What is Cryptocurrency and How To Create One?
Posted March 25, 2022 by Gifhary Syidhqa Hamim ‐ 6 min read
A cryptocurrency is a digital or virtual cash that is secured by cryptography techniques, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology, a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
Cryptocurrency was created as a way for people to send money over the internet. The digital currency was intended to provide an alternative payment system that would operate free of central control but otherwise be used just like traditional currencies.
Is Crypto Coin The Same Thing As Crypto Token?
Short asnwer: No, its not.
Long aswer: Coin or token sometimes can be used interchangeably refering the same thing, but its not always. At a basic level, all coins are considered tokens but not all tokens are considered crypto coins. The term crypto token refers to a special virtual currency token or how cryptocurrencies are denominated.
These tokens represent fungible and tradable assets or utilities that reside on their own blockchains. Crypto tokens are often used to fundraise for crowd sales, but they can also serve as a substitute for other things. These tokens are usually created, distributed, sold, and circulated through the standard initial coin offering (ICO) process, which involves a crowdfunding exercise to fund project development.
Layers Used In Blockchain Technologies
Layer 1 (L1)
In the decentralized ecosystem, a Layer-1 network refers to a blockchain, while a Layer-2 protocol is a third-party integration that can be used in conjunction with a Layer-1 blockchain. Bitcoin, Litecoin, and Ethereum, for example, are Layer-1 blockchains. Layer-1 scaling solutions augment the base layer of the blockchain protocol itself in order to improve scalability. A number of methodologies are currently being developed and practiced that improve the scalability of blockchain networks directly.
Layer 2 (L2)
This refers to a network or technology that operates on top of an underlying blockchain protocol to improve its scalability and efficiency. This category of scaling solutions entails shifting a portion of a blockchain protocol’s transactional burden to an adjacent system architecture, which then handles the brunt of the network’s processing and only subsequently reports back to the main blockchain to finalize its results. By abstracting the majority of data processing to auxiliary architecture, the base layer blockchain becomes less congested, and ultimately more scalable.
Layer-1 and Layer-2 scaling solutions are two sides of the same crypto coin, they’re strategies designed to make blockchain networks faster and more accommodating to a rapidly growing user base. These strategies are not mutually exclusive either, and many blockchain networks are exploring combinations of Layer-1 and Layer-2 scaling solutions to achieve increased scalability without sacrificing adequate security or decentralization.
The word “tokenomics” is a compound of the words “token” and “economics”. This term raised popularity in the middle of 2017 due to the high numbers of ICOs and different project models. Tokenomics contains all decisions around the implementation of a token within an ICO ecosystem.
The Importance of Understanding Tokenomics
A famous rule of investing, stated by Seth Klarman, is that supply and demand are the only things that determine market prices in the short run. So if we take that to be true and apply it to cryptocurrencies using blockchain technology and the stock market, then understanding what impacts the supply and demand of tokens are crucial to speculators and investors.
So there are various factors to think about when looking into cryptocurrency tokenomics. One of the most important factors is understanding how people use digital currency. For example, is there a clear link between the platform’s usage and the asset? If so, there’s a chance that a growing platform will require the usage of certain tokens, ultimately increasing their price. If not, why would someone use the token?
Other important tokenomics questions to consider include:
- How many tokens currently exist?
- How many will be created in the future, and how quickly?
- Who owns the coins, and are there any set aside for developers in the future?
- How many tokens have or will be burned, lost, deleted, or unusable?
Cryptocurrency burning is the process in which users can remove tokens (also called coins) from circulation, which reduces the number of coins in use. The tokens are sent to a wallet address that cannot be used for transactions other than receiving the coins. The wallet is outside the network, and the tokens can no longer be used.
A project burns its tokens to reduce the overall supply. In other words, it creates a “deflationary” event. The motivation is often to increase the value of the remaining tokens since assets tend to rise in price whenever the circulating supply falls and they become more scarce.
Burning tokens can be similar to a company buying back its shares. The company “returns the value” to its shareholders in this way. Crypto projects burn their tokens to achieve the same goal.
The price of the token does not necessarily increase overnight when the burn takes place. Sometimes, other news about the token can overwhelm the impact. Alternatively, investors may know a token burn is going to happen and “price it in” at an earlier point. Even so, in the long run, burning tokens tend to support an asset’s price and is considered a positive move.
How To Create Your Own Token
Define your token properties
First of all, you need to decide what your crypto token will do. If it’s a typical ERC-20 token meant to attract investors, it will have the inherent properties of the ERC-20 standard. You’ll be able to specify:
- Total token supply
- Token’s name, symbol, and number of decimals
- Auxiliary functions to check balances on addresses, enable and verify transactions If it’s an NFT, it will have slightly different parameters, e.g., to specify owners of non-fungible crypto tokens.
If it’s an NFT, it will have slightly different parameters, e.g., to specify owners of non-fungible crypto tokens.
Develop a smart contract
Any crypto token is governed by a smart contract, which is a piece of software running on a blockchain. So to make your own token, you need to code a smart contract, or you can find open source smart contract code on GitHub copy-paste and modify to your own token properties.
Run QA on a test chain
When creating a vanilla smart contract for a crypto token, keep in mind that it will be quite a hassle to replace it in case there’s a bug. Therefore run multiple tests on a test blockchain like Rinkeby or Ropsten.
Deploy to blockchain
Deploying a smart contract is pretty simple. Depending on a tool your developers are working with, they’ll just need to send a transaction with compiled contract code without specifying a receiver. It’s just a matter of a few clicks, really, and something not to worry about.
In any case, ensure that the contract functions perform flawlessly on a test net (user can send and receive crypto tokens, the contract executes the rest of its features, etc.) before deploying it to the mainnet (Ethereum).