You seem to hear about digital currencies everywhere these days! Do you find yourself wondering what exactly they are and having a lot of questions about this new form of payment?
Digital currencies are a form of currency that only exists in digital or electronic form. You may also have heard these currencies referred to as digital money, electronic currency, electronic money, or cybercash. These currencies can sometimes operate completely independently and not be linked to any central bank. Cryptocurrencies are one of the most commonly known types of digital currency that operate in decentralized networks. These currencies are secured by cryptography, or the practice of hiding or coding information so that only the sender and intended recipient can view and decrypt certain contents. This makes it nearly impossible to counterfeit or double-spend cryptocurrency and makes it safer from hackers. One appealing aspect of cryptocurrencies is, since they are not controlled by any central authority, they are effectively immune from any government interference.
Cryptocurrencies have the ability to enable secure online payments and transfers directly from user to user. Cryptocurrency transactions take place using blockchain technology, a relatively new technology that acts as an electronic ledger that is shared among many different computer networks. This technology facilitates the recording of transactions and the tracking of assets online. Blockchain technology is what makes it so hard to engage in fraudulent transactions. The contents of the digital ledger that this technology maintains must be agreed upon by a network of individual computers, making it extremely secure.
It is important to understand that there are several different types of cryptocurrencies out there that were designed for different purposes. When investing in cryptocurrencies, it is important to know whether the coin or token you are investing in has a purpose or not, since a cryptocurrency with a purpose tends to be less risky than a one without a purpose. Some of the different forms of cryptocurrency coins and tokens you will find include utility, transactional, governance, platform, and security tokens.
Firstly, it is important to note the distinction between a coin and a token. A cryptocurrency coin is used to transfer monetary value. These cryptocurrencies are created as a part of a specific blockchain’s software and are crucial to the happenings of that blockchain. Some popular types of cryptocurrency coins are Bitcoin, Ethereum, and Binance Coin. Tokens, on the other hand, are enabled by smart contracts and are built on top of an existing blockchain platform rather than being built into it. Some popular types of cryptocurrency coins include Tether, Shiba Inu, Decentraland, and Axie Infinity. These tokens are basically digital representations of an asset. It is important to note, however, that the terms coin and token are often used interchangeably when speaking of cryptocurrencies.
A utility token is a type of cryptocurrency that the developer can assign a specific purpose to. Usually, these tokens provide access to a specific service or product that uses blockchain technology. In other words, these tokens serve a specific purpose within their respective blockchains. Utility tokens allow users to perform some specific actions within a specific network. One example of a cryptocurrency token is the BAT, or Basic Attention Token. This token works in the Brave Browser, in which users can earn BAT by opting in to view advertisements. Then, the users can use BAT to tip content creators on websites like Twitter.
Transactional tokens are designed to be used as a payment method. They can be used to pay for goods and services, often functioning like traditional currencies. One of the most popular cryptocurrencies that exists, Bitcoin, is a type of transactional cryptocurrency coin. Some people actually prefer cryptocurrencies like Bitcoin over traditional currencies since Bitcoin can be transferred without the need for a third-party intermediary like a bank.
Governance tokens represent voting or other rights on a blockchain. These tokens allow all stakeholders in a project to collaborate, debate, and vote on how to manage and maintain the system. They are often used to signal support or opposition toward proposed changes and to vote on proposals. These tokens are used by decentralized organizations to distribute power to its users.
Platform tokens are used to support applications that are built to use blockchain technology. These tokens use their blockchain systems to deliver decentralized applications (dapps) to different users. Dapps are software programs that run on blockchain systems and, like cryptocurrencies, are not under the control of a centralized authority. These applications have been developed to serve a variety of purposes, including gaming, finance, advertising, online marketplaces, and social media.
Security tokens are tokens that represent the ownership of an asset. These tokens emerged as a result of concern towards the regulation of coins and tokens. These tokens often represent stock in the company that issued the token, but can also represent other things like debts, commodities, and real estate. Basically, a security token is a tokenized security, or a tradable financial asset that holds monetary value, that is based upon a blockchain. Many people consider security tokens to be the bridge between blockchain technology and traditional financial markets.
Some of the most common types of cryptocurrencies include Bitcoin, Ethereum, Cardano, Tether, Ripple, and Dogecoin. Bitcoin is a digital asset that holds value and can be used like money or as a store of value. Bitcoin can be used to buy goods and services, pay friends or family, and can be exchanged between users. It also can be used to store value like in stocks and real estate. Bitcoin is often compared to gold because of its similar characteristics that make it valuable. Bitcoin, like gold, has a limited supply. There will only ever be 21 million bitcoins, making it relatively rare. It is also easily divisible- while the US dollar can be divided into 100 pieces, or 100 cents, bitcoins can be divided into 100 million pieces. It is also durable, because it is internet based. The network of computers that handle bitcoin is globally distributed and extremely secure, meaning no bitcoin will ever be lost.
Though blockchain technology makes cryptocurrencies extremely secure, they do still come with some risks. For example, there is no way to reverse or cancel a cryptocurrency transaction once it has started. It is also estimated that about 1/5 of all bitcoins are now inaccessible due to lost passwords, incorrect sending addresses, lost hard drives, etc. Additionally, cryptocurrencies are often the subject of scams, which have caused many new and inexperienced users to lose money. Overall, the technical complexity might be a bit much for certain users and can cause problems.
Aside from these risks, cryptocurrencies have many advantages and disadvantages. Overall, cryptocurrencies are easy to transfer, do not need third parties to use, and eliminate the possibility of a single point of failure such as financial crises. Cryptocurrency transfers are often faster than standard money transfers, and cryptocurrency investments can generate profits. Some disadvantages include pseudonymity, centralization, and expenses. Though many cryptocurrencies claim to be an anonymous form of transaction, like actually use pseudonyms. This means that they are still trackable because they leave a digital trail. Also, cryptocurrencies have become popular to some criminals who use it for things like money laundering, ransomware activities, or illicit purchases. Plus, though blockchains are secure, off-chain systems like digital wallets are not, meaning that they can be hacked. Lastly, cryptocurrencies can be extremely expensive, and can suffer from extreme surges and crashes.
Even with all of this information you’ve learned here, there is still much to know about cryptocurrencies. The world of technology is ever-changing, so it is important to keep up to date on new developments in digital currencies and cryptocurrencies in order to make the best decisions for you!
Read our previous blog post here: Choosing An Internet Browser
