For many users of the digital space who have just entered the domain of digital finance, the question “what is crypto currency” becomes one of the first that they enter into search engines as queries. Their desire to learn what a digital currency is can be justified, considering the amount of hype that cryptocurrencies have received in recent years, riding the wave of astronomical appreciation and speculative bacchanalia. In fact, many of the users who enter the space in search of more information about cryptocurrencies are initially misled, maligned by the fantastic amount of misinformation and outright delusion that exists in the informational field.
Hyped stars, celebrities, crypto investors, digital currencies appreciating in the thousands of percentage points within days, Instagram stars showing off tags like “crypto unicorn” or “crypto millionaire” are all part of the larger marketing ploy used by those who run the so-called decentralized digital economy. Attracting attention is one of the main purposes of such advertising, since without the influx of new investors and their liquidity, the crypto market will simply flop. Those deluded by such Instagram stars who boast luxurious lifestyles and claims of being crypto millionaires who try and look past the veil of Photoshop and realize that the money these people made, if they have so, either comes from other sources, or is simply nonexistent, with the backgrounds acting as veneers for creating an attractive picture used for boosting self esteem.
That does not go to say that there are no crypto millionaire, but they are actually so few and far between that average retail investors, much less average users, can never hope to attain such heights without either an extraordinary amount of luck, or a ludicrous amount of capital invested into more reliable and less volatile sources. As such, this brings us to the point of what a crypto currency actually is and how it can be related to wealth and prosperity.
To start answering the aforementioned point of relation to wealth, it is necessary to first understand how a digital currency came into being.
It all started in 2008 when an anonymous individual who went by the nickname of Satoshi Nakamoto released the first Bitcoin White Paper – a manifesto, a technical document outlining the concept of a digital currency. The Bitcoin White Paper became the founding stone of the digital economy, explaining the technical characteristics of the Bitcoin blockchain – a fully decentralized ledger of transactions in digital space used for recording the movements of Bitcoin – the first ever crypto currency.
In 2009, the Bitcoin blockchain was launched under the power-intensive Proof-of-Work algorithm – a special mathematical process that required so-called miners to extract Bitcoin as rewards for their contribution in making the Bitcoin network run. By competing among each other for solving a highly complicated mathematical equation using their computers’ processing power, the miners hashed transactions into the Bitcoin network, effectively solidifying their location inside the ledger with a full record of all preceding operations. The rewards issued to miners were in the form of Bitcoin, which few took seriously in the past.
The founding principles that may in the Bitcoin blockchain paved the way for the development of all ensuing cryptocurrencies. The core concept of such digital currencies was to allow the holders of such coins to become the true owners and managers of the entire economy, doing away with the need for such institutions of oversight, such as a central bank or a reserve. The miners would replace the institutions, while the blockchain itself would act as the environment of exchange, ensuring unrestricted, instantaneous and fully transparent processing of peer-to-peer operations.
It is precisely the transparency of the blockchain that was supposed to make it the ideal environment for transactions, since it would deprive it of the need for such actors as intermediaries. With the users of the network acting on a peer-to-peer basis, the network would itself act as the intermediary and the miners would ensure its operation. Such a principle made crypto currencies a good alternative to fiat funds, which are always under the oversight and regulation of central bank authorities. The anonymous nature of digital currencies also acted in their favor, masking users from surveillance and making the blockchain the perfect medium for remaining private.
Another key characteristic of the blockchain that is transmitted to all crypto currencies is immutability. The blockchain cannot be altered. Any transaction that is hashed into its history will remain there forever until the blockchain is shut down. This factor allows anyone with a blockchain explorer service to trace the individual history of every single asset on a blockchain. The potential value of such a technical characteristic is immense, since it directly links every asset to the specific wallet address that sent or received it. With Know Your Customer and Anti-Money Laundering procedures being the standard norm in all banking and financial institutions, the ability to identify the source and destination of so-called “dirty money” is a powerful tool that can lead to the identification of criminals and their accounts for subsequent legal action.
Another important element ensured by the blockchain is its trustless nature of operation, or more specifically – the trust it provides to all of its users. Being anonymous in the network is a boon to privacy, but a serious impediment to actually trusting the counterparty. The risk of having a contract not executed by the counterparty is a major stumbling block on the way to conducting a transaction and committing funds to an endeavor. However, the blockchain ensures the execution of all transactions by relying on the smart contract – a simple program that operates on a very basic principle of “if – then”. The conditions prescribed in the smart contract must first be fulfilled for the smart contract to execute the intended transaction. The conditions can be anything – one of the main qualities of smart contracts being their versatility and ease of programming.
The combination of the aforementioned characteristics of the blockchain leads to the formation of cryptocurrencies – the internal value carriers and transaction facilitating instruments of the network. There are numerous types of crypto currencies available, including coins, tokens, stablecoins, and later on – Non-Fungible Tokens, or NFTs, which can be classified separately.
In essence, cryptocurrencies are individual smart contracts that are transferred between addresses held by specific users on the blockchain. Each crypto currency represents an information carrier, such as its ticker, its current price, the location in the blockchain, the origin wallet address, etc. As self-executing programs, smart contracts carry tokens and cryptocurrencies of all types across the blockchain, effectively making the decentralized economy function.
As for the types of cryptocurrencies, the most essential is the coin – a mined crypto currency that is inherent to a specific blockchain. Bitcoin and Ethereum are native coins of their respective blockchains and are both extracted by miners. The coins are rewarded for hashing transactions into the blockchain and can be either pre-mined, or extracted as time goes on. The limited supply of coins in existence ensures their value based on the law of supply and demand. This factor alone is sufficient for miners to compete for extracting the remaining coins, which can be used for a variety of purposes, including making purchases of goods and services, staking in liquidity pools, trading, and many others.
Tokens are the second and most abundant type of crypto currencies in existence. The vast majority of tokens are of the ERC-20, or Ethereum Request for Comment, standard. The reason for their abundance is the dominance of the Ethereum network as the largest blockchain in the world, and the fact that the given standard is extremely versatile and easy to adapt to a wide variety of purposes. Among the latter are utility tokens, which act as access passes to various decentralized application services, and security tokens that are issued for value generating purposes.
Stablecoins stand apart as a class of crypto currencies that has their value pegged to a specific real-world asset, most often – a fiat currency. Stablecoins are intended to be less, or completely not volatile by retaining their value in stark contrast to the highly unpredictable prices of tokens. However, the downside is that stablecoins will have to be pegged to actual reserves of the asset they are tethered to in value, potentially posing a risk of bankruptcy or fraud if the issuing company fails to have sufficient reserves to cover the supply it claims.
Last but not least are Non-Fungible Tokens, which are indivisible and act on a slightly different type of smart contract that is unique, transferring the same quality to the NFT. As unique assets, NFTs are rare and highly coveted, since their smart contracts can be traced to the original owner, thus revealing the entire chain of ownership, proving rights thereto.
Crypto currencies are digital value carriers that operate on the blockchain as internal units of account. Endowed with full transparency, immutability, a trustless nature and privacy, cryptocurrencies oftentimes replace, and sometimes even surpass, fiat funds by their reliability as units of account and value carriers, or means of value storage.