Before buying cryptocurrency or engaging in any transactions with it, it is essential to thoroughly understand what cryptocurrency really is. To help you get started, the Sabai Academy has decided to compile all the important information in one place and has created today's comprehensive guide on how cryptocurrency works. Let's not waste any time and take a closer look at the definition of cryptocurrency!

Table of Content:

What is cryptocurrency?

Cryptocurrency is a digital currency without a physical form that enables peer-to-peer (P2P) transactions directly from user to user.

Its operation is based on a decentralized database called blockchain, which contains all data about conducted cryptocurrency transactions. The blockchain consists of a chain of data blocks, with each block detailing several successful transactions. Essentially, the blockchain is a large and extremely secure transaction ledger. The data recorded in it is practically impossible to alter or delete, and new information can only be added.

Here's a great example for better understanding: if a hypothetical user, Jack, buys 5 digital coins (e.g., BTC), the record of the change in ownership will be entered into a new block. Meanwhile, earlier transactions that led to the 5 BTC appearing in the seller's crypto wallet won't disappear—they will always be available in the blockchain. Similarly, once the 5 BTC are sold to another person, it will be recorded as a new transaction, rather than a modification of the old ones.

If you want to delve deeper into the specifics of cryptocurrency and fully understand its origins, we recommend exploring the cryptocurrency history right here.

Types of Cryptocurrencies Based on Acquisition Method

Once you understand what cryptocurrency is, let's delve into the types of cryptocurrencies you should be aware of.

There are three main types of cryptocurrencies based on the method of creation:

  • Coins: This type of cryptocurrency can be mined by any user. Typically, this occurs through one of two methods. In the case of a blockchain operating on the Proof of Work (PoW) algorithm, which we'll discuss in more detail in subsequent articles, mining involves using the computational power of mining equipment (often ASIC or GPU) owned by the user-miner. They compete with other users to solve a complex mathematical problem, and the winner adds a new block to the blockchain, earning a fixed reward. The second method of cryptocurrency mining is staking, considered more environmentally friendly as it doesn't require significant computational power. Users temporarily freeze (stake) their existing coins, gaining the right to participate in creating new blocks. The more cryptocurrency a user stakes, the higher the likelihood they will be selected to create a new block and receive a reward.

 

  • Tokens: Unlike coins, tokens are not mined by users. Typically, projects issue them all at once, although new tokens may be introduced gradually. Tokens are essentially digital resources that grant users access to project services or represent other assets in the digital realm. For example, the popular stablecoin USDT is a cryptocurrency version of the US dollar, with its price usually pegged closely to it.

 

  • Forks: Lastly, forks are digital coins created as a result of a hard fork after the split of the original blockchain. We'll discuss this non-trivial process in more detail in upcoming articles. After the completion of a hard fork, data about cryptocurrency owners at the time of the split remains in both the old and the new blockchain. Essentially, this means that a holder's coins are duplicated. For instance, on August 1, 2017, a hard fork occurred in Bitcoin, resulting in Bitcoin Cash, and owners of Bitcoin received an equivalent amount of the new coin.

Why Do We Need Cryptocurrency?

We've crossed the finish line! To fully grasp the essence of cryptocurrency, let's explore the question: why do we need it in the first place?

So, what is the purpose of cryptocurrency? The primary advantage and function of digital currency are the swift, anonymous, and cost-effective movement of funds from any point in the world to another. Thanks to these fundamental features, cryptocurrency has become an excellent alternative to traditional bank transfers.

Moreover, as digital currencies gain popularity, they have evolved into sought-after assets. The topic of how to make money with digital currency has increasingly captured people's attention. Regarding the use of cryptocurrency as a means of payment, today, you can purchase a plane ticket, book a hotel, and even pay for tuition in several countries using cryptocurrency.

In addition, a whole new direction has emerged—tokenization, where rights to ownership of various real-world assets, such as company stocks, fiat currencies, and even real estate, are placed within the token framework.

In summary, overall, crypto technologies are constantly evolving and providing more opportunities for use. Furthermore, blockchain initiatives are quickly gaining acceptance and conquering new markets. Therefore, before diving into this world and embarking on your journey here, it's advisable to thoroughly study the cryptocurrency sphere.

The Future of Cryptocurrency

As of the beginning of 2017, the total market capitalization for all cryptocurrencies stood at $15 billion. However, by November 2021, it had reached a record $3 trillion, showcasing unprecedented growth for the entire industry.

Furthermore, cryptocurrency regulation is gradually evolving and varies among different countries. For instance, in 2021, El Salvador became the world's first country to adopt Bitcoin as a legal form of payment, while China implemented strict regulations on the trading and mining of digital currencies. In the United States, heated debates continue regarding how to regulate cryptocurrencies in the country.


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