Definition
A cryptocurrency is a digitally represented asset whose transfers are authorized using cryptographic keys and recorded by a network. Most cryptocurrencies operate on blockchains. Unlike a bank-account balance, a native cryptocurrency can be transferred directly on its network without a bank maintaining the authoritative ledger.
How It Works
A wallet creates and signs a transaction with the relevant private key. Network participants verify it against protocol rules and use a consensus mechanism to determine which transactions become part of the accepted record. The wallet manages access to assets; it does not contain the coins themselves. Some assets are native coins, while others are tokens issued through smart contracts.
Uses and Limitations
Cryptocurrencies may be used for payments, network fees, governance or access to applications. Their purpose and design differ significantly. A digital asset is not necessarily decentralized, anonymous or backed by reserves. Price volatility, custody arrangements, protocol vulnerabilities and transaction fees affect how an asset can be used. Legal treatment also varies by jurisdiction.