What is digital currency? [Types, uses and benefits of cryptocurrencies]
- What is digital currency and what is its use?
- How is digital currency mined?
- What are the advantages and disadvantages of buying cryptocurrencies?
- What is the most famous digital currency?
The increase in the number of investors in the field of cryptocurrency has led to daily fluctuations in the price of digital currencies. Cryptocurrency is a special form of digital money that is based on encryption technology. Most digital currencies use blockchain to benefit from basic features such as decentralization, transparency, and immutability. In order to fully familiarize yourself with these concepts, we suggest you to participate in the digital currency course of Rahvard Academy.
The decentralized nature of digital currencies means that no single entity, group or organization oversees them. Cryptocurrencies can be directly transferred to another person without the need to open a bank account, use the services of banks or any other intermediary organization on the Internet.
Cryptocurrencies are currencies that are created and distributed by various mechanisms. The production process of some digital currencies such as Bitcoin is done by mining, and for a number of others, all the coins are already mined in the network.
Before entering the field of cryptocurrencies, digital currency education is necessary. Because the range of price fluctuations of digital currencies during the day is unlimited, activity in this field without acquiring sufficient knowledge can lead to severe financial losses for traders in this field.
The use of digital currencies is only in online areas and on the Internet, and they do not have a physical nature. Its goal is to create open source and decentralized currencies that can be used around the world.
The history of cryptocurrencies
The science of cryptography was used for the first time in World War II to transmit military messages, but gradually this cryptography was also used in other fields. American scientist David Chaum used the term digital currency for the first time, and after that, experts paid more attention to this concept.
How are cryptocurrencies different from regular money?
Some unique features of digital currencies have made them different from ordinary money. Of course, all these features are not present in all digital currencies, and exceptions can also be observed.
The first feature of digital currencies is the irreversibility of transactions. If you make a digital currency transfer and your transaction is confirmed, you cannot reverse it, and this is only possible if the recipient is willing to do so. But if you have mistakenly transferred money to another personal account, you can eventually get it back through legal proceedings.
The second unique feature of digital currencies is their anonymity. Digital currency wallet addresses, which have the same role as card numbers or account numbers in bank accounts, do not include your identity information. These addresses, which consist of strings of letters and numbers, can be linked to the identity of people only by checking the history of transactions and deep analysis.
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Types of digital currencies
Digital currencies are divided into two categories: Bitcoin and Altcoin.
Bitcoin
Bitcoin is the first digital currency that was developed in 2009 by a person named Satoshi Nakamoto, whose identity has not yet been determined, and today it is known as the king of digital currencies.
Altcoin
All the digital currencies that emerged after Bitcoin are called altcoins. But altcoins are also divided into two parts “token” and “coin”.
Coin: Coins are actually divided into two parts; The first part of coins that are a fork of Bitcoin and operate on the Bitcoin blockchain platform. Such as Dogecoin, Bitcoin Cash and Litecoin. The second part, coins that have their own blockchain. Like Ethereum and Monero.
Token: Token: Tokens do not have their own blockchain and are developed on the platform of other blockchains, such as Ethereum. Tokens are divided into two categories: NFT and NFT. Some tokens are published on their own blockchain after they are expanded and completed on the blockchain.
The most important digital currencies
Bitcoin
Bitcoin is a type of digital currency that became famous and flourished when the price of Bitcoin reached 13 thousand dollars in early 2018.
Bitcoin was a combination of creativity, overcoming legal barriers and eliminating middlemen in various financial and banking affairs that made financial transactions possible on an international level. Because of this, he was able to attract a lot of attention to himself in a short period of time.
Ethereum
Ethereum is the second generation of digital currencies. This fresh currency was created with the aim of making processes smarter and creating a space for running decentralized and automated programs. Ethereum entered the field of digital currencies on July 30, 2015 under the leadership of a 23-year-old Russian named “Vitalik Buterin”. The price of Ethereum can be seen on the Rahvard website.
Tether
Tether digital currency with the abbreviation USDT is a stablecoin. The price of Tether is always fixed. The value of Tether is always dependent on the price of the US dollar. One of the main uses of Tether is its convenient transfer between exchanges and wallets. This cryptocurrency also protects your assets from the volatility of the digital currency market.
Tron
Tron digital currency with the abbreviation TRX is the internal currency of the Tron blockchain. This digital currency is a blockchain-based decentralized platform that aims to create a global network of free content sharing in the field of entertainment. Tron’s official digital currency is called Tronix.
Tron uses blockchain technology as a platform to develop the global market, which includes the world of entertainment, media and all kinds of content. This means that the current central organizations of the Internet (which also act as intermediaries for creators) are left out of this loop.
Dogecoin
By looking at the price of Dogecoin with the abbreviation DOGE and the current price of 0.53 cents, you can see that this digital currency is ranked fifth in the cryptocurrency market. This digital currency was created in late 2013 by Billy Marcus of IBM and Jackson Palmer of Adobe with the aim of creating a peer-to-peer cryptocurrency for transferring assets.
Maybe at the beginning of the work, no one expected this cryptocurrency to be known, but some well-known people such as Elon Musk brought it up more and more day by day with their support for this cryptocurrency.
The reason for the popularity of digital currencies
Digital currencies quickly gained popularity among people due to their volatile market, the technology used in them, as well as their libertarian ideas. Due to their newness, the market of digital currencies has a lot of fluctuations and the price of one of them may grow by hundreds of percent or fall by tens of percent in one day.
The technology used in digital currencies by applying the science of cryptography, which is based on mathematics, removes the possibility of fraud from people and encourages payment systems to be honest. In addition, the libertarian aspect and the elimination of middlemen have made people who were skeptical of traditional financial systems also lean towards digital currencies.
Applications of digital currency
Online purchases using cryptocurrencies
At the beginning, the purpose of cryptocurrencies was to facilitate internet payments and these currencies were used in financial transactions like real money. Currently, many of the world’s major websites, mobile applications, online shops and reputable stores have added the possibility of buying and selling online with digital currencies to their payment methods.
The possibility of trading with digital currencies internationally
One of the most important features of digital currencies is their international recognition. Since these currencies do not belong to specific countries, they are recognized as an internationally convertible currency that makes it possible to conduct financial transactions using cryptocurrencies from anywhere in the world.
Facilitate heavy transactions using cryptocurrencies
Cryptocurrencies, unlike real money, have no external existence and because they are not based on physical money, they are the best choice for high-value transactions and large amounts of money. In many heavy transactions where the cost of moving physical money is high, digital currencies can easily replace physical money.
Investing with cryptocurrencies
Everyone is looking for different and new ways to invest. Today, various digital currencies are used in the world, and the investors’ acceptance of this financial market and the entry of huge amounts of money into this financial market have made it attractive for retail investors. Also, the increase in the number of investors in this financial market has led to daily fluctuations in the value of cryptocurrencies.
Bypassing sanctions using cryptocurrencies
One of the most important uses of digital currency is to bypass sanctions. Cryptocurrencies can be a factor in circumventing sanctions for any country around the world.
How is digital currency produced and mined?
The steps of the digital currency extraction process are as follows:
Step 1: A user makes a transaction through the cryptocurrencies in his wallet and tries to send the desired digital currency or token to another person.
Step 2: This transaction is broadcast through the wallet program and at that moment it waits to be selected by a miner on this blockchain. This transaction remains pending in the “Unconfirmed Transaction Pool” until the miner chooses it.
Step 3: Miners in the network select transactions from these pools and make them into a “block”. A block basically contains a set of transactions plus some other additional information such as digital signature, timer, etc.
Each miner creates its own block of transactions, and multiple miners can choose the same transaction to be included in their block.
Step 4: Miners create a block of transactions by selecting transactions and adding them to their block. They need a signature in the blockchain to add this block of transactions. This signature, which is also called proof of work, is created by solving a very complex mathematical problem and is unique for each block of transactions. Each block has a different math problem.
Therefore, each miner will work on a different problem specific to his block. Solving each of these problems is so difficult that it requires high computing power and a lot of electricity. This process is called mining.
Step 5: In the next step of digital currency mining, we must say that the miner who can find the first qualified signature for his block will publish this block and its signature to other miners.
Step 6: Other miners must now verify the validity of the signature using the broadcast block data and check whether the output hash matches the existing signature or not. If it matches, other miners verify its validity and this block can be added to the blockchain and sent to all other nodes in the network.
Other nodes also accept this block and store it in their transaction data as long as the transactions in the block correctly match the current wallet balances at that point in time.
Step 7: After a block is added to the chain, every other block that is added after that is considered “confirmation” for that block. The reason it’s called confirmation is that every time another block is added after that, the blockchain will completely agree on the transaction history again.
The more confirmations your transaction gets, the harder it will be for hackers to change it. After a new block is added to the blockchain, all miners must start again from the third step and form a new block of transactions.
How does digital currency work?
Digital currencies came about as a side invention while working on the digital money project. This project sought to produce a method through which financial exchange and transactions would be possible in digital platforms, but this system was a centralized system. While Bitcoin and other types of digital currency can be used in a completely decentralized platform.
One of the advantages of the decentralized system and network is that all transactions in the blockchain platform and the network in which cryptocurrencies are exchanged are like a very large accounting ledger. In this big ledger, all transactions made by users are completely recorded in the network and everyone is informed about it.
In this case, it will not be possible to change the information registered in the system and manipulate them. Every new transaction that is going to be registered in the system must be approved by all users who are known as nodes or nodes in the blockchain network and similar networks.
Advantages of buying cryptocurrencies
- Ease of transactions
- High security and no possibility of fraud
- The impossibility of repeated transactions
- High price compared to physical currencies
- Not included in the tax
- Unclear identity of buyer and seller
- The possibility of making transactions all over the world
- Ease of transferring money with high volumes
Disadvantages of buying cryptocurrencies
- It is not possible to restore the password in case of forgetting
- The need to protect the account and wallet
- The high price volatility of digital currencies
- It is not possible to recover money deposited by mistake to another account
- Cryptocurrency trading is prohibited in some countries
Distinguishing features of cryptocurrencies
- being digital
- Decentralization
- Person to person exchange
- Preservation of identity and anonymity
- Reducing the cost and increasing the speed of transactions
- Simplicity and transparency of transactions
- Help control swelling
- Facilitating the globalization of businesses
Conclusion
Cryptocurrencies are designed encrypted protocols and the purpose of their mining is to reduce fraud and prevent forgery and fraud. Due to the high security of cryptocurrencies, wide applications and their high price fluctuation during the day, if a person is familiar with the topic of cryptocurrency, he will be able to earn high profits by investing in this field.
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