What Is Cryptocurrency, and How Does It Work?



What Is Cryptocurrency? When new technologies are introduced, it can be difficult to understand them without resorting to Google to find answers to questions like, “How does artificial intelligence work?” Both “What is virtual reality?” and “What is the metaverse?” Most of the technology we use every day, from ATMs and mobile check deposits to digital wallets, Venmo, robot vacuum cleaners, and Alexa, were once just concepts. It’s not surprising that when cryptocurrency first became popular, everyone turned to the internet to find out the answer to the burning question: how does it work?

Although 50% of RD.com users are at least somewhat familiar with cryptocurrencies, nearly all (99%) have never used them or paid with them. It is beneficial to learn about the technology behind digital currencies before using them, regardless of whether you are completely unfamiliar with crypto or only have a surface-level understanding. If you have questions about bitcoin that have plagued you since its introduction, read on. Where did digital currency come from, how does it function, and what does its future hold?

Can you explain what crypto is?

Cryptocurrency is distinct from fiat currency, which refers to government-issued legal tender but is not backed by a commodity like gold or silver. All fiat currencies, including the USD, EUR, and JPY, are issued and managed by a central bank or government.

In contrast, a cryptocurrency is a digital form of money that does not exist in physical form and is administered by a decentralized network rather than a central bank or government.

Thousands of digital coins and tokens are “minted” electronically on a blockchain using cryptography, as explained by Guy Gotslak, founder and president of My Digital Money in Los Angeles. “Cryptography is the study of encoding data in a way that makes it unreadable to anyone but the intended recipient.”

Explain the concept of blockchain technology.

To fully grasp digital currency, you’ll need to expand your lexicon beyond the cryptocurrency definition. To begin, consider the blockchain, a central component of any cryptocurrency.

“Blockchain is a system for keeping a distributed ledger of all bitcoin and other cryptocurrency transactions that take place across a peer-to-peer network of computers. According to Coinme co-founder and CEO Neil Bergquist, “it’s the foundation of all cryptocurrencies.”

The blockchain ledger is mirrored and updated across a network of computers. Decentralization refers to the fact that there is no single entity responsible for managing a public blockchain, but rather a distributed group of users.

“A government can’t pass new laws that artificially inflate or deflate its value on the open market,” says Monica Eaton, owner, co-founder, and chief operating officer of Chargebacks911, a financial technology cybersecurity company that protects more than 200 million digital purchases per month. Bitcoin is decentralized, private, and immune to political manipulation if all the pieces fall into place.

What factors led to Crypto’s meteoric rise to prominence?

In 2009, Satoshi Nakamoto (a pseudonym for an unknown person or group) introduced the world to Bitcoin, the first successful decentralized cryptocurrency.

Cryptocurrency client advocates Gai Sher explains that “Bitcoin: A Peer-to-Peer Electronic Cash System” is the title of Nakamoto’s nine-page white paper. When confidence and legitimacy in financial institutions plummeted, an opening was created for bitcoin to provide a solution, as explained in the white paper which was published 15 days after the Lehman Brothers crash.

The name “Bitcoin” is a portmanteau of the words “bit” and “coin,” and the cryptocurrency has come a long way in the 13 years since Nakamoto mined the first 50 of them. The price of bitcoin has fluctuated a lot since then, but that hasn’t stopped the interest of users, as Sher puts it.

The coin’s value has fluctuated wildly, from a high of over $68,000 in November 2021 to a low of $18,958 in June 2022. The most up-to-date price, which will likely have changed by the time you read this (August 18, 2022, at 5:03 p.m. ET), was $23,422.89. CoinGecko is a good place to view the current market price of cryptocurrencies.

Varieties of Digital Currency

There are over 20,000 distinct cryptocurrencies, which can be classified either by name (such as Bitcoin, Ethereum, or Tether) or by the technology they use. Omid Malekan has been working in the cryptocurrency industry for nine years and is currently teaching blockchain and cryptocurrency as an adjunct professor at Columbia Business School.

For the better part of four years, he served as Citi Ventures’ and Citibank’s resident crypto expert, advising top management and the company’s most important clients on how to best approach blockchain technology, cryptocurrencies, stablecoins, central bank digital currencies, and decentralized finance.

Don’t worry if you just heard a bunch of gibberish. Malekan has contributed to the categorization and definition of various forms of cryptocurrency, making the concepts accessible to novices.

Bitcoin, What Is Cryptocurrency?

According to Malekan, “I am intentionally making bitcoin the sole member of its own category” due to bitcoin’s “most recognizable brand name,” “highest total value market cap,” “greatest number of unique owners,” and “most decentralized” attributes.

Bitcoin is a digital currency that operates independently from central banks and is instead issued. and Transferred on a decentralized network. Similar to actual cash, it can be used without any special permission to send money to anyone else. The potential for criminal use of this feature has garnered a lot of attention in the West. But it has also given people in countries where the currency is unstable and the banking system is either nonexistent or corrupt a new reason to believe in the future.

Systematized smart contract

Decentralized digital currencies like bitcoin are used on smart contract platforms and traded on online exchanges. Bitcoin, on the other hand, was “created as a sort of money with its own payment system,” explains Malekan, while “smart contract platforms” were conceived as “decentralized computing platforms.” Not only can people use them to transfer cryptocurrency to one another. They can also set rules for when and how those transfers take place. Because of this, anyone can create a blockchain-based app, and many already have.

Two common examples are online gaming and banking. Also, “unlike bitcoin, these platforms can handle different digital assets [beyond their own native coin], so they can be used to move things like stocks, dollars, or digital art,” he says. Users “pay” for these features using the platform’s native currency.

Ethereum is the most valuable and widely adopted smart contract platform, though there are many others. It surpasses bitcoin in terms of the number of developers working on top of it. The variety of decentralized applications it supports, and the size of its user base. The size of the transaction fees its users are willing to pay.

Users can trade one digital asset for another on the Uniswap decentralized exchange. Which is the most widely used application built on the Ethereum blockchain. Imagine the New York Stock Exchange. Users act as brokers and all transactions are recorded in a public ledger called the blockchain. More than a trillion dollars’ worth of transactions has taken place on this exchange in just the past three years.

Stablecoins, What Is Cryptocurrency?

Most people are aware that the cryptocurrency market is extremely unstable. That limits the usefulness of cryptocurrency as a medium of exchange.

A stablecoin is an alternative whose value is pegged to a preexisting asset, such as the dollar. For example, if you have a million $1 coins. Ideally, there would be $1,000,000 in the bank to back them up. Tether is the first and largest cryptocurrency. It has been losing ground this year to USD Coin, another cryptocurrency pegged to the U.S. dollar, due to concerns over the transparency of its operations and the security of the cash reserves backing its coins.

Funny money, What Is Cryptocurrency?

This form of crypto is a satirical cross between a currency and a social network. Dogecoin is the most popular and widely known of these cryptocurrencies. Elon Musk has tweeted his support for it (either seriously or jokingly). The Shiba inu coin is another option, with its low price per coin possibly being its main selling point.

The value of shiba inus has fluctuated; at one point they were worth more than Dogecoin. It’s important to remember that the majority of professionals in the cryptocurrency industry do not take such initiatives seriously. Despite their widespread appeal.

Incentives tokens

Virtual currency is what most people picture when they hear the term “cryptocurrency.” Tokens, stand in for noncash assets like those used to fund a project. Gain access to its service or facilitate decisions. Another component under the crypto umbrella.

In order to finance the creation of a cryptocurrency platform. A company may choose to issue utility tokens. Tokens can be used to purchase future services, such as a decentralized cloud storage system. Dropbox or Box but without a central authority such as Google or Apple. Tokens can also be used as a form of representation in decentralized application governance. Investors who own Uniswap’s UNI token, for instance. Have a say in what features the team behind the decentralized exchange implements.

What’s the deal with crypto, anyway?

You have a basic understanding of crypto and the different kinds of digital currencies you may come across.

You might be thinking, “That’s all well and good, but how does cryptocurrency actually work?”

To create new cryptocurrencies, miners solve mathematical puzzles. Gotslak compares crypto mining to gold mining. Except that instead of digging for precious metals, miners must solve complex mathematical puzzles. The cryptocurrency’s “cryptographic problems or puzzles were set in place by the creator.”

However, you, the human, are not the one working through these problems and “mining” cryptocurrency. A computer, or a group of connected computers.

Miners use the proof-of-work system to verify cryptocurrency transactions before they are added to the distributed ledger or blockchain. However, this requires a lot of processing power.

It has been said that Bitcoin’s use of proof-of-work mining is bad for the environment. It causes “billions of pounds of carbon dioxide to be emitted by miners’ powerful and high-energy-usage computers.” (It’s the same rationale advanced by those who claim NFTs are harmful to nature.) Proof of stake is one such alternative validation method that several altcoins have already adopted.

This approach is more environmentally friendly than proof-of-work mining. According to Sher, it is “a mechanism by which miners use the cryptocurrency. They already own to gain access to mining rights equally. The coins they own, which do not require as much energy usage.”


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