What Is Dogecoin And How Does It Work?

What Is Dogecoin And How Does It Work

Dogecoin is a cryptocurrency, like Bitcoin or Ethereum—although it’s a very different animal than either of these popular coins. Dogecoin was originally created at least in part as a lighthearted joke for crypto enthusiasts, and took its name from a once-popular meme. Despite this unusual origin story, it has exploded in popularity in 2021—as of writing, Dogecoin has become the fifth largest cryptocurrency by market cap.

What is Dogecoin?

Software engineers Billy Marcus and Jackson Palmer created Dogecoin in late 2013. Palmer branded the cryptocurrency’s logo using a meme popular at the time that featured the deliberately misspelled word “doge” to describe a Shiba Inu dog.

“Doge was really started to poke fun at Bitcoin,” said Pat White, CEO of Bitwave. In its early days, a community of enthusiasts arranged publicity stunts to raise Dogecoin’s profile, gathering funds to send the Jamaican Bobsleigh team to the 2014 Olympics, for instance, or sponsoring a NASCAR driver.

In early 2021, Dogecoin gained cult status on Reddit’s WallStreetBets message board—the prime instigator behind the GameStop affair in January—where enthusiasts had promised to propel its value “to the moon” (that was before all discussion of crypto was banned on the subreddit).

How Does Dogecoin Work?

Dogecoin is a cryptocurrency that runs on blockchain technology, similarly to Bitcoin and Ethereum. Blockchain is a distributed, secure digital ledger that stores all transactions made using a decentralized digital currency. All holders carry an identical copy of the Dogecoin blockchain ledger, which is frequently updated with all new transactions in the cryptocurrency. Like other cryptocurrencies, Dogecoin’s blockchain network uses cryptography to keep all transactions secure.

Also Read: How Crypto Wallets Work: Key Things To Know

People called miners use computers to solve complex mathematical equations in order to process transactions and record them on the Dogecoin blockchain—a so-called “proof of work” system. In exchange for processing transactions and supporting the blockchain ledger, miners earn additional Dogecoin, which they can then hold or sell on the open market.

Dogecoin may be used for payments and purchases, but it’s not a very effective store of value. This is chiefly because there is no lifetime cap on the number of Dogecoins that may be created by mining—meaning that the cryptocurrency is highly inflationary, by design. The blockchain rewards miners for their work by creating millions of new Dogecoins every day, which makes it very challenging for speculative price gains in Dogecoin to hold up over time.

Dogecoin vs Bitcoin

Dogecoin has a few significant differences compared to Bitcoin. First, it’s quicker and easier for miners to complete the mathematical equations that complete and record transactions on the transactions, which makes Dogecoin somewhat more efficient for processing payments. “Where it takes 10 minutes for the process to ratify new blocks on the Bitcoin blockchain, it takes only one minute on the Dogecoin blockchain,” said Gary DeWaal, Chair of Katten’s Financial Markets and Regulation group.

Another significant difference is the absence of any lifetime cap on the number of Dogecoins that can be created, as we noted above. There is a lifetime cap of 21 million Bitcoin that limits the maximum possible number of coins that can be created. This means that miners are forced to work harder and longer over time to earn new Bitcoin, and to a degree it helps guarantee Bitcoin’s ability to hold and grow its value over time.

How to Buy Dogecoin

You can buy Dogecoin on a cryptocurrency exchange like Binance or Kraken. Exchanges require that you Set up an account with Dollars or CryptoKitties and fund it. You are then able to buy and exchange cryptocurrencies. Notably, the major crypto exchange Coinbase does not support the purchase of Dogecoin. Some online brokers, including Robinhood and TradeStation, allow you to buy cryptocurrency in addition to traditional assets such as stocks, mutual funds and bonds. They do not offer as many cryptocurrencies as exchanges.

Dogecoin Cryptocurrencies

As with other cryptocurrencies, once you’ve purchased Dogecoin it’s best to move your coins to a crypto wallet. Wallets take many forms, from online services offered by exchanges like Coinbase (while you can’t buy Dogecoin on Coinbase, you can store it in your Coinbase wallet), to apps on your mobile device or even a physical hard drive. You secure the wallet with a private password. Since your coins are held outside of an exchange, there’s an extra layer of protection against hacks. Before Dogecoin broke out into the mainstream and rocketed higher in price, you used to be able to earn free coins for doing basic tasks online.

“For many years, you could perform tasks at Dogecoin ‘faucets’ to earn Dogecoin instead of buying it,” said C. Neil Gray, partner in the fintech practice areas at Duane Morris LLP. “The tasks included things like watching an advertisement or taking a survey. More recently, it’s become difficult to find any that work.”

Also Read: Why Elon Musk Said Governments Can’t Destroy Crypto? Is He Right?

Is Dogecoin a Good Investment?

Since there is no lifetime limit on the number of Dogecoins that can exist, and millions of new Dogecoins are released onto the markets every single day, there is very little incentive to hold the cryptocurrency for the long term. Bitcoin continues to rise in value because of the system’s lifetime cap on the number of coins that can be created. “Doge really is less like Bitcoin and more like DASH or Bitcoin Cash, where the express goal is a spending currency,” said White.

Historically, Dogecoin has had a very low per coin value, around $0.003 per coin for most of 2020, so people were more likely to give them away. “Users on social platforms, such as Reddit, Twitter, Facebook and others, can use this cryptocurrency to reward, or “tip” each other for posting content,” Gray said at Dogecoin. The gains that are seen in 2021 may not be sustainable in the long term. Whether crypto’s culture of tipping and donating will continue remains to be seen.

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