Cryptocurrency Characteristics and Attributes

Cryptocurrencies use the blockchain technology and so they apply the main properties of safety, transparency, and irreversibility that the technology offers. These three and some additional properties of cryptocurrencies are discussed below.

Decentralization

Cryptocurrencies are based on peer-to-peer networks and not on a central
server. Transactions are verified by the entire community, the users themselves, and there is no need to rely on a third party.

This decentralization feature applies to most cryptocurrencies, but there are exceptions where transactions are verified by either a central authority or a number of delegated participants; the blockchain technology allows these differentiations to exist, and it is up to the designer of the project to decide on the level of decentralization.

Safety

Safety is an inherent feature of the blockchain technology that uses encryption. All transactions are encrypted, and it is practically impossible to hack them and change the chain of transactions. Some concerns were recently raised by advancements in quantum computing, but IT experts believe that blockchain encryption practices can be respectively updated.

Transparency

There are three features of transparency in cryptocurrencies. First, transactions are verified by multiple nodes of the network via a group consensus mechanism.

Second, all transactions are recorded in public databases (public ledgers). Third, all users have access to this public record/public ledger at any time.

Irreversibility

The moment a transaction is validated and a block is created and recorded in the blockchain, it cannot be canceled. The only way to reverse a transaction is to create a new one with the opposite direction.

Anonymity Feature of Crypto

Cryptocurrency transactions are carried out by certifying the digital signatures of the participants and no other personal information is needed. This anonymity feature has raised concerns regarding using the technology for malicious practices (i.e., money laundering and terrorism financing). However, since the entry and exit points to the system (i.e., the exchanges of cryptocurrencies with fiat currencies) can be traced, and since all transactions are recorded and are publicly available in the system, regulators should be able to trace any malicious practices.

Convertibility

All cryptocurrencies are either directly or indirectly convertible with fiat currencies. Some cryptocurrencies (i.e., bitcoin, Ethereum, Litecoin) can be converted directly to fiat currencies. All the others should be first exchanged with the former ones before being cashed out to fiat currencies.

Finite supply

Most cryptocurrencies have a finite supply. Depending on the project, this finite supply can be either exercised from the start, namely produce and offer all tokens, right from the start, or can be gradually reached over time, namely tokens will continue being created via the mining process until a specific supply cap is reached sometime in the future. Note that even though the majority of cryptocurrencies have a finite supply embedded within their protocol, programmers can also create cryptocurrencies that have an infinite supply; the most prominent example here is Ethereum, which has no stated supply cap yet, but this can be introduced by the programmers of the project, if needed.

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