Bitcoin, the first cryptocurrency to register its presence in the digital world, celebrated its 13th birthday this year. Since the advent of Bitcoin, the crypto market has witnessed the birth of thousands of cryptocurrencies with varied use cases and utilities.
There are more than 300 million cryptocurrency users globally, and the number is expected to grow further. As the relevance and acceptance grow around these digital assets, it becomes more significant to understand the fundamentals underlying these innovative assets. So let’s explore what cryptocurrencies are, their kinds, and their use cases in this article.
What is Cryptocurrency?
Cryptocurrency is any digital or virtual currency that uses a combination of cryptography, decentralization, and consensus mechanisms to secure transactions. To put it simply, cryptocurrency is a decentralized digital currency designed to be used over the internet directly by users without the need for any intermediary. The term ‘crypto’ refers to the encryption algorithms and cryptographic techniques used to protect these entries. These include public-private key pairs, hashing functions, etc.
The blockchain technology that underpins cryptocurrency is a distributed ledger shared over a network of computers. The fact that cryptocurrencies are generally not issued by any central authority makes them theoretically immune to government censorship or manipulation. The entire transaction history concerning cryptocurrencies is stored on the distributed ledger we know as blockchain. Once recorded, the data cannot be changed, making the transaction history transparent, secure, immutable, and entirely traceable. Cryptocurrencies are stored in digital wallets.
Types of Cryptocurrencies
There are over 19,000 cryptocurrencies around the world. However, they are divided into the following categories:
Bitcoin is the world’s most popular and largest cryptocurrency. It is intended to function as a peer-to-peer medium of exchange and a form of digital money independent of any single person, group, or entity, thereby eliminating the need for third-party involvement in financial transactions.
Altcoins, also known as alternative coins, are all cryptocurrencies other than Bitcoin (BTC). Ethereum is the largest altcoin in terms of market cap. The majority of altcoins, though based on Bitcoin, perform distinct functions and solve use cases.
Crypto tokens are units of value created by blockchain-based projects on top of existing blockchain networks. Even though crypto tokens share deep compatibility with the cryptocurrency of the blockchain on which they are built, both tokens and cryptocurrencies are two different classes of assets. For instance, Ethereum hosts thousands of platforms like Cryptokitties, Dai, Chainlink, Compound, etc., which have their native token.
Tokens can be created using several token standards; however, ERC-20 is the most popular token standard. These tokens serve various uses related to the platform for which they are created, such as for Defi services, using platform-specific services, etc.
A stablecoin is a cryptocurrency whose value is tied to less volatile real-world assets like precious metals or fiat currencies. Stablecoins are most commonly pegged to fiat currencies like the US dollar or Euro in a 1: 1 ratio. Examples of stablecoins include Tether (USDT), Dai (DAI), USD Coin (USDC), etc. Stablecoins like Pax Gold (PAXG), Tether Gold, etc., are pegged to gold.
Memecoins are cryptocurrencies inspired by internet memes and jokes. Dogecoin (DOGE), the most popular memecoin, was inspired by the Doge meme, which was inspired by a viral Shiba Inu meme. Meme coins operate in the same way as any other cryptocurrency, taking full advantage of blockchain and related technology; however, they aren’t backed by any fundamental use cases.
These joke cryptos are mostly community-driven, and their success rides high on social media marketing and influencer hype. Some other memecoins include Shiba Inu (SHIB), Safemoon (SFM), Baby Doge (BABYDOGE), etc.
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Use Cases of Cryptocurrencies
Online Payment and Digital Transactions
Cryptocurrencies will play an important role in the digital economy in the coming web3 era of the internet. The decentralized nature of crypto, combined with low transaction costs, privacy, and security, has enticed a new generation of investors, entrepreneurs, and tech enthusiasts to join the crypto bandwagon daily.
Payments can be made using cryptocurrencies on any e-commerce site or merchants that accept cryptocurrencies. All you need is a crypto wallet to make such transactions. Over 15,000 merchants around the world accept Bitcoin with Starbucks, Tesla, McDonald’s, Visa, Mastercard, Pepsi, etc., to name a few who allow their customers to use cryptocurrency as a valid payment method.
The rapidly expanding crypto finance market is entering into traditional banking functions such as lending, borrowing, and crowdfunding. Crypto banks offer interest-bearing accounts, term deposits, credit cards, collateralized loans backed by crypto asset deposits, and other services similar to traditional banks’ offerings, albeit at much higher interest rates / accounts.
Banking titans such as Goldman Sachs, JP Morgan, and Barclays have already tailored their services to manage digital currencies. They provide services such as crypto interest accounts and savings accounts.
Store of Value
Cryptocurrency is a store of value because it can store and transfer value over time and space. For example, Bitcoin is frequently referred to as ‘digital gold.’ Civilians in Ukraine and Russia have been exchanging domestic currency for Bitcoin and other cryptocurrencies to hedge against the war’s rapid inflation. Bitcoin, given its phenomenal ascent, has the potential to dethrone gold and oil as the preeminent store of value. It is even expected that BTC will take the market share away from gold in the coming years.
Cryptocurrencies have made it possible to tokenize physical assets and link them to digital tokens. Copyrights, real estate, art, stocks, and commodities can all be tokenized and represented as cryptocurrency tokens. Asset-backed tokens have intrinsic value that is directly connected to the underlying physical asset.
Asset tokenization increases the market liquidity of real-world assets like real estate. The digitization of assets also allows previously excluded investors to explore the market. For instance, a Zurich-based crypto bank transformed Picasso’s 1964 masterpiece Fillette au beret into 4,000 tokens to sell to over 50 investors.
Crypto Gaming and Governance
Cryptocurrency and gaming are proving to be a winning combination in the current era of play-to-earn NFT-based games. Cryptocurrencies are being used to refine the way policies are governed in online gaming platforms, private organizations, and clubs.
These platforms use the concept of decentralized autonomous organizations (DAOs) and governance tokens to pioneer the concept of on-chain governance. For instance, MetaBrewSociety allows its NFT holders to partake in the governance of its physical breweries via a DAO.
On-chain governance is a system for managing and implementing cryptocurrency blockchain changes. Popular governance tokens include AXS (Axie Infinity), SAND (Sandbox), and others. As more people play play-to-earn (P2E) games on such platforms, crypto gaming platforms will emerge as potential income sources for many people.
The above list of use cases isn’t exhaustive as cryptocurrency platforms, and their utilities are vast and still expanding at a great pace as cryptocurrencies continue to percolate industries and sectors around the world. Cryptocurrencies aren’t just payment networks or digital money; they are a hybrid innovation that the world needs to embrace to continue on its path toward digitization and development.
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