How do cryptocurrencies work? What they are and how they are used
Digital currencies such as Bitcoin and Ether are gaining increasing popularity, mainly due to the promises of web 3.0 and the rise of the metaverse. However, even today, few people know how cryptocurrency works.
These assets use encryption and blockchain technology to ensure the validity of transactions, as well as to control the creation of new drives.
Another feature is that they are decentralized, which means that they are not subject to the control of the government or financial institutions to be issued.
In addition to trading on exchanges, banks and brokers, virtual currencies can already be used to purchase goods and services around the world. In addition, the trend is that they are increasingly accepted as a means of payment.
Like any type of investment, cryptocurrencies also have a certain degree of risk. Still, many people and companies believe it is a promising investment opportunity.
But is it really advantageous? To find out, you must first understand what cryptocurrency is and how it works.
What is cryptocurrency?
Simply put, cryptocurrency is a digital asset that uses encryption-based encoding to perform and track transactions. It is an entirely virtual money, that is, there is no currency or physical banknote.
Unlike traditional currencies, these assets operate without a central authority or regulatory institution, which has the responsibility to manage the flow of money.
In addition, it is possible to buy, send and receive cryptocurrencies without the need for an intermediary, such as banks or credit card issuers. For these reasons, they are considered decentralized.
However, even if they are decentralized, many countries are already regulating the crypto market to give greater security to investors.
In Brazil, for example, Bill 3,825/2019 was created to establish rules in the commercialization of cryptoassets, in addition to protecting consumers and fighting financial crimes. However, so far, the project has not yet been approved, but the expectation is that approval will occur soon.
In the video below, Empiricus’ Vinicius Bazan and Juliana Facklmann of the Bitcoin Market explain how cryptocurrency works, what its advantages are and how brands are exploiting this market:
How do cryptocurrencies work?
To understand how cryptocurrency works, you first need to know what blockchain is. Basically, it is a database that records and checks all transactions made with digital assets.
This means that transaction information is stored on a decentralized network of computers, not on a central server. This is where the numbers of transfers and portfolio balances are recorded, for example.
In addition, personal information is not linked to the operation, which allows you to make transfers anonymously.
Encryption is used to issue digital currency units and thus ensure secure transfers.
This technology also protects data stored on the blockchain from cyber attacks and other fraud, and prevents digital assets from being cloned or spoofed.
In addition to being considered a type of investment, cryptocurrencies are increasingly being accepted as a form of payment when purchasing products and services, especially in the United States and european countries.
Currently, there are thousands of cryptocurrencies in circulation on the market, in addition to the famous Bitcoin. The following are the main ones:
Created in 2008, Bitcoin was the world’s first digital currency and still works seamlessly.
Its creator, under the pseudonym Satoshi Nakamoto, developed the digital asset with the aim of having something decentralized that could operate without a central bank or single administrator as a response to the 2008 crisis.
Currently, it is the main digital currency in circulation and has the highest market value. And even though it is a currency without ballast, it is increasingly accepted by companies and institutions.
Litecoin, launched by in 2011, is a digital currency created by Charlie Lee, a former Google employee.
Like Bitcoin, it operates using blockchain technology, which allows for secure and anonymous transactions. It can also be used to pay for goods and services or traded in traditional currency exchanges.
The great difference is that anyone can participate in the process of developing new units. It is a virtual currency that is easier and more accessible to the population.
In addition, it also has a shorter transaction processing time. Compared to Bitcoin, the currency is able to process blocks four times faster.
However, the overall adoption of the currency is lower and its prices are highly volatile.
Ripple is a real-time gross settlement system, currency exchange, and delivery network.
Launched in 2012, the network was designed to be a more efficient and cost-effective alternative to traditional, mainly international bank transfers.
The technology allows the almost instant and secure transfer of funds by connecting payment providers, banks and companies.
The platform’s native currency is XRP. Although it was not created for the end consumer, cryptoactive is accepted as an agile and low-cost payment method.
Ethereum is a decentralized, open source platform for executing smart contracts and non-centralized applications.
It was launched in 2015 by Vitalik Buterin, a cryptocurrency programmer and researcher. The platform’s currency, Ether, serves as fuel for the execution of these contracts and smart applications.
Contracts can range from financial exchanges, voting systems, and domain name registrations.
Unlike Bitcoin, Ethereum allows users to create their own programs on the network, which leads to a wide variety of potential uses and applications.
Ether has become one of the most popular digital assets and continues to grow in both value and popularity. Currently, it is the second most valuable cryptocurrency on the market.
How does the purchase and sale of cryptocurrencies happen?
Those who want to enter the crypto market, in addition to understanding how cryptocurrency works, should also know how the purchase and sale of these assets occurs.
The transaction takes place through exchange, either by trading traditional money for cryptocurrencies at market value or by exchanging one type of asset for another. For example, use Real to acquire digital currencies or exchange Bitcoins for Ethers.
However, not all transactions allow individuals to buy and sell digital assets using traditional currencies. Sometimes it is possible to trade only with specific types of cryptocurrencies.
Everything takes place in real time and packages are made through bids for buy and sell prices, following the law of supply and demand, similar to trading on the stock exchanges.
All crypto asset operations are virtual and currencies are transferred from person to person, without requiring any intermediary or bank.
Seller and buyer data is kept confidential through encryption, which ensures the security and integrity of the information.
But even if the data is anonymous, all transactions can be tracked and the information is stored on the blockchain, publicly and permanently.
In order to perform this type of operation, it is necessary to have an account on exchanges, which are crypto market-specific brokers. Some examples are: Bitcoin Market, Binance, Coinbase and NovaDAX.
What is cryptocurrency mining?
Virtual currency mining is also an important concept when talking about the functioning of cryptos.
It is a process that aims to verify and include cryptoactive transactions in the blockchain, the database that records users’ movements.
This action is done by virtual currency miners, who are people or companies that use specialized hardware and software to solve complex mathematical problems and confirm these transactions in exchange for cryptocurrencies.
– the user sends a cryptocurrency or part of it to another person;
– this transfer is recorded on the blockchain within a block;
– when the block becomes full of transactions, it must be sealed with an identifier, which functions as a padlock, called a hash;
– the miner is responsible for placing this hash and thus maintaining the system.
Therefore, mining plays a crucial role in maintaining the security and integrity of the blockchain.
As financial transactions of cryptoassets grow, the need for mining increases and mathematical problems become more difficult, which requires more computing power.
How can companies use cryptocurrencies?
In 2021, the crypto market reached $3 trillion in capitalization, according to a study by Coingecko. This number is three times higher than the value of all companies present on the Brazilian stock exchange.
The expressive growth arouses the interest of companies, which enter the virtual race to start investing in cryptocurrencies and other technologies.
Several brands are already preparing to join this new business model. McDonald’s, for example, already has a unit in El Salvador that accepts payments for digital currencies.
This means that once you understand how cryptocurrency works, the next step is to find out how companies can benefit from this feature.
One of the simplest strategies is to allow customers to make payments with digital currencies. This can increase the payment options available to consumers, which helps attract a larger and more diverse customer base.
There is still the advantage of eliminating financial intermediaries, as the payment model works peer to peer (P2P), which allows for lower rates and faster transactions for buyers and sellers.
In addition, reducing the risk of fraud, reduced costs and increased security are other positive points when accepting this method as a means of payment.
Another option is to invest in virtual currencies strategically, as they have significant long-term growth potential.
However, it is worth noting that cryptocurrencies still have risks due to their highly volatile nature. Therefore, it is important to carefully study the options before making any decision.
Companies that want to enter the metaverse should keep an eye on cryptocurrencies in this universe. There, several financial transactions can only be made through digital currencies.
Companies that already use cryptocurrencies
Many companies have started incorporating cryptocurrencies into their businesses. One example is BTG Pactual, which pioneered the banking sector to enter the crypto market.
The company, considered the largest investment bank in Latin America, has developed an exclusive platform for its clients to trade digital currencies.
Even was the first construction company to accept payments through cryptocurrencies in Brazil. Since the decision, the company has earned more than R$ 1 million in payments made through digital assets.
Another example is the social media platform, Twitch, popular with gamers, which allows users to use Bitcoin to buy gift cards and games on their website.
In addition, some physical establishments have also begun to accept crypto currencies as a means of payment. In addition to Mc Donald’s, which we’ve already cited, Pizza Hut and Starbucks already allow customers to pay using digital assets.
Cryptocurrencies, such as Ether, Litecoin and Bitcoin, are digital currencies that use encryption and blockchain to ensure the integrity and security of transactions, as well as controlling the creation of new units.
One of its main characteristics is that they are decentralized, which means that they are not subject to the control of the government or financial institutions.
By offering several advantages to companies, such as cost reduction, faster transactions and greater security, this type of digital asset has become more used by brands, whether as a means of payment or medium to long-term investment.
However, it is important to note that digital currencies are still volatile and there are risks, as well as any type of investment or business strategy.
Therefore, companies should carefully study their options before making any decision, in addition to understanding in depth how cryptocurrency works