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What You Need To Know About Cryptocurrency

5 November, 2022

📈 Like the real world that needs currencies to run, the digital world also demands a similar type of fuel to operate. Cryptocurrency is not only the fuel, but also the exchange between physical money and digital money to support the connection of both worlds. Many GameFi projects now are aiming at traditional gamer communities. Therefore, cryptocurrency is their first connection to the traditional gamers. Understanding this, Djinn Guild has created a knowledge library to equip gamers with fundamental information that enables them to enjoy their time in the blockchain-powered world.

❓ The first question for cryptocurrency will be: What is Cryptocurrency?

Cre: bePos

Cryptocurrency, or Crypto for short, is a series of binary data issued by the blockchain as a digital payment system, and functions as a medium of exchange and rewards for miners, blockchain validators, investors, and other related parties. Crypto utilizes blockchain technology and sophisticated cryptography to circulate its transactions without relying on a monetary authority such as the central bank. The term “cryptocurrency” is taken from “cryptography” and “currency”, and also to depict the use of encryption to verify transactions. This implies that complex coding is used to store and transmit cryptocurrency data between wallets and public ledgers for the sake of security and safety.

In 2009, a person, or group of people, going by the pseudonym of Satoshi Nakamoto, introduced Bitcoin as the first decentralized cryptocurrency and deployed the first blockchain database. And as of March 2022, there were over 9000 of other cryptocurrencies in the marketplace. Up until today, the true identity of the person or group of people behind the name Satoshi Nakamoto was never revealed.

💎The characteristics of Cryptocurrency

Fundamentally, every type of cryptocurrency shares these features:

  • Decentralization: Crypto is a kind of encrypted money which is not governed by a central server. It is distributed on the network with the participation of many peer-to-peer users. This system is called a decentralized network.
  • Digitized form of money: Crypto is a digital asset that can only be traded between users on the blockchain. However, users or investors do not physically own or touch them. The items traded on blockchain platforms are also fully digitized like crypto.
  • Peer-to-peer and Independent: Users can directly trade crypto through peer-to-peer network without the need of a 3rd party. This significantly saves time and transaction fees compared to the traditional methods.
  • Anonymity: No personal information or identity proof is required when trading crypto on blockchain platforms. Furthermore, since crypto transactions are not controlled or managed by any monetary authority, the risk of losing coins to the other shady party is considerable.
  • Globality: Due to its independent nature, no country asserts their authority over crypto. Crypto is traded across the world and is considered a stateless currency.

There were over 9000 cryptocurrencies running in the market, and even more as of now. Crypto classification is a primary aspect of getting to know different kinds of crypto.

Cre: Esri.com
  • Bitcoin & Altcoin:
Cre: Binance

Bitcoin (BTC): is the first cryptocurrency and was released as an open-source software. Bitcoin utilizes peer-to-peer protocol in blockchains to perform direct transmission between users without the management of intermediaries.

Altcoin: is used to call any cryptocurrencies aside from Bitcoin. Their functions are essentially similar to that of Bitcoin. Some popular Altcoins are Ethereum (ETH), Litecoin (LTC), etc.

  • Coin and Token:

Coin: is a cryptocurrency issued on blockchains for the purpose of solving problems related to transactions, information security, development of financial and banking applications, etc.

Token: is also a currency issued on blockchain. However, Token operates on another Blockchain instead of having its own platform. Most tokens use the following platforms: Ethereum – ERC20, Solana – SOL, Binance Smart Chain – BSC, etc.

💎Pros and Cons of Cryptocurrency

Cre: Paxful.com

Cryptocurrency has its Pros including:

  • The potential of cryptocurrency is realized by a larger group of people and industries. Therefore, it helps to boost its value and stabilize the market that is always considered to be highly volatile. The more intense the race to invest and store cryptocurrencies, the more they increase in value.
  • The idea of having no middlemen such as central banks is considered to be ideal, since central banks tend to reduce the value of money through inflation.
  • Some individuals regard cryptocurrencies as a possible footing in communities that have been underserved by the traditional financial system. Pew Research Center data from 2021 reported that Asian, Black, and Hispanic people have more tendency to invest, and have invested, traded or used a cryptocurrency than White adults.
  • The blockchain technology that powers cryptocurrency is essentially a secured and decentralized processing and recording system that lowers the risks available in traditional payment systems.
  • Some cryptocurrencies allow their owners to earn passive income through a process known as “staking”. Crypto staking entails utilizing your cryptocurrency to assist in the verification of transactions on a blockchain protocol. Staking carries risks, but it might let you build your crypto holdings without buying more.

The other side of this coin also involves:

  • Many cryptocurrency projects are untested, and blockchain technology in general requires a considerable amount of resources to operate. Therefore, mass adoption is still in process, though slowly. Crypto will need some time to reach its full potential as ideally proposed.
  • The high volatility is risky and cannot be fully anticipated. While some investors might earn a giant amount due to buying at the right time, the others might lose an equally large sum of money by doing so just before a crypto crash.
  • This risk leads to reticence in using cryptocurrency and it quite goes against the basic ideas of what cryptocurrency wants to support. Users might refrain from using cryptocurrency as a payment system if they are not sure about the fluctuation of its value.
  • The environmental impact of cryptocurrency projects and other projects that use similar mining protocols is noteworthy. For example, almost 38 kilotons of electronic waste are produced as a byproduct of Bitcoin mining annually. Though some cryptocurrency projects do not use mining protocols or use more energy-economical technology.
  • No clear regulations have been distributed in many countries regarding cryptocurrency management. Therefore, regulatory changes and crackdowns have a chance to affect the market in unforeseeable ways.

💎How Cryptocurrency Works

  • How it’s created

One typical way to create cryptocurrencies is through a method called mining, as Bitcoin is using. This is an energy-intensive process in which computers solve complicated algorithms to verify the authenticity of network transactions. Owners of those machines may earn freshly minted cryptocurrency as a reward. Other cryptocurrencies manufacture and distribute tokens in other ways, and several have a substantially lower environmental impact.

  • How it’s traded:

Cryptocurrency can be traded typically by two types of exchanges powered by blockchain technology:

  • Centralized Exchange (CEX) is managed by a third-party organization. Users create their account with ID and password to begin exchanging, and are obligated to complete the KYC (Know Your Customer – a process designed to protect financial establishments against fraud, corruption, money laundering and terrorist financing). Investors do not own private keys to their crypto assets and they are managed by exchange owners instead. Example: Binance, Huobi, Gate.io, etc.
  • Decentralized Exchange (DEX) is a platform that allows users to exchange cryptocurrencies without the assistance of a middleman or centralized institutions. Users have private keys that indicate their ownership of the crypto wallets.
Cre: dailytimes.com
  • How it’s stored:

Cryptocurrency is often held in crypto wallets, of which are in the form of physical hardware or online software that securely hold the private keys to the coins. Some exchanges provide wallet services to store crypto directly, though not all exchanges or brokers will immediately provide wallet services. There are two terms to remember when it comes to cryptocurrency storing:

  • Hot wallets (or Non-custodial wallets) are online softwares used to store crypto or tokens. Users need to keep their own private keys to secure their assets. Example: Coin98 Wallet, Trust Wallet, Metamask, etc.
  • Cold wallets utilize offline electronic devices to store private keys through multiple security steps. Example: Ledger, Trezos, etc.
Cre: Coindesk.com

💎The legality of Cryptocurrency

The legal position of cryptocurrencies varies greatly between jurisdictions and remains undefined or changing in most of them. The usage of cryptocurrency itself isn’t exactly illegal in many countries, though regulatory implications vary with its status and usability as a means of payment or a commodity. However, whether cryptocurrencies are lawful is simply one aspect of the legal matter. Other factors to consider include how crypto is taxed and what users may buy with it.

  • Legal tender: Cryptocurrency is called a “currency”, but it varies from traditional currencies in one essential way: they are not required to be recognized as “legal money” in most countries. In contrast, the US dollar must be acknowledged for “all debts, public and private.” Countries throughout the world are approaching cryptocurrency in a variety of ways. El Salvador became the first country to accept Bitcoin as legal money in 2021. In the meanwhile, China is creating its own digital money. For the time being, what you can buy with crypto in the United States is determined by the seller’s preferences.
  • Crypto taxes: Once again, when it comes to taxes in the United States, the phrase “currency” is a bit of a red herring. Rather than being taxed as cash, cryptocurrencies are taxed as property. That implies users will have to pay capital gains tax on the difference between the purchase and selling prices when they sell crypto. And if they get cryptocurrency as money or as a reward for doing an activity such as mining, they will be taxed on the value at the time they got it.
Cre: Medium

💎Conclusion

It will take a considerable amount of time and effort to reach cryptocurrency’s full potential and find out a more economical way to develop cryptocurrency and its related technology such as blockchain. However, with how fast crypto is developing right now, supporters could hope that a future life supported by cutting-edge technology with cryptocurrency being a part of them is approaching soon.

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