You’ve probably seen different cryptocurrencies mentioned in the news - Bitcoin, Ethereum and Dogecoin are just a few, but you may not understand what they are and how they work. This piece will explain all this and more.
What's wrong with the current financial system?
The current financial system doesn’t work well for everyone. Some of its problems stem from it being too centralized and closed off. There are middlemen charging exorbitant fees, legacy technology and processes slowing everything down, you don’t actually control your assets, and you’re often locked into services.
This is where cryptocurrencies enter.
What is a cryptocurrency?
A cryptocurrency is a digital-only peer-to-peer currency. They are decentralized and use blockchain technology, preventing the need for a third party like a bank or government to manage them.
Bitcoin (BTC) was the first cryptocurrency created in 2008 by Satoshi Nakamoto. Since then, the number of cryptocurrencies has exploded.
Some cryptocurrencies, like Bitcoin and Ether (ETH), are fungible, meaning that they are fully replaceable by another of their currency. This is how traditional money works: $1 is as good as another $1. There are also non-fungible currencies (NFTs), where each token is unique. For example, a Beeple picture.
Sometimes, cryptocurrencies get referred to as ‘tokens’. A token is not a cryptocurrency, but they are similar. The difference is that a token is an asset built on an existing blockchain like Ethereum.
How do cryptocurrencies work?
Cryptocurrencies remove the need for a centralized server by using blockchain technology. Blockchain uses a decentralized and distributed network to confirm and validate transactions.
Each blockchain is different, but they all have a consensus mechanism. A consensus mechanism is how the blockchain comes to an agreement about its activity.
There are two main types of consensus mechanisms. The first is Proof of Work (PoW), which most cryptocurrencies use, including Bitcoin. The second is Proof of Stake (PoS) which fewer blockchains use. Ethereum is currently upgrading from PoW to PoS, and this upgrade is known as Ethereum 2.0.
Let's explain how they work:
Proof of Work
Computers known as 'miners' solve complicated cryptographic problems pass blocks. The miner that first solves the problem will share the solution with the other miners to confirm their answer is correct. If the answer is right, a new block gets added to the blockchain. For their effort, the successful miner gets rewarded in cryptocurrency, and the fees for the previous block.
Proof of Stake
This is an attempt to solve some of the issues of Proof of Work, like scaling and energy consumption. Proof of Stake replaces miners with 'validators.’ A validator is a user that locks up the native cryptocurrency, and they are randomly selected to produce and approve blocks. If a validator acts maliciously, they lose a percentage of their cryptocurrency.
What can you use cryptocurrencies for?
There is a wide range of use cases that cryptocurrencies can be used for. Here are just a few beneficial applications for society:
- Direct digital payments: Many people are excluded from the current banking system. This prevents them from getting a job or make and receive payments. As cryptocurrency is peer-to-peer, they solve this issue. Anyone can create a wallet and start making transactions.
- Store of value: Cryptocurrencies are easier to store than gold. And some cryptocurrencies, like Bitcoin, have a fixed supply making them ideal for being an inflation hedge.
- Fighting corruption: In the current banking system, corrupt countries will close activist bank accounts. This prevents them from funding and fighting their cause. With cryptocurrency, activists can raise funds without needing to go through a bank. This happened with the Nigerian protests against SARS and the Belorussian opposition fighting for democracy.
What are the most popular cryptocurrencies?
You can find cryptocurrencies in order of market cap on most cryptocurrency data websites such as CoinGecko, CoinMarketCap, and FTX (formerly Blockfolio). We've already mentioned the two most popular cryptocurrencies, Bitcoin and Ethereum. But there’s more out there, like Solana (SOL) and Cosmos (ATOM).
Where can you buy cryptocurrencies?
You can buy cryptocurrencies with your local currency by using a centralized exchange (CEX) like Coinbase or Binance. But, If you decide to keep your funds on the exchange, you're taking a risk. That's because you're trusting that the exchange will keep your crypto safe.
In the past, exchanges have lost users' funds, like in 2014 with Mt Gox. At the time, they handled an estimated 70% of Bitcoin transactions. More recently, Binance has had regulatory issues, leading to some of their customers' unable to cash out their funds.
That's why you should self-custody your funds by using a crypto wallet, like Argent. A wallet gives only you access and control of your crypto. The way it should be.
How can you buy cryptocurrencies with Argent?
Argent is a crypto wallet for the Ethereum blockchain. That means you can only store and exchange ERC-20/721/1150 tokens in-app. You can also buy Ether directly in Argent without needing to use a centralized exchange.
You will also be able to do this with our Layer 2 wallet.
Hash Power -- Cryptocurrencies a three-part podcast series by Invest Like The Best Podcast Host Patrick O'Shaughnessy
The Scoop: a podcast by The Block a digital asset newsource
Unchained: a podcast by Laura Shin a cryptocurrency journalist
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