We explain cryptocurrencies and digital assets in detail. We recommend reading our post on blockchains before diving into this one because cryptocurrencies leverage blockchain technology.
Cryptocurrencies haven’t been around for long, but they are already revolutionizing the way we invest and transact. Cryptocurrencies are powered by blockchain technology and transactions are transparent and immutable. They provide easy access to a variety of products and services.
What are cryptocurrencies exactly?
Cryptocurrencies are internet-based mediums of exchange. They can be traded directly between two parties without the need for a traditional financial institution to act as an intermediary. Cryptographic functions are used to conduct transactions, ensuring that they are safe. Think of cryptocurrencies as digital money for investing, trading, and transacting.
There are two major types of cryptocurrencies:
1. Native blockchain payment currency
These cryptocurrencies are used to transact on specific blockchains, such as Bitcoin and Ethereum. You need a cryptocurrency to enter into a transaction on its native blockchain. Think of it as the fuel required to drive a car. Without the fuel – the native cryptocurrency – you won’t be able to drive, meaning take part in a transaction on that particular blockchain. Some wallets, including the Linen App Wallet, pay for its members’ transactions on a blockchain.
2. Digital assets
Digital assets are the digital representation of financial assets, such as stocks, payment streams, stablecoins (digital dollars), and even video game assets. Anything recorded onto a blockchain can be used as a digital asset. However, digital assets can be issued on multiple blockchains. While blockchains operate independently, they are capable of interoperating.
The number of cryptocurrencies and digital assets is rising. According to CoinMarketCap, there are over 5,000 different cryptocurrencies and digital assets currently.
Ethereum and Bitcoin lead by market capitalization
Ether (ticker: ETH) is the native cryptocurrency of the Ethereum blockchain, while Bitcoin (ticker: BTC) is native to the Bitcoin blockchain. Both are the two most widely used cryptocurrencies and the largest by market capitalization. Ether is widely used in DeFi because the majority of DeFi activities happen on the Ethereum blockchain.
USDC and DAI are crucial in DeFi
USDC and DAI are the two most used digital dollars in DeFi. USDC is a type of cryptocurrency called “stablecoin” and is backed by U.S. dollars. DAI, on the other hand, is the world’s first unbiased currency and the leading decentralized stablecoin soft-pegged to the U.S. dollar.
Cryptocurrencies and digital assets are stored in wallets
Cryptocurrencies can be accessed through secure wallets, mostly in mobile apps or hardware devices. The wallets are protected by mathematical cryptography keys. Every wallet has a public and private key. The public key is visible and accessible to all, while the private key is tied to a personal wallet and not accessible to anyone but the owner of the wallet. The public and private keys are used together to validate a transaction.
What can be done with cryptocurrencies?
You can use cryptocurrency for almost anything. While cryptocurrencies aren’t as widely accepted as credit cards, plenty of product and service providers accept them. Common applications of cryptocurrency:
1. Buy and sell
You can buy and sell cryptocurrency, just like you can buy and sell shares of stock in a company – if you believe that it is a sound investment and you can make money on it. This can be risky, however, because cryptocurrency prices tend to be volatile, unless it is a stablecoin (digital dollar), and can rise and fall drastically.
2. Send to others directly
You can send cryptocurrencies to anyone who has a cryptocurrency wallet. You can also receive cryptocurrency in your own wallet. For example, you could send some Bitcoin or Ether to someone as a gift or pay someone using stablecoin USDC. Some people choose to donate Bitcoin to charity, which may be tax-deductible.
3. Deposit to liquidity pools
You can choose to deposit cryptocurrency – your digital dollars – into a liquidity pool like Compound. You have the ability to earn yield on the assets you deposit. People draw liquidity from the collective pool and return it with interest. This interest is often higher than that of traditional investment assets, such as bonds or loans.
Just like with regular money, you can borrow cryptocurrency. Borrowing cryptocurrency is the same as borrowing dollars. You are required to repay the borrowed sum plus interest. The interest rate depends on the platform.
5. Trade for another cryptocurrency
It’s possible to trade one cryptocurrency for another. Speculators may want to trade because they think one cryptocurrency is undervalued and the other is overvalued, much like speculating on foreign currencies.
Many retailers, merchants, and service providers accept cryptocurrency. For example, you can use cryptocurrency to make purchases at retailers like Newegg, Overstock, and Microsoft. Also, you can dine at restaurants that accept cryptocurrencies.
Cryptocurrency has had more than its fair share of ups and downs over the years. If you follow the news, you know that the prices of major cryptocurrencies like Bitcoin have fluctuated wildly. Despite the turbulence, the sector is going strong with novel financial applications and products being built using cryptocurrencies. In fact, it’s becoming increasingly stable, especially when looking at the different applications where stablecoins (digital dollars) are used. We expect crypto to continue to grow and be a major influence on how we use our money in the next few years.
The next post will be about self-custody wallets, a feature of Linen App.