Cryptocurrencies: Introduction to the New Financial Era

Cryptocurrencies: Introduction to the New Financial Era

So, what is a cryptocurrency?

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Let's start with the fact that any cryptocurrency is a decentralized digital currency that uses cryptography to provide an additional layer of security. It can function independently of various intermediaries, including banks and payment systems.

Such a decentralized nature makes direct transactions between people easy and hassle-free. At the same time, instead of using physical wallets and bank accounts, people get access to their cryptocurrency through unique cryptocurrency wallets or exchanges.

It is worth noting that the first and most famous cryptocurrency is Bitcoin, which was created in 2009 by an individual or group hiding under the Satoshi Nakamoto name. Since that time, thousands of different cryptocurrencies have appeared. In addition, each of them offers unique features and goals.

Like traditional fiat currencies, cryptocurrencies can be used as a medium of exchange. However, the use of cryptocurrencies has expanded significantly in recent years, including smart contracts, decentralized finance (DeFi), vaults, various management tools, and non-interchangeable tokens (NFT).

So, how does cryptocurrency work?

In the beginning, we have already mentioned that cryptocurrency uses cryptography to provide an additional layer of security. So, what does it really mean? In straightforward terms, cryptocurrencies use advanced mathematical algorithms to protect transactions and data from unauthorized access or manipulations. These algorithms perform two key functions: Maintaining the confidentiality of user IDs and verifying the authenticity of transactions.

At the same time, all transactions in the blockchain are publicly available, while addresses (public keys) are aliased, although not completely anonymous. In other words, even though all transactions can be seen on the blockchain, the users behind them are not easily identifiable. Cryptocurrencies achieve such a level of security by using cryptographic techniques, including hash functions and digital signatures.

Interestingly enough, cryptocurrencies achieve autonomy by using a distributed network of computers collectively known as the blockchain, essentially a decentralized digital ledger storing transaction data on a huge number of special computers on the network.

These computers are called nodes. Each of them maintains a copy of the ledger, while the consensus algorithm preserves the blockchain, ensuring the elimination of fake or inconsistent copies. Such a distributed architecture increases network security because there is no single point of failure, such as a bank vault, which can be used by the attackers.

Cryptocurrencies allow people to transfer funds directly to each other. In an average cryptocurrency transaction, the sender initiates a transfer by creating a digital signature using their private key. The transaction is then sent to the network, where nodes verify it by checking the digital signature and ensuring the sender has enough funds to perform it.

After the verification process, the transaction is added to a new block, which is then added to the existing blockchain. Even though it may sound complicated, miners take care of these steps so the user doesn't have to worry about them.

Now, what makes cryptocurrency so unique?

As of now, cryptocurrencies had a serious impact on various ecosystems in the world of finances and technology while introducing innovative features that distinguish them from traditional protocols and currencies.

Here are the most unique aspects of cryptocurrencies:

1. Decentralization
The decentralized architecture of the cryptocurrency eliminates the need for a central authority. Such an approach allows reaching greater autonomy, as well as decreases vulnerability to manipulation or control by a single entity.

2. Transparency and immutability
Blockchain technology records all transactions in a transparent and fraud-resistant ledger. As a result, once a transaction is added to the blockchain, it can be viewed by anyone and cannot be changed or deleted.

3. Programmability
A lot of modern cryptocurrencies, including ETH, are easily programmable. Such a feature allows developers to deploy smart contracts to create decentralized applications, or so-called dApps, and other innovative blockchain-based solutions. Keeping in mind the fact that permissioned permissive blockchains are open source, anyone can start deploying code on the blockchain and create their own dApps.

4. Immensity
Cryptocurrencies can be easily transferred and exchanged around the world, which allows people to use them for international transactions and money transfers.

5. Predefined and limited number of coins
Many cryptocurrencies have a limited number of coins, which means that the teams behind them will create only a finite number of coins. Such a deflationary aspect of cryptocurrencies could potentially be positive over time by increasing the overall level of demand.
At the very same time, modern fiat currencies are often inflationary because central banks can print more money at any moment in time. At the very same time, with limited supply, crypto inflation can be better controlled because the total number of coins is predetermined.

Types of cryptocurrencies

In the vast world of cryptocurrencies, there are four notable players, including Bitcoin (BTC), as well as such popular altcoins as Ethereum (ETH), Binance Coin (BNB), and Tether (USDT). Edelcoin (EDLC) is a stable payment token from Switzerland and is a new player that will take a well-deserved place at the top of the list in the future.

Bitcoin (BTC)
Let's start with the fact that BTC is the most popular cryptocurrency. It uses a consensus mechanism called Proof of Work (PoW), where miners compete to confirm transactions and keep the network running. In addition, the limited BTC supply of 21 million coins makes it relatively rare and helps maintain its value over time.

Ethereum (ETH)
Ethereum (ETH) is the second most popular cryptocurrency, launched in 2015 by Vitalik Buterin and his team. In addition to many transfers and transactions, it allows programming by using smart contracts.

Like in the case of BTC, ETH initially used the PoW consensus mechanism but switched to a more environmentally friendly and energy-efficient proof-of-stake (PoS) model. Such a transition allowed users to confirm transactions and ensure network security by using their ETH, rather than using nodes and computing power.

Binance Coin (BNB)
Previously known as Binance Coin, BNB (Build and Build) was introduced in 2017 by the Binance cryptocurrency exchange as an ERC-20 token on the Ethereum blockchain. In 2019, it switched to its blockchain, BNB Chain, and became a BEP-2 token.

Later, they created the Binance Smart Chain (BSC, now called BNB Smart Chain). As of today, the BNB cryptocurrency exists both on the BNB Chain in the form of a BEP-2 token and on the BSC in the form of a BEP-20 token. Interestingly enough, the BNB Chain consists of two chains: the EVM-compatible BSC and the BNB Beacon Chain (formerly called Binance Chain), which is used to perform management, staking, and voting transactions.

As you can guess, BNB Chain provides an environment for creating smart contracts and dApps. In addition, it has lower transaction fees and faster processing times than many other blockchains.

BNB can be used in many different ways, including paying transaction fees on BNB Chain and trading fees on Binance, participating in token sales, and staking transactions, which are used to verify the network on BNB Chain. Binance also uses a periodic token-burning mechanism that limits the total supply of BNB.

Tether (USDT)
USDT is a USD-linked stablecoin launched in 2014 by Tether Limited Inc. Stablecoins are cryptocurrencies designed to maintain a stable value relative to a reserve asset, such as a fiat currency. In the case of USDT, each token is secured by an equivalent amount of assets held in the reserves of the company. As a result, USDT offers the advantages of cryptocurrencies by minimizing price fluctuations.

Edelcoin (EDLC)
Edelcoin is a digital currency backed by precious and base metals available in reserves. The structure of the reserve allows one to minimize fluctuations in value, which makes it a stable tool for storing value. Edelcoin is a secure and potentially valuable means of payment that uses the capabilities of decentralized finance. It is issued within the framework of Swiss regulation, and its additional services will allow holders to generate income through the lending protocol and trading fees from liquidity. In addition, EDLC is intended to become a reliable alternative to existing stable coins for trading, lending, and payments in the limitless cryptocurrency market.

What is the safest way to invest in cryptocurrencies?

Like other financial assets, investing in cryptocurrency can be risky and lead to financial losses. We have prepared for you five basic tips that will make buying and selling cryptocurrencies safer:

The DYOR acronym stands for "Do your own research." First, it is important to understand the basics of blockchain technology, such as different types of cryptocurrencies and market dynamics, before investing in any cryptocurrency.

Books, blogs, podcasts, and online courses are the most important assets. In addition, you need to find more information about the specific cryptocurrency you will invest in by studying its whitepaper, development team, price history, and current news.

2. Never invest more than you can afford to lose
This rule applies to all types of investments, including cryptocurrency. Always remember that investing involves risk, and you should be prepared to lose all money.

3. Use only reliable and secure platforms
Choosing a reliable platform for buying and storing cryptocurrencies is the key to success. Use only verified exchanges and wallets with a good reputation and strong security measures.

4. Keep your cryptocurrencies safe
Keep your cryptocurrencies in a secure wallet, and never share your private keys or passwords. Consider using a hardware wallet for additional security.

5. Always be careful with ICOs and new Cryptocurrencies
Even though some ICOs (initial coin offerings) and new cryptocurrencies may offer attractive opportunities for investors, they can also be risky. Many ICOs and new cryptocurrencies have turned out to be fraudulent, so it is important to be careful and conduct thorough research before paying anything.

Finally, cryptocurrency represents a new era in the financial world, offering unique opportunities and challenges. By understanding the basics of cryptocurrency and blockchain, as well as taking safety measures, you can successfully navigate this new world of innovative finances.

Test Your Knowledge

  1. What is a cryptocurrency?
    a. A type of shares
    b. Decentralized digital currency
    c. A new type of banking system
  2. What is the key technology for most cryptocurrencies?
    a. Artificial intelligence
    b. Blockchain
    c. Quantum computing
  3. Which of these cryptocurrencies is a stablecoin?
    a. Bitcoin (BTC)
    b. Binance Coin (BNB)
    c. Edelcoin (EDLC)

Correct answers: 1b, 2b, 3c.