Considering its monumental growth and pricing right now, it’s hard to believe it used to cost only $1 at some point.
And this is just one cryptocurrency. There are tens of thousands of others in the market that you can learn about. But what is decentralized finance all about?
Below are the basics of cryptocurrency and how you can buy crypto, even if you’re a newbie.
What are cryptocurrencies?
Cryptocurrency (also called crypto-currency, crypto, or crypto currency) is a form of digital currency. That is, it only exists virtually or digitally.
Unlike 'real' money backed by gold stored in central bank vaults (or at least it used to be), digital currency has nothing backing it.
Crypto uses cryptography to secure transactions and is completely decentralized. There is no central issuing authority governing the digital currency. The decentralized system (run by the people) records transactions and issues new crypto units.
What is decentralized finance (DeFi)?
Think about the way real money is run right now. The government of the country issues the currency and has a hold on the currency itself. It governs how much of the currency will be released each year, regulating it in case of inflation or stagflation.
DeFi removes governments and central banks from the equation, giving control to the users. There are no intermediaries either, like brokers, financial institutions, or exchanges.
From a technical point of view, DeFi can be highly secure because it runs on a decentralized network of computers, rather than a single server.
What is the difference between decentralized finance and centralized finance?
As mentioned earlier, the main difference between DeFi and centralized finance (which is all the normal banking systems in the world), is that there is no central governing body or authority in DeFi.
That’s because the financial transactions are approved by the users themselves. There are checks and balances in place to ensure there is no fraud or errors. No single entity has control over or can alter the ledger of transactions in DeFi, which is quite a powerful thing.
What can they be used for?
Decentralized finance and cryptocurrency both have found a variety of uses in the modern financial world. At first, DeFi and the regular banking system kept a far distance from each other.
But slowly they are being integrated into one another. Some potential uses of DeFi right now are:
- Make a payment to friends or others using crypto
- Sending money anywhere in the world affordably and fast
- Storing money using a crypto wallet
- Borrowing and lending money on a peer-to-peer basis
- Trading crypto anonymously 24/7
- Buying insurance
- Crowdfunding
As more people are interested in crypto, interesting and varied solutions will pop up in the future.
How does blockchain work?
Blockchain is a decentralized immutable public ledger that Bitcoin is based on. Essentially, in a blockchain, all the computers (or nodes) on the network hold a copy of all the historical transactions. It is not focused entirely on one computer or server.
These computers that store a copy of all transactions are linked in a peer-to-peer network. The interesting thing about blockchain is that anyone can look into the history of transactions and see exactly what transactions are taking place. It’s all open to the public.
How are transactions verified?
You might wonder, how are the transactions verified if anyone can go in and check up on them?
No transaction gets added to the blockchain without a 'consensus' between several nodes (or computers) on the network. When a majority of nodes agree that a transaction is valid, only then is it verified and added to the ledger.
Random folks, just like you and I, own these computers and get incentivized to verify transactions through rewards.
On average, the crypto transaction time (the time it takes to confirm a transaction) is 10 minutes on the Bitcoin network. Each cryptocurrency is different in this regard.
The two most stable coins: Bitcoin and Ethereum
Most newbie crypto investors will want to focus on stable coins first. These are coins that have been around for a longer time than most and have built up a higher degree of trust in the market.
The general advice is to not put more than 5-10% of your investment portfolio into crypto and keep as much of it as possible in stable coins like Bitcoin (BTC) and Ethereum (ETH).*
You can keep your crypto safe by storing it in a crypto wallet or a hardware wallet.
*Investments always come with risks. The general advice does not come from bunq.
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