Cryptocurrency Basics
What is cryptocurrency?
Cryptocurrency (abbreviated “crypto”) is a digital currency that individual users can use as a medium to transfer economic value in a digital environment.
You might be wondering how this system differs from PayPal or the digital banking app on your phone. On the surface, they seem to be used in the same way – paying friends, shopping on your favorite website, investing into some fund, etc. are all common usage scenarios. However, the fundamental working principles of the two can be very different.
What is unique about cryptocurrencies?
Cryptocurrencies are unique in many ways. However, their main function is to act as an electronic cash system that does not belong to any party.
A good cryptocurrency will have the characteristics of decentralization. No single central bank or subset of users can change the rules without reaching a consensus. Network participants (nodes) establish communication with other participants by running software to share information with each other.
Cryptocurrency networks are decentralized and can effectively resist service interruptions or censorship. Conversely, simply interrupting the main server can bring down the centralized network. If a bank’s database is wiped and there is no backup, it is difficult to determine a user’s account balance.
In the cryptocurrency world, nodes keep a copy of the database. Everyone can act as their own server and play an effective role. Each node can go offline, but its paired nodes can still capture information about other nodes.
As a result, cryptocurrencies can circulate 24 x 7, allowing value to be transferred anytime, anywhere, free from the intervention of intermediaries. Therefore, we often refer to it as the permissionless type: as long as it is connected to the Internet, everyone can transfer money and value.
Why is it called “cryptocurrency”?
The term “cryptocurrency” is a compound word composed of cryptography and currency. This is because cryptocurrencies widely use cryptography to secure transactions between users.
What is Public Key Cryptography?
Public key cryptography provides a solid foundation for cryptocurrency networks and the technical backing for users to send and receive funds.
In a public key cryptography scheme, you have a public key and a private key. The essence of a private key is a string of huge numbers that no one can guess. This number is often beyond imagination.
For Bitcoin, the difficulty of guessing the private key is equivalent to accurately predicting the outcome of 256 coin tosses. With today’s computers alone, even when the universe dies, it will not be able to crack it.
As the name suggests, the private key must be kept safe no matter what. In addition, the public key can be generated from the private key. The latter can be sent securely to anyone. But reverse engineering the public key cannot obtain the private key.
You can also create a digital signature by signing data with a private key. This is similar to signing a document in the real world. The main difference is that anyone can compare the signature with a matching public key to determine if the signature is valid. In this way, the user does not have to expose the private key, but can still prove ownership.
In the field of cryptocurrencies, funds can only be spent if you have the corresponding private key. After opening a transaction, you will announce your operation of transferring the currency to the network. The specific content will be announced through a message (i.e. transaction). The message is signed and added to the cryptocurrency database (blockchain). As mentioned above, a private key must be used to create a digital signature. Also, since the database is fully open, everyone can verify that your transaction is valid by checking the signature.
Who invented cryptocurrency?
Various digital cash schemes have been launched over the years, the first cryptocurrency being Bitcoin , launched in 2009. Its creator is a person or group of people under the pseudonym Satoshi Nakamoto . To this day, their true identity remains a mystery.
Bitcoin has spawned a large number of cryptocurrency “latecomers” – many of them competitors, and others trying to integrate functions that Bitcoin does not have. Today, in addition to routinely sending and receiving funds, many blockchains also support the use of smart contracts to run decentralization applications . Ethereum is perhaps the hottest example of such a blockchain.
What is the difference between cryptocurrencies and tokens?
At first glance, there seems to be no difference between cryptocurrencies and tokens. Both are traded through a trading platform and can be transferred between blockchain addresses .
Whether as a medium of exchange, a means of saving value , or both, cryptocurrencies can only be used as money. The function of each unit is homogeneous , that is, the value of the same currency is exactly the same.
Bitcoin and other early cryptocurrencies were just “money”, but later blockchains tried to do more. For example, Ethereum provides more than just monetary functions. It allows developers to run code ( smart contracts ) in a distributed network and create tokens for various decentralization applications .
Tokens can be used like cryptocurrencies, but with more flexibility. You can mint millions of tokens of the same type, or choose a few products with unique attributes . They can play a variety of roles, from digital receipts representing company equity to loyalty points.
In protocols that support smart contracts, the base currency (payment for transactions or applications) is separate from its token. For example, the native currency in Ethereum is Ethereum (ETH), which can only be used to create and transfer tokens within the Ethereum network. These tokens are created according to ERC-20 or ERC-721 standards.
What is a digital currency wallet?
Essentially, a cryptocurrency wallet is a vehicle for storing private keys . It can be a dedicated device ( hardware wallet ), an app in a computer or smartphone, or even a piece of paper .
Wallets are an indispensable interface for most users when interacting with cryptocurrency networks. Different types of wallets correspond to functional categories – obviously, paper wallets cannot sign transactions or display current prices in fiat currency .
If convenience is considered, software wallets (such as Trust Wallet ) are undoubtedly the most suitable tool for everyday payments. The security of hardware wallets is almost unrivaled, effectively protecting private keys from prying eyes. Cryptocurrency users tend to store funds in both types of wallets.