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All You Need To Know About Cryptocurrency: Types, Benefits, History and More

Today, hundreds of different cryptocurrencies are being created, with each having different use cases. Cryptocurrencies are digital currencies that are fast reshaping the traditional financial system. They offer the benefits of traditional fiat currencies and a lot more, which has made them the interest of millions across the globe. Cryptocurrencies are slowly becoming a must to learn about as their revolutionary nature changes the world as we know it.

What Is The Meaning Of Cryptocurrency?

The simple meaning of a cryptocurrency is digital currencies. Unlike fiat currencies, they cannot be touched or moved physically. Another distinctive feature of cryptocurrencies is that they are typically decentralised which means that they are not managed by the central bank, government, or other central authorities. Rather, they are run by thousands of computer systems from ordinary individuals across the world.

Transactions involving cryptocurrencies are stored on a decentralised ledger called the blockchain. The information on this computer system is almost impossible to manipulate by a person or group of people, making cryptocurrencies very secure to use as they cannot be abused. Another vital detail to note about cryptocurrencies is that they usually operate on a peer-to-peer model. This means cryptocurrencies can be exchanged directly between individuals without the need for a middleman.

Understanding Crypto Coins and Tokens

Almost everyone will mix up a token and a coin at some point during their cryptocurrency journey. While a coin and a token are fundamentally similar. When it comes to utility, they are not the same. There are some things you can do with tokens that you cannot do with coins and vice versa. It's like comparing investors and traders. While all traders invest, not all investors trade.

What is a Coin?

A coin is defined as a cryptocurrency that operates on its blockchain, acts as money serving a means of exchange and can be mined. When you pay someone with bitcoin, the receipt goes to the bitcoin blockchain. If the same person pays you back later with ethereum, the receipt goes to the ethereum blockchain. Each transaction is protected by encryption and is accessible by any member of the network. Crypto coins include blockchain, ethereum, solana etc.

What Is A Token?

Tokens, unlike coins, do not have a blockchain. Instead, they operate on the blockchains of other crypto coins, such as ethereum. Tether and other stablecoins such as the USDC are among the most commonly seen tokens on Ethereum.

Differences between Crypto Coins and Tokens

While crypto coins are essentially digital versions of money, tokens can represent assets or deeds. Tokens can be a digital representation of an asset, such as NFTs or company shares, that is transferred from one person to another.

This is distinct from coins in that crypto coins do not move; only account balances change. When you transfer money from one bank to another, it does not leave your account. The bank adjusts the balances of both accounts and charges fees.

What Is Cryptography?

To understand all about cryptocurrency, we must know the meaning of cryptography. Cryptography has existed long before the digital era and generally involves hiding information or data to protect it from getting into the wrong hands. Assume you want to send a message to a friend through someone but you want only your friend to understand it. You will need to find a coded way of sending the message or saying what you want so that only both of you understand it while it makes no sense to an outsider. This is the meaning of cryptography in the computer world, as it is a format to protect data.

Cryptography is a process used to hide or encrypt plain words or instructions. It also involves decoding and understanding data or information. The goal is to secure data and information from hackers through a series of encryptions. Data or information is encoded through a series of mathematical theories and computation processes. Information can then be distributed across nodes of even unsecured networks.

Cryptocurrencies are built around cryptography which ensures their security and makes it difficult to manipulate. Cryptography allows cryptocurrency to maintain its decentralised nature securely and ensures that only valid users or blocks are introduced on the blockchain network.

Brief History of Cryptocurrency

The idea of the existence of digital currencies has been around since the end of the 20th century. That idea was first shared with the world by David Chaum, a cryptographer when he came up with ecash which was electronic money that used cryptography to protect users’ identity. He implemented the idea through Digicash in 1995 but the company declared bankruptcy 3 years later. Although Digicash used cryptography protocols to encrypt data about a person withdrawing money from a bank and sending it to another party, it was basically a way to ensure that electronic transactions were untraceable.

In 1998, Wei Dai and Nick Szabo described other electronic cash systems called b-money and bit-gold respectively. The concept behind these ideas was the existence of anonymous electronic cash. However, these concepts were never implemented.

It wasn’t until 2009 that the first cryptocurrency, bitcoin, was created. Bitcoin was developed by a person or group of persons under the pseudonym, Satoshi Nakamoto. Bitcoin was first mentioned in a white paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System”. Since the creation of bitcoin, other cryptocurrencies have been created similar to bitcoin and others quite distinct from it for specific purposes.

Cryptocurrencies are built on a blockchain; for instance, bitcoin is built on a bitcoin blockchain. The blockchain contains all the transactions on bitcoin and records them as blocks. Learning how the bitcoin blockchain works helps us see that new blocks are added to the blockchain through mining which involves validating the authenticity of blocks added to the blockchain network for a reward.

Benefits of Cryptocurrency

Cryptocurrencies are revolutionary and are gradually changing the economic and financial ecosystem because of their numerous uses. Cryptocurrencies benefits are enormous as they can be used to send funds from person to person irrespective of their geographical location at a faster and cheaper rate. You can also use cryptocurrencies to pay for products and services. Cryptocurrencies can also be used as a store of wealth to protect your funds from inflation which fiat currencies are subject to.

Cryptocurrencies can also be considered short-term or long-term investments. You can earn profits from crypto trading and even investments in crypto projects like mining, staking, yield farming, loaning, among others. You may also borrow crypto loans and use them for your financial needs. You can even use cryptocurrencies as collateral when collecting these loans.

Let's take a look at other standard benefits and uses of cryptocurrency below;

1. User Privacy

Because cryptocurrency transactions are anonymous, your wallet address can represent you without revealing any personal information. Since you do not need to open an account with a financial institution to use cryptocurrency, you can keep your transactions private.

2. Accessibility

Anyone with a smartphone and an internet connection can use cryptocurrency.Cryptocurrency enables financial inclusion, particularly for the unbanked, by allowing them to access financial services without going through a centralized authority. People who do not use traditional banking services may be able to use cryptocurrency to easily make online transactions or send money to loved ones.

3. Transaction fees

When compared to other financial services, the cost of transacting in cryptocurrency is relatively low. A domestic wire transfer, for example, is not uncommon to cost $20 or $50. However, for the same amount of money, cryptocurrency transactions are usually less expensive.

4. Transaction speed

There are few ways to move money or assets from one account to another faster than with cryptocurrency. Most transactions with traditional financial institutions are settled in one to seven working days depending on medium.

However, one of the benefits of cryptocurrency transactions is that they can be completed in a matter of seconds or minutes once the network confirms the block containing your transaction.

5. Security

Someone cannot sign transactions or access your funds unless they have access to your crypto wallet's private key.

The network of distributed computers verifying transactions secures blockchain transactions. The network becomes more secure as computing power is added.

Different Types Of Cryptocurrency Explained

There are various types of cryptocurrencies including utility token, security tokens, stablecoins, Non -fungible tokens, etc.

1. Utility Tokens

Utility tokens are thought of as coupons or vouchers that have digital representations of value on the blockchain. In other words, the token provides certain access to a product or service run or operated by the token issuer like discounts but is not an investment. Utility tokens are meant to provide access to platform services. Examples of Utility tokens are Funfair, Basic Attention Token, Brickblock etc.

2. Security Tokens

These are cryptocurrencies whose value is derived from an external asset that can be traded as security under financial regulations.

They represent a stake, share of stock or equity, voting rights, and a dividend right in the asset represented.

Security tokens are classified further as follows:

-Equity tokens:

These are similar to traditional stocks, but ownership and transfer occur digitally. Dividends are paid to investors as a result of managerial and issuer actions and decisions.

-Asset-backed tokens:

These have real-world assets as underlying value, such as real estate, art, carbon credits, or commodities. Because they are tradable, they have characteristics of gold, silver, oil, and so on.

Sia Funds and Science Blockchain are two security token examples.

3. Payment Tokens:

These kinds of cryptocurrency are used to pay for goods and services both inside and outside of their own platforms. Almost every cryptocurrency falls into this category. Tether, ethereum, and bitcoin are examples of payment tokens.

4. Exchange Native Tokens

Exchange tokens are digital currencies that are issued by a cryptocurrency exchange. While they can be used outside of their native exchange environments, they are mostly used to facilitate token exchanges or as gas utility payments on these exchanges.

Binance Coin or BNB token, Gemini USD, FTX Coin for FTX Exchange, OKB for Okex exchange, KuCoin Token, and others are examples of exchange tokens.

5. Stablecoins

Stablecoins are tokens with a stable value in the sense that their value is somewhat predictable and stays the same almost all of the time. They are critical given how volatile the cryptocurrency market can be.

Stable tokens or stablecoins are backed by a stable or relatively stable asset, such as fiat currency or a commodity instrument. So we have stable coins that are dollar or euro-stabilized or backed, gold and other precious metals, oil, and commodity-backed tokens.

Other types of cryptocurrency includes Non-Fungible tokens, Decentralized Finance or De-Fi Tokens and Asset Backed Tokens.

Fiat Currency vs Cryptocurrency

Fiat currencies and cryptocurrencies are used to facilitate transactions and can be used as a store of value. Yet, certain distinct features differentiate fiat currencies and cryptocurrencies that help explain crypto better.

Tangibility

Cryptocurrencies are entirely electronic and can only be exchanged digitally while fiat currencies can be touched and handled physically. 

Centralised/decentralised nature

Fiat currencies are issued by a central authority or governing body responsible for issuing and keeping transactions of the currency. Cryptocurrencies, on the other hand, are not issued or run by a governing authority but thousands of nodes spread across the globe.

This introduces another feature of cryptocurrencies which is pseudonymity. This means that cryptocurrencies provide a level of anonymity that allows  anyone to perform transactions without revealing their private details. All transactions performed by a person are however tied to their bitcoin address. Banks, however, require that you reveal your personal details to own an account to store fiat currencies.

Cryptocurrencies are borderless because of their decentralised nature, which means cryptocurrencies can go anywhere at cheaper transaction rates and faster. Fiat currencies are usually tied to a particular country or region and one would need to exchange their local currency, say Ghanaian cedis, for another country’s currency, say rand, if they were to travel to South Africa.

Supply Limit

Fiat currencies often do not limit how much of their currencies can be in supply. However, many cryptocurrencies are structured to have a finite or limited supply. For instance, there can only be 21 million bitcoins in supply. The limited supply of cryptocurrencies such as bitcoin makes it resistant to inflation (deflationary), making it a great store of value.

Exchange Medium

Fiat currencies can be exchanged physically (direct contact) and digitally (banking app, payment platform apps such as PayPal). However, cryptocurrencies can only be transferred digitally. Therefore, you need a cryptocurrency wallet to exchange cryptocurrencies.

Storage

Fiat currencies can be stored in cash or in banks and accessed electronically. Cryptocurrencies are stored in a crypto wallet, either cold or hot storage.

Crypto Wallet Public and Private Keys

When you open a cryptocurrency wallet, you are issued a public and private key. Think of the public key as an account number. In order to receive funds or information, you would need to share your account details with others. The private key is also similar to your password or ATM PIN that allows you to access the funds in your account. You are expected to keep the private key securely. It is structured to grant you access to the cryptocurrencies locked in your wallet. Anyone can access these cryptocurrencies as long as they have your private key.

Now that you have understood the basics of how the private and public key operates let's dive deeper. The public key is an alphanumeric string of numbers and words. It may also be a QR code shared with others to receive cryptocurrencies, but that's not all. The blockchain is like a public ledger that holds all the cryptocurrency transactions, for instance, bitcoin. The bitcoin blockchain displays all the bitcoin transactions for everyone willing to see it from the time bitcoin was created till the present. The public key is an identifier used while recording each transaction.

Therefore, although people don't know who owns the public key, they can see all the transactions that have taken place on the public key. They can see the amount of bitcoin a person holds and every address they have received bitcoin from and sent it to. Yet, your identity remains anonymous as people can only see the public key and its transactions but do not know the public key owner.

The private key is used to secure your account from thefts, fraudsters among many others. Yet, unlike your ATM pin, which you can change at will, you cannot change your private key or recover if lost except if it is backed up. The best way to secure your private key is never to share with others, as access to your private key means that your cryptocurrencies can be accessed anytime and from anywhere in the world. This means that although anyone can see the transactions on your public key, you are the only person that can initiate those transactions with your private key.

It is vital that you store your private key securely. Several people consider cryptocurrency exchanges like Yellow Card to secure their private keys in a hot wallet. This allows them to securely safeguard their private keys and access their cryptocurrencies from the exchange through two-factor authentication. Still, this time it is through passwords they have set for themselves, which is easier to remember. Apart from this, their information is backed up, which means that they can recover it following a security and verification process if they lose their passwords. An alternative to securing your private key is storing it offline: on a computer without internet, pieces of paper, or even memorising it.

About now, you may be wondering how cryptography comes into place in securing your crypto funds. The public key and private key are synced; the public key is generated from the private key. This is why you can initiate and verify a transaction with your private key. The transactions are initiated on the blockchain and need to be verified before they can be processed. The transaction is encrypted on the public key and can only be decrypted by the private key. Once you have confirmed that the transaction is authentic through your private key, it can then be processed. Anyone who doesn't have the right key has the transaction falsified and dismissed.

How to buy cryptocurrencies

Conclusion

Since the creation of bitcoin, several cryptocurrencies have been created, many of which have also been successful in their own right. Different variations of cryptocurrencies have also been created, such as stablecoins, Non-fungible tokens (NFTs), among several others. Cryptocurrencies are built to solve the limitations of fiat currencies and bring banking closer to the underbanked and unbanked.

Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.

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