What is Cryptocurrencies and How Do They Work?

Is this all a scam? or is it simply a highly complicated model that is too high for our regular brains? None of the two. To comprehend, the first thing someone must do is clean out all of their existing assumptions. Let's talk about three very basic concepts: need, utility, and value. In economics, there are sophisticated equations and thoughts about all three concepts. But here, let us simply think,

"I want to talk to my parents who live in Chicago while I work in California." This is my dilemma in economics. Such a problem is typically classified as a "need." Because I want to talk to my parents, I purchased two cellphones, one for my parents and one for myself. Now that both ends have a gadget, we can communicate. The problem of detachment has been handled. Cellphones that I have purchased have addressed my problem and satisfied my demand; the ability to solve my problem or satisfy my desire is referred to be "UTILITY" in economics. Cellphones can solve my problem, so I need them. They must have produced value, so I am willing to pay, say, $50 for each of them.

The same goes for cryptocurrencies. These virtual currencies are "created values" by solving problems, which can then be used in a variety of applications. In the old world, raw materials are turned into products that are distributed to consumers via a network of enterprises. While cryptocurrency is not a physical object, it does have an ecosystem that includes several players. Here's how we can adapt those steps to the world of cryptocurrency,

Protocol Developers

Think of them as the Producers: These are the individuals or teams who create the underlying blockchain technology and protocols that power specific cryptocurrencies. They design the rules, security mechanisms, and functionalities of the crypto ecosystem. Examples include the team behind Bitcoin (Satoshi Nakamoto) or Ethereum (Vitalik Buterin).


Think of them as the Processing Companies: These are the entities that verify and secure transactions on the blockchain network. In proof-of-work systems like Bitcoin, miners use powerful computers to solve complex math puzzles to validate transactions. In proof-of-stake systems, validators lock up their cryptocurrency holdings to secure the network. Miners or validators receive rewards in cryptocurrency for their work.

Cryptocurrency Exchanges

Think of them as the Wholesalers: These platforms act as marketplaces where users can buy, sell, and trade cryptocurrencies. They connect buyers and sellers, provide liquidity, and often charge fees for their services. Examples include Coinbase, Binance, and Kraken.

Wallet Providers

Think of them as the Retailers: These companies offer digital wallets where users can store, send, and receive cryptocurrencies. They provide a secure way for individuals to manage their crypto holdings. Examples include Exodus, MetaMask, and Ledger (hardware wallet).

Additional Players

Decentralized Applications : These are applications built on top of blockchain platforms that offer various functionalities. They can leverage cryptocurrencies for payments, governance, and other purposes. developers can be seen as a separate category within the ecosystem.

Regulatory Bodies: Governments and regulatory institutions are increasingly involved in the crypto space, establishing guidelines and regulations to ensure consumer protection and prevent illegal activities.

Important Note

Decentralization: Unlike the traditional model, cryptocurrency operates on a decentralized network. There's no single entity controlling the entire process. Developers, miners/validators, exchanges, and wallet providers all play independent but interconnected roles in the ecosystem.

This is a simplified view, and the specific roles and interactions between these players can vary depending on the specific cryptocurrency and its underlying technology.