What is Cryptocurrency and its Variants | Relationship between Crypto and Blockchain

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The Finance Bro Adventure

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In this post I am going to share my Analysis about Cryptocurrency. Before writing this post I got knowledge about it from different places. In this regard I have studied articles from different platforms. So let's start now.

What Is Cryptocurrency?

A cryptocurrency is a digital or virtual currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology —a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation. Cryptocurrencies are digital or virtual currencies underpinned by cryptographic systems. They enable secure online payments without the use of third-party intermediaries. "Crypto" refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public key and private key pairs, and hashing functions. Cryptocurrencies can be mined, purchased from cryptocurrency exchanges, or rewarded for work done on a blockchain. Not all e-commerce sites allow purchases using cryptocurrencies. In fact, cryptocurrencies, even popular ones like Bitcoin, are hardly used for retail transactions. However, cryptocurrency values have made them popular as trading and investing instruments. To a limited extent, they are also used for cross-border transfers.

Blockchain

Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology. As its name indicates, a blockchain is essentially a set of connected blocks of information on an online ledger. Each block contains a set of transactions that have been independently verified by each validator on a network. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories. The contents of the online ledger must be agreed upon by a network of individual nodes, or computers that maintain the ledger. Experts say that blockchain technology can serve multiple industries, supply chains, and processes such as online voting and crowdfunding. Financial institutions such as JPMorgan Chase & Co. (JPM) are testing the use of blockchain technology to lower transaction costs by streamlining payment processing.

Cryptocurrency Variants

Many cryptocurrencies were created to facilitate work done on the blockchain they are built on. For example, Ethereum's ether was designed to be used as payment for validation work done on the blockchain. When the blockchain transitioned to proof-of-stake in September 2022, ether (ETH) inherited an additional duty as the blockchain's staking mechanism. Ripple's XRP is designed to be used by banks to facilitate transfers between different geographies. Because there are so many cryptocurrencies on the market, it's important to understand the types of cryptocurrencies. Understanding if the coin you're looking at has a purpose can help you decide whether it is worth investing in—a cryptocurrency without a purpose is likely to be riskier than one with utility. Most of the time, when you hear about cryptocurrency types, you hear the coin's name. However, coin names differ from coin types. Here are some of the types you'll find with some of the names of tokens in that category:

1. Utility
2. Transactional
3. Governance
4. Platform
5. Security tokens
   If you find a cryptocurrency that doesn't fall into one of these categories, you've found a new category or something that needs to be investigated to be sure it's legitimate.

Advantages of Cryptocurrencies

• Cryptocurrencies represent a new, decentralized paradigm for money. In this system, centralized intermediaries, such as banks and monetary institutions, are not necessary to enforce trust and police transactions between two parties. Thus, a system with cryptocurrencies eliminates the possibility of a single point of failure, such as a large bank, setting off a cascade of crises around the world, such as the one triggered in 2008 by the failure of institutions in the United States.
• Cryptocurrencies promise to make it easier to transfer funds directly between two parties without needing a trusted third party like a bank or a credit card company. Such decentralized transfers are secured by the use of public keys and private keys and different forms of incentive systems, such as proof of work (POW) or proof of stake.
• Because they do not use third-party intermediaries, cryptocurrency transfers between two transacting parties can be faster than standard money transfers. Flash loans in decentralized finance (DeFi) are an excellent example of such decentralized transfers. These loans, which are processed without backing collateral, can be executed within seconds and are used in trading.
  trading.
• Cryptocurrency investments can generate profits. Cryptocurrency markets have skyrocketed in value over the past decade, at one point reaching almost $2 trillion. As of April 2023, Bitcoin was valued at more than $540 billion in crypto markets.
• The remittance economy is testing one of cryptocurrency's most prominent use cases. Currently, cryptocurrencies such as Bitcoin serve as intermediate currencies to streamline money transfers across borders. Thus, a fiat currency is converted to Bitcoin (or another cryptocurrency), transferred across borders, and subsequently converted to the destination fiat currency. This method streamlines the money transfer process and makes it cheaper.

Disadvantage of Cryptocurrency

• Though they claim to be an anonymous form of transaction, cryptocurrencies are pseudonymous. They leave a digital trail that agencies like the Federal Bureau of Investigation (FBI) can investigate. This opens up the possibility that governments and authorities (and others) can track financial transactions.
• Cryptocurrencies have become a popular tool with criminals for nefarious activities such as money laundering and illicit purchases. The case of Dread Pirate Roberts, who ran a marketplace to sell drugs on the dark web, is already well known. Cryptocurrencies have also become a favorite of hackers who use them for ransomware activities.
• In theory, cryptocurrencies are meant to be decentralized, their wealth distributed between many parties on a blockchain. In reality, ownership is highly concentrated. For example, just 100 addresses hold roughly 12% of circulating bitcoin and total value.
• One of the conceits of cryptocurrencies is that anyone can mine them using a computer with an Internet connection. However, mining popular cryptocurrencies require considerable energy, sometimes as much energy as entire countries consume. The expensive energy costs and the unpredictability of mining have concentrated mining among large firms whose revenues run into billions of dollars. For example, only 98 (2%) of the 4,882 Bitcoin blocks opened from Dec. 29, 2022, to Jan. 29, 2023, were opened by unknown addresses—the other 98% were opened by mining pools.
• Though cryptocurrency blockchains are highly secure, off-chain crypto-related key storage repositories, such as exchanges and wallets, can be hacked. Many cryptocurrency exchanges and wallets have been hacked over the years, sometimes resulting in millions of dollars worth of "coins" stolen.
• Cryptocurrencies traded in public markets suffer from price volatility. For example, Bitcoin has experienced rapid surges and crashes in its value, climbing to nearly $65,000 in November 2021 before dropping to just over $19,000 a year and a half later. As a result, many people consider cryptocurrencies to be a short-lived fad or speculative bubble.

Finally, Cryptocurrencies are digital assets that are secured by cryptography. As a relatively new technology, they are highly speculative, and it is important to understand the risks involved before making an investment. Investing in cryptocurrencies and other initial coin offerings (“ICOs”) is highly risky and speculative. A qualified professional should always be consulted before making any financial decisions.

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Thanks for reading my post. Thanks for supporting me. I will be back with another exciting content soon. Till then good bye and have a good day.

Sincerely yours,
@vagabondww

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