Definition
Cryptocurrencies are digital money.
Description
Cryptocurrencies are digital money that are tracked using a virtual accounting system called the blockchain.
Cryptocurrencies are stored in virtual wallets. The blockchain records the number of cryptocurrency coins every wallet has and all the transfers that have ever occurred.
Anyone can verify the transactions in the blockchain by setting up computers or servers to ensure all the transactions tally.
In exchange, they are rewarded with coins for their work. Those who do this are called miners.
The most common cryptocurrency coins are Bitcoin (BTC) and Ethereum (ETH).
3 Broad Uses of Cryptocurrencies
There are many cryptocurrencies with different uses. They fall into 3 broad categories.
Store of value, medium of exchange
Cryptocurrencies can be spent to buy goods or services. In this aspect, they are similar to fiat currencies or gold.
Smart contracts
A smart contract is a code that enforces certain action when an event occurred.
Example: If Wallet A receives Coin X, Wallet A will return Coin Y to the sender of Coin X.
In this case, the smart contract is attached to Wallet A. The action and events coded onto the smart contract has to be digitally trackable.
Smart contracts can interact with non-digital events if an entity is appointed to input the results of the non-digital event. This entity is known as an oracle.
Example: If the temperature in City X falls below 32 degrees Fahrenheit, based on weather.com, Wallet A must send 10 coins to Wallet B. In this case, weather.com is the oracle.
Asset tracking
Cryptocurrencies can be pegged to an external value such as the US Dollar or Gold.
However, it is up to the creator of that cryptocurrency to devise a way to ensure that the cryptocurrency accurately tracks the external asset.
The most common way to do this is to store the external asset and issue only the equivalent value in cryptocurrency coins.
For instance, if Crypto X is pegged to the value of the US dollar, it might store 1 billion USD in its bank and issue out 1 billion USD worth of Coin X.
Storing Cryptocurrencies
Cryptocurrencies are stored in virtual wallets.
Most wallets are designed to only store certain cryptocurrencies. If you have 2 different coins, you will usually need 2 different wallets.
Transaction Mechanics
Transferring of coins are usually cheap and fast.
Wallets and smart contracts submit a transfer request to the blockchain and the miners will add that transaction to it.
Characteristics of Transactions
Irreversible
After a transaction has been confirmed by the miners, it cannot be reversed.
Semi-anonymous
Wallets are not connected to real-world identities.
Fast and Global
Transactions can be completed within seconds or minutes.
This time does not change even if the person you are sending the coins to is physically far away.
You can send coins to anyone around the world
Permissionless
No one can prevent you from setting up wallets, and sending/receiving coins. (You do need access to the Internet though.)
Examples of Popular Cryptocurrencies
- Bitcoin
- Ethereum
- Ripple
- Litecoin
- EOS
Links to Complicated Explanations
Related Terms