Cryptocurrency

Cryptocurrency is a digital asset—very similar to a currency—and is an integral part of a blockchain ecosystem. Cryptocurrency does not exist without a Distributed Blockchain Ledger (DLT) and some fundamental blockchain mechanisms can't be realized without this asset.

Let's learn what cryptocurrency is with a question/answer approach—first we'll ask the right questions, and then answer them one by one:

• How is cryptocurrency modeled and realized in a blockchain?

• How is cryptocurrency issued?

• Why does cryptocurrency exist?

• How is cryptocurrency secured?

• Who has control over the cryptocurrency?

How is cryptocurrency modeled and realized in a blockchain?

All the data stored in a blockchain is immutable and recorded as transactions in the blocks. This information is then used to derive the current state of a blockchain (world state).

The current state is a set of key-value pairs, where the key identifies an account and the value is data associated with that account. These data contain the balance, indicating the number of cryptocurrency units owned by the account.

So, cryptocurrency is a type of information stored on the blockchain ledger.

How is cryptocurrency issued?

An account only owns a certain quantity of cryptocurrency and can't create new units. The issuing of new cryptocurrency units is strictly tied to the process of adding new blocks to the chain. Every time a new block is created, a certain amount of new cryptocurrency is issued.

The newly issued cryptocurrency is used as an incentive and it will be added to the balance of some nodes of the network. Typically in PoW networks, only the miner who mined the block receives this reward, while in PoS, the reward is split between both block proposer and validators.

Why does cryptocurrency exist?

Cryptocurrency is used as a medium of exchange, similar to traditional currencies. It was designed to intervene in some mechanisms that underlie the functioning of a blockchain.

Transaction fee

The world state of a blockchain changes when transactions are submitted to the network and then finalized in a block. In a permissionless blockchain, everyone can send transactions and potentially clog the network with spam transactions. To prevent the risk of a malicious transaction flooding slowing down and compromising the network, each transaction has an associated fee. The transaction sender must pay the fee with a certain amount of cryptocurrency from their balance (this is the only acceptable form of payment). Transaction fees are used as an incentive and transferred to active nodes of the network. So, essentially, a transaction sender pays the nodes who participate in the network maintenance and security.

When many people use the blockchain at the same time, the volume and rate of transactions increase and the nodes require a higher fee for their services. Remember that a node (miner or staker) independently decides which transactions are included in a block. Of course, they will pick transactions where higher fees are paid.

For this reason, transaction fees are not constant and predetermined; there is typically a base fee, but the transaction sender can decide to pay more to gain priority. 

This means that in a way, transaction fees reflect the speed with which the user wants to have a transaction validated.