Blockchain 102 - Digital Currency

Walter Pinson, Smashing Boxes President & COO and Lindsey Morgan, Innovation Fellow
June 7, 2020

Throughout the past decade, blockchain technology has gone from a new financial experiment with a cult following, to a potential revolutionizer of data management. As blockchain has gained more and more traction, many people still struggle to understand: what exactly is blockchain? And why would anyone want to use it? In this series, we answer those very questions and provide the foundation needed to understand blockchain and cryptocurrency.

What is currency? We use money every day, but few people take time to understand why the dollars in their bank accounts have value. Before we take a deep dive into the processes behind popular cryptocurrencies, like bitcoin, lets first define the various types of currencies and cryptocurrencies on the market.

While many people may think of cars when they hear the word “Fiat,” fiat currencies are the most typical currency people use every day. Fiat currencies are any government backed currency like the US dollar or Euro. In contrast private currencies are issued by a non-government group. An example of a private currency would be points that universities give students to use at stores on campus. Cryptocurrency is digital private currency enabled by blockchain. Some popular cryptocurrencies include Bitcoin, Litecoin, Ripple, and Ethereum.

Cryptocurrency networks
Figure 1: Cryptocurrency Networks

Coins are cryptocurrency that exists on their own blockchain and are not tied to any assets. Coins are generated when adding data to a blockchain (mining). Examples of coins include bitcoin for the Bitcoin network and ether for the Ethereum network. When a group wants to launch a new cryptocurrency, they may issue an Initial Coin Offering (ICO). An ICO, similar to an IPO,  is a public crowdsourcing of funds to launch a new cryptocurrency coin or app. Investors receive coins for their investment.

Another digital currency often intertwined with cryptocurrency are tokens. A token is a non-mineable blockchain digital currency. Anyone can make their own blockchain token, and tokens can represent a wide range of assets. Tokens are made to meet specific technical standards (e.g. ERC-20, ERC-223, and ERC-721). Like an ICO, investors are given tokens to represent investments in a Security Token Offering (STO). Tokens, like stocks, represent partial ownership of the blockchain product.

Cryptocurrency Coins vs Tokens
Figure 2: Cryptocurrency Coins vs Tokens

Continue to the next section of this series, Blockchain 102- Cryptocurrency, to learn more about the key aspects of cryptocurrency.

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