What is a cryptocurrency?
A cryptocurrency is a form of digital money. You can use it to pay your share at the bar with friends, buy that new pair of socks you have your eye on 👀 or book flights ✈️ and hotels 🏨 for your next vacation. Since cryptocurrency is digital, it can also be sent to friends and family anywhere in the world.
Just like PayPal or bank transfers, right?
Well, not really. It is much more interesting!
Traditional online payment gateways are owned by organizations. They keep your money to you and you have to ask them to transfer it to your name when you want to spend it.
There is no organization in cryptocurrencies. You, your friends and thousands of other people can act as individual banks, running free software. Your computer connects to other people's computers: this means you communicate directly - no intermediaries needed!
To use cryptocurrency, you don't need to sign up for a website with an email address and password. You can download a wide variety of apps to your smartphone and start sending and receiving cryptocurrency in minutes.
Hence, this internet magic money is not owned by anyone and uses encryption to protect the system. But if there are already apps for paying, why should you care?
1. It is Unrestricted
Nobody can stop you from using cryptocurrencies. Centralized payment services, on the other hand, can freeze accounts or prevent transactions from taking place.
It is resistant to censorship
Thanks to the structure in which the network is designed, it is virtually impossible for hackers or other attackers to disable it.
It is a cheap and fast payment method
When you transact with someone on the other side of the world, the money arrives in seconds, at a fraction of the fee paid for an international bank transfer.
And what about ₿ Bitcoin, that thing you've heard about your friend or relative? It is the first and, to date, the most popular cryptocurrency.
Bitcoin has provided the foundation for many other cryptocurrencies. Some were based on the same software, while others took a very different approach. Ok, but what's the difference between all cryptocurrencies?
It would take weeks to make a list of all the various cryptocurrencies. Some are faster than others, some offer more privacy, some are safer, and some are more programmable.
There is a common saying in the cryptocurrency industry:Do your research (or DYOR). We don't say this to be rude, but to help. It means that one should not trust a single source of information as if it were the absolute truth.
Insights:
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What is Bitcoin? (the king of cryptocurrencies)
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What is Ethereum? (the distributed computer)
What is the blockchain?
Don't be frightened by the technical conversations that many describe the "blockchain." A blockchain is simply not a particularly sophisticated database - you could create it using a spreadsheet with minimal effort.
These databases have some peculiarities. The first is that blockchains are append-only. This means you can only add information - you can't just click on a cell and delete items you've already added or edit them in any way.
The second is that each entry (called a block) in the database is cryptographically linked to the previous one. Put simply, each new entry must contain some sort of fingerprint (hash) of the last.
And this is all! Since the blocks are linked together, they create a chain of blocks. Or as it is often called, a blockchain.
A blockchain is immutable: if you change a block, its fingerprint also changes. And since that fingerprint is included in the next block, the next block will also be changed. And since that block's fingerprint ... well, you get it. You end up with a domino effect where every change becomes evident. It is not possible to change any information without attracting everyone's attention.
Is that all there is?
Are you overwhelmed with all this information? It's normal. The innovation here isn't a cumbersome alternative to Google Sheets. Anyone can download blocks from other people on the network to create identical copies of the blockchain on their computers. This is what the software we talked about earlier does.
Let's assume you and your friends Alice, Bob, Carol and Dan are using the software. You might say "I want to send five coins to Bob." Then you send this instruction to everyone else in the network, but the coins are not sent to Bob immediately.
At the same time Carol may decide to send five more coins to Alice. She also sends her instructions to the network. At any time, a participant can collect pending instructions to create a block.
If someone manages to create a block, what prevents them from cheating?
It can probably seem very tempting to create a block that says "Bob pays me a million coins." Or buy Lamborghinis and furs from Carol with funds you don't own.
Well that's not how it works. Thanks to cryptography, game theory is something called un consent algorithm, the system prevents you from spending funds that you shouldn't be able to spend.
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