Cryptocurrency: What Are Coins?
Last updated on June 8th, 2023 at 03:13 pm
There can be some difficulty when it comes to wrapping your head around cryptocurrency. It certainly doesn’t help when you are greeted with a litany of new terms, some of which have a very different meaning in the world outside of crypto.
Understanding what coins are, as it relates to the cryptocurrency space, is one of those new terms that anyone investing in cryptocurrency should grasp.
In cryptocurrency, coins are digital assets that exist on their own native blockchain. Coins are created by using consensus algorithms. The two most used algorithms are Proof-of-Work (PoW) and Proof-of-Stake (PoS). Key features of coins include being used as currency, a store of value and a medium of exchange.
To increase your understanding of the coins that exist in the cryptocurrency space, I will delve further into the characteristics that make a cryptocurrency a coin.
Coins Have Native Blockchains
The primary hallmark of a coin in the cryptocurrency space is that it runs on its own native blockchain.
This means that the coin only operates on the blockchain it was built on. This limits fungibility and even prevents blockchain interoperability.
This is currently the main disadvantage of cryptocurrency when it is compared with the U.S. dollar. However, in this article, I show how crypto remains a better bet overall.
The most widely known coin is Bitcoin (BTC).
Besides being the OG in the crypto space, Bitcoin is currently the most used and invested in crypto asset.
In 2021, Bitcoin was made legal tender in El Salvador. Currently, Bitcoin is used daily in many countries, especially those currently experiencing out of control inflation.
Top 24 Coins
Coins On Other Blockchains
In recent years there has been increasing use of coins on blockchains that are not their own.
These coins are not actually the genuine coin itself, but a representation of the original that is pegged to the price of the actual coin.
These representations are created by a process called minting.
During this process the original coin is taken into custodianship and the representation is created. Taking the original coins into custodianship removes the ability to double spend assets or create forgeries.
When the time comes to return to the original coin, this action is completed by a process called burning.
During the burning process, the representation is returned to the custodian, who burns or destroys the representation and then sends the original coin back to the owner.
For example, I have purchased Bitcoin on the Ethereum blockchain.
This Bitcoin is called Wrapped Bitcoin (WBTC). This WBTC is directly correlated to actual BTC on the Bitcoin blockchain, this prevents fake WBTC from being created.
Because this Bitcoin (WBTC) is wrapped in Ethereum (ETH), it can be moved, used and traded on the Ethereum blockchain.
Need more help understanding WBTC?
In order to increase fungibility and save users from high fees on certain blockchains, some coins have representations on many different blockchains.
Need a better understanding of a blockchain?
You can take a deeper dive with me into understanding what blockchains are and how they work.
Coins are created as a result of the consensus algorithm which is used to secure the blockchain.
Currently, the two most popular consensus algorithms are Proof-of-Work (PoW) and Proof-of Stake (PoS).
In short, Proof-of-Work (PoW) uses powerful computers to solve complex mathematical equations to earn the right to create a block on the blockchain. This process is called mining. Once that block is validated, new BTC is created and given to those miners as a reward.
The largest and most powerful PoW blockchain is Bitcoin.
Proof-of-Work is considered the most secure blockchain algorithm. This is because a hacker would have to take control of over 51% of the mining power to control the blockchain. While possible, this is very cost prohibitive for a blockchain the size of Bitcoin due to the energy requirements.
Proof-of-Stake (PoS) on the other hand, requires stakers to own a large amount of the coins and then lock them up on the blockchain. This locking process is known as staking.
Staking allows the stakers to earn more coins as rewards for verifying blocks on the blockchain while also providing security to the network.
In 2022, Ethereum (ETH) became the largest PoS blockchain when it transitioned from PoW to PoS.
Want a deeper dive into Proof-of-Work (PoW) and Proof-of-Stake (PoS)?
Then take a few moments to read through this comparison I did of the two algorithms.
Key Features of Coins
Most cryptocurrencies, whether tokens or coins, share similar qualities. Unlike their physical fiat counterparts, coins are not something you can hold in your hand, they are completely digital.
For cryptocurrency coins however, exhibiting the characteristics of a currency, being a store of value and a medium of exchange are common.
For example, Bitcoin meets all of these criteria.
It was developed to be a peer-to-peer currency.
People argue that it is not a store of value, however, I would ask you to consider that it IS an appreciating asset, unlike USD. I believe that it will be considered a store of value as we see the continuing degradation of the world economy and fiat currency.
As for being a medium of exchange, BTC can’t be beat. You can send BTC to anyone, anywhere for anything, instantly, for next to nothing.
Crypto Coin Round-up
Coins are an integral part of the cryptocurrency framework. Most were developed to be a digital form of money that was meant to be controlled by its owner.
Though others, like Ethereum were created to allow other crypto assets, such as tokens and stablecoins to use their blockchain. Think of it like an app that uses your phone’s operating system to work.
But coins are just one piece of the cryptocurrency pie. To see how they fit in with all of the other pieces, check out my article about what cryptos are and how they work.
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