ALL IN THE CRYPTO BASICS
- animenigma415
- Sep 22, 2022
- 4 min read
Updated: Dec 16, 2022
cryp·to·cur·ren·cy
/ˈkriptōˌkərənsē/
noun
"a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority."
What exactly does this mean? If you're anything like me, after reading the above definition, you've probably got nothing but a blank stare and questions marks popping up all around you. So let's break down the basics to make this easier to understand.
Cryptocurrency is a digital currency, meaning, it does not come in a tangible form such as bills or metal coins. It lives strictly on the web and is created using encryption algorithms. It has two key beneficial features. Not only can it be used as a currency to pay for things, but is also a digital asset that is used for investing for long-term or short-term(a.k.a aggressive trading) gains, and in most cases, do not have the need for banks or any other third-party to regulate them. This means, most cryptocurrencies are what you call decentralized.
There are four major types of cryptocurrency: utilitiy, payment, security, and stablecoins. There are also DeFi tokens and NFTs, but we will touch on this more in a future post. The most common cryptocurrencies are utility and payment tokens.
Lets start with utility. A utility token is a special type of token that helps in the capitalization or financing of projects for startups, companies, or project development groups. They are a safeguard for participation in mass sales to raise capitol on a project. Think of them as coupons or vouchers. Having these "coupons" or "vouchers", provides the holder access to a product or service operated by the token issuer. For example, a current NFT project I am a part of called Ether Goddess. This project has a utility token called $FAITH. I currently accumulate 10 $FAITH/ day. With this $FAITH I am able to use it for interaction and upgrades with my goddess thus upping her value. Other examples of utility tokens are Funfair, Basic Attention Token, Brickblock, Timicoin, Sirin Labs Token, and Golem.
Next, we have payment tokens. The name pretty much explains itself. These tokens are used for buying and selling goods or services on digital platforms or crypto marketplaces. Most popular payment tokens are Bitcoin and Ethereum with Solana not to far behind in popularity.
Third, we have security tokens. These tokens represent transferred ownership rights or asset value on the blockchain through tokenization. In other words, they are the digital version of a stock, bond, certificate, other investment asset (i.e. real-estates/properties), or other real-world currencies that live on the blockchain. The security token is created when the investment criteria information is entered into the blockchain completing the tokenization process. Security tokens can be divided into two categories: equity tokens and asset-backed tokens. Equity tokens are similar to traditional stocks in form and how they operate. Within equity tokens, you have debt tokens which represent short-term loans that carry pre-defined interest rates. Asset-backed tokens are your real-world, physical investments. An example of these are; real estate, art, or commodities as underlying value. Security tokens have one major difference in respect to other cryptocurrencies, they are traded under financial regulation. All security tokens must be approved by The Securities and Exchange Commission, meanind it is a centralized tokem. Popular blockchains used to create security tokens are Sia Funds, Bcap (Blockchain Capital), and Science Blockchain.
Finally, we've got stablecoins. It's all in the name. A stablecoin is a token that remains stable and somewhat predictable in value in the sense that it remains the same most of the time. For example, fiat currencies, gold, or other precious metals. The stablecoin was designed to rid the volatility in assets or even other digital currencies and are backed on a defined ratio and the asset backing them must be kept in reserves as per the defined ratio. For example, look at USD as an asset, the value of that stablecoin remains constant with respect to that particular asset, i.e. a ratio of 1:1. Most cryptocurrency is decentralized, and from the above paragraph, we learned that security tokens are centralized. The stablecoin falls in the middle and can be both decentralized and centralized. Centralized stablecoins are your fiat currencies and are backed by a third-party custodian like a bank. Some popular centralized stablecoins are Tether (USDT), TrueUSD (TUSD), and USD Coin (USDC). Decentralized stablecoins have no third-party and the holder, you, are in full control of your coin and are created like other digital currencies, through encryption algorithms. Decentralized stablecoins offer the promise of stability similar to that of fiat currency. Popular decentralized stablecoins are DAI token, EOSDT, and DeFi dollar (DUSD).
I know this is a lot of information to take it, but it is the foundation for understanding the crypto world and all is has to offer. With the human collective wanting the move itself closer to financial freedom one resource at a time, I believe, in my own opinion and research, that each day as the world continues to turn and evolve it can be achieved. Thank you for reading and stay present for more to come.
-Animenigma
DISCLAIMER: This editorial content was created for the sole purpose of education and is not financial advice. Please seek financial advice from a trusted financial consultant or advisor.
RESOURCES
Comments