Cryptocurrency is a means of exchange like the U.S. dollar. Unlike the dollar, however, crypto is entirely digital, decentralized and tracked by a distributed ledger called a blockchain.
Cryptocurrencies like Bitcoin and Ethereum have become significant players in world finance. Since the introduction of Bitcoin in 2008, the number of publicly and privately traded cryptocurrencies now totals more than 22,000, with a total market capitalization of $1.1 trillion.
Cryptocurrency has no central body behind it. Instead, its authenticity is verified by cryptographic proof. Conversely, the U.S. dollar, a so-called fiat currency, is backed by a federal government that guarantees its authenticity and value as a tool of exchange.
The authenticity of a cryptocurrency transaction is verified by one of two methods: proof-of-work (PoW) or proof-of-stake (PoS). Proof-of-work, the validation method for Bitcoin, has become controversial due to its negative environmental impact. It can take as much energy to mine Bitcoin as it does to run a small European country.
PoW leverages raw compute power to solve cryptographic problems called hashes, a process known as mining. Mining pits validators against each other in a race to solve a hash and earn the right to add a verified block to the blockchain.
Miners who win a given race to validate a transaction are awarded a few coins. This serves two purposes. It gives miners an incentive to keep going, and it provides a means of introducing new coins into the economy.
The other form of cryptocurrency authentication is called proof-of-stake. The PoS method requires far less computing power than PoW and, therefore, less of a negative environmental impact.
With PoS, validators provide an amount of crypto they’re willing to “stake” or temporarily lock in a communal safe. In the case of Ethereum, the minimum stake is 32 ETH (currently worth just over $60,000). The more coins you stake, the more transactions you’re eligible to validate.
Validators are chosen randomly to confirm transactions and validate blocks. Each block must be validated by more than one validator. When a specific number of validators verify that a block is accurate, that block is finalized.
As with the PoW method, validators receive additional coins as a reward for successfully validating a block. When a validator chooses to no longer participate in PoS validation, they are refunded their initial stake.
Cryptocurrency is just one use for decentralized ledgers like blockchain. Blockchain technology is also used to keep track of things like decentralized banking, video games and non-fungible tokens (NFTs).
In the future, we may rely on blockchains to provide authenticity for many types of data, including medical records, insurance, gambling and voting.
