Cryptocurrency is similar to politics. The parties involved cannot seem to agree on which factors make a better candidate. Although cryptocurrency is still a very new concept, this $370 billion industry has formed in-depth opinions within its user groups. These divisions are primarily why so many different cryptocurrencies exist, all with varying features to appeal to its users.
While opinions vary widely, there are a few standard points to what makes a good cryptocurrency.
- Solve Problems
- Limited Supply
This article will help you identify and analyze the features that make a robust cryptocurrency platform. We will also explore cryptocurrency for the average layperson by discussing it in everyday language. Then I’ve included a pros and cons table comparing some of the more popular cryptocurrencies to help you understand the best one for your unique situations.
Table of Contents
Features of a Good Cryptocurrency
As more of our lives transition into digital solutions online, it’s not surprising that security around finance and cryptocurrencies would need to a forefront consideration.
Cryptocurrencies are held within a digital wallet. A wallet is identified by a long set of random letters and numbers. This is referred to as a private key, which grants the currency owner permission to withdraw coins from the wallet. Keeping the private key secure is a crucial step in the security of your digital funds.
According to the Forbes analytics, about $21 billion of funds are stored in the cryptocurrency wallets with lost access.Svetlana Yurkevich, Elinext
A shorter version of the private key is called a public key. It is mathematically tied to the private key and used to accept deposits.
Through digital forensics, cryptocurrency wallets can sometimes be linked to real-world identities. But some blockchain technology projects aim to make wallets and transactions completely anonymous.
Transactions between two wallets are recorded in blocks that are added to a decentralized list or ledger. Once a block of transactions is registered to the ledger, it can no longer be changed. This database of transactions is distributed to a worldwide network of computers to further protect the records.
This brings us to the next important trait.
By avoiding a central authority, there’s an increased level of security. Cryptocurrency users also have a level of assurance that the coin’s value is mostly immune to manipulation or corruption by any group or government.
After the role banks played in the 2008 financial crisis, many people lost trust in central banks and even the Federal Reserve.
Many cryptocurrency platforms operate with a Proof-of-Work system to achieve decentralization. This system is one where users, or “miners,” use their computational power to solve mathematical puzzles that allow them to process transactions. The transactions form blocks, which are added to a list or ledger, known as a blockchain. The blockchain record-keeping is distributed worldwide and keeps the network transparent and quite hard to tamper with.
The downside to decentralized systems is the need to architect a reasonable processing speed so the cryptocurrency can keep up with usage or scale with the demand.
The scalability of the cryptocurrency refers to the number of transactions that can be processed or confirmed per second. This is key to any monetary currency. Transactions must be settled between two parties quickly and efficiently.
For example, there is a time gap between depositing a check and having the related monies available for use. There’s also a delay when a currency crosses a political border or is converted to another currency.
Since cryptocurrencies operate with a peer-to-peer system without a central authority to remain decentralized, increased scalability often sacrifices this decentralization aspect.
Bitcoin Cash and Dash were both begun with a focus on decreasing transaction times.
For cryptocurrencies to be useful and compete effectively with fiat currencies, platforms must have transaction speeds at least as fast as current systems such as Paypal, Venmo, and Visa. They must also be ready to further scale transaction speeds, and demand and users increase.
This means each transaction must be processed in approximately 3 seconds or less.
Scalability solutions are still in their early stages. Second-layer technology, such as lightning networks, are proving to overcome this issue. Parallel processing and sharding are also undergoing testing.
Because the cryptocurrency industry is expanding at a breakneck pace, a valid and widespread answer to this problem is likely not far off. Once solved, this will help users accept cryptocurrencies and increase its usability as a medium of value exchange.
The intended use of a cryptocurrency varies from person to person. Each project and platform attempts to solve a different value exchange aspect not addressed in other projects or in the real world.
For example, developers created Bitcoin Cash to address the scalability problems with Bitcoin. At the same time, other alternative coins, or altcoins may focus on accessibility or increased anonymity.
There’s no one right cryptocurrency. Each cryptocurrency is a tool in a toolbox. Consider learning and using the cryptocurrencies that solve a personal need. Investing in a crypto project with the characteristics that align with your use case is a vital step.
Once you’ve found a couple of blockchains that solve a problem for you, the next thing that makes a good cryptocurrency is that it must be easy to use.
In addition to the speed of completing a transaction, a good cryptocurrency should be easy to use.
Using a cryptocurrency can be intimidating. A private key, public key, block size, confirmation consensus…it can all be confusing to novice users or those that are less tech-savvy.
The best blockchain technology gives developers a lot of flexibility to handle all the cryptocurrency complexity for users and expose a straightforward and easy-to-use experience via mobile app, browser extension, or desktop application.
Pro Tip: Avoid cryptocurrency projects where the user interface is hosted via a website. Good cryptocurrency platforms use full-fledged apps to manage your finances on your personal device.
As a project matures and more users enjoy it as a payment method for real-world goods and services using consumer-friendly wallets, the cryptocurrency gains acceptance and garners mainstream attention.
The demand for cryptocurrency follows the same economic principles as any other good or service.
The higher demand goes, the more valuable the product becomes. The market needs to demonstrate a high enough interest for cryptocurrency to create value for the buyers and increase the coin price over time.
Factors which affect demand for cryptocurrency include:
- Media coverage
- Potential regulation
- Industry competition
- Cost of running the systems
- Availability of currency exchanges
- Inflationary or deflationary pressure
All of the world’s fiat currencies are now inflationary. The national central banks may print more units of their money, leading to each unit being worth less.
Starting at the US Federal Reserve’s founding, the dollar has lost 95% of its purchasing power over 100 years between 1913 and 2013. The primary causes of this value loss are the decoupling from gold and the increase in the number of dollars in circulation.
Most cryptocurrencies have a fixed amount of coins that will ever exist, predefined by mathematics.
Some projects release all of the coins at once and rest on the upper limit to keep inflation capped. Other projects, most notably Bitcoin, slowly uncover available units to help ensure price stability.
Some newer blockchain projects will “burn” cryptocurrency tokens sending them to inaccessible wallets. This action makes each coin more valuable over time if done in a controlled manner.
Ultimately, what makes a good cryptocurrency are those that adhere to sound economic principles while appealing to consumer ease-of-use.
Cryptocurrency Terms and Easy-Explained Definitions
- Fiat Currencies: centralized currencies minted by national banks on behalf of governments.
- Cryptography: the process of encoding and decoding information.
- Cryptocurrency: a currency which relies on cryptography, such as Bitcoin or Ethereum.
- Block: confirmed transactions which are bundled together through mining or validation.
- Blockchain: a series of blocks organized and link sequentially distributed ledger.
- Distributed Ledger: a list or database spread across many computers or devices.
- Consensus: an automated agreement of a majority of computers that a transaction is confirmed; a necessary part of a distributed ledger.
- Mining: a process of creating new units of digital currency by confirming transactions.
- Altcoin: non-Bitcoin cryptocurrencies.
- Fork: a fundamental change in a digital currency’s rules leading to a new a completely new cryptocurrency blockchain.
- Proof-of-Work: a system of proving that a digital currency’s transactions are verified.
- Proof-of-Stake: an alternative way of confirming transactions by using miners with the highest holders of the underlying cryptocurrency.
- Token or Coin: the individual unit of currency.
- Private Key: akin to a password, a string of characters that allows investors to access their tokens or coins held in a digital wallet.
- Public Key: a shorter and mathematically linked version of the private key enabling the ability to deposit but not withdrawal stored cryptocurrency.
- Smart Contract: a digital contract that self-executes on and is secured by a blockchain.
- Oracle: a way for smart contracts to execute using external/off-blockchain information.
- Decentralized Finance or Defi: financial applications running on and secured by a blockchain.
Overview of Major Cryptocurrencies
Here are some key characteristics of the top 10 cryptocurrencies listed on CoinMarketCap.com.
|Bitcoin||– Easy to use and trade|
– Large community
– Large exchange markets/liquidity
|– High transaction fee|
– Low scalability
– Hard to reach consensus
|Ethereum||– Enables smart contracts|
– Acts as a currency
|– No limit on supply|
|Tether||– Mirrors value US Dollar|
– Layered & secure on top of other blockchains
|– History of scandals|
|Bitcoin Cash||– Fork of Bitcoin with higher scalability|
– Large community
– Large exchange markets/liquidity
– Lower transaction fee
|– Low adoption|
– Concerns of false decentralization
|Ripple||– Adopted by banking institutions|
– Fast transactions
|– Centralized and private|
– Risks of being manipulated/inflated
– Majority of coins owned by foundation
|Chainlink||– Cross blockchain transactions|
– Large number of partnerships
– Less energy-consuming proof-of-stake
|– Depends on Ethereum|
– Defi is in early stages
|Binance Coin||– High transaction speeds|
– Low-cost transactions
– Pay fees on Binance exchange
– Total count is decreasing
|– Affected by Chinese regulation|
– Tied closely to the success of Binance
|LiteCoin||– High flexibility to implement improvements|
– Near zero transaction fee
|– Fork of Bitcoin with little improvements|
– Facilitated by Swiss foundation
– Cross-chain oracle project
– Sharded, parallel processing architecture
|– Early interoperability problems|
– Highly competitive smart contract arena
– Less energy-consuming proof-of-stake
– Layered separation between transactions & contracts
|– Centralization into a few large verification groups|
– Programmed in less-tested language
Cryptocurrency is certainly a recent hot topic due to the volatility in the global economy. However, it is still a very new concept which aims to correct problems in the use of current fiat currencies. The best steps you can take is to proceed with caution learning and understanding about cryptocurrencies.
For a clear explanation of how currency works along with what makes a good cryptocurrency, check out Simplilearn’s video (4m59s@2x).
Financial Disclaimer: This content is for educational purposes only and is not suitable as financial advice. Opinions and statements expressed herein are those of the author. They do not reflect the views of Data Overhaulers or its owner. Data Overhaulers is not a subsidiary of or owned by any ICOs, blockchain startups, or companies that advertise on our platform. Investors should do their due diligence and meet with a licensed financial advisor before making any investments in any ICOs, blockchain startups, or cryptocurrencies. Please be advised that your investments are at your own risk, and any losses you may incur are your responsibility.