Introduction to Cryptocurrency

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Introduction to cryptocurrency

Cryptocurrency is a digital asset that sits on top of the blockchain system. Crypto assets can be used for internet-based transactions. Cryptocurrency uses cryptography and blockchain technology to verify every transaction so that neither party can do double-spending (i.e. spending the same asset twice in a digital world).

What is double-spending problem?

As you know, it is very easy to copy data in the digital world. When you email a file from your computer to your friend, you are essentially creating a copy of the file. One of the biggest challenge of creating electronic money is to ensure that the same money cannot be spent twice.

Before the invention of blockchain technology, we solve this problem by having a centralized entity (i.e. Banks and e-wallet players such as OVO) to perform debiting and crediting of accounts. Blockchain technology replaces the need of this centralized entity with distributed computers (miners) that can verify transactions independently, but also work together to form consensus / agreement on the latest transaction history on top of the blockchain..

Blockchain technology enables the creation of many new digital assets

Since the blockchain technology became the solution to the double-spending problem, many new digital assets have sprung up on the blockchain. For example; Bitcoin, Ethereum, and others.

Each of these assets can be traded & transacted globally and 24/7. The exchange rate of each asset is determined by the supply & demand of the trading market participants.

Let’s discuss some types of digital assets further:

Types of cryptocurrencies:

There are many cryptos circulating in the market, such as Bitcoin, Ethereum, Binance Coin, Tether, and so on. But broadly speaking, there are two types of crypto, namely native coins and tokens.

Native coin

Native coins can be mined like a metal commodity

The native coin is a digital asset/coin that was created simultaneously with the creation of a blockchain itself. For example, Bitcoin (BTC) is a native coin circulating on the Bitcoin blockchain, and Ether (ETH) is a native coin on top of the Ethereum blockchain.

In general, to increase the number of native coins in circulation, these native coins need to be “mined” like a metal commodity. In the crypto world, mining is the activity of validating, processing, and securing transactions in a decentralized manner. “Miners” who successfully carry out the process will receive a reward in the form of native coins from the blockchain system. Bitcoin blockchain miners will receive BTC, and Ethereum blockchain miners will receive ETH.

The value of a coin on the market is determined entirely by supply and demand. If more people use it (eg for investment or other means of exchange of value) more than what available in the market, then its value will increase.

On the contrary, if more coins are sold than buyers, the value will decrease.

All transactions on the blockchain require real coins as fees that are paid to miners. For example, if you want to send BTC on the bitcoin blockchain, you have to pay the miners a fee in BTC. If you transact on the Ethereum blockchain, you have to pay the miner’s ETH.

Token

Tokens are like securities in the digital world

In the crypto world, there are certain blockchains that allow programmers/developers to create applications (smart contracts) and new digital assets (tokens) on top of the blockchain. One of the most popular blockchains for developing applications and tokens is Ethereum.

Tokens are cryptos that are issued “hitchhike” as projects on other blockchain platforms (eg Ethereum). Tokens are issued for specific purposes and the amount can be adjusted by the token developer.

Tokens can be digital securities, stock representations (security tokens), or be used to provide access to a function (utility token) such as cellular pulses used to make calls.

One form of token application is the issuance of stablecoin. Stablecoins are issued as a form of digital representation of the original assets that support them. The original assets are kept by the developer.

Examples of stablecoin are:

  • Rupiah Token (IDRT) – a stablecoin worth 1 Rupiah.
  • Tether (USDT) / USD Coin (USDC) – **** stablecoin is worth 1 US Dollar.
  • Digix (DGX) – a stablecoin worth 1 gram of gold.

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Trading and investing in crypto assets is a high-risk activity. Past information does not reflect future performance. Historical performance, expected returns, and projected probabilities are provided for informational and illustration purposes. All decisions on trading crypto assets are independent decisions by the user.