What Is Cryptocurrency?

Cryptocurrency is a method of exchanging value digitally without the need of a centralized "gatekeeper" or intermediary, such as a bank or brokerage firm. In traditional finance, the centralized institution keeps track of account balances, payments from one account to another, etc. Thus, everyone who transacts through this institution is dependent on the institution and its managers to remain honest, non-corrupt, and error-free. If the institution makes a mistake, or its managers embezzle or mismanage funds, then the institution's clients are at risk of bearing the loss.

Cryptocurrencies, by contrast, are transacted on a digital ledger known as a "blockchain," which is actually just a specialized type of database. The programming used to manage and maintain the blockchain is "decentralized." That is, it is not dependent on, or under the control of, any particular individual, corporation, government, or other group or institution. The blockchain programming code itself is designed to function in a way that guarantees that all transactions on the blockchain are recorded accurately and irrevocably. Once a transaction is recorded and confirmed in the blockchain, it is impossible to alter it. Thus, the blockchain also provides a permanent and transparent accounting trail which is publicly visible and can be examined by anyone.

Cryptocurrencies are often treated as investment vehicles, although they were not originally designed that way, and blockchains themselves are not necessarily financial in nature. A blockchain can be used for virtually any purpose that a standard database can be used for, and blockchains are sometimes overkill for a particular type of task. Private blockchains have been designed and are being used by companies around the world for a wide variety of purposes: tracking shipments of items, tracing and recording the origins of food products to guarantee their quality, recording real-estate and similar transactions, among many other purposes. When implemented properly, the blockchain is inexpensive, reliable, and tamper-proof -- exactly the qualities many businesses need to track their day-to-day inventories and activities.

But blockchains are also ideal for financial uses. And more specifically, the idea for the original blockchain cryptocurrency -- Bitcoin -- was to allow individuals to retake control over their money and finances from banks, governments, and other established financial institutions. Bitcoin was developed in the aftermath of the 2008-2009 financial crisis, when thousands of people lost their savings due to the corrupt, or simply careless, activites of major world banks. Cryptocurrencies allow people to maintain their money and transact their business outside the control of these institutions, on their own terms and having to trust no one except themselves.

Since Bitcoin was first created in 2009, many other blockchains have been developed and released, and the number of cryptocurrencies and their related "coins" or "tokens" has expanded into the thousands. The vast majority of these currencies are simply experiments with little or no real-world value. However, as we noted above, a significant number of blockchains do provide practical utility and are used daily in some fashion by millions of people and companies. A few of these utilitarian chains and coins are Ethereum, Tether, USDCoin, Tezos, Cardano, and more. Applications developed using these blockchains and their coins provide very real and concrete services every day.

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