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Cryptocurrency Explained

Discover how cryptocurrency works and why it’s so popular.

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Why does Cryptocurrency exist?

Learn why cryptocurrency was created and why it is so valuable.

Cryptocurrencies are designed to let you store, send, and receive value (like money) without any third parties (like banks or credit card companies).

They have many additional features beyond money, but let’s start with the basics.

Until cryptocurrencies came around, you needed banks, credit cards, or companies like PayPal and Venmo to send and receive money.

These companies were necessary to do something only they could do: verify that the person spending money, actually has money to spend. Banks can do this because they hold everyone’s money, so they know all account balances.

But what's so great about not using banks and credit card companies? For starters, they are slow, expensive, and part of a broken financial system.

Banks have huge costs for buildings, lawyers, and highly paid executives - all funded by the fees you pay (and massive taxpayer bailouts, like in 2008). Banks also limit how you can access and send your money.

In 2008, a mysterious person calling himself Satoshi Nakamoto invented the first cryptocurrency, Bitcoin. To this day, Satoshi remains anonymous and nobody knows who he is.

Bitcoin has grown a lot since its invention and remains the most popular cryptocurrency.

Satoshi could be a woman, a man, or a group of people. Nobody knows! What we do know is that the bitcoin.org domain was registered in August 2008. Then, in November, Satoshi posted the famous Bitcoin Whitepaper. The first bitcoin were issued in January 2009.
Embedded in the first Bitcoin code was the message “Chancellor on Brink of Second Bailout for Banks.” - hinting at Bitcoin’s creation because of the 2008 financial crisis.

Cryptocurrency’s breakthrough is that it’s the first technology to solve a problem so tough, it has its own name: The Double Spend Problem.

Here is how the Double Spend Problem works: Digital money is just like a computer file, so it would be easy for somebody to just “counterfeit” it by copy and pasting. Before Bitcoin, the solution was for banks to keep track of the money in everybody's accounts, so that nobody could spend money twice.

Bitcoin solves the Double Spend Problem differently. It makes all accounts and transactions public - but without revealing private details like your name. Since account balances are public, it would be obvious if someone used the same money twice. Once bitcoin is sent, it’s publicly added to the receiver’s account. So if a scammer tries to spend their bitcoin twice, it’s easily discovered and prevented.

Solving the Double Spend Problem is a big deal. It allows cryptocurrencies like Bitcoin to be sent directly from one person to another, without using ANY third party like a bank.

Not needing a third party (like a bank) to handle accounts and transactions has a lot of benefits. Transactions can be faster and cheaper since there is no middleman. Plus, your personal information becomes more private since no bank has to store it. That’s why cryptocurrencies are such a game changer!

Cryptocurrency’s revolutionary solution for the Double Spend Problem can be applied to much more than money transfers, though.

Soon, many new cryptocurrencies were created based on Satoshi’s original idea. They all focus on different industries which benefit from removing a third party middleman.

Bitcoin removes the middleman from money transfers - but a lot of other things can benefit from removing middlemen and their fees. That’s why other cryptocurrencies focus on removing middlemen from the way we use apps, music, cloud storage, digital records, contracts, and even supercomputers. And that’s just for starters!

All cryptocurrencies share one important feature: They let you exchange money, files, and other things of value WITHOUT using any third parties.

The goal of cryptocurrencies is to put you in charge, by removing power from traditional middlemen.

Think about it: Almost everything you do in your daily life relies on middlemen. Want to pay someone? You have to use a middleman like Visa or Venmo. Want to send files? You have to use a middleman like Gmail or Dropbox. Want to listen to music? You have to use a middleman like Apple or Spotify.

With cryptocurrencies, all this can change. The result could be a completely new way of how we use products and services. You’re probably beginning to see why cryptocurrencies are such a big deal.

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What is Cryptocurrency?

Let’s talk about why cryptocurrencies are so unique and revolutionary.

As we learned, cryptocurrencies are digital systems that allow for the exchange of value without third parties.

They can be used by anyone, anywhere in the world. There are no dollars, Euros, pesos, or Yen – cryptocurrencies are global.

Unlike traditional forms of money, there are no physical cryptocurrencies. No dollar bills, no metal coins, no plastic cards – it’s 100% digital! Everything is done from phones and computers. This allows for fast and cheap transactions around the world and around the clock.

Think of cryptocurrencies as a newer type of money. They store and transfer value, just like money, but they do it more safely, quickly, and efficiently. This is what makes them so useful and valuable.

Traditional systems that exchange value (like money) are controlled by banks and governments – which makes them “centralized.”

Most cryptocurrencies are not controlled or regulated by any single entity like a bank - which makes them “decentralized.”

Take money, for example. Traditional money is controlled by banks and governments. Cryptocurrencies like Bitcoin are an alternative to money and are not controlled by any single entity.

Having no banks in control makes money transfers cheaper, faster, and easier.  Not having banks involved means nobody can deny your application, nobody can close your account, and nobody can charge you outrageous fees. In short, banks are no longer in charge. This is what makes decentralized cryptocurrency so powerful.

Incredibly, since cryptocurrencies are decentralized, they’re run by the communities of their users. No central authority is required!

The cryptocurrency Bitcoin, for example, is completely controlled by its users. They’re located all around the world and use the internet to send and receive payments. But unlike traditional payments that pass through banks, bitcoin is sent directly from person to person. This is known as a peer-to-peer system (P2P). It means there is no central control.

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Cryptocurrency Examples

Let’s take a look at the most popular cryptocurrencies.

After Bitcoin’s invention, many other cryptocurrencies were created. They focus on different goals, but almost all shared the original purpose of removing middlemen.

Some of the most popular cryptocurrencies include Ethereum, Ripple, Litecoin, Dash, NEO, Monero, and IOTA. The list grows constantly, because new cryptocurrencies are created all the time.

Anybody is allowed to create their own cryptocurrency. In fact, there are already over 1,500 different ones, and that number is growing quickly. People are developing new cryptocurrencies for fun, to solve problems, and to make money. Because anybody with some technical skills can make them, it’s important to know that some cryptocurrencies are more trustworthy than others.

Ethereum is focused on removing middlemen from digital applications. So instead of using Apple’s and Google’s app stores, you can use apps online through a decentralized community.

Ethereum uses what’s called “Smart Contracts.” Those are computer programs that run exactly as promised - without any downtime, censorship, or interference.

All participants in the Smart Contracts can trust that what they agreed on will actually happen - because it happens automatically. For example, if your purchase gets delivered, the seller will automatically be paid.

Ripple is working on removing middlemen from company-to-company money transfers. So instead of a buyer and seller using a payment processor like Bank of America or VISA, they can send money directly to each other.

What’s really interesting about Ripple is that the type of money you put in doesn’t have to be the same that comes out. Ripple works like a universal translator for money. You can send Euros and the other party can receive dollars. A global network that’s constantly moving money around makes this possible.

Litecoin is based on the ideas behind Bitcoin but is ocused on being able to process more payments in a shorter period of time. The goal is to make cryptocurrency ready for millions of everyday transactions.

Litecoin was created in 2011 and is based on the original Bitcoin code, with some changes. Because Bitcoin’s code is openly available, anybody can modify it and create a new version. Each time that happens, it’s called a “fork” (like a fork in the road). The creators of Litecoin did exactly that. They liked Bitcoin but disagreed on certain parts of the technology, so they created a modified version.

Dash is focused on creating a cryptocurrency that can be used as digital money more conveniently. That’s why its name is short for digital cash. It also has built-in community systems to pay for ongoing development and to vote for updates.

Dash is trying to build a fast, cheap, and easy-to-use digital currency. As with all cryptocurrencies, there is competition and disagreement about what strategy works best. Dash’s creators like parts of Bitcoin but wanted to change other parts. The great thing is that anybody can develop their own cryptocurrency and the market eventually decides which ideas win.

NEO is the first cryptocurrency launched in China. It’s similar to Ethereum in that it’s designed to remove middlemen from applications. But it’s also designed to help manage your digital identity.

Just like Ethereum, NEO can potentially be used for a lot of different things. This includes removing middlemen from online payments, voting, insurance, and even digital file storage. Because there are over 1.4 billion people in China, many see great potential in NEO - if it becomes successful.

Monero is building very private, digital cash. It’s designed to be completely anonymous and untraceable. The main goal of Monero is to put you in charge of your money – banks and governments can no longer control or even monitor it.

Monero makes it possible to store and send money in private – nobody else knows what you do with it. Anonymous money may sound like only criminals would need it, but think about people living in dictatorships that try to control how citizens can spend their money. For them, Monero can be life-changing.

IOTA is a cryptocurrency that’s built to run the Internet of Things (IoT). This refers to all internet-connected devices like your smartphone, smart thermostat, smartwatch, and smart TV. The number of these products is growing quickly and IOTA plans to help run them.

A good example for IoT devices is self-driving cars. Imagine, that in a few years all taxis and Ubers are self-driving smart cars without human drivers. IOTA could be used to automatically send payments from your smartphone to the smart car – you don’t even have to touch an app. You simply get in, take a nap, and get out.

As our world becomes more connected, cryptocurrencies like IOTA could play a larger role in the background – and we might not even notice them.

How does Cryptocurrency work?

Ultimate Blockchain Guide

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You’ve just learned how cryptocurrency works.

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