Learn about cryptocurrencies from a web3 developer. Clear your doubts and understand how to use them in this informative article.
Cryptocurrencies are digital assets that use decentralized technology to operate. They can be used as a medium of exchange and are stored in wallets using secret phrases. There are many different cryptocurrencies with varying characteristics and purposes. They operate on different blockchain ecosystems and cannot be easily transferred between them. It is impossible to make a general judgment about all cryptocurrencies because of the diversity of the different coins.
What are crypto coins?
Crypto coins are digital assets that can be used as a medium of exchange, similarly to a traditional currency. Unlike conventional money however, crypto coins are decentralised, meaning that the transactions take place directly between two users without the need for a third party such as a bank or government. Crypto coins are powered by a network of computers and are part of a larger concept known as distributed ledger technology, or blockchain.
The main advantage of crypto coins is that they are extremely secure due to the distributed ledger technology. Transactions occur directly between those involved, without intermediaries, which means you don't have to rely on a bank or a state to be able to send or trade money. You may not be familiar with the distributed ledger technology, but it is basically the way the blockchain works, because yes, these cryotocurrencies work on all types of blockchains. To make it easier to understand we will focus on the Ethereum blockchain, as it is where I have more experience as a web3 developer and the blockchain I like to work with the most. Before adding more concepts let's look at some key points with examples to better understand cryptocurrencies:
- Crypto coins do not need an intermediary to execute transactions, but they do need an environment where to execute such transactions, this environment is the blockchains (a network of computers), one of the blockchain with more cryptocurrency ecosystem is Ethereum.
- Crypto coins cannot move from one ecosystem to another (except in certain cases that we will see later), they cannot migrate from a blockchain with one type of ecosystem to another with a different ecosystem. If you have Bitcoins for example, you will not be able to move these cryptocurrencies to the Ethereum ecosystem, and if you have $DAI, $UNI, or $AAVE (cryptocurrencies of the Ethereum ecosystem) you will not be able to move them to bitcoin blockchain.
- The value of these cryptocurrencies depends on the value of the blockchain under which they are originally held, the logic under the coin, the project behind or the value at which it is pegged. For example, the $DAI crypto coin is a transparent and audited stablecoin, which is pegged to the U.S. dollar by its smartcontract logic, This means that 1 $DAI will always be 1 $DOLLAR, without the need for a third party (a company, a state or an investment fund), since it is the smartcontract itself that ensures that this is the case.
- Crypto coins, just like regular coins, exist inside wallets, these wallets are compatible with multiple blockchain ecosystems. To use cryptocurrencies from the Ethereum blockchain we can find different 'brands' of compatible wallets, the most popular is Metamask, although, we can find a lot of flavors like: Ledger, Trust and my favorite one Rainbow 🌈
- Cryptocurrencies are the sole property of whoever owns the wallet that contains them, which means that any coin that is not inside a wallet you own is simply not yours. The way to obtain absolute ownership of a wallet is to have its secret phrase, only the owner must know this phrase and absolutely no one else, because if someone gets the phrase that is used as a key to the wallet, this person would also be the owner of the wallet.
In conclusion, cryptocurrencies are digital assets that use blockchain technology to operate, this decentralised technology allows us to have hundreds of crypto-coins with different characteristics, advantages and disadvantages. This is why, when we talk about cryptocurrencies , it is impossible to make a general judgement in favour or against them, since the truth is that there are different crypto-coins, each one with its particular properties and therefore, the criteria for judging them can be completely different from one crypto-coin to another.
Why are there so many crypto coins?
There are many cryptocurrencies, or "crypto coins," because they serve a variety of different purposes and use cases. Some cryptocurrencies, like Bitcoin, were designed as digital currencies to be used as a store of value and a means of exchange. Others, like Ethereum, were designed to be platforms for building decentralized applications.
In the case of the Ethereum blockchain for example, it works particularly well for creating new cryptocurrencies, as it allows the creation and execution of the ERC-20 standard; this standard is only the code fragment (smartcontract) that is responsible for defining and executing the cryptocurrency created (coin name, token, amount, functionalities or limitations).
Since Ethereum has one of the most audited and used standards to create cryptocurrencies, this makes the Ethereum blockchain and Ether (Ethereum's base cryptocurrency), the favorite tools for developers and teams around the world to carry out web3 projects, hence there are so many types of currencies, giving birth to $DAI, $USDC, $USDT or $APECOIN. With this in mind we should know that other blockchains also have their own standards for creating their currencies, which means that there will also be other types of currencies within other blockchains apart from their cryptocurrency base.
Having a variety of cryptocurrencies provides people with flexibility and choice, which is why it is important to have a mix of different types of cryptocurrency in your portfolio. Different coins may have different features, and some may be more suitable for certain goals than others. That's why it's important to do your research and understand the different coins before you decide which one(s) to operate with. I like to use $DAI in my case, because I don't use cryptocurrencies as an investment but I use them as I use regular money, and that's why I am interested in having a currency whose value is stable and whose value cannot be intervened by anyone, since only the self-executing code is what dictates the value of $DAI. Please don't take this as an investment advice but as an example of how to choose a currency to operate with on the web3.
What are crypto coins and why are there so many of them: Conclusion
Cryptocurrencies are digital assets that exist on the blockchain. They are created, governed and secured by decentralized technologies and algorithms, and not by any centralized organization or government. There are many different types of cryptocurrencies, each one serving different purposes and having different characteristics. Cryptocurrencies are stored in digital wallets, and the only way to get absolute ownership of a wallet is to have the secret phrase. It is important to do research and understand the different types of cryptocurrencies before deciding which one to use, as different coins may have different features and be more suitable for certain goals than others.
Still not clear on what cryptocurrencies are? I'd love to hear from you.
The blockchain ecosystem can be confusing, so I hope I have cleared up some doubts about cryptocurrencies, if not and you have more doubts or questions feel free to contact me 👇🏽