Cryptocurrencieswhat is cryptocurrency and how does it work for beginners?

what is cryptocurrency and how does it work for beginners?

Cryptocurrency is a type of virtual or digital currency that is network-based and distributed on many computers. These virtual currencies are created by cryptography, which prevents repayment or counterfeiting.

The most important feature of cryptocurrencies is that any institution or authority does not control them, and government intervention and manipulation are impossible. The essential component of many cryptocurrencies is blockchain.

Blockchain is an accounting office that records all digital currencies’ activities, transfers, ownership, and valuations. This information increases over time. Blockchain technology has many other uses in addition to cryptocurrency. But, it is usually known as bitcoin and other cryptocurrencies.

Blockchain for Bitcoin is like the Internet for email. So just as you need the Internet to use email, Bitcoin does not make sense without blockchain.

Blockchain is a unique platform on which you can build applications. And currency codes are just one of them. Ethereum is one of these currencies. Many cryptocurrencies are built on a blockchain network. They vary in usage and capability.

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Cryptocurrency features

  • Anonymity: The identity of activists in this field, including individuals participating in the transaction and currency holders and personal information or companies, are protected, and currency transactions are based on a random sequence of characters. The popularity of some cryptocurrencies reflects the scale of supply and demand. It is practically impossible to sign a contract with individuals or companies.
  • Lack of intermediary and regulatory institutions: Lack of governmental control and laws and regulations in this area have eliminated additional restrictions and costs. However, cryptocurrency holders have been deprived of the support of financial authorities.

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  • Security: To store cryptocurrencies, you can use unique virtual wallets with a private key called seed phrase. In this case, only the holders of cryptocurrencies will be able to access their existence. To increase security, cryptocurrency holders should keep their funds in storage devices.
  •  Decentralization: No official or government can control cryptocurrency. Virtual currency transactions are not done in just one place. This prevents transactions from being disrupted after being hacked. Transaction information is spread all over the network because it is stored directly by the holders of encrypted currencies.
  • Cryptocurrency transactions: There is a significant difference in how cryptocurrencies are sent with traditional currencies. The institutional model relies on banking systems. For example, incoming and outgoing meetings in the receiving and sending countries. Virtual currency transfers are almost instantaneous and independent of the user’s location.
  • Irreversible transactions: Since there is no institutional oversight of the virtual cryptocurrency market, transactions made on the blockchain are not reversible. No organization can correct this error if the recipient’s address is incorrect.

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  • Rapid development: Holders of cryptocurrencies can use rapidly evolving services and tools to encrypt their currencies. It is now possible to convert virtual currencies into dollars and euros and vice versa. These currencies can be obtained through exchange offices and cryptocurrency wallets, which can convert.

Types of cryptocurrencies

Types of cryptocurrencies

The classification of cryptocurrencies allows us to compare and evaluate currencies properly. With this in mind, there are different ways to classify cryptocurrencies, and there is also disagreement about currencies that can fall into several categories. One of the most essential classifications is the classification based on their field of activity, which will be examined in the following.

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1- Digital currencies: One of the primary purposes of cryptocurrencies is international payments and remittances. Therefore, cryptocurrencies can be used to buy goods and pay for services in the fastest possible time and with the lowest commission globally. This was previously used for illegal purposes, such as drug trafficking on sites such as Silk Road.

However, the usefulness of this type of cryptocurrency soon became apparent, especially in high-inflation countries that are losing their currency value. Bitcoin (BTC), Litecoin (LTC), Z cash (ZCASH), Dogecoin (DOGE), Nano (NANO), and Vert coin (VTC) are examples of these cryptocurrencies. Digital money itself is divided into two categories:

Stable Coins: These currencies have a fixed value, far from price fluctuation. This category has Fiat support. The most critical stablecoin is the tether (USDT), worth one US dollar.

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• Privacy Coins: These currencies keep their user’s information secret by covering the origin and destination. Some techniques hide the user’s balance and actual wallet address and merge multiple transactions to avoid chain analysis. Monero, Zcash, and Zen are among these currencies.

2- Platform tokens: Another name for these currencies are protocol tokens. These currencies are used to power entire decentralized networks. These tokens are used to pay for the calculation of power in the network and as an economic incentive for operators to maintain the safe and efficient operation of networks and perform various other functions on the platform.

Without platform tokens, decentralized platforms may face massive network requests, and the entire system may be suspended.

Many platforms provide an opportunity for other projects to adapt their security and application tokens to the platform on which they are built. These platforms have many functions. For example, eliminating intermediaries, reducing transaction costs, high transaction security, and the possibility of creating decentralized applications (DApps) are examples of applications of these platforms. EOS, Tezos, and Ethereum are some examples of these tokens.

3- utility tokens: These tokens allow you to use services or tools within the network. Utility tokens are used for services or products of companies creating tokens. Ripple and filcoin are two examples of utility tokens.

4- Security tokens, like stocks, are considered securities under U.S. securities law. Security tokens are restricted under securities law, and their public offering requires registration with the US Securities and Exchange Commission (SEC).

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Secure tokens, decentralized and digital tokens, have advantages over traditional securities, which include easy division into smaller units and availability for global transactions around the clock. tZero (TZROP), CoinMint (CBM), and CityBlock Capital (NYCQ) are some examples of this group.

Advantages and disadvantages of cryptocurrencies

advantages of cryptocurrencies

Advantages of Cryptocurrency

Cryptocurrencies allow users to exchange money directly between themselves, without the need for intermediaries. These transfers are secured by private and public keys and systems such as proof of work (POW) and proof of stake (POS).

Cryptocurrency wallets have a public key used to deposit money into the wallet. This is while the private key is only in the owner’s possession. The transfer of funds is done with a low fee and in the shortest time, and users can use this payment system at any time of the day and night without the need for financial institutions and banks.

Disadvantages of cryptocurrencies

The anonymity of cryptocurrency transactions allows them to be used for illegal activities such as smuggling, money laundering, bribery, tax evasion, etc. Most of these activities and money transfers are done by Privacy Coins because the blockchain of other currencies, such as Bitcoin, can be analyzed and lead to the identification of criminals.

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However, users of cryptocurrencies are very happy with the anonymity and privacy policy. Many blockchain technology experts consider it a good option for online voting and crowdfunding applications. Also, large financial institutions such as JPMorgan (JPM) have found that they can reduce commissions by simplifying the payment process.

But since the cryptocurrencies are not stored in the central database, if the private key is forgotten and access to it is lost, the user’s funds are lost, and no central authority, government, or company can help.

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