Cryptocurrencies stablecoins CBDC 2021 glossary here's everything you need to know about cryptocurrencies, stablecoins and CBDC.

Cryptocurrencies and stablecoins are booming in 2021. Central banks around the world are increasingly interested in creating your own digital currencies. But how do they all work and what are they for?

Cryptocurrency

Cryptocurrencies are basically digital currencies that are not controlled or issued by a centralized authority, such as commercial or central banks.

These coins are sent back and forth on huge peer-to-peer networks, which are basically groups of computers that share data.

The innovation of cryptocurrencies is that the" ledger "or" ledger "that keeps track of transactions, known as blockchain, is monitored and verified by network users known as"miners." These collectively do the work of a central authority, verifying that people do not attempt to spend 2 times the coins while earning newly created bitcoins in return.

"What we want with the blockchain is to do a thorough monitoring so that no one gets absolute control. It's completely democratic [and] it's completely accessible," explains Ben Edgington, software developer for the ethereum network.

Cryptocurrencies stablecoins CBDC 2021 glossary

Bitcoin investors refer to this cryptocurrency as 'digital gold'

When bitcoin was launched in 2008, created by Satoshi Nakamoto, many thought it could be used for current payments. However, it is too volatile.

Now, many investors say that its scarcity (only 21 million coins can be mined) implies that it will maintain its value and protect investors against inflation. Others, however, claim that it is purely speculative.

On the other hand, there are other cryptocurrencies that have different uses. The ethereum network, for example, can be used to create applications as collectible "non-fungible tokens".

Cryptocurrencies are very risky

In bitcoin and other networks that follow its model, miners verify transactions using large amounts of computing power to solve complex mathematical problems. The bitcoin mining system uses as much electricity annually as some medium-sized countries.

Cryptocurrencies stablecoins CBDC 2021 glossary

Other cryptocurrencies consume less energy

Cryptocurrencies are mostly unregulated and are some of the riskiest investments out there. For example, bitcoin has plummeted around 50% since its April all-time high of about 65,000 (just over 55,000 euros).

Stablecoins

High volatility has been a major impediment for some investors as it can make digital currencies more difficult to use. That's where stablecoins come into play. These maintain a "stable" value with a link to other assets, such as the dollar.

For example, Tether, the third largest cryptocurrency by market capitalization, is designed to be pegged to the US dollar. It is backed by assets such as dollars and treasury bills.

Cryptocurrencies stablecoins CBDC 2021 glossary

Traders love stablecoins

The interest of these other digital currencies has also skyrocketed. They are critical to cryptocurrency trading as they allow investors to easily enter and exit more volatile assets such as bitcoin.

Stablecoins are also commonly used in the world of decentralized finance, a booming ecosystem that allows people to create financial products without the need for central authorities.

Regulators are worried

However, they face strong scrutiny. In May, the Federal Reserve's Brainard expressed concern that stablecoins could fail and destabilize the financial system. New York also banned trade in Tether after an investigation found that it had altered data on its US dollar value.

As with the rest of the cryptocurrency world, the lack of regulation implies that investors have almost no protection if their currency suddenly collapses.

Cryptocurrencies stablecoins CBDC 2021 glossary

CBDC (central bank cryptocurrencies)

Countries are trying to find ways to make it easier to spend and send money, and keep control of increasingly private payment systems (think PayPal or Visa). A digital currency issued by central banks directly to consumers could be the answer.

At the moment, private banks and payment companies are the most important players in the daily use of money. But a central bank digital currency (or CBDC) would be a digital version of notes and coins, allowing people to withhold and make payments with central bank money.

China currently leads the group of the world's largest economies. But the European Central Bank and the Bank of England are seriously investigating it.

CBDCs could make payments safer

CBDCs could accelerate transactions for large individuals and institutions, Chris Giancarlo, founder of the Digital Dollar Project, a nonprofit, told.

"If you can send a photograph to Japan in a second, why can't you send money in a second?"Giancarlo reflects.

Central banks also believe that CBDCs can make the financial system more secure. Although unlikely, even a large global payment system could collapse.

Some bankers worry about the situation

One of the main concerns is privacy. Some governments may design CBDCs to make transactions anonymous, such as cash, but others may not. In fact, privacy concerns have arisen over China's digital yuan test.

"With a CBDC, the government would have direct access to all of its spending patterns," says Bobby Ong, co-founder of data firm CoinGecko.

Some bankers worry that CBDCs may remove them from key parts of the financial system. They could reduce the demand for commercial bank accounts and exclude banks from the business from verifying transactions, although central banks are working on the details.