Getting a full understanding of cryptocurrencies can be an extremely arduous task, especially since the underlying technology that births digital currencies – the Blockchain – is shrouded in computing language and technical terminologies. This is a huge barrier to many who are interested in the cryptocurrencies. But do not worry! This article will guide you in understanding fundamental concepts of cryptocurrency that is essential for you to know.
Cryptocurrencies are virtual or digital currencies that are encrypted or secured using cryptography. Cryptography is simply the use of encryption procedures to verify and secure the transfer of transactions. Bitcoin is the first decentralized cryptocurrency, which is run by a public ledger that registers and validates all transactions in a chronological order called the Blockchain.
Even though many digital currencies have existed before Bitcoin, it’s invention marks an essential milestone in the world of cryptocurrencies, due to its decentralized nature.
Coins vs. Tokens: Categorization of Cryptocurrencies
It is essential to know that all coins or tokens are considered cryptocurrencies, despite the fact that most of the digital coins do not operate as a medium of exchange or currency. The term cryptocurrency is a wrong name since, technically, a currency is a store of value and a medium of exchange. All these qualities are common to Bitcoin, and since Bitcoin’s creation kick-started the cryptocurrency space, any other coins created after Bitcoin have been called a cryptocurrecny, though most do not fulfill the characteristics to be called such.
The most common categories of cryptocurrencies are: Alternative Cryptocurrency Coins (Altcoins), and Tokens
Altcoins (Alternative cryptocurrency coins) or simply “coins” refers merely to coins that serve an alternative to Bitcoin. Most altcoins are a modification of Bitcoin, developed using the open-sourced, innovative protocol of Bitcoin with some adjustments to its underlying codes, therefore creating an utterly new coin with a distinctive set of features.
Other altcoins aren’t derived from Bitcoin’s open-source protocol. Instead, they have created their protocol and Blockchain that supports their native currency. Examples of these coins include Ethereum, Omni, Ripple, Nxt, Waves, and Counterparty.
A feature common to all altcoins is that each of them has an independent blockchain, in which transactions regarding their original coins occur.
A token is a representation of a certain utility or asset, which usually stays on top of another blockchain. Tokens can represent any assets that are tradeable and fungible, from stocks to loyalty points to even other digital currencies.
Generating tokens is a much more comfortable process as you do not have to alter the codes from a specific protocol or create a blockchain from the beginning. All you have to do is follow a model template on the blockchain. This process of creating your tokens is achieved through the use of smart contracts, which are self-executing programmable computer codes that do not need any third-parties to operate.
Tokens are generated and distributed to the public via an ICO (Initial Coin Offering), which is a way of raising funds, through the release of a new digital currency or token to fund the advancement of the project.