What Exactly is Cryptocurrency?
— A cryptocurrency is a unit of value. It is used as digital money on the blockchain.
— Unlike fiat, cryptocurrency is not issued by a bank or controlled by the government – it exists on the blockchain autonomously.
— Because cryptocurrency is decentralized, it cannot be impacted by the bank, the government, the federal reserve or any entity.
In the last article, you got familiar with different generations of blockchain. We’ve seen how blockchain is maturing from being a simple means of transferring value to a platform where conditions could be applied. Finally, a network that allows the communication of different blockchains is in progress.
Just like there are different blockchain networks, there are different types of crypto. The whole existence of a blockchain is closely related to cryptocurrencies. But, how? Let’s learn what is crypto and its connection to blockchain.
How does crypto relate to blockchain?
As we’ve discussed in the previous chapters, a blockchain is a digital ledger. It keeps track of value within the network and stores transactional data. But, there’s no way for us to access its services with traditional fiat money (the cash in your pocket, issued by a central bank at the request of a central government). Blockchains need their own native money that allows us to communicate with the network.
Similar to how we use tokens at a carnival, we need to use “a different type of money” to access blockchain services. Here is where the concept of cryptocurrency fits in the blockchain ecosystem. The different type of money that gives access to the blockchain world, is called “cryptocurrency.”
You might be wondering what could be the reason behind calling this digital money cryptocurrency. Remember the double-spending problem we discussed in the first article? To eliminate the double spending problem, digital money on the blockchain is secured by “ Crypto graphy” techniques. And that is why digital money is called “ Crypto currency.”
Cryptocurrency is the lifeblood of the entire blockchain ecosystem. It allows you to interact with the platforms and services of a blockchain network. Cryptocurrencies are not managed, governed, or controlled by any central authorities or institutions. Blockchain is a decentralized system that operates autonomously, and cryptocurrency is the native money of that system.
You might not be able to hold cryptocurrency in your hand or keep it in your pocket. But its value is as real as the notes in your wallet. A digital wallet is for cryptocurrency just like a bank account is for fiat money. We will cover this topic in detail in the coming articles.
Let’s learn about various types of cryptocurrencies used in the blockchain space.
Crypto and fiat: what’s the difference?
Now, let’s tackle one final question – what is the difference between cryptocurrency and the money in your bank account (fiat money)?
Cryptocurrencies and fiat money share a few similarities such as both can be used as payment for goods and services. Both cryptocurrencies and fiat money are divisible – 1 Bitcoin can be divided into small fractions like 0.001 Bitcoin and we can divide 1 dollar into 100 cents. Just like there are various types of fiat money (USD, GBP, EUR), there are different types of cryptocurrency (Bitcoin, Ether, BNB). However, they have clear differences.
Let’s look at the differences between cryptocurrencies and fiat money.
- Crypto is not issued by a government and is created on the blockchain. Fiat money is backed by governments.
- A cryptocurrency is a virtual form of money, whereas fiat money exists in physical form as well.
- Crypto can cross borders without friction. On the contrary, fiat money varies from place to place. We need to convert the currency each time we enter a new nation.
- Crypto enables peer-to-peer transactions, whereas fiat money relies on a middleman to verify transactions.
- Cryptocurrencies like Bitcoin can act as a hedge against inflation but not fiat money.
- You don’t need to provide any personal data like a name or address to make crypto transactions. You would have to provide all your information to utilize fiat money services provided by banks.
- And above all, crypto transactions are irreversible. Once you make a transaction, there is no going back. There will be no customer support to help you bring your assets back.
Now, you understand cryptocurrency and why it differs from fiat money, we can talk about the interesting bit – just how many cryptos ar there?!
In the next chapter, we’ll give you the ultimate glossary of different cryptos, and explain what each one means. See you there!