What Is Cryptocurrency and How Does It Work?

Table of Contents

• The Meaning of "Cryptocurrency"
• How Cryptocurrency Works With Blockchain
• How Many Cryptocurrencies Are There?
• Bitcoin (BTC)
• Ethereum (ETH)
• Monero (XMR)
• Why Cryptocurrencies Matter

While the internet has globalized trade and led to more migration and international travel, no truly international currency exists. People are encumbered with exchange rates and other fees, not to mention the risks of identity theft when shopping online. Cryptocurrencies represent one of the most impactful efforts to change security and anonymity in the financial world.

The Meaning of "Cryptocurrency"

Cryptocurrency is an internet-based currency that uses blockchain technology to make financial transactions. It is an alternative form of cash, credit, and checks, and does not need to go through a bank or other third party.

Users can transfer money through systems secured by cryptography, meaning there is generally less risk of identity theft. These transactions are bundled into blocks, and linked together to form a chain of information that can be traced and verified through the web, called "blockchains".

How Cryptocurrency Works With Blockchain

Blockchains are a way to pass information through transactions. The database is distributed to users for transparency and maintains a growing list of records called "blocks". The blocks are chunks of information that define its value and who it belongs to. Only the owners are allowed to edit the information, using private "keys", and each block is linked to previous blocks by time-stamped chains.

The "chains" are secured and bound by cryptography, to ensure that all blocks are kept in sync. These blocks are distributed across many hosts, which all have the relevant blocks — a complete ledger of financial information.

There are three different types of blockchains:

• Public blockchains: Large distributed networks that are run through a native token, like Bitcoin.
• Permissioned blockchains: Networks that control roles that individuals can play within the said network, like Ripple.
• Private blockchains: These networks are smaller and do not use tokens, and membership is closely controlled.

The blockchain network has no central authority and does not need a bank or government agency to facilitate a transaction. It is fully automated, safe, and verified by thousands of computers. Falsifying a block is virtually impossible since it would require falsifying millions of blocks in the same chain.

In terms of cryptocurrency, blockchains allow users to safely send monetary transactions through the web without fees, bank accounts, or credit cards. The corresponding keys verify the identity of the reciprocal and record the transfer, virtually eliminating the need for banks.

How Many Cryptocurrencies Are There?

Technically, anyone can create a cryptocurrency with a computer and an internet connection, but there are a few common ones that are in use.

Bitcoin (BTC)

The first and most common cryptocurrency, Bitcoin began in 2009, quickly growing in value. It is the first decentralized, peer-to-peer payment network with no middleman. There are many advantages to Bitcoin, including:

• Payment freedom: Users can send currency anywhere, at any time, even on holidays and weekends.
• Users choose fees: There is no fee to receive Bitcoins. Many wallets let users control how large a fee they'd like to pay when spending. Higher fees can encourage faster confirmation of transactions.
• Fewer risks for merchants: Bitcoins do not contain personal information, which protects users from fraud.
• Security and control: Since no personal information is needed, there is less risk of identity theft. Bitcoins are also impossible to counterfeit, and users cannot receive unapproved charges as with credit cards.
• Transparent and neutral: All transaction information is available on the blockchain. While no one person can edit the information, it is accessible to verify by all.

The total estimated value of all existing Bitcoins is currently over $100 billion.

Ethereum (ETH)

Founded in 2015, Ethereum distinguishes itself as a programmable blockchain. It uses a native currency called "ether", which is similar to Bitcoin — it is purely digital and can be sent anywhere at any time. It's also not controlled by any government or company, and people can use it to make payments.

However, since it is programmable, developers use it to build new applications. These applications are not owned by a single person and include services such as:

• Cryptocurrency wallets
• Financial applications
• Smart contracts
• Decentralized markets
• And in-games assets, which can translate to real money.

Ethereum is maintained by contributors all over the globe and has one of the largest and most active blockchain communities in the world.

Monero (XMR)

Monero was launched in 2014 and is maintained by over 500 developers, including 30 core developers.

This cryptocurrency focuses on privacy and security and claims that, unlike many other cryptocurrencies, its transactions are confidential and untraceable. It shields sending and receiving addresses as well as transaction amounts and is currently working on a project that will hide the IP addresses of users as well, providing further protection of network monitoring.

In an age of increasing personal information leaks, like the infamous Target leak, a private cryptocurrency sounds increasingly beneficial. There are many advantages to Monero, including:

• Ownership over currency: All identities are private so no one can see what others spend their money on. Users who don't like companies knowing their buying behaviors can find solace in a private cryptocurrency like Monero.
• Fungibility: Data and transactional privacy allows Monero to be interchangeable, and therefore always accepted. For example, Bitcoin is completely traceable, so if it was used in illegal activity, that particular piece of currency could be rejected as payment.
• Scalability: Monero has no pre-set size limit on blocks, which means there is no limit on the amount of money you can transfer.

Monero allows fast transfers with little fees to and from anywhere in the world, and there are no multi-day holding periods and no risk of fraudulent chargebacks.

Why Cryptocurrencies Matter

Cryptocurrencies could revolutionize the global financial landscape. With their security and anonymity, individuals can rest easy knowing their personal information is protected with cryptography.

It also opens the door to the globalization of the Fintech industry, since cryptocurrencies are not tied to any particular country or region. This can help drive freelance or remote work by allowing employees to receive funds securely. With the help of cryptocurrencies, people can transfer money for a fraction of the price paid for exchange fees.