Here is all you need to know about how cryptocurrencies work

this is how cryptocurrencies work – all you need to know.

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Jan Granroth

jan.granroth@trijo.co

It is easy to feel lost among the many cryptocurrencies and the influx of information is never-ending. This guide provides a good overview of some of the most fundamental aspects.

Navigating the crypto jungle is difficult, even for a tech savvy person, so it’s not strange if “commoners” have a feeling that the threshold to get in is too high. For someone who just has gotten an interest for bitcoin, the realization that there are thousands of other cryptocurrencies as well can be rather discouraging.

Hopefully, this will be remedied after having read this short guide. Note that crypto-related terms often lack clear definitions, which makes categorization and defining difficult.

Following bitcoin, uncountable other cryptocurrencies have appeared in a fast pace, and even though many are similar, there are a number of extremes on several scales distinguishing them from each other. This makes the spectrum for the usage and function of cryptocurrencies very wide.

A medium of exchange or function?

The perhaps biggest watershed is manifested by whether or not the purpose of the cryptocurrency is as a medium of exchange or function (utility). The purpose of bitcoin is of course, like conventional currencies, a medium of exchange. Store of value is also a purpose not to be forgotten and the scarcity of bitcoin has a deflationary effect, as opposed to conventional money, which can be produced in infinity.

The expression “utility token” refers to the coin being used for a certain function, and can often be thought of as a token exchangeable for goods or services produced by the issuer.

For example, binance coin, issued by the crypto exchange binance, can be classified as a utility coin since its owners get access to discounts on the binance platform.

Decentralization or not?

Advocators of crypto often mention decentralization as a great advantage with cryptocurrencies. It stands clear that centralization, the norm up until now, comes with risks since both data and power is concentrated to one place. Furthermore, it constitutes a counterparty risk due to the fact that the issuers have total power over any decisions.

On the other hand, decentralized cryptocurrencies, such as bitcoin, is not controlled by a central authority, but by consensus among the stakeholders. That means that the group mutually decides on the development of bitcoin through majority decisions.

Unfortunately, this is a time-consuming method and makes hard decisions difficult to take, as opposed to centralized currencies where the issuer keeps full control of the number of coins, their creation, and distribution.

How is bitcoin created and operated?

Most people have by now heard of “mining”, which is the method used for the creation and operation of bitcoin. This approach is called “proof of work” (PoW) and means that one, through mining, invests time and energy in order to create new coins and gain power in the decision-making process.

Since neither time nor energy can be obtained through hacking, this method is considered to safeguard against such. At the same time, this requires access to equipment and electricity, which is costly.

The “proof of stake” (PoS) method requires, instead of time and energy, a stake in the cryptocurrency in question. This stake renders a right to vote in decisions corresponding to the number of coins possessed, much like a-shares in a company do. In other words, no specific equipment or accomplishment is required as all depends on the size of your stake.

More methods upcoming

Aside from these methods, new ones are constantly being developed, with the latest perhaps being “proof of space”. Here the power distribution is based on how much space one allocates for the platform.

For example, this could be a system that gives you more power the more data storage space you let the platform dispose of.

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