like Tezos run on Proof of Stake.

Some projects that start as proof of work will attempt to switch to proof of stake, which Ethereum is in the process of trying to do with Eth 2.0. It is still undetermined at this point how successful that transformation will be. Proof of stake is considered to be a greener, more eco-friendly method for blockchains to run. It can also allow the networks to maintain extremely low transaction costs even as network congestion grows.