What Are Crypto Assets and How Do They Work?

in cryptocurrency •  2 years ago  (edited)

Before we delve into the world of crypto assets, we need to understand what is an asset. The Organisation for Economic Co-Operation and Development in its website defines an asset as "an entity which functions as stores of value. Ownership rights are enforced by institutional units, individually or collectively and from which economic benefits may be derived by their owners by holding them or using them, over a period of time”.

The crypto asset

In the world of crypto coins, an asset is a term that refers to any cryptocurrency. Even though they are used as money, they have other applications beyond payment. In fact, the classical definition and utility of a currency concept fall short when talking about cryptocurrencies. This is because, while Bitcoin, for example, can be used to buy water, you can also use it to acquire other coins which may hold intrinsic value. University of New South Wales, Usman W. Chohan explained on his paper, Cryptocurrencies: A Brief Thematic Review the nature of crypto assets. Dr Chohan explains that a crypto asset exists in a dimension that is not physical and can only exist in a digital form. Furthermore, the value is derived from supply and demand forces instead of outside intervention, while offering the utmost privacy.

Cryptocurrencies

What is Cryptocurrency?

Cryptocurrency (Cryptographic Currency) is the term used to describe digital currencies which utilizes Cryptography to secure their payment networks and transactions.

The term ‘Cryptography’ is a derivative of two Greek words ‘Kryptos’ and ‘Graphein’, which literally translates into ‘Secret’ and ‘Writings’. The process of encrypting words and numbers has continued for thousands of years and today, the process is often done digitally.

Any digital currency with a blockchain – a public ledger which records all transactions publicly – which uses* ‘cryptography’* to encrypt recordings can be referred to as Cryptocurrency. Bitcoin, Ethereum, Litecoin, Dash, Monero, Ripple, Steem all fall under the category of cryptocurrencies.

Many get confused between what a digital currency is and what a cryptocurrency is… to be it simple, all cryptocurrencies fall under the category of digital currency. PayPal, virtual game money, and even loyalty points on a platform can be considered as a digital currency. Think of digital currency as the main category and cryptocurrency as the child (sub-category) of digital currency.

All cryptocurrencies utilize what’s known as the ‘blockchain’. It is a network of various different computers working together to record and confirm transactions. To put it simple, think of it as a ‘magic book’ in which few thousands of people have. This ‘magic book’, once edited, requires everyone who has the book to ‘confirm’ these changes so that the ‘edit’ can be verified. In the case of cryptocurrencies, this ‘edit’ is ‘transactions’.

Because it is a peer-to-peer collaborative network, the transactions are also strictly peer-to-peer. Hence, the reason why most cryptocurrencies do not have a ‘central authority’ which governs and controls the currencies. Hence, the reason why cryptocurrencies are deemed as the most democratic currencies we currently have.

There are over 800 different cryptocurrencies currently available on the market (according to Coin Market Cap: a platform where cryptocurrencies are ranked based on their total market volume). Certainly, Bitcoin is the most popular amongst these currencies as it is the pioneer, the first ever cryptocurrency to be created. This is followed by Ethereum, Ripple, and so on.

If you are looking for an instant, secure, democratic, and truly global payment method which takes little to no transaction fees, do learn more about cryptocurrencies and how to use them!

Under the hood

Crypto assets work exclusively on the internet by using a network of computers that lend their processing power to verify and register all the transactions made. In return for their work, computers are rewarded with a payment in the form of tokens. The system that allows for this to happen is known as the blockchain, and it is the fundamental force behind any crypto asset.

Sunny Kin and Scott Nadal talked about how the blockchain keeps everything secure and public in their paper, PPCoin: Peer-to-Peer Crypto-Currency with Proof-of-Stake. The two men explain that the blockchain form by blocks and each block is a segment of the chain that holds the register of any transaction made with crypto assets. It is then reviewed and stored in the system which allows for more blocks to be found and used. It is this process that allows for privacy and security to be maintained at all times.

It all has a purpose

The usefulness of cryptocurrency can be defined by the term that began this article, asset. Unlike tender or fiat money, crypto coins are not subject to depreciation by inflation. They are less related to forex and more comparable to gold. That means that they can increase in value as demand for it increase. However, unlike gold, cryptocurrency can also be used to pay for goods and services.

Jerry Brito and Andrea Castillo argued in the 2013 paper, Bitcoin: A Primer for Policymakers that it is the duality of crypto assets (as a place to store of value and as means of payment) what has driven its popularity. The decentralisation of the economy along with avoidance of taxes, inflation, and local incertitude, implies that anyone can save their money in tokens and withdraw it when the local economy improves. That is why crypto assets is the latest craze in Wall Street.

References:

» https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3024330
» http://www.economist.com/sites/default/files/the_future_of_cryptocurrency.pdf
» https://www.mercatus.org/system/files/Brito_BitcoinPrimer.pdf
» https://decred.org/research/king2012.pdf

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Thanks for the info. I'm trying to figure out how cryptocurrencies work.

Like it.

Nice, well-researched explanation of how to see cryptos as assets.

For those that think this is long and don't want to read it, what I thought the takeaway of this article: cryptos are currencies that aren't depreciated by inflation, a digital asset that is more like gold than foreign exchange, but that unlike gold, can be used to buy goods and services.

And very importantly, they are inter-exchangeable. Like regular currencies, you can buy one for the other. Websites where you can do this are call crypto exchanges and they vary wildly between each other. For beginners, it's important to find one that is reliable and somewhat user friendly. One recommendation for the first stop is Switchain

thanks for the info its very helpful, just wondering if trading competitions are worth it? i saw a tread about aergo trading comp just looking for other insights.

crypto is powerful and i wonder if what would happen in the next years hope crypto would grow