They all have different properties. Bitcoin is a store of wealth with a limited number in circulation. Ether is a token that can run its own programs on top, called smart contracts.
While each digital asset has its own functionality, they also have market prices that move around. This offers investors opportunities to speculate on which systems will achieve widespread adoption.
These assets are useful to buy things online and track who you’re buying from, and are powerful because they don’t rely on a centralised institution to control their supply. At their core, cryptocurrencies are digital assets that cannot be duplicated.
Cryptocurrencies are issued through a “mining” process, whereby millions of computers track and verify the existence of every single coin.
Once they confirm that every coin is in the right place, and agree on every owner of every coin in the past, a new coin can be created. This issuance method is different to that of fiat currencies, where central banks decide how many are in circulation.
The tracking and verification process, which is underpinned by mining, is visible on a public blockchain. Because hundreds of millions of people are transacting, it can take time to verify all the past and current transactions.
That’s why bitcoin miners have set up huge server operations to keep up with the hundreds of millions of people transacting every second. In Australia, we have a few bitcoin miners that are plugged into renewable energy sources to power their operations.
The blockchain is the public record of all the transactions that have ever existed.
It’s different to a typical database in that the data streaming in is clumped into blocks, instead of tables. And once full, those blocks are linked to the previous block and are immutable, meaning they can’t be altered.
Miners ensure all the blocks are accounted for. At their core, blockchains let people agree about data with strangers on the internet.
Stablecoins are a digital asset pegged to another asset, such as the Australian dollar or the price of gold. They are mostly used as a way for investors to hold “cash” within the crypto ecosystem.
As it stands now, investors swap their Australian dollars for a cryptocurrency, whether that’s bitcoin or ether or some other coin, which then allows them to participate in broader crypto-based activities such as trading, staking or gaming.
But when they make that conversion, they sometimes need to pay tax.
NFT popularity stems from the technical breakthrough that digital files can be attached to a blockchain – a public ledger that records all transactions associated with that file.
Artists around the world are creating work and “minting” it to a blockchain. This ensures the provenance of the work is recorded and, as the artwork changes hands, each new owner is also recorded.
While anybody can find and download the file associated with an NFT for nothing and store it on their phone or computer, only the owner has the right to sell it.
DAO (decentralised autonomous organisation)
A DAO is a way of organising people and automating the contracts that bind them. They are used to coordinate financial contributors from around the world on a common project, but Australian law doesn’t recognise them.
If a corporation is a collection of employment and administrative contracts, managed by a board of directors for shareholders, then a DAO automates the management of those contracts and offers a way for the collective group of shareholders to make decisions about how their investments are spent.
Decentralised finance (DeFi)
DeFi is short for “decentralised finance”, an overarching term for a variety of financial applications using cryptocurrencies and blockchains. It is geared toward disrupting financial intermediaries by replacing them with automated software.