What Are Cryptocurrencies?

Cryptocurrency is very different from other digital solutions such as banking apps and PayPal, even if on the surface, they might look similar and have corresponding use cases.

Decentralized vs Centralized 

Traditional digital financial solutions are in essence centralized and controlled by the governments and companies that maintain those monetary systems. 

Centralized systems have a history of manipulation and interference, and after the financial crash of 2007 many individuals desired a more stable and fair financial solution.

Satoshi Nakamotos’ Bitcoin Whitepaper, published at the end of 2008, was a groundbreaking document that described how cryptography could create a trustless peer-to-peer form of electronic cash without the need for any middleman to be involved in the transactions. The strength of Bitcoin is mainly to have been the first cryptocurrency to prevent the risk of double-spending.

This decentralized structure offered a potentially more balanced and equal system, with each user or ‘node’ connected to the network playing its part in reaching a consensus. A consensus is when each user can participate in the validation of the blockchain transactions by downloading a node containing the entire blockchain from its beginning.

When the majority of nodes agree to execute a transaction or discover a new block, this is called a ‘consensus’. In this way, it becomes extremely hard to manipulate the blockchain because it would require more than half of the nodes to agree to rewrite the blocks.

Consensus is reached when 51% or more of nodes validate a transaction.

Private vs Public Blockchains 

There are two types of blockchain: public and private.

The majority of cryptocurrencies are decentralized and held on publicly viewable blockchains. These blockchains are part of a trustless, peer-to-peer open network of users or nodes dispersed around the world. There is not one single authority but rather a collective of users agreeing to a mass consensus. Secured by cryptography, cryptocurrency is virtually impossible to double-spend or falsify. 

The most famous example of a public blockchain is obviously that of Bitcoin, but Ethereum also meets this criterion. Anyone can explore transactions on these blockchains by using a Block Explorer or Etherscan.

A private blockchain, on the other hand, will only give access to this information to a small group of entities (people, companies..) previously chosen by their creator. This is the case, for example, with Hyperledger, which will leave this choice to the company, which can customize its blockchain as it sees fit.  Interestingly, more and more banks are creating their own internal blockchains that are under private, centralized control of the banks themselves.

There is also a third case. Some blockchains use a consensus to guarantee the anonymity of a user while allowing visibility of transactions. This is the case, for example, with Monero which by design gives information on the total number of transactions as well as the total number of $XMR spent in a block without letting information about who sent how much to whom.

Different Types of Cryptocurrencies

• Coins 

The term ‘altcoins’ is used to refer to all cryptocurrencies other than Bitcoin. This is due to the dominance of the Queen Mother of cryptos which accounts for over 60% of the market capitalization of all crypto! However, this term is used very implicitly and there is no specific rule that determines at what percentage a crypto becomes an alternative to Bitcoin. Each altcoin has its own blockchain. An altcoin is a full-fledged cryptocurrency that meets a specific need, with its own community and associated consensus.

• Tokens

Unlike altcoins, tokens depend on cryptocurrency. They are therefore set apart from other cryptos yet there is confusion between cryptocurrencies and tokens. For example, Ethereum is a cryptocurrency, but the Aavegotchi token ($GHST) is a token. In order to be considered a token, they must meet a standard that allows interaction and interoperability with the blockchain to which it is attached. It is quite common to see a project starting as a token (EOS, TRX …) before becoming an altcoin the day they decide to use their own blockchain in order to continue to evolve. 

• Stablecoins 

Stablecoins are tokens whose value is always tied to a specific fiat currency. The oldest example of this is Tether, which is tied to the United States dollar. It has been around since 2014 and was a Bitcoin token before moving to Ethereum. Even in times of strong demand or supply, its price has always been within a few cents of a dollar. Stablecoins like Tether are mainly used for trading because they allow exchanges between cryptocurrencies with a stable indicator to fiat currency without entering the fiat system.

Since the advent of DeFI, other uses have been developed such as lending or borrowing stablecoin. In particular, it is now possible to create forms of decentralized savings that are more advantageous than what a bank can offer today.

• CBDC (Central Bank Digital Currencies)

The latest creation in terms of blockchain usage, Central Bank Digital Currencies, are issued by the central banks of a country. They are therefore backed by the fiat currency of the country that issued it. Unlike stablecoins, CBDCs are issued by central banks and not by a company, foundation, or association outside the fiduciary system. It is therefore a government that defines the rules for its use, emission, and regulation without being obliged to ask its users what they think. CBDCs are therefore cryptocurrencies in name only and should not be confused with other existing projects.

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