Glossary

What is cryptocurrency?

Cryptocurrency is a type of digital or virtual currency that uses cryptography to secure transactions, control the creation of new units, and verify asset transfers. Unlike traditional currencies, cryptocurrency operates on decentralized networks, eliminating the need for central banks or financial institutions to mediate exchanges.

How does cryptocurrency work?

Cryptocurrency transactions are powered by cryptography, which employs mathematical algorithms to encode and secure data. Cryptography ensures the security, authenticity, and integrity of each transaction while preventing unauthorized access. Key components of cryptocurrency functionality include:

• Blockchain technology: Transactions are recorded on a decentralized, tamper-proof digital ledger, which is publicly accessible and maintained by a network of computers.
• Cryptographic keys: Each transaction requires a private key to sign and authorize, and a public key to verify the transaction.
• Proof mechanisms: Cryptocurrencies use algorithms like proof-of-work (PoW) or proof-of-stake (PoS) to validate transactions and maintain network integrity.

By removing intermediaries, cryptocurrencies enable peer-to-peer transactions, providing faster and often more cost-effective alternatives to traditional banking systems.

Types of cryptocurrency

Cryptocurrencies serve various purposes and can be categorized into several types:

1. Transactional cryptocurrencies: Designed for payments and transfers, examples include Bitcoin (BTC) and Ethereum (ETH). These are the most widely recognized cryptocurrencies used for everyday transactions.
2. Stablecoins: Pegged to stable assets like the US dollar or gold, stablecoins (e.g., Tether and USD Coin) minimize price volatility, making them ideal for trading, savings, and payroll purposes.
3. Entertainment tokens: Used within specific industries or platforms, such as gaming or media, to purchase goods or services.
4. Infrastructure cryptocurrencies: Support blockchain networks by enabling the creation and operation of decentralized applications (dApps) and smart contracts, like Ethereum (ETH) and Solana (SOL).

Benefits of cryptocurrency

Cryptocurrencies offer several advantages:

• Lower transaction fees: Peer-to-peer exchanges reduce the costs associated with intermediaries.
• Increased privacy: Cryptographic security provides anonymity for transactions.
• Global accessibility: Cryptocurrencies enable seamless cross-border payments without exchange rate concerns.
• Transparency: Blockchain technology ensures a public, immutable record of transactions.

Challenges of cryptocurrency

Despite their potential, cryptocurrencies come with risks:

• Volatility: Prices can fluctuate significantly, affecting their reliability as a store of value.
• Regulatory uncertainty: Laws governing cryptocurrencies vary widely by country and are continually evolving.
• Security vulnerabilities: While blockchains are secure, digital wallets and exchanges can be targeted by hackers.

Is cryptocurrency legal?

The legal status of cryptocurrencies varies globally. While some countries have embraced and regulated their use, others have imposed restrictions or outright bans. Increasing regulatory clarity has helped foster institutional adoption and reduce market volatility. For businesses, adhering to local regulations is essential when using cryptocurrencies for payments or investments.

The future of cryptocurrency

As adoption grows, cryptocurrencies are becoming more integrated into traditional financial systems. Stablecoins, in particular, are gaining traction for business applications like payroll and international transactions. Enhanced regulatory frameworks are expected to boost legitimacy and trust, paving the way for broader use in everyday commerce and investment strategies.