What is Cryptocurrency? (The Ultimate Guide)

Digital currency that is decentralized and built on the blockchain is known as cryptocurrency. Although Bitcoin and Ethereum are the most well-known cryptocurrency, there are more than 20,000 others in existence.

To understand what cryptocurrency is, we have to understand what a blockchain is and lastly, how it all fits together into making crpytocurrency usable to the everday person.

What is a blockchain?

A blockchain is a digital ledger that stores all transactions in a public, decentralized database. In reality, it's more like a checkbook that's spread out over a large number of computers all over the globe. There are "blocks" of bitcoin transactions, which are subsequently linked together on a "chain."

An African cryptocurrency exchange's co-founder Buchi Okoro adds, "Imagine a book where you write down everything you spend money on each day," he says. In the same way that each page of a book is a block, the complete book is a blockchain.

For the sake of creating an all-inclusive ledger of all transactions, a blockchain ensures that every bitcoin user gets their own copy. As soon as a transaction occurs, it is recorded in the blockchain, and all copies of the blockchain are automatically updated with the new information.

There are several validation techniques used to make sure that no transactions have been fraudulently altered.

Proof of Work vs Proof of Stake

Transactions are added to a blockchain via a consensus technique known as proof of work or proof of stake. For their efforts, verifiers are paid with cryptocurrency.

Proof of Work

When it comes to authenticating transactions on the blockchain, "proof of work" is a mathematical issue that computers race to solve, says Simon Oxenham, social media manager at Xcoins.com.

A "miner" is a computer that participates in the blockchain record by solving a mathematical challenge to verify a set of transactions, known as a "block." To show its appreciation, the first computer to successfully complete the task gets given a modest sum of cryptocurrency. For example, verifying a new block in Bitcoin rewards a miner with 6.25 BTC (approximately $200,000).

Solving blockchain puzzles may necessitate considerable computer and electricity resources. After accounting for the expenses of power and processing resources, the miners may only break even with the crypto they earn for validating transactions.

Proof of Stake

Using a proof of stake verification approach, certain cryptocurrencies lower the amount of electricity needed to verify transactions. Proof of stake limits the number of transactions any user can verify to the amount of cryptocurrency they're willing to "stake," or temporarily lock up in a communal safe, in order to participate in the process.

Okoro compares it to "bank collateral." If you stake crypto, you're qualified to verify transactions, but your chances of getting picked tend to improve the more you invest.

According to Anton Altement, CEO of Osom Finance, proof of stake is more efficient than proof of work because it doesn't require energy-intensive equation solving. This results in speedier verification/confirmation times for transactions.

Bitcoin, for example, has a transaction time of at least 10 minutes per transaction. Take Solana, which uses the proof-of-stake mechanism and has an average transaction rate of roughly 3,000 transactions per second (TPS), and compare that to Bitcoin's sluggish network.

Ethereum, Bitcoin's main competitor, is also moving to a proof-of-stake consensus process. "The final chapter of proof of work on Ethereum" is expected to result in a 99.95% reduction in energy consumption.

So how does cryptocurrency work?

A cryptocurrency is a digital, encrypted, and decentralized medium of exchange. Unlike the U.S. Dollar or the Euro, there is no central authority that manages and maintains the value of a cryptocurrency. Instead, these tasks are broadly distributed among a cryptocurrency’s users via the internet.

You can use crypto to buy regular goods and services, although most people invest in cryptocurrencies as they would in other assets, like stocks or precious metals. While cryptocurrency is a novel and exciting asset class, purchasing it can be risky as you must take on a fair amount of research to understand how each system works fully.

Bitcoin was the first cryptocurrency, first outlined in principle by Satoshi Nakamoto in a 2008 paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” Nakamoto described the project as “an electronic payment system based on cryptographic proof instead of trust.”

That cryptographic proof comes in the form of transactions that are verified and recorded on a blockchain.

How do you mine cryptocurrency?

Mining is the process through which new units of bitcoin are created and released into the world. Proof-of-work systems, such as Bitcoin, are more harder for the average person to mine despite theoretically being doable.

According to Spencer Montgomery, head of Uinta Crypto Consulting, "as the Bitcoin network grows, it gets more sophisticated and more processing power is necessary. There was a time when this was possible for the average person, but now it's just too pricey. We can't compete with the sheer number of people who have perfected their technology and equipment."

It takes a lot of energy to mine proof-of-work cryptocurrency, as well. Mining bitcoins presently consumes more electricity than Norway uses in a year, at an annualized rate of 127 terawatt-hours (TWh).

Proof-of-stake systems require less computer resources than proof-of-work systems since validators are picked at random based on the amount they staked. However, in order to take part, you must already have a cryptocurrency. Nothing can be staked without crypto. (This is true even if you do have crypto.)

How can you use cryptocurrency?

In addition to purchasing goods and services with cryptocurrencies like Litecoin, Bitcoin, and Ethereum, you can also utilize crypto as an alternative investing strategy.

What you're looking to buy will determine whether or not you can safely use crypto to make the purchase.

You'll need a cryptocurrency wallet if you want to send money using cryptocurrencies. As a "hot wallet," this program interacts with the blockchain and allows users to transfer and receive their cryptocurrency stored on the blockchain.

It's important to keep in mind that transactions don't happen instantly because some method is required to verify them.

Where can you buy cryptocurrency?

In general, the best way to buy cryptocurrencies is thru centralized exchanges such as Binance, Coinbase, Kraken, and Gemini. Bitcoin, Ethereum, and BNB are some of the most popular cryptocurrencies available for trading. But it's possible that they have certain drawbacks. You'll need to check with your exchange to see if they support the crypto pairing you require to make a buy.

If you have USDT, a crypto stablecoin, you can use it to purchase any crpytocurrency with that particular pairing. Some exchanges may have a cryptocurrency that another one doesn't, so make sure the exchange you're about to sign up for actually has that particular cryptocurrency on their exchange.

Lastly, the fees on some exchanges can be prohibitively high for tiny crypto purchases, so keep an eye out for that.