Understanding Cryptocurrency and Its Different Types
We can all agree that in our generation today, the digital era is slowly dominating the world. It is not surprising since we, humans, can create change.
Probably, one of the most amazing human creations in history is the cryptocurrency. Because of this, we need an understanding of cryptocurrency since it will likely affect our lives in the near future.
Cryptocurrency is a digital currency created with cryptographic protocols that make the transactions completely secured and difficult to counterfeit.
It allows secured online payments, designated, and treated like a virtual token. And blockchain technology is the one processing these cryptocurrencies transactions.
Blockchain is a shared, reliable database of ledger entries programmed to keep all the records of transactions that have value.
Because of the nature of cryptocurrency, a lot of people are getting more interested in it. Since cryptocurrency transactions hide the identities of users, banks are not the only option now to process financial activities securely.
Users of cryptocurrency do not need to disclose their private information, unlike when having transactions with banks.
The first blockchain of cryptocurrency created was Bitcoin – which is very in demand until today. Bitcoin has been the face of cryptocurrency ever since the latter became famous.
However, Bitcoin is not the only cryptocurrency that exists nowadays. For the record, there are over 4,300 cryptocurrencies available in the market, and the number continues to grow.
But in this article, we will focus on the three main types of cryptocurrency.
The Three Main Types of Cryptocurrency
As we all know, Bitcoin is the most famous among all digital currencies existing right now. It is the first blockchain created in 2009 by someone called Satoshi Nakamoto.
Ever since then, Bitcoin grew tremendously, that its value is dramatically higher than a decade ago. For this reason, Bitcoin caught the attention of the world.
Many people became traders and miners of Bitcoin, believing that for another decade, its value will jump higher and higher.
Bitcoin works like the typical money itself, except that it has no physical form. You can use it for online purchase of products or services, or you can send it as a gift.
It has diverse usage in the virtual world, but its benefits do not end there. Bitcoin is also decentralized, meaning there is no third party in between of any Bitcoin transactions.
And this third party pertains to any financial institutions or government that requires personal information to verify any transaction.
Since there is no third party involved, the users of Bitcoin will remain anonymous in the transactions. No one will ever know who is behind a crypto transaction, except the owner of the Bitcoin himself.
As I have mentioned earlier, Bitcoins use blockchain. And the blockchain is a technology where it allows a fast and secured transaction in a peer-to-peer network.
Each piece of information on the blockchain is encrypted, and only the owner of Bitcoin can decrypt it using a private key.
The second type of cryptocurrency is Altcoin. It launched right after the success of Bitcoin. For the record, there are more than a thousand Altcoin now, and it keeps on increasing.
Most of the Altcoins are just alternative versions of Bitcoin, hence its name Altcoin. However, some of its goals and purposes are far different from Bitcoin.
Altcoins aim to improve the observed limitations of Bitcoins. It is easier for altcoins to be more advantageous since its primary structure came from Bitcoin.
Most Altcoins act like Bitcoins, which are peer-to-peer. But they are offering affordable and efficient ways to carry out transactions in the virtual world.
The earliest Altcoins recorded is the Namecoin. It was almost the same with Bitcoin, as it also used the same proof-of-work algorithm.
Just like Bitcoin, it has 21 million coins available in the market. Aside from this, the users’ domains are also not visible.
Eventually, Litecoin emerged in the market after Namecoin, recognizing as the silver to Bitcoin’s gold.
Meanwhile, the Litecoin varies from Bitcoin when it comes to its mining transactions. Even though both have similarities in functions and codes, Litecoin approves mining transactions more often.
And unlike Bitcoin and Namecoin that have limited coins, Litecoin provides 84 million coins in the crypto market.
Some distinct categories of Altcoins emerged in the market, and these include mining-based, stablecoins, security tokens, and utility tokens.
- Tokens for dApps
The third main types of cryptocurrency are tokens used for decentralized applications or DApps (pronounced as dee-apps).
These tokens are more interesting than the other cryptocurrencies as they do not have their own blockchain. But before we dig deeper into these tokens, it is essential to understand first what DApps is.
The decentralized applications or DApps are open source application and works just like the normal apps. However, these apps function autonomously on a decentralized blockchain.
Thus, no single entity can ever control them.
Blockchain platforms, such as Ethereum and NEO, build the DApps. And these DApps generate and use tokens, by following a standard cryptographic algorithm.
This cryptographic algorithm represents the proof of work, just like the Bitcoin.
Now, let’s go back to tokens – and don’t get confused with coins. As I have mentioned earlier, tokens do not have their own blockchain.
They need another platform or protocol to operate and exist. They are different from coins as they can run without relying on any other blockchain platforms or protocols.
However, tokens do not serve as an electronic payment to physical things like a house or electricity bills. Nonetheless, they are the means of purchasing anything in the DApps.
When it comes to valuation, tokens also have its price to buy and sell. Some people purchase tokens for value appreciation, instead of buying things in the DApp.
Then when the price of the token rises, they sell it to gain earnings.
The nodes on the protocol or platform verify each token transaction. And each transaction has a fee paid by Ether or any equivalent altcoin for the protocol used. That means altcoins are necessary for purchasing on a DApp.
As you can see cryptocurrencies are more complex than actual currencies even though they are digital. However, in theory they offer the user the valued bonus of not having to divulge personal information.
That’s important in an era when governments are increasingly eroding personal privacy. Cryptocurrency use is increasing as the public becomes more aware of it and its uses.
Banks and financial institutions seem to be gearing up to make using cryptocurrencies a normal part of business. This may happen in 2021. It’s April 2021 now and I think that maybe this year will see much more use of crypto currencies. Especially with the steep rise of Bitcoin.
It remains to be seen how governments will react to wider use of cryptocurrencies.
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