Cryptocurrency: A 5 Minute Crash Course
Put plainly, cryptocurrency is internet money. Unlike traditional money, cryptocurrency is internet native — this means it exists on the internet by design. As you can imagine, internet money has a lot of exciting use cases. You can send money to your family in another country, you can make purchases online without a credit card, and most excitingly, you can manage all kinds of unique financial assets without the need for a bank!
Want to leverage your assets to generate new money in the form of a loan? Want to purchase equity based in countries around the globe? Want to provide liquidity to cryptocurrency exchanges and earn upwards of 30% annual interest on your deposit? Want to play videogames and sell the items you earn for real money? Want to own the world’s first internet bond? All of this is possible and more with cryptocurrency.
You’ve probably heard of the underlying technology that makes cryptocurrency possible — blockchain. Cryptocurrency and blockchain have a symbiotic relationship. Blockchain makes it possible to track and verify value on the internet, and cryptocurrency is required to keep the blockchain secure. These two terms are often confused because they are so intimately intertwined — neither can exist without the other. To add to the confusion, both Bitcoin the blockchain and bitcoin the cryptocurrency share the name (the only difference is the capitalization). This differs on the Ethereum blockchain where the central cryptocurrency is known as ether.
It can be difficult to grasp all of the various benefits of blockchain and cryptocurrency. A short and simple list would look something like this:
- Decentralized. Control belongs to no single person or group, instead governed by distributed communities of many thousands of users, maybe even you!
- Algorithmic. Supply of new tokens is controlled and distributed evenly amongst many miners & validators.
- Convenient. Extremely cheap and fast transactions are possible.
- Borderless. Send money anywhere, bring it with you anywhere.
- Secure. Bitcoin and Ethereum protocols have never been directly hacked.
- Programmatic. Money can be embedded into software in ways never before possible, these programs are called smart contracts.
- Trustless. Allows direct interaction with other users without the need for middlemen to broker the deal.
(Note: Not all blockchains are created equally. These points are true for Bitcoin, Ethereum and a few others.)
The three primary characteristics of blockchains are:
- Security
- Decentralization
- Transactional Throughput (Scalability)
It is impossible for any single blockchain to achieve perfect scores in all three of these categories at the same time. Trade-offs must be made. Blockchains that prioritize scalability must make sacrifices to either decentralization or security, or both. Security and decentralization are both incredibly important for a blockchain to succeed, which is why the most successful blockchains tend to have lower transactional throughput — They have sacrificed some scalability for vital security and decentralization.
There are hundreds of potential use cases for a blockchain, and each use case requires a different combination of these three primary characteristics. You can have one blockchain that is designed for quick, cheap transactions, while another is designed to be an ultra secure store-of-value. Since these two use-cases require separate blockchains, they must also have separate cryptocurrencies. Because there are so many use-cases for blockchains, there must be many blockchains, and since there are many blockchains, there must be many cryptocurrencies.
To get started learning about the individual blockchains, I always recommend starting with the big players — Bitcoin and Ethereum. These two blockchains together cover about 80% of possible use-cases, they are battle tested and well ahead of other projects in terms of adoption. The descriptions from their respective websites are:
Bitcoin
Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part. Through many of its unique properties, Bitcoin allows exciting uses that could not be covered by any previous payment system.
Ethereum
Ethereum is open access to digital money and data-friendly services for everyone — no matter your background or location. It’s a community-built technology behind the cryptocurrency ether (ETH) and thousands of applications you can use today.
In addition to the main type of cryptocurrencies, the kind that are designed to secure blockchains (like bitcoin and ether), there is another type — Tokens. Tokens exist within a smart contract enabled blockchain ecosystem. In other words, an Ethereum token lives on the Ethereum blockchain, but is not ether. Instead, tokens are designed to represent any type of value — anything from financial instruments like stocks or bonds, to paintings and video game items. Having these items tokenized on a blockchain like Ethereum enable them to be moved and exchanged as freely and securely as any cryptocurrency.
There is a unique type of token that is worth mentioning, called stablecoins. Stablecoins are tokens that are specially designed to remain stable in price. Typically, stablecoins are pegged to the price of a local currency, such as the US Dollar, but they can be pegged to the value of anything. A notable stablecoin issued on Ethereum is known as Dai.
As you can see, cryptocurrency is a broad definition, which is why it is often difficult to put your finger on. Hopefully, this article has helped you conceptualize the general meaning of the word and provided you with some good examples. If you enjoyed this explanation, please follow our channel — we are dedicated to continue providing high quality, high level information about the many intricacies of the cryptocurrency ecosystem. If you’re interested in how we can help you succeed even further, we encourage you to check out the Ethereum Index. The Ethereum Index is an index fund that seeks to provide investment results that correspond generally to the price and yield performance of the greater Ethereum ecosystem. The Ethereum Index intends to hold tokens from projects involved in decentralized finance, on-chain oracles, and algorithmic stablecoin issuance. Invest today!
The Ethereum Index is built on Enzyme Finance. Enzyme is a decentralized asset management infrastructure built on Ethereum. It allows asset managers to build on-chain investment products that utilize and allocate to the newest innovations in decentralized finance. Because all transactions occur on the Ethereum blockchain, compliance, accounting, and investor management services are rendered programatically and at a dramatically-reduced cost to their traditional finance counterparts.
