Cryptocurrencies are digital assets that can be traded, but there is much more to it than lines on a chart.
- Cryptocurrency, or crypto, came into existence in 2008 with the invention of Bitcoin. It was designed to be a peer-to-peer electronic payment system, with the goal to eliminate the need for trust in a third-party like a bank.
It works on a system of checks and balances like a bank, but instead of one centralized entity controlling the ledger, the database is maintained by a network of computers distributed all over the world. Depending on the type of blockchain, 1/2 or 2/3 of these computers need to be online to keep the blockchain running.
- The database collates all information in groups called 'blocks'. Each block can fit a set amount of data, and once filled, it is closed, time-stamped and linked to a new block following it.
This is what is known as blockchain.
- Bitcoin, Dogecoin and Litecoin are first-generation cryptocurrencies. Their proof-of-work consensus mechanisms are slow and intensely energy-consuming.
Ethereum is the second generation of crypto. It introduced smart contracts so that decentralized applications (dapps) could be built on the chain, giving it more use cases. It was still using a proof-of-work consensus mechanism until the Merge in September 2022.
The next evolution of crypto brought smart contracts together with a new, faster, less-energy consuming consensus mechanism: proof-of-stake. Cosmos and Osmosis are examples of this third crypto wave.
- Crypto now is much more than peer-to-peer payments. New projects launch every day, aiming to provide solutions to different problems. There are decentralized applications for lending and borrowing, gaming and gambling, social media, art and music, and much more!