Types of Cryptocurrency
The word ‘cryptocurrency’ refers to virtual or digital money. ‘Crypto’ has to do with the complex cryptography upon which the creation and functioning of this currency depends. Cryptocurrency is a relatively new idea. However, in the last few years, it has become increasingly popular and has attracted the world’s attention. It is gradually being legalized and accepted in a few countries. Thousands of cryptocurrencies have been invented. Listed below are five of the most popular options.
Bitcoin is the oldest and the most widely-used cryptocurrency. It was introduced in 2009 by a person, or a group of people, who use the pseudonym ‘Satoshi Nakatomo’. Bitcoin is a public decentralized cryptocurrency. ‘Decentralized’ means that there are no ‘middlemen’, such as the Government, banks or large companies, involved in a transaction.
Bitcoin functions using ‘blockchain technology’. A simplistic overview of blockchain is that it is a digital ledger, which keeps a record of every transaction. Each blockchain consists of thousands of nodes, which perform complicated mathematical calculations and create cryptographic codes for each proceeding. The entire network of the nodes needs to approve the transaction. It is virtually impossible for hackers to find the complicated cryptographic code, counterfeit money or double spend. This is named the proof-of-work (PoW) mechanism and it is the reason why bitcoin is so secure. However, one of the main criticisms of PoW is that it requires an enormous amount of electricity to function and is, therefore, not environmentally friendly.
Bitcoin’s technology has laid the foundation for all other cryptocurrencies.
Ethereum launched its software in 2015. Like Bitcoin, it is a decentralized public currency and uses Blockchain technology. Ethereum uses tokens, called Ether, which are mined using the proof-of-work mechanism. However, in 2022, Ethereum plans to change its system to ‘proof-of-stake’. Using this method, users are required to stake their Ether in order to become validators. ‘Validators’ are the people who order transactions and create the blocks for the blockchain system to operate. Consequently, less computational work and therefore, less electricity is needed for the system to function. This makes it more energy-efficient and environmentally friendly.
In its present state, the main difference between Bitcoin and Ethereum is that Ethereum was originally made not to be a cryptocurrency but to be a free market. Users and developers can build decentralized apps as well as make financial contracts on this platform.
Tether (USDT) is the third-largest cryptocurrency in the world, based on its market value. It was launched in 2014 as ‘RealCoin’. Unlike Bitcoin and Ether, tether tokens are stablecoins. This is a digital currency that is directly ‘tethered’ or bound to an already-existing physical asset. USDT holds the same value as US Dollars. This means that 1 USD = 1 USDT. This also implies that changing other fiat currencies to USDT is equivalent to changing them to US Dollars. For example, as of 9th January 2022, 1 USDT= 74.27 Indian rupees.
Tether exists on several different blockchains such as Bitcoin (the Omniversion) and Ethereum (ERC20). This is not to be confused with the companies’ currencies themselves.
An advantage of Tether is that its value is unaffected by the changes in the investment in cryptocurrencies. Therefore, it is ‘stable’. Investors tend to be appealed by this stability.
However, Tether is facing a massive controversy, due to issues with price manipulation, privacy and liquidity. It was also hacked in November 2017 and almost $31 Million was stolen.
Cardano launched its cryptocurrency, ADA, in 2017. Like the cryptocurrencies mentioned before, Cardano’s blockchain is decentralized, public and open source. This platform uses Ouroboros, which is the first blockchain protocol that was founded using peer-reviewed research. Interestingly, it was also the first verifiably safe proof-of-stake protocol. This method uses technology and techniques that are mathematically proved, that also use behavioural psychology and economic philosophy to ensure maximum security on the blockchain.
Monero, launched in 2014, is an ‘untraceable’ cryptocurrency. This is the feature that distinguishes it from the other types. Currencies such as Bitcoin do not provide ‘anonymity’. Instead, they provide ‘pseudonymity’. The ledger can reveal information such as the addresses of senders and receivers as well as the money being transacted, making transactions ‘traceable’.
Although Bitcoin is extremely secure, Monero’s privacy techniques are more advanced. Monero’s software provides complete anonymity. The transactions performed on the software are anonymous for the network members, miners as well as developers. However, cryptocurrencies such as Monero are coming under scrutiny, especially by countries’ governments due to worries about potential criminal activity that may take place on this software, and be unidentifiable.
Written by Ishana Kandhari Illustrated by Rishita Banerjee
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