How does cryptocurrency work?

Cryptocurrencies are a new digital trend that uses blockchain technology to conduct and approve transactions. Users can send tokens to one another without interacting with any third party for approval. This type of censorless transaction is what makes cryptocurrency valuable.

The process of using cryptocurrencies is twofold. First, users rely on the blockchain network to approve and add transactions to the blockchains. Each blockchain uses a consensus mechanism where network validators (miners) approve a set of transaction blocks and add them to the blockchain string.

Every transaction on the blockchain is public and permanent, meaning nobody can alter or delete transaction data. Cryptocurrencies have gained popularity due to their ability to prevent double-spending, which helps secure the network and prevent fraudulent actors from taking advantage.

The second stage is token minting, a form of rewards miners receive for validating transactions. Miners are tasked with adding transactions to the blockchain, and in return, they are rewarded with new tokens. Again, the consensus mechanism can vary from PoW to PoS; however, the validation idea is similar across every network protocol.

Cryptocurrencies can be purchased from exchanges or received from other users. To own a cryptocurrency, you have to have a wallet that supports every crypto. Thus, cryptocurrency is accessible to individuals on major crypto exchanges, or they can use crypto through other banking platforms.

Users can keep their crypto on the exchange wallet or send it to their wallet using their unique wallet address.

Cryptocurrencies are not fully interoperable, meaning that sending an ERC-20 standard token to a Binance wallet will lead to a loss of funds. However, ERC-20 tokens are part of the Ethereum network, and every cryptocurrency built on Ethereum can be sent to an Ethereum wallet. 

Similarly, BEP-20 tokens, native to Binance Smart Chain, can be sent to the BSC network. Users can also buy crypto directly or use DeFi applications to swap their to other tokens on the same protocol.

Users must create an account on a platform that transacts cryptocurrencies. Then, each user must pass a KYC process to ensure they are the true beneficiaries of the account. Once the account is set up, users can fund their account using credit cards, and payment processors or send cryptocurrencies to their account.

Another way to acquire cryptocurrencies is to use Decentralized Financial platforms like Uniswap or Pancakeswap. For that, users have to connect their crypto wallet to the platform and have the native token they want to swap ready in their account. Then to purchase crypto, they must swap tokens on the DEX. Each trade takes place on the protocol itself, and every user must pay a network fee to finalize the transaction.

One of the main reasons users purchase cryptocurrency is that they become an investment instrument for traders. Thus the objective of each trader is to identify the top cryptocurrencies to invest in early and buy or sell them at the appropriate time to generate a profit.

Where to store cryptocurrency?

Cryptocurrencies are stored on digital wallets connected to a blockchain protocol. Each wallet has a uniquely generated address that can be used to receive or send cryptocurrencies. There are two types of crypto wallets: hot wallets and cold wallets, each with specific characteristics.

Hot wallets are always connected to the internet, making them ideal for quicker transactions. For example, each exchange has a hot wallet for every token available to facilitate the selling and direct purchasing of cryptocurrencies. Additionally, hot wallets can be digitally kept on a computer or a smartphone. However, the drawback of hot wallets is that they are more susceptible to security issues and can potentially be hacked in numerous ways.

Cold wallets, on the other hand, are more secure. This is because funds are stored on an offline platform that is not always connected to the internet. As a result, cold wallets like Trezor are more secure, given they don’t facilitate unauthorized access to the user’s funds when they are offline.