Cryptocurrency and crypto are two terms that are often used interchangeably. The latter is often used as a shorthand for both cryptocurrencies and the broader blockchain and Web3 industry. Cryptocurrency is a specific type of digital asset that exists within a particular blockchain network and is typically created and maintained by the blockchain protocol it is native to. Such cryptocurrencies are called native coins, which distinguish them from other crypto assets (tokens) created on top of existing blockchains.
Cryptocurrencies serve multiple purposes, including trading, storing value, and acting as an exchange medium. They are also used to pay transaction fees on their respective networks, incentivizing participation in securing the network and maintaining its decentralized structure.
It is essential to differentiate between cryptocurrencies and other digital assets we encounter daily, such as loyalty points. The term digital assets refers to any assets that exist in digital form, including cryptocurrencies themselves, various tokens, tokenized equities, NFTs, loyalty points, and more. While all cryptocurrencies are digital assets, not all digital assets are cryptocurrencies. Many digital assets are managed by central authorities (namely companies) that have complete control over their issuance and the conditions of their distribution. Unlike centrally managed digital assets, most cryptocurrencies are decentralized and have no single issuing authority. Instead, they use a unique type of database known as blockchain, which is essentially a public spreadsheet in the cloud. To maintain the network's security and functionality, different computers, called nodes, run software that adds transactions to the blockchain.
In 2009, the first-ever cryptocurrency, Bitcoin, was introduced to the world by a pseudonymous developer or group of developers under the name Satoshi Nakamoto. The purpose behind its creation was to establish a payment system that did not depend on financial institutions. To achieve this goal, they created a peer-to-peer network that enables decentralized transactions. Bitcoin is widely recognized and has inspired the development of many other blockchains and cryptocurrencies. While some of them aim to replace Bitcoin as a payment system, others function as utility or security tokens in new emerging blockchains or financial technologies.
Ethereum, the second most popular cryptocurrency, was introduced in 2015 and gained rapid acceptance due to its usability. It provided a standard for developing custom tokens — the ERC-20 Token Standard. This standard enabled developers and companies to create their own tokens and raise funds through Initial Coin Offerings (ICO), the crypto equivalent of IPOs. As a result, many projects opted to use Ethereum as their blockchain for business development, contributing to its worldwide success.
Although Bitcoin and Ethereum are still the most prominent cryptocurrencies, the crypto industry continues to evolve, with new blockchains appearing on the crypto market and building their own ecosystems.
One of the most distinctive characteristics of crypto is decentralization, which sets it apart from traditional fiat currencies controlled by governments and financial institutions. Instead, cryptocurrencies rely on a global network of nodes that use cryptography to process and validate transactions and record them on a blockchain, a publicly distributed ledger accessible to everyone. Such a system reduces reliance on third parties, as transactions are verifiable and replicated across the network.
Another dominant characteristic of blockchain technology is immutability, which means that once a transaction is recorded on the blockchain ledger, it cannot be deleted or altered in any way. Thus, users can be assured that their data is unalterable and, consequently, cannot be falsified or manipulated in other ways. In combination with the decentralized nature of blockchain, immutability allows users to avoid trusting some financial institution or its employees with their funds.
The third characteristic is a certain degree of anonymity. When using cryptocurrencies, users do not have to identify themselves, as the decentralized network will verify and record transactions on the blockchain using a system of private and public keys to authenticate these transactions. As a result, users can create anonymous digital identities and transfer their assets securely.
Finally, most cryptocurrencies have a predetermined and limited supply. This is in contrast to fiat currencies, which can be issued in unlimited quantities by central banks, leading to inflation and a decrease in the currency's value over time. A limited supply can greatly reduce the risk of inflation (although this also depends on each cryptocurrency’s monetary policy).
The popularity of cryptocurrencies continues to grow as more people invest in crypto and new DeFi (Decentralized Finance) projects emerge on the market. Big corporations also explore cryptocurrency and blockchain technologies to help their businesses evolve and grow.
