What is Cryptocurrency?

Cryptocurrencies, Web 3.0, NFTs, DeFi, Metaverse ... What The HECK?

This is a beginner's guide to cryptocurrency in 2023

So if you want to learn:

1. What is a cryptocurrency (It is not what you think)

2. Where they come from (The History of Money + The Internet)

3. How many types of cryptocurrencies are there + lots more

Let's get started.

CONTENTS

  1. What is Cryptocurrency? A Simple Definition
  2. Understanding Cryptocurrency
  3. Types of Cryptocurrencies
  4. The Future of Crypto
  5. FAQs


1. What is Cryptocurrency? 

Cryptocurrencies bring together three powerful ideas:

Accounting (Ledger) + Cryptography (Security) + Network Science (Decentralization). 

To put it simply, cryptocurrencies allow for the ownership and transfer of digital assets (value) through the internet without the participation of trusted third parties (Institutions, banks, payment processors, etc). The investors (holders) decide what happens on the network. 

What exactly do we mean by the future generation of (digital) money?

Cryptocurrencies are nothing more than data entries (strings of cryptographically protected digital code) that represent value in a database (Ledger). Consider them giant accounting books (ledgers) enabled by technology (DLT) that keep track of the value moved internationally over the internet, 24 hours a day, 7 days a week, without the need for third parties and for extremely low fees. 

To put it another way, cryptocurrencies are digital currencies that are decentralized and designed to be used over the internet (digital money). This is the “currency” or exchange feature of cryptocurrencies. 

What exactly do we mean when we talk about the next iteration of the internet?

The first two iterations of the internet (web 1.0 and Web 2.0) allowed individuals to read information and write content. Nonetheless, big tech (Google, Facebook, Twitter…) has complete influence over what happens on the internet.

For the first time in history, individuals can now own a chunk of the underlying network thanks to Web 3.0, thereby “owning the internet”, empowering them over bank CEOs and other strong central decision-makers. 

To put it simply, cryptocurrencies are digital assets that enable investors (holders) to own a piece of “the internet” and have direct control over the underlying networks and their applications. This is the feature of cryptocurrencies that allows them to be used as a store of value. 

There are over 8,000 cryptocurrencies in circulation, there are different ways to classify them:

  • By Features: Coins (they own their own blockchain) vs Tokens (applications built on top infrastructure coins). 
  • By Market Cap: High (top 10), Mid (10-50), and low (>50) market cap. 
  • By Use Case: Payment altcoins (which are used to pay for goods and services and minimize volatility), infrastructure/platform altcoins (which are used to build networks and run applications), services altcoins (which provide a service in a specific financial area, financial altcoins, or non-financial area, non-financial altcoins), and media & entertainment altcoins (related to social media and the entertainment industry as well as the ones designed for fun, meme coins).

That’s really cool! But what will my grandma do with them?

Online payments (shopping, international transactions, travel, technology, luxury goods, cars…) to financial services such as insurance, savings, real estate, crowdfunding, investing, or trading, to gaming, dentistry, or social media are just a few examples. 

Despite being mostly limited to “early adopters”, cryptocurrency usage is accelerating at a breakneck speed, growing at twice the speed (113 percent) of the world’s fastest technology, the Internet (63 percent). 

Here’s a quick and easy definition of a cryptocurrency. Continue reading to learn more. 


2. Understanding Cryptocurrency

To understand how we get here, we must go back in time and examine the history and evolution of money and the internet (web).

The History and Evolution of Money

Humans cannot exist in isolation; from hunter-gatherers to homo sapiens, we have attempted to meet our needs. To survive, humans must extract resources from the environment and convert them into energy.

The problem is we cannot generate everything ourselves; we need what other humans supply, and we provide what other humans need.

To solve that problem, you give up something you own in order to obtain what you desire. This is known as an exchange.

Here are different ways to solve that problem. Here’s a quick rundown of the evolution of money. 

Barter System: This is the simplest method of exchanging goods and services. In the barter system, you exchange goods and services (cows, bread, fish, haircuts, caring…) directly for other goods and services without the use of a means of exchange, such as money.

Problems: Your desires have to match those of the other person. Let’s say I want to trade my horse for your cat but you don’t really want a cat. 

Commodity Money: To address the aforementioned issue, the ancients began to rely on widely consumed (and scarce) commodities that were always in demand and could be swapped for other items. Cattle (India), salt (Rome), tobacco (Virginia), rice (Carolina), cowry shells (Africa), sugar (Brazil), and tea (Mongolia) are examples of commodities.

Later, to address the issue of perishability (certain commodities decay over time) and weren’t universally accepted, metallic money (gold, silver…) was established.

Problems:  First stage: Perishability (mainly); Second Stage: Weight, security (thieves), government debasement (decline of purity by mixing metals and deteriorating their value).  

Paper Money: Initially, people would leave their gold with a goldsmith or trusted agent (Chinese) who would issue “paper currency” that could be quickly redeemed for gold or silver. Paper money was easy to keep, transport, and divide into small units. 

However, counterfeit and trust difficulties arose, and governments such as the Chinese first and the United States (Coinage Act of 1792) intervened by providing a national paper currency standard backed by gold (24.75 grains) and silver (371.25 grains) in the case of the US.

The Coinage Act of 1792 established the Gold Standard Monetary system and lasted until Nixon (1972) put an end to the direct convertibility of gold after years of massive money printing (debasement) to keep the US economy afloat. In other words, debasement reduced the amount of gold each dollar was worth until the system collapsed. 

The US dollar had effectively become a fiat currency (only backed by the word of the government). This is the current monetary system in which we live. 

Problems: Centralization, monetary debasement through excessive money printing. This is a pattern that has persisted throughout history. 

Electronic Money: Physical fiat currencies were eventually superseded by credit cards (plastic money) and electronic money stored in computer databases. Value is represented by figures and numbers. Mobile phone payments (such as Apple Pay, AliPay, and Samsung Pay) and other technological advances are now commonplace.

This is where the first attempts at virtual, digital money were made. eCash, Hashcash, e-gold, B-money, Bit Gold are just a few examples. 

Problems: Double-spending problem, centralization, hacking

Cryptocurrencies: The introduction of the first cryptocurrency, Bitcoin, by an anonymous developer known as Satoshi Nakamoto, in 2009 marked the birth of cryptocurrencies.

Cryptocurrencies tackle the early digital currencies’ concerns of double-spending (ensuring that your money cannot be spent twice), centralization, trust, and hacking.

Cryptocurrencies rely on a decentralized ledger (DLT), nodes of computers to verify the authenticity of transactions, instead of a central entity, and cryptography to secure them.

Cryptocurrencies are the internet’s currency

The History and evolution of the Internet (Web)

The internet started in the 1960s as a way for government researchers to share information. Nonetheless, January 1, 1983, is regarded as the formal birth of the internet with the creation of a new communication protocol known as Transfer Control Protocol/Internetwork Protocol (TCP/IP), which allowed computers to “talk” to one other. 

Here is a quick (and dirty) rundown of the web’s evolution: 

Web 1.0: Read. The first version of the internet lacked interactive features. Pages were mostly informational, static, and made with simple HTML.

The web is read-only at this point, and the user cannot interact with the page content; it is confined to what the webmaster adds to the website. 

Web 2.0: Read, Write. Web 2.0, coined by O’Reilly in 2004 shifted the world away from static desktop websites designed for information consumption toward interactive experiences and user-generated content, which gave rise to Uber, Airbnb, Facebook, and Instagram. Web 2.0 is propelled forward by three key layers of innovation: mobile, social, and cloud. 

Web 2.0: Client-Server (Centralization)
Web 2.0 encourages active participation. The web becomes a platform. The user is no longer limited to accessing information, but rather creates it; people now have a voice on the internet, and they can interact, create and share content “freely.” 

Web 3.0: Read, Write, Own. Web 3.0, or Semantic Web as Tim Berners-Lee refers to it is the next generation of the internet, powered by edge computing, decentralized data networks, and artificial intelligence.

Web 3.0: Peer-to-peer Network (Decentralization)

All worldwide coordination via the internet in Web 2.0 must go through centralized platforms such as Facebook, Google, eBay, Paypal, or Twitter. Unfortunately, we have become overly reliant on these platforms, which have complete control over our data and have the power to destroy any business that runs on it. 

Web 3.0 takes the power back to the user by enabling women, men, machines, and enterprises to trade value, information & work without the need for an intermediary. The most significant evolution of Web 3.0 is the reduction of the trust necessary for global coordination.

Cryptocurrencies make this possible. Cryptocurrencies are digital assets that let users “own” and control these networks’ future. 

This is the real revolution. Users now, effectively “own the internet.” 

What makes a cryptocurrency?

People overcomplicate the technology underlying cryptocurrencies. We will discuss it briefly (be aware that this is an oversimplification) with a mental model and then elaborate on it in upcoming articles. 

Let’s look at a financial transaction as an example. Let’s say you want to buy a cake for your beloved grandmother.

Function: Every system has a goal, a role to perform. In general, the function is the transfer of value (assets). In our instance, the function is to buy our cake securely, quickly, and without hassles. 

Inputs: Inputs are all of the new ingredients that must be combined in order to achieve the desired outcome. In our situation, we need two people (ourselves, a baker, and our beloved grandmother to deliver her present), a payment mechanism, and a database to safely record, update and confirm our transaction. 

Process (Rules): The process is the mechanism we use to arrange those inputs and produce our results. Here is where DLT comes in, DLT stands for distributed ledger technology and goes beyond blockchain. Blockchains are a type of DLT, but not all DLTs are blockchains. 

DLT is a database that records the transaction of assets (in our example, payments) that exist across several locations or among multiple participants and is updated in real-time.

The following are the ingredients:

  Ingredient #1: P2P Network (Decentralization)
  • P2P Network stands for peer-to-peer. Cryptocurrencies, unlike traditional digital currencies, do not rely on a central authority to validate or enable transactions. 
  • In a decentralized network, equally privileged participants validate and update transactions at the same time in a shared ledger (database). 
  Ingredient #2: Cryptography (Security & Access)
  • DLT uses cryptography to securely store data and allow access to the ledger only to authorized users. It uses two types of cryptographic signatures

    • Digital Signatures: Wallets (consider them as keys to open the ledger) create digital signatures using public-key cryptography (public and private keys). Wallets sign, send, store, and receive digital currency. Consider using a credit card. The credit card number is available to the public and is used for deposits. This is known as the public key in DLT language. While the CVV on the card’s back is valid for withdrawals. This is your personal private key. Private keys are also used to generate your digital signature and prove the ownership of funds. Anyone who gets access to it has complete control over your assets. Keep it in a secure place at all times!
    • Cryptographic (Hash) Signatures: Hash signatures are used to verify message(data) integrity; if a message changes, the hash of the message will change as well. That makes the history of transactions tamper-proof.
  Ingredient #3: Consensus Mechanism (Synchronization in updating a ledger)
  • A Consensus mechanism is a type of protocol (rules that govern cryptocurrency) that tells what, where, when, why and how a DLT needs to be updated in order to keep its robustness and core functionality.  
  • Is a form of coordination to avoid cheating, double-spending or absolute control by a few individuals. Proof-of-Work (PoW) used by Bitcoin, Proof-of-Stake (PoS) by NEO and Delegated Proof of Stake (DPoS) by STEEM are just a few examples. 

Outputs: Our system’s outputs are the cake we buy from the bakery shop and the money in the baker’s wallet.

Feedback: A DLT explorer comes in handy when we need to see the confirmation of our transaction. DLT explorers are tools that help us keep track of our transactions (we can check all transactions that happen on the network). Just a few examples include Bitcoin Explorer (blockchain.info), Ethereum explorer (Etherscan), and Binance Smart Chain explorer (BscScan).

Environment: Everything is linked together, and the outputs of one system become the inputs of another. The environment includes things like new regulatory frameworks, protocol updates, and other networks that allow DLTs to be linked together (E.g., Polkadot).

How Are Cryptocurrencies Created?

Cryptocurrencies can be basically created in two ways: 

  • Hard Forks: Hard forks occurred when a majority number of network participants disagree with an update proposal and decide to create a new version. Litecoin (LTC) and Bitcoin Cash (BCH) are hard forks of Bitcoin, Ethereum Classic (ETC) of Ethereum,etc.
  • ICOs (Initial Coin Offering): ICO, or Initial Coin Offering, is a mechanism for cryptocurrency firms to raise capital in the cryptocurrency market, comparable to an IPO in the stock market. There are several types, including IEOs (Initial Exchange Offerings), IPOs (Security Token Offerings), IDOs (Initial DEX Offerings), and ISPOs (Initial Stake Pool Offering).

3. Types of Cryptocurrencies 

Coinmarketcap (a price-tracking website for cryptos) presently lists 8853 cryptocurrencies (or 8852 altcoins) at the time of writing this article.

Why 8852 altcoins? What is an Altcoin, exactly? Altcoins were created as a replacement for Bitcoin and traditional fiat money. They were mostly interested in expanding Bitcoin’s capabilities or enhancing certain elements such as transaction speeds and energy efficiency. 

Nowadays, any cryptocurrency other than Bitcoin is referred to as an altcoin (alternative coin). 

With so many cryptos is hard to find the signal amid the noise. The first step is to remove the word “currency” from cryptocurrency and think of it as a new generation of “internet stocks.”

There are different ways to classify them: 

By Features: Tokens vs Coins.

  • Coins: Coins are all altcoins or cryptocurrencies that have their own DLT or Blockchain. They are also called native cryptocurrencies or assets. For instance, to use the Ethereum platform, you need Ether. 
  • Tokens: Tokens are a representation of an asset that runs on an existing blockchain. To put it simply, tokens are altcoins that are used in applications.

    • Fungible: Fungible tokens are interchangeable (e.g., US dollar, Bitcoin, Ethereum, etc). There are many different types such as utility tokens, governance tokens, and security tokens
    • Non-fungible (NFTs): NFTs are a digital representation of something unique (e.g., a piece of art). 

By Market Capitalization: 

  • High-Cap: Anything in the top 10 by market cap. E.g, Bitcoin (BTC), Ethereum (ETH), BNB(BNB), USD Coin (USDC), XRP (XRP), etc. 
  • Mid-Cap: Anything in the top 10-50. E.g., Dogecoin (DOGE), Polkadot (DOT), Polygon (MATIC), Hedera (HBAR), etc. 
  • Low-Cap: Anything not in the top 50. E.g., Flow (FLOW), Gala (GALA), Waves (WAVES), Holo (HOT), etc. 

By use case (our favorite):

  • Payment Altcoins: Payment cryptocurrencies can be considered as “digital cash” or cryptos meant to be used as money. E.g., Bitcoin (BTC), Bitcoin Cash (BCH), Tether (USDT), Paxos Gold (PAXG), Monero (XMR), etc. 
  • Infrastructure/Platform Altcoins: Infrastructure cryptocurrencies can be viewed as the “entry fee” that users must pay in order to use a specific shared infrastructure, platform, or DLT to develop their own applications. E.g., Ethereum (ETH), NEO, IOTA, Cardano (ADA), Polkadot (DOT), etc. 
  • Services Altcoins: Services altcoins can be defined as any use case in which someone provides a business, social or personal service to someone.

    • Financial Altcoins: Services related to a specific area of the financial industry. E.g., Compound (COMP), PancakeSwap (CAKE), Voyager Token (VGX), etc. 
    • Non-Financial Altcoins: Encompass all services other than financial. E.g., Dentacoin (DCN), Chainlink (Link), EFFORCE (WOZX), Fetch.ai (FET), etc.
  • Media & Entertainment Altcoins: Media and entertainment cryptocurrencies include anything associated with the social media and entertainment industry. 

    • Social Media Altcoins: E.g., Basic Attention Token (BAT), THETA or Steemit (STEM). 
    • Entertainment Altcoins: Enjin Coin (ENJ), Decentraland (MANA) or OVR (OVR).
    • Meme coins: Dogecoin (DOGE), Shiba Inu (SHIB) or Akita Inu (AKITA)


4. The Future of Crypto 

Cryptocurrencies are the next step in the evolution of digital money, and they are a vital component in the development of the new internet (web 3.0). They can be used as money to buy and sell goods and services, or as digital assets to store value and influence the future of the internet (effectively owning the internet). 

DLT (Decentralize ledger technology) is a huge accounting ledger powered by technology that allows cryptocurrencies to operate independently of external third parties. To be fair, centralized cryptocurrencies do exist. They aren’t all decentralized.

Despite the fact that they are still in their infancy (akin to the internet back in 1998), a regulatory framework is being drafted as we speak, and are highly volatile assets, we believe it is past time to return power to the user. We believe that the digital assets value proposition (as a store of value and internet owners) is more plausible than the currency original idea for replacing the current fiat monetary system (although this remains to be seen). 

As investors, we have the opportunity to enter a market that is growing at twice the speed (113 percent) of the world’s fastest technology, the Internet (63 percent). 

Even if you’re skeptical, we believe it’s a wonderful way to diversify your portfolio. You can think of them as the next generation of “internet stocks,” an entirely new asset class.

On this website, we will assist you in navigating the world of cryptocurrency and making solid and smarter decisions to ensure the building of wealth for you and your family. 

Follow us on our adventure!


5. FAQs 

What is the difference between DLT and Blockchain?

There are many misconceptions concerning DLT and Blockchain; they are used interchangeably but are not the same thing.

Blockchain is a sort of distributed ledger that organizes its pages into blocks and records transactions using an immutable cryptographic signature known as a hash.

A DLT is just a database that is distributed over numerous sites, regions, or participants.

What is the difference between cryptocurrency and Blockchain?

They are actually the same, as cryptocurrencies are nothing more than a record on a ledger (there is no physical coin). However, for the sake of clarity, people use cryptocurrency to describe the end result and blockchain to describe the means to that end result (technology).

What is the difference between Cryptocurrencies and Tokens?

Tokens are a representation of an asset that sits on an already existing DLT, whereas cryptocurrencies have their own separate DLT. For instance, ERC-20 tokens (Chainlink, Tether, etc.) are issued on the Ethereum network.

We can classify tokens into two types: Utility tokens are intended to be used as a product or service, not as an investment, like Security tokens, which represent transferable financial assets, such as a company’s share or bond.

Are there any centralized cryptos?

Yes, centralized cryptocurrencies do exist and are typically issued by for-profit companies that define the cryptocurrency’s protocol as well as who can participate in the network. 

They can be thought of as an improved version of traditional fiat currency; nevertheless, with centralization comes the possibility of fraud, neglect, and control. 

Examples include Ripple (XRP), Tether (USDT) or EOS

How do I invest in cryptocurrency?

  1. You can use third parties like centralized exchanges or traditional brokers (CEX), traditional brokers tend to offer higher trading costs and fewer crypto features but they are the best way to get exposure as a beginner. On the contrary, centralized exchanges offer more options such as more cryptocurrencies to trade, interest-bearing accounts (staking), liquidity pools (decentralized finance) and more complex trading instruments such as CFDs and futures. 
  2. A less user-friendly option is to use decentralized exchanges, or DeFi, where you connect your wallet directly to the network and may instantaneously buy, sell, stake, or engage in more complicated instruments like liquidity pools. Because the UX part isn’t quite there yet, this requires a bit more technical and financial understanding.
  3. You can also gain indirect exposure by investing in key companies that specialize in the technology behind crypto, or by purchasing stocks or ETFs of companies that use DLT technology. 
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AUTHOR

Marc Arbonés
Marc is a millennial economist, systems thinker, crypto investor (since 2017), crypto writer, and peak performance consultant. He is the Editor and Founder of Altcoins Mastery, where he supports creators and investors in capitalizing on a "fairer" financial system powered by Crypto, DeFi, and web 3.0.