Cryptocurrency

What is cryptocurrency?

Cryptocurrency is a type of digital currency functioning as a medium of exchange, store of value, or unit of account that is cryptographically secured by a blockchain-based ledger.

Unlike traditional fiat currencies issued by governments, cryptocurrencies exist on decentralized networks built on secure blockchain technology and governed by mathematical algorithms. They can be traded, stored, or used to buy goods and services, similar to traditional money but with unique properties specific to their decentralized nature.

Here are some key characteristics:

• Digital and peer-to-peer: Cryptocurrencies exist only in digital form and can be transferred directly between individuals without a bank or intermediary.
• Programmable: Some cryptocurrencies support programmability (e.g., ERC-20 on Ethereum).
• Limited supply: Some cryptocurrencies have a fixed supply, creating a perceived ‘scarcity’ value, which can have an effect on supply and demand, as well as inflation.

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How is cryptocurrency made and distributed?

Cryptocurrencies are typically created through a process called mining or minting, depending on the type of blockchain and consensus mechanism involved.

• Mining: For blockchains using Proof of Work (PoW) based consensus like Bitcoin, new coins are created and transactions are validated through mining. Miners use powerful computers to solve complex mathematical puzzles that secure the blockchain. Once a puzzle is solved, a new "block" of transactions is added to the blockchain, and the miner is rewarded with newly created cryptocurrency.
• Minting: Networks using Proof of Stake (PoS) instead of PoW, generate crypto through minting. In PoS systems, active validators are randomly chosen to propose new blocks and are required to "stake" a certain amount as collateral. Ethereum is a great example of this.

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Once mined or minted, cryptocurrency can be made available in a variety of ways. Here are a few examples.

• Initial Coin Offerings (ICOs): In some cases cryptocurrencies are created during ICOs, where new coins are distributed to investors in exchange for funding a project. These tokens do not require mining or minting and are instead issued by the project’s development team. Filecoin, for instance, raised over $250 million during their ICO in 2017.
• Token Sales: Cryptocurrencies can also be sold outside of an ICO in public or private token sales. Private sales target strategic investors or institutions, while public sales allow broader participation via decentralized platforms such as Binance Launchpad or Ethereum-based protocols.
• Airdrops: Often used to promote awareness, reward loyalty, or kickstart governance in decentralized projects, free tokens are distributed to wallet holders or community participants.  Uniswap famously airdropped UNI tokens to early users of its platform.‍
• Pre-Mined Allocation: Some cryptocurrencies are pre-mined, meaning a portion of the total supply is created before public launch. These tokens are reserved for team members, investors, or ecosystem development. For example, Solana allocated a portion of their supply to support network growth and incentivize stakeholders.

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How does cryptocurrency differ from fiat?

To better understand how cryptocurrency differs from fiat (traditional government-issued money, like US Dollar and Korean Won), here are some key comparisons:

• Authority
  • Cryptocurrency: Operates on a decentralized network with no single authority. The creation and management are carried out by code and community governance. Each participant can validate transactions through consensus, and control is spread across a global network of computers. 
  • Fiat: Central banks and governments regulate supply, set policies, and ensure monetary stability, giving them direct influence over the economy. 
• Transparency
  • Cryptocurrency: Transactions are recorded on a public ledger (blockchain), accessible to anyone. This transparency allows users to verify and view the history of all transactions on the network, adding a layer of trust and accountability.
  • Fiat: Transaction records are usually private and can only be accessed by authorized individuals, such as bank employees, government officials, or account holders.
• Regulatory Climate
  • Cryptocurrency: The regulatory environment varies widely by country and is evolving. Some governments embrace cryptocurrency, while others impose restrictions or outright bans due to concerns over volatility, financial stability, and security risks.
  • Fiat: Well-regulated by national governments and financial authorities. Regulatory frameworks are established to protect consumers, maintain market stability, and prevent fraud and money laundering.
• Stability
  • Cryptocurrency: Typically more volatile due to a smaller market size and speculative trading. Prices can fluctuate dramatically within a short period, leading to higher risk.
  • Fiat: Generally more stable, with value managed through government and central bank policies aimed at controlling inflation and ensuring economic stability.
• Security
  • Cryptocurrency: Security relies on advanced cryptographic techniques. Although blockchain is highly secure and tamper-resistant, wallets and exchanges are sometimes vulnerable to hacks and security breaches. Users must take responsibility for securing their private keys (accounts).
  • Fiat: Security is provided by banks and government regulations, and in many countries, deposits are insured up to a certain amount. However, physical cash can be counterfeited, and digital accounts are subject to fraud and cyber-attacks.

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Types of cryptocurrency

Cryptocurrencies can be broadly categorized based on their primary use cases and functionalities. Here are some categories:

• Cryptocurrencies designed for payments: These cryptocurrencies focus on enabling peer-to-peer transfers without intermediaries, making transactions faster and more direct. They often come with lower transaction fees compared to traditional payment systems, providing a cost-effective alternative for global remittances and daily use. Popular examples include Litecoin (LTC) and Dash (DASH).

• Utility tokens: Grant access to services or functionalities within a specific blockchain ecosystem. These tokens are commonly used to pay for network fees (such as gas fees), execute smart contracts, and power decentralized applications (dApps) . Binance Coin (BNB), and Chainlink (LINK) are some examples of utility tokens.

• Stablecoins: Aim to maintain a stable value by pegging their worth to a reserve asset like fiat currency or commodities. Pegging mechanisms vary and include fiat-backed reserves (USDC) and crypto-collateralized systems (e.g., DAI).  Stablecoins are frequently used for trading, remittances, and as a reliable store of value, offering stability within the volatile cryptocurrency market.

• Governance tokens: Allow holders to participate in the decision-making processes of decentralized protocols or blockchain projects. Token holders can vote on proposals, protocol updates, and resource allocations, fostering community-driven development and decentralization. Examples include Uniswap (UNI), Aave (AAVE), and MakerDAO (MKR). 

• Security tokens: Represent ownership in real-world assets (RWAs) or financial instruments such as stocks. These tokens, often issued during regulated Security Token Offerings (STOs), provide rights like dividends, profit sharing, or voting privileges and are subject to government regulations. 

• Non-Fungible Tokens (NFTs): Represent unique digital or physical assets, such as art, collectibles, in-game items, or real estate. Unlike other cryptocurrencies that are fungible and interchangeable (hold the same value), NFTs are one-of-a-kind and cannot be exchanged on a one-to-one basis. Built on blockchains like Ethereum (using ERC-721 or ERC-1155 standards), they are widely used in digital art, gaming, and the metaverse. Popular examples include CryptoPunks, Bored Ape Yacht Club (BAYC), and virtual land on platforms like The Sandbox.