Cryptocurrency has been at the heart of financial discussions for several years. But what exactly is a cryptocurrency ? How does it work? What technology is it based on, and what is its impact on the global economy? This article reveals everything you need to know to understand the world of cryptocurrencies.
Table of contents
History and Evolution of Cryptocurrency
The beginnings with Bitcoin
Bitcoin , the first cryptocurrency, emerged in 2009. It was created by Satoshi Nakamoto . At that time, online transactions relied almost exclusively on banks and other financial institutions for security. These institutions acted as trusted third parties, entailing high fees and risks, as they had the power to block or review transactions. Furthermore, some banks, due to poor management of the assets entrusted to them, could fail during an economic crisis, jeopardizing the security of individuals' funds.
In his white paper, Nakamoto described Bitcoin as a new form of electronic money, designed to operate without intermediaries. Through a proof-of-work and a decentralized structure, Bitcoin allows two parties to transact directly, without banks or other central authorities. This system makes transactions virtually impossible to manipulate or reverse, as each exchange is permanently and securely recorded on a blockchain. In response to the practices of central banks, which can create money without limit, Nakamoto limited the supply of Bitcoin in order to create a stable and resilient digital currency.
The evolution towards thousands of cryptocurrencies: a rapidly expanding decentralized economy
Today, there are thousands of cryptocurrencies, each with a specific use and role within the digital ecosystem. These cryptocurrencies can be grouped into different categories, such as projects focused on basic blockchain infrastructure, solutions to improve the speed and cost of transactions, or applications for decentralized finance ( DeFi ), artificial intelligence, data storage, and much more.
Depending on the category, a project's token fulfills a specific and unique function within its ecosystem. For example, Ether (ETH) is the token used on the Ethereum blockchain: it is used to pay transaction fees for interacting with decentralized applications, thus ensuring the network's smooth operation. Other tokens, such as TAO in the Bittensorproject, are used to reward participants who contribute to learning and sharing artificial intelligence models, thereby fostering the development of a decentralized machine learning infrastructure. All these tokens are peer-to-peer exchangeable, meaning directly between users without intermediaries, across different blockchains, creating a complete and decentralized economy.
This diversity creates a fully decentralized economy where transactions and exchanges take place without centralized institutions, thus allowing everyone to access a wide range of services and investment opportunities in the world of cryptocurrencies.
What is a cryptocurrency?
Simple definition of cryptocurrency
A cryptocurrency is a digital currency that relies on cryptography to secure transactions and control the creation of new units. Unlike traditional currencies such as the euro or the dollar, cryptocurrencies are decentralized and not controlled by a central bank.
The difference with traditional currencies
Cryptocurrencies are neither physical nor issued by governments. Instead, they operate on a blockchain , a technology that securely and immutably records every transaction. Thus, owning cryptocurrencies means possessing monetary value that is independent of banks and governments.
How does a cryptocurrency work?
Blockchain and secure transactions
Blockchain is the central element of cryptocurrencies, serving as a public and decentralized ledger where each transaction is recorded transparently and securely. To guarantee the validity of transactions, blockchains use various consensus mechanisms, that is, methods to verify and approve exchanges without the need for an intermediary.
Among the best-known consensus mechanisms are Proof of Work Proof of Work where "miners" solve complex calculations to validate transactions, and Proof Proof of Stake , which relies on validators staking a portion of their cryptocurrencies to secure the network. Each system contributes to the reliability of the blockchain, ensuring transaction security while maintaining the integrity of the decentralized ledger.
Digital wallets: storing your cryptocurrencies
The easiest way to buy cryptocurrencies is through centralized exchanges like Gemini.
The platform offers:
- Top-notch security, with “cold” storage of the majority of funds
- A dual interface: a simplified application for beginners and ActiveTrader , an advanced platform offering decreasing fees according to volume and a competitive order book.
- Access to more than 60 cryptocurrencies, as well as a rare offering on the market: tokenized stocks (Nvidia, Apple, etc.). These products replicate the price of real stocks via tokens issued directly on the Gemini platform, allowing them to be purchased and traded 24/7 like cryptocurrencies, without going through a traditional stock broker.
- Strict regulatory compliance, with Gemini being one of the first platforms approved in the United States and holding the European license ( MiCA ).
- Additional services such as staking to generate returns on these cryptocurrencies.
Gemini therefore allows you to invest in both cryptocurrencies and tokenized stocks, all in a secure and regulated environment.
However, when you buy cryptocurrencies on these platforms, they are the ones who actually hold your assets, much like a bank promising to return funds to your bank account. This means your cryptocurrencies are not stored in a decentralized manner, which limits your direct control.
To fully own your cryptocurrencies in a decentralized and completely independent way, it's helpful to use a digital wallet . However, this requires a bit more technical knowledge. It involves knowing how to transfer cryptocurrencies from one public address to another using a single network (also called a blockchain).
This wallet can be a hot wallet (software that is always connected, ideal for frequent transactions) or a cold wallet (a disconnected hardware device, more secure for long-term storage). Each wallet contains a public key (like an IBAN, for receiving funds) and a private key (like a secret password), which are necessary to securely access and manage your assets.
The Main Cryptocurrencies and Their Uses
Bitcoin, Ethereum, and others
Bitcoin is often compared to digital gold, used primarily as a store of value. Ethereum , on the other hand, introduced a major innovation with smart contract : autonomous programs that execute automatically on the blockchain, without human intervention, once specified conditions are met. This technology enables the hosting of decentralized applications ( DApp ) and has paved the way for numerous uses.
For example, on Ethereum , applications like Drift (decentralized trading), Aave (lending platform) or OpenSea (NFT marketplace) operate using smart contract .
Consider an insurance application: suppose a smart contract is programmed to trigger an automatic reimbursement if a flight is delayed. Once the delay is confirmed by an oracle (external data source), the smart contract instantly sends the reimbursement amount to the insured passenger. Everything is automatic, secure, and requires no intervention from the insurer, making the process faster and more transparent.
The Importance of Blockchain in Cryptocurrencies
Why blockchain is crucial
Blockchain the heart of cryptocurrency security and transparency. It guarantees that every transaction is verifiable, eliminating the risk of fraud. Unlike traditional systems, it relies on a network of nodes (computers) that collectively verify the integrity of transactions.
The advantages of transparency and decentralization
Thanks to blockchain, transactions are not only transparent , but also irreversible and traceable . This limits the possibility of fraud and makes each transfer publicly visible without revealing the users' identities.
The Advantages of Cryptocurrencies
Freedom and decentralization
Cryptocurrencies allow money to be transferred without intermediaries, thus reducing transaction fees and delays. Furthermore, they offer access to financial services without the need for a bank account, which is essential for millions of people worldwide.
Reduced transaction costs and instant transfers
Transferring cryptocurrencies is often much cheaper than an international bank transfer. Transactions are instant and without limits on amounts or borders, offering a simple solution for global exchanges.
Current Risks and Limitations of Cryptocurrencies
Price Volatility
The high volatility of cryptocurrencies is partly due to the market's relative youth and the constant emergence of new projects, fueling significant speculation. Prices, particularly those of Bitcoin, can fluctuate by thousands of dollars in just a few days. While this instability might be perceived as a drawback, it also presents an opportunity for those employing appropriate trading strategies, potentially leading to substantial gains.
Security and protection against fraud
Although cryptocurrencies are secured by blockchain, risks exist. Hacking of wallets or exchange platforms is possible, and transactions, once validated, are irreversible.
Cryptocurrencies and Regulation
The Challenges of Cryptocurrency Regulation
With the rapid growth of cryptocurrencies, governments are seeking to implement regulations. For example, some regulations require Know Your Customer ( KYC ) to open an account on an exchange platform. In the United States, the SEC (Securities and Exchange Commission) is in conflict with several crypto platforms and projects, seeking to classify cryptocurrencies as securities. In Europe, the MiCA (Markets in Crypto-Assets) regulation aims to regulate stablecoin and requires platforms to meet strict standards of transparency and fund protection.
Challenges for Governments and Institutions
Regulating a global and decentralized market like the crypto market presents a major challenge. Governments must strike a delicate balance between encouraging technological innovation and ensuring user safety. Too many restrictions could stifle the growth of this new economy, while an overly permissive approach could increase the risk of abuse and scams.
Cryptocurrencies and DeFi: A New Financial Paradigm
Decentralized finance and its promises
DeFi Finance ) is an ecosystem of applications that enable financial services without intermediaries. Loans, savings, and exchanges take place directly between users, thanks to smart contract . DeFi promises to revolutionize the banking sector by offering open and accessible alternatives.
The opportunities offered by DeFi
With DeFi, users can obtain loans or generate interest without going through a bank. These services are accessible to anyone with an internet connection, facilitating financial inclusion on a global scale.
Future Prospects for Cryptocurrencies
Potential for mass adoption
Cryptocurrencies could become a common means of exchange in the future. With adoption by large companies and even some governments, cryptocurrencies are becoming increasingly integrated into the global economy.
Technological innovations and new uses
Innovations like NFTs and asset tokenization are expanding the possibilities for using cryptocurrencies. Users can not only exchange currency, but also own artwork, real estate, and much more.
Cryptocurrency FAQs
What is a cryptocurrency in simple terms?
A cryptocurrency is a decentralized digital currency, operating without the intervention of banks or governments, and secured by the blockchain.
How does blockchain work in cryptocurrencies?
The blockchain is a public ledger that records each transaction securely and transparently, thus ensuring the reliability of cryptocurrency transfers.
What are the risks of investing in cryptocurrencies?
Cryptocurrencies are volatile, with prices that can fluctuate rapidly. Furthermore, they are not protected by the same safeguards as traditional banks.
Is cryptocurrency legal?
Yes, in most countries, although each country imposes its own regulations and restrictions on the purchase and use of cryptocurrencies.
Investments in cryptocurrencies are risky. Crypternon could not be held responsible, directly or indirectly, for any damage or loss caused following the use of a property or service put forward in this article. Investments linked to cryptocurrencies are risky by nature, readers must do their own research before undertaking any action and investing only within the limits of their financial capacities. This article does not constitute an investment .
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Yoann
Training engineer, I quickly became interested in the field of finance. Convinced that decentralized finance has a bright future ahead of it, I participate in its democratization by developing Crypternon.
