What Are Cryptocurrencies?

In 2008, the very first cryptocurrency that ever existed, Bitcoin (BTC), was born, the one that today is by far the most famous among the investing public and the most valued in terms of price and market capitalization. From that day on, the financial system has never been the same, even if some people still today remain of the idea that cryptocurrencies are, from a certain point of view, a threat to people and institutions.

Others, on the other hand, immediately embraced the crypto universe, thus contributing to its growth, both as a simple user and as a developer of new products based on blockchain technology. In fact, despite the vast unexplored territory, the financial one and more specifically cryptocurrencies have been the very first practical application of the blockchain, which has demonstrated the enormous potential that this technology can offer to the public.

The why of cryptocurrencies

The term cryptocurrency derives from the union of two words, crypto and currency, where the first immediately points out the digital aspect and the cryptographic system, fundamental for the creation of private keys and for the determination of the complex mathematical problem behind the confirmation of each block.

Therefore, if on the one hand we are faced with a purely IT aspect, linked to the cryptographic techniques used to secure the network, on the other hand the peculiarities that are part of the definition of a currency are reflected. This means that, like fiat currencies, cryptocurrencies can also be used as a medium of exchange, a store of value and a unit of account.

Certainly a fast, secure, transparent system focused on user privacy and anonymity at the same time can counter the interests of some large players who immediately attempted to hinder the entry and diffusion of cryptocurrencies in the modern market. Fortunately, their intent has not been successful, at least until now, even if it is still far from the much sought after mass adoption.

Cryptocurrency applications

There are currently 5609 existing cryptocurrencies listed on Coinmarketcap, each developed by different blockchains, with different characteristics, use cases and overall capitalization levels, depending on how much it is used and the value it presents.

Thanks to the birth and rapid diffusion of dApps in recent years, especially considering the DeFi sector and all its applications not only within the financial market, the ERC20 token has taken over all the others, a standard protocol born from the blockchain of Ethereum for the creation of this specific type of cryptocurrency. Suffice it to say that at the time of writing on Etherscan it is possible to find 270,808 contracts relating to different ERC20 tokens. Furthermore, the rapid diffusion of decentralized video games has opened the doors to another type of token, ERC721 specifically, used to represent digital assets as non-fungible tokens. Different ways of developing a cryptocurrency were then born and consequently different characteristics that make up the model.

Some for example, unlike BTC, ETH and many others, cannot be mined. This means that their consensus mechanism does not require computing power in the network for a block to be confirmed, but their circulating supply varies according to several parameters, one of which is the degree of demand, a factor that certainly has a strong influence on to others.

Returning to Bitcoin, however, it is said that it was designed according to a deflationary rule that encourages its value to increase over time. This is precisely due to halving events, after which the units in circulation become increasingly rare thanks to the halving of the reward for miners contained in a block, a process which therefore makes the value of the BTC appreciate.

There are many parameters that play an important role in determining mining activities, such as the hashrate and the size associated with it, the difficulty, which varies with the variation of the first quantity mentioned.

Stablecoins

Finally, last but not least, there are some types of cryptocurrencies, stablecoins, called in this way precisely because their value remains stable and anchored to an underlying quantity, which can be a fiat currency, a raw material, etc.

The most traded in terms of volume is certainly the stablecoin Tether, which has become the third most important cryptocurrency by overall capitalization after overtaking XRP recently. Tether currently covers 36,16% of total trades, considering the entire crypto market, with a daily volume range that can go from around $15 billion to peaks of $100 billion.