Cryptocurrency for Beginners: What It Is and How It Works

The history of cryptocurrencies began with the emergence of bitcoin in 2008. The creator of bitcoin was a programmer or group of scientists Satoshi Nakamoto. In 2008, bitcoin was available for free; today, bitcoin is worth $19,116 (October 2022).

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Let’s start learning about cryptocurrency, its types, and how crypto works.

What is cryptocurrency?

Cryptocurrency is digital money without physical expression. Unlike fiat, cryptocurrency has no central authority that controls it and maintains its value. It is the task of cryptocurrency holders.

The unit of measurement of cryptocurrency is a coin. These coins are only stored and circulated online in users’ wallets. They are protected from hacking and counterfeiting by cryptography.

Cryptocurrencies have two forms — coins and tokens.

Coins are a means of payment and work like traditional money. The owners of coins store them, use them to pay, and exchange them for other cryptocurrencies. Programmers create coins on their own blockchain.

Tokens are created on off-the-shelf blockchains. Their functionality is like the stocks. That is, you can invest in tokens, and receive dividends or benefits from a particular project. You can also send tokens to a liquidity pool and receive interest. This way of earning is like a bank deposit.

How does cryptocurrency work?

Cryptocurrencies work based on blockchain technology. A blockchain is a continuous chain of blocks. Each new block stores information about previous transactions. This creates a chain of blocks.

Blockchain stands for decentralized. Transaction information is stored simultaneously on all user devices. This means that it is impossible to hack, change or delete information from the blockchain.

To avoid fraud, programmers develop the blockchain on a specific consensus algorithm. PoW (Proof of Work) and PoS (Proof of Stake) are two of the most popular consensus algorithms.

As part of the PoW algorithm, miners decrypt the block hash. To decrypt the hash, the miners provide the network with the computing power of a computer. The more powerful the computer, the faster the miner will find the hash and get the reward for the block.

As part of the PoS algorithm, users keep the network running and contribute their assets to the pool. The more assets a user contributes, the greater the reward.

Types of cryptocurrencies

There are three types of cryptocurrencies: bitcoin, altcoins, and stablecoins.

Bitcoin is the first and main cryptocurrency. The rest of the market reacts to the rise and fall of bitcoin. To get bitcoins, miners mine them using the PoW principle. Bitcoin has limited issuance. A total of 1 million bitcoins can be mined. It is estimated that the last bitcoin will be mined in 2140. Cryptocurrency creator Satoshi Nakamoto wanted to avoid inflation and programmed the system.

Altcoins are all coins except bitcoin. Programmers created altcoins to solve bitcoin’s problems. For example, complicated mining or lengthy transactions.

The most popular altcoins are:

Ethereum
Litecoin
Binance Coin
Ripple
Solana

In total, developers have created more than 10,000 altcoins.

Stablecoins are stable cryptocurrencies. Stablecoins are pegged to other assets at a 1:1 ratio. For example, gold, fiat currency, or another cryptocurrency. Smart contracts or algorithms make these coins stable. The first and most popular stablecoin is Tether USDT. It is backed by the U.S. Dollar.

Conclusion

Cryptocurrencies have both advantages and disadvantages. The pros are fast transactions, transparency, and security. Minuses — many fraudsters. But one thing is certain, digital currencies have become part of everyday life.