Cryptocurrencies can be extremely difficult to understand, especially because their underlying technology, the blockchain, is wrapped in technical terminology and language. This is a great impediment for many who are interested in the cryptographic space. But do not worry! We will guide you to understand the key concepts of cryptocurrencies that it is good for you to know.
What are Cryptocurrencies?
Let’s start by understanding the definition of cryptocurrencies. Cryptocurrencies are digital or virtual coins encrypted (secure) by cryptography. Cryptography refers to the use of encryption techniques to secure and verify the transfer of transactions. Bitcoin represents the first decentralized cryptocurrency, which works with a public book that registers and validates all transactions chronologically, called Blockchain.
Although many cryptocurrencies have existed before Bitcoin, its creation marks an important milestone in the field of digital currencies, due to its distributed and decentralized nature. The creation of Bitcoin precipitated the expansion of an exuberant and more diverse ecosystem of other currencies and tokens, which are often considered as cryptocurrencies in general, even when most of them do not fall within the definition of “currency”.
Currencies vs chips: categorization of cryptocurrencies
It is important to keep in mind that all coins or tokens are considered cryptocurrencies, even if most currencies do not function as currency or means of exchange. The term cryptocurrency is a misnomer because a currency technically represents a unit of account, a reserve of value and a means of exchange. All these characteristics are inherent to Bitcoin, and since the cryptocurrency space was initiated by the creation of Bitcoin, any other currency conceived after Bitcoin is generally considered a cryptocurrency, although most do not fulfill the aforementioned characteristics of a real currency. .
The most common categorization of cryptocurrencies is:
- Alternative cryptocurrency currencies (Altcoins)
Alternative crypto currencies are also called altcoins or simply “coins.” They are often used interchangeably. Altcoins simply refers to coins that are an alternative to Bitcoin. Most altcoins are a Bitcoin variant (fork), built using the original Bitcoin open source protocol with changes in its underlying codes, so it conceives a completely new currency with a different set of features. The examples of altcoins that are variants of the Bitcoin codes are Namecoin, Peercoin, Litecoin, Dogecoin and Auroracoin.
There are other altcoins that are not derived from the Bitcoin open source protocol. Rather, they have created their own Blockchain and protocol that supports their native currency. Examples of these coins include Ethereum, Ripple, Omni, Nxt, Waves and Counterparty.
A common feature of all altcoins is that each one has its own independent block chain , where the transactions related to its native coins occur.
Tokens are a representation of a particular asset or utility, which usually resides at the top of another chain of blocks. Tokens can basically represent any asset that is fungible and negotiable, from merchandise to loyalty points and even to other cryptocurrencies!
Creating tokens is a much easier process since you do not have to modify the codes of a particular protocol or create a chain of blocks from scratch. All you have to do is follow a standard template in the blockchain, such as the Ethereum or Waves platform, which allows you to create your own tokens. This functionality of creating your own tokens is made possible through the use of intelligent contracts; Programmable computer codes that are self-executing and do not need any third party to operate. It’s really great!
The tokens are created and distributed to the public through an initial offer of coins (ICO), which is a means of crowdfunding, through the launch of a new cryptocurrency or token to finance the development of the project.