All you need to know DeFi

What is cryptocurrency and how can it be used?

1inch Network-photo

by 1inch Network

• 5 min read

Cryptocurrency operates on decentralized blockchain technology, enabling secure, peer-to-peer digital transactions without traditional intermediaries and offers a vast array of use cases beyond mere currency.

Key Takeaways:

Cryptocurrency is a digital currency protected by cryptography and designed for online transactions.
It can be used worldwide, eliminating the need for traditional banks.
Cryptocurrency wallets facilitate crypto storage and transactions.
Benefits include decentralization, global acceptance, fast transfers and self-custody options. Blockchain technology ensures security, and private keys provide direct access and protection.
Challenges include a limited acceptance in some countries, price volatility, potential for scams/theft and evolving regulations.

A cryptocurrency (crypto, crypto coin, crypto token) is a digital currency based on cryptographic technology. It is purely digital, meaning there are no physical coins or banknotes. Сryptography protects tokens from duplication or counterfeit. You can use crypto as a regular currency (referred to as fiat in the crypto world) to pay for a product or service online or send money to your family or friends, just like you do in a bank app. 

How does cryptocurrency work?

With crypto, you don’t have to rely on banks. Crypto is specifically designed to make payments directly between users, without involving intermediaries. 

Unlike a fiat currency, which is normally accepted only in the country which issued it, crypto can be used anywhere in the world.

Interacting with crypto is no more complicated than with a bank app or a payment system. Crypto coins can be stored in crypto wallets, which are basically mobile apps or web apps. A crypto wallet allows you to make transactions - pay for products and services or send money to other people, similarly to what you can do in a banking app. 

Cryptocurrency transactions are recorded on blockchains – online digital ledgers. Transactions are processed by validators – individuals who do that in exchange for transaction fees.

Unlike fiat currencies, which are issued by countries’ central banks, the supply of cryptocurrencies are mined or minted through complex computer computations.  

The regulation of digital currency varies from one jurisdiction to another. The vast majority of states allow individuals to own crypto, but not all countries permit using it as a means of payment.

Similarly, taxation differs from state to state. In some countries, crypto is taxed as income, sometimes with no VAT applied. In other states, crypto is taxed as property.

In order to further develop payment systems, more and more central banks of various countries are using blockchain technology - for fund transfers and for their own digital currencies - CBDCs.

What are the advantages of crypto?

  • Decentralization. No individual or entity owns the system. Transactions are powered by blockchain technology. The process of managing and recording transactions is distributed across a large number of computers. No information is stored in a central location.  
  • Self-custody option. Non-custodial wallets allow users to fully manage and control their funds. With an intermediary (such as a bank), the user’s account relies on a third party who can block the funds or, in the worst case, go bankrupt. In self-custody, private keys that give access to funds, serving as an encrypted password, belong only to the user.
  • Accepted around the globe. Since cryptocurrency isn't tied to a specific country, it can be used globally. 
  • Superfast and cheap transfers. Crypto transactions only take seconds, whether you transfer money internationally or domestically. This is a much faster and more economical way of sending funds, compared with banking transfers that can take multiple days. At the same time, the cost of transfers is much lower. 
  • Easy to handle. Users can instantly purchase, receive, send and exchange cryptocurrencies directly in their wallets that can be installed within seconds and rarely require lengthy registration procedures.

What are the disadvantages of crypto?

  • Initial time investment. For many, crypto is a very new thing, and learning to navigate the crypto space takes time. Even the most basic actions require a thorough and well-researched approach. 
  • Limitations as a means of payment. Only a limited number of countries accept cryptocurrency as a means of payment. Plus, a few countries banned crypto transactions altogether. However, even in those countries where crypto is a legitimate means of payment, the number of outlets accepting crypto still remains limited.
  • Price volatility. Since the value of cryptocurrencies is determined by demand and supply, token exchange rates can swing quite wildly. However, the volatility of crypto can be used as an opportunity to make money by trading. Meanwhile, some cryptocurrencies are not volatile by design. For example, the price of stablecoins can be tied to the value of real-world assets, such as fiat currencies. 
  • Scams/theft. Cryptocurrency users can suffer from scammers who try to gain access to their funds through various fraudulent schemes. However, such a risk applies to fiat money, as well. If you follow basic security rules, your crypto will be safe. Self-custody wallets are very secure, and the only thing users should take care of is not to lose their private keys and not share them with anyone, as they are the only means of access to their funds.
  • Potential regulatory issues. Regulation of cryptocurrencies is still in its infancy. So, there is a risk of possible regulatory overreach in some countries.

Is cryptocurrency safe?

Сrypto is safer than fiat in many ways. Unlike cash, cryptocurrencies cannot be counterfeited since they don't exist in physical form.

One of the main security guarantees is blockchain technology behind crypto. Its consensus mechanism eliminates the potential for manipulation with crypto transactions. In most cases, hackers cannot reach users’ transactions and steal crypto.

Some crypto wallets (non-custodial and cold wallets) facilitate storing crypto in a more secure way than banks. No third party has access to users’ wallets and no one can block them from transacting. Bankruptcies, defaults or sanctions do not have an impact on users’ funds. Crypto is always accessible to owners who properly manage their wallet’s private key, which gives them direct access to their funds.

How can you earn with crypto?

  • DeFi platforms usually offer higher revenues than traditional banks’ saving accounts. Users can receive passive income in various forms, like lending or yield farming. Overall, learning to use most DeFi applications is quite straightforward. In addition, such services as yield aggregators enable earning interest in automatic mode.
  • Lending in cryptocurrencies can be more accessible and profitable than loans from traditional institutions, which often require a credit history and proof of income.
  • Trading is a way to profit from market price movements by buying or selling crypto.

Be mindful that hypothetically all investments and opportunities for interest earning can be risky, whether they are crypto-related or not.  

There are more than 20,000 various cryptocurrencies in existence. Meanwhile, only a handful of them are well-known and widely used. Bitcoin (BTC) is the first and oldest cryptocurrency. It is followed by Ether (ETH) in popularity. You may also have heard about BNB, Cardano (ADA), Dogecoin (DOGE), Ripple (XRP), SHIBA or PEPE. There is also a specific category of crypto, stablecoins, whose price is pegged to fiat currencies, such as the U.S. dollar. The best-known stablecoins are USDT and USDC.  

How to get cryptocurrencies?

Many crypto wallets offer an opportunity to buy tokens for fiat using bank cards or other payment methods. In this case, all you have to do is choose a wallet, download it and follow the installation instructions. 

Keep in mind that this option is only available in wallets with integrated fiat on-ramp providers, and some providers might have geographic restrictions. Still, if you can’t use a fiat on-ramp, you can purchase cryptocurrency on a centralized exchange. 

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