In just a few years, more than 2,000 cryptocurrencies have appeared, all offering something a little different. But what are they, how do they work, and why are people so excited by them? We explore all this and more below.
What is a cryptocurrency?
A cryptocurrency is a digital currency. It uses cryptography to regulate how people transfer them, how they're created, and how secure they are. Oh, and last but not least, it doesn't use or need a central bank or government to control or manage them.
In essence, cryptocurrencies are:
- Digital: Cryptocurrencies are completely native to the internet. They have no physical form - although people do like to create little physical bitcoins, but you can't use them to buy pizza with.
- Bitcoin began it all: The first cryptocurrency widely adopted was Bitcoin, created in 2009 by the fictitious person or group Satoshi Nakamoto.
- They use a distributed ledger: All cryptocurrency transactions are stored on a global list or ledger. That means the records are stored in many places at once.
- Not all currencies are created the same: Most cryptocurrencies generate new units or coins through the process of Mining. This is where individuals or groups solve cryptographic puzzles and get rewards for their efforts.
- Decentralized: Cryptocurrencies don't live in one place. They circulate across a network made up of nodes.
What are some examples of how cryptocurrencies are being used?
Cryptocurrencies weren't created just to be an alternative to your $ and £. They can be used for lots of different things.
- Ethereum - Ether, the currency Ethereum uses is used to power Dapps and smart contractson its network.
- Golem - the Golem network, and its GNT token is used to rent computer power.
- Filecoin - the Filecoin network allows people to rent computer storage space, like Dropbox for the decentralized web.
Bitcoin was invented to be a form of digital money, but since then cryptocurrencies have become more sophisticated.
The evolution of cryptocurrencies has been so rapid, to help understand how it evolved, we've created this table to show how currencies are trying to solve different problems.
Why are there so many?
Bitcoin was the first currency that solved some of the key problems of creating a currency that just lives online. But it wasn't without its flaws. We've created a whole article on Bitcoin's limits here. As a result, developers, entrepreneurs, and programmers have been busy trying to build cryptocurrencies serve a variety of different needs and fix different problems.
Why are cryptocurrencies so different for regular currencies?
- They're anonymous (sort of) - cryptocurrencies can be designed so that no one can see who you are or what you're spending your crypto on.
- They're not controlled by a government - People in unstable countries where currencies are volatile can use cryptocurrencies as an alternative way to buy goods and services.
- They're borderless - just like the internet, cryptocurrencies can go anywhere.
- They're secure - distributed ledgers are very difficult to hack.
- Lower transaction fees - while some cryptocurrencies have fees as part of their transactions, they tend to be cheaper than what it costs to move money across borders in the real world.
- They can be used for contracts - cryptocurrencies aren't just used as a form of money. They can be used to create contracts between people, or transfer resources that were previously difficult to quantify using regular money.
We're just at the beginning of the cryptocurrency age. Many currencies will come and go, some will become incredibly valuable, others might drop to zero. But one thing is for certain, cryptocurrencies are here to stay.