The world of cryptocurrency has always piqued my interest. I have always tried to understand it. Having spent the summer interning at ACDX, a crypto-derivatives exchange, I’ve gained insights into how the cryptocurrency market works. I have also learned more about the technology that underpins cryptocurrencies: blockchain.
Let’s start with a discussion of Cryptography:
When someone asks you about cryptocurrency, what comes to mind? I knew that people who had invested in Bitcoin years ago would have made a fortune and that Bitcoin was a digital currency that authorities couldn’t easily track.
I had no idea why this was the case, but now I can explain why the latter is correct — it has to do with the way cryptocurrency works. When two parties want to exchange cryptocurrency on a decentralized exchange, their trade is considered peer-to-peer.
The platform connects the trade orders between the parties looking to exchange tokens. When a trade is placed, the transaction data is stored in “blocks,” including the transaction details, transaction time, and the sender’s private key, which acts as a digital signature.
Blockchain miners then process this block, determining whether it is valid by solving “proof-of-work” mathematical problems. If the block is valid, it gets added to the cryptocurrency’s blockchain network. The transaction is sent, with the recipient confirming that the transaction came from the sender by using the sender’s public key.
The critical thing to remember about this whole process is that the transaction can only be verified using the sender’s public and private keys. The sender and recipient never have to share any information about their identity in real life to exchange cryptocurrency — the transaction is anonymous.
Furthermore, only the private key is required to send cryptocurrency to another person. As long as you have your private key, you can access your cryptocurrency funds regardless of which trading platform you use.
Authorities can still track crypto transactions on the cryptocurrency public ledger, but it’s much more complicated than tracking a transaction between bank accounts where both parties’ account information is publicly shared.
Now let’s shift gears and consider the various crypto assets available today.
Bitcoin, for example, is a cryptocurrency that is only used for payments and runs on its blockchain. Other coins, such as Ether, run on their blockchain but serve the same purpose as Bitcoin.
These coins are also known as tokens, which not only include such coins (value tokens) but also refer to other types of tokens, such as security tokens — assets similar to traditional securities such as stocks; utility tokens — used to give users access to specific services or voting rights; and NFTs (non-fungible tokens), the hottest buzzword of 2021.
Other crypto assets, such as crypto derivatives, crypto futures, and crypto options, are also available. Crypto derivatives are secondary contracts that derive their value from an underlying crypto asset, and crypto futures are contracts with a limited lifespan.
They will expire based on their respective calendar cycle, and crypto options are contracts that allow investors to buy or sell a crypto asset at a predetermined price at a future date.
With all these types of crypto assets currently on the market, it can be not very clear, and what I’ve described only provides a brief overview of each.
Still, I hope you now have a basic understanding of the underlying principles that power today’s cryptocurrencies and what some of the crypto jargon means.