What Is Cryptocurrency and How Does It Work?
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What is cryptocurrency?
Cryptocurrency is a type of digital money designed to be used over the internet, operating without the control of a central authority like a bank or government. Instead, cryptocurrencies function on decentralised networks based on blockchain technology, which maintains security and integrity through distributed ledger systems.
Cryptocurrencies like Bitcoin, Ethereum, and others offer an alternative to traditional financial systems by enabling direct peer-to-peer transactions without intermediaries.
Key features:
- Exists only digitally – no physical coins or notes
- Allows direct person-to-person transfers worldwide
- Often has lower fees than traditional banking
- Records all transactions on a public ledger (blockchain)
How does blockchain work?
Blockchain is the technology that powers cryptocurrencies. It is essentially a chain of data blocks, where each block contains a comprehensive set of transactions that network participants can view and verify.
It works like this:
- Transactions are grouped into "blocks"
- Network computers verify these blocks
- Verified blocks link to previous blocks, forming a "chain"
- This chain creates a permanent, tamper-resistant record
Why this matters to you: Blockchain makes cryptocurrency secure without needing a bank to verify transactions. |
Each block in a blockchain contains three key elements: the data (transactions), a unique identifier called a hash, and the hash of the previous block.
The verification process relies on a network of computers (nodes) that validate transactions according to the rules of the blockchain protocol. For example, in the Bitcoin network, all transactions are verified according to the Bitcoin Protocol without any central authority overseeing the activity.
What's the Difference Between Coins and Tokens?
In the cryptocurrency ecosystem, there's an important distinction between coins and tokens, which serve different purposes and have different characteristics.
| Feature | Coins | Tokens |
Purpose | Work as money | Provide access to services |
Examples | Bitcoin, Ethereum | LINK, USDT |
Own blockchain | Yes | No (built on existing blockchains) |
Best for | Payments, storing value | Accessing platform features |
What types of cryptocurrencies exist?
- Payment coins: Used as digital money (Bitcoin, Litecoin)
- Platform coins: Power blockchain platforms (Ethereum, Solana)
- Stablecoins: Maintain steady value (USDT, USDC)
- Privacy coins: Focus on confidentiality (Monero, Zcash)
- Utility tokens: Provide access to services (BAT, Chainlink)
- Governance tokens: Allow voting on platform decisions (UNI, COMP)
Each type of cryptocurrency serves different purposes and offers unique benefits, allowing you to choose options that align with your specific needs and investment strategies. |
