If you have found yourself trying to look like you know what’s being discussed when someone begins talking about cryptocurrencies (which is quite often these days), but deep down, you know you understand little about it, fear not. You are not alone.

Cryptocurrencies, in most cases, may seem like a daunting subject. But when broken down, it  can be easily deciphered.

Simply put, cryptocurrency is a digital tender that can be mined online and, in some cases, used to purchase goods and services.

So, what makes it different then?

Let’s get into that.

What is cryptocurrency and how is it different from other currencies?

What makes cryptocurrency different from other, more traditional forms of currencies is how it is created and transmitted, which is anything but traditional.

The need to have coded messages, not understood without a key, has been around for millennia. In Ancient Greece, these served a military purpose, as they still do today. In fact, the ‘crypto’ in cryptocurrency traces its origins to the Greek word “kryptós” meaning “hidden.”

Encryption, in the digital era, has allowed for the transfer of data securely via the internet and it was only a matter of time before it could be used for monetary exchange.

What this essentially means is that you could transfer money to someone digitally without a bank or a centralized authority simply via encrypted monetary.

Also read: 7 cryptocurrencies with unique use cases

Copyright © 2021 Kalkine Media

This, however, gives way to the question of security in cryptocurrencies.

Cryptocurrencies depend heavily on blockchain technology, which is basically a decentralized distributed ledger system that allows people part of the chain to keep score.

To understand it better, imagine an ice hockey game with no referee or scoreboard. In it, the players keep score themselves, and should any player have the wrong score, it can be compared and contrasted to that of the other players, a majority of which would have the right score line. So, instead of depending on the word of a central authority, the game get driven by the strength of the players, or rather the security in numbers.

Some believe that this lack of a dominant figure makes the system of exchange in cryptos less vulnerable to failure, be it from ill-intended parties or technical challenges.

Each ‘block’ added to the ‘chain’ is said to be as unique as an individual’s DNA, and so, it is believed that there can be no confusion as transactions continue to add to the chain.

What are the different types of cryptocurrencies?

Bitcoin

The shadowed Satoshi Nakamoto, either an anonymous genius or a group of programmers, created, or rather “mined”, the “genesis block” of Bitcoin that today stands head and shoulders above every other cryptocurrency.

Going back to ice hockey example, in this case, the players keeping score solve complex mathematical problems in order to ensure the score line is true and for their services are rewarded with Bitcoin.

They do so by running a program and when a block is added, they successfully mine Bitcoin. In essence, this is how new Bitcoin is created.

Copyright © 2021 Kalkine Media

Although Bitcoin has noted massive volatility, it has found significant mainstream acceptance. It briefly saw Tesla allow it as a payment mode (before junking the idea citing environmental concerns) and in June 2021, it became legal tender in El Salvador.

In creating new Bitcoin, the value of each block added is said to be halved about every four years. A block’s value began at about 50 Bitcoins in 2009 before falling to 25, 12.5 and so on. There are about 18.6 million Bitcoins in the current year and the maximum number of Bitcoins allowed is 21 million, estimated to be reached in the year 2140.

Ethereum

The Ethereum genesis block was created on July 30, 2015, the credit for which goes to Russian-Canadian programmer Vitalik Buterin.

Buterin conceived the idea in 2013 and a 2014 crowdfunding effort saw it come to fruition. Ethereum, arguably, is even more democratic in nature compared to Bitcoin as it allows users to create and use decentralized applications, or Dapps, within its network.

Also read: Ether rises over 8% as London hard fork upgrade begins

Copyright © 2021 Kalkine Media

The open-source and programmable nature of Ethereum’s blockchain means it allows its users more customization than Bitcoin, conceiving possibilities as limitless as, well, the ether.

These customized codes and apps allow specific functions within the network and thus, enable the creation of ‘smart contracts’. Think of these as plugins in your browser that enable you to perform specific tasks. What is noteworthy here is that transactions with smart contracts are said to be  legally binding.

Binance Coin

While lightyears behind Bitcoin and Ethereum in terms of market capitalization, Binance Coin gets bronze.

The coin had its genesis in the Ethereum chain but its home is now Binance Exchange, the world’s largest cryptocurrency exchange.

Dogecoin

Created as a joke, Dogecoin finds an honorary mention. It is sometimes referred to as a “meme coin” on account that it was inspired by the popular ‘Doge’ meme with the Shiba Inu dog.

Copyright © 2021 Kalkine Media

The coin continues to feature the Shiba Inu on it as its logo. But in recent times, it has shown that it is no laughing matter. With its tail in the air, Dogecoin has seen an almost galactical rise over the past year.

There has been volatility as well, which is a common scene with cryptocurrencies, but with near-continuous support from Tesla boss Elon Musk, the token has risen in ranks.

Bottomline

As it has been clear, cryptocurrency has an erratic nature for the most part. But despite that, there has been quite a bit of FOMO (fear of missing out) around it, especially amid the pandemic-enforced lockdown periods.

Many argue that cryptocurrency has a vast potential for wealth creation, while others are charmed by its decentralized nature. But as exciting as it may all seem, the lack of stability in their values is also something to be taken seriously.

Who knows what next big idea may come along in the currency orbit? Will it turn cryptocurrencies even more widely accepted, or will it make them obsolete? Only time can tell.