What is cryptocurrency? Is it money of the future or just 21st century unicorn? In today’s world, cryptocurrencies are nothing less than a global phenomenon and almost everyone has heard of them. While it is true that they have become well-known, it is also a fact that they are still not understood properly by most governments, banks and companies.
Nonetheless, almost everyone is interested in learning more about cryptocurrencies, especially after Bitcoin reached its peak at the end of last year and changed fortunes overnight. Beyond the press releases and noise, the overwhelming majority, including consultants, developers, scientists and bankers, don’t have a lot of knowledge about cryptocurrencies.
As a matter of fact, these people don’t even understand the basic concept. However, due to their widespread use and rapid adoption, more and more people are fascinated by cryptocurrencies, just as Guy Galboiz has said. This guide will help everyone in understanding exactly what cryptocurrency is and how it came to be.
How did cryptocurrency originate?
Not many people are aware that cryptocurrencies emerged as a byproduct of another invention. The mysterious inventor of the first and most important cryptocurrency, Bitcoin, Satoshi Nakamoto had absolutely no intention of inventing a currency. In late 2008, when he announced Bitcoin, Satoshi declared that he had created a ‘peer-to-peer electronic cash system’. His purpose had been to invent something that a lot of people had failed to do before; digital cash. The single most noticeable feature of Satoshi’s invention was the fact that he had succeeded in building a decentralized digital cash system.
In the 90s, a number of attempts had been made for creating digital money, but most of them had failed. This failure pushed Satoshi to create a digital cash system that didn’t have a central entity. This decision led to the birth of the first cryptocurrency, Bitcoin.
What is cryptocurrency?
If you eliminate all the noise that surrounds cryptocurrencies and only get the gist, then they are defined as limited entries in a database that cannot be changed by anyone unless certain conditions are fulfilled. It may seem rather ordinary, but this is exactly what cryptocurrency is. It is the same as the money in your bank account. This is also just entries in a database that can only be altered under particular conditions. You can even take it in the form of physical coins and notes. Thus, this means that money is simply about a verified entry in a kind of database about transactions, balances or accounts.
How coins are created and transactions confirmed?
There is a mechanism that rules the database of cryptocurrencies; every cryptocurrency has a network of peers such as Bitcoin. Every peer will possess the complete history and records of all transactions, which means they will be aware of the balance of every single account. When a transaction occurs, the entire network will know about it immediately, but it will get confirmed after a specific amount of time. Confirmation is a critical part of cryptocurrencies. In fact, they are all about confirmation. As long as a transaction remains unconfirmed, it is pending and can be subjected to forgery. However, when it is confirmed, there is nothing that can be done to change it, which means that it is set in stone.
This transaction cannot be reversed or forged and becomes part of the blockchain; an immutable record of all transactions. Transactions can only be confirmed by miners as it is their job to do so. They stamp transactions as legitimate and spread them throughout the network. After a miner confirms a transaction, it needs to be added by every node and thus, becomes part of the blockchain. Doing this job gets miners rewarded with a cryptocurrency token.
What do miners do?
Anybody can be a miner. As this task is not delegated by a decentralized authority, a kind of mechanism is needed by a cryptocurrency for preventing one ruling party from abusing it. If thousands of peers are created by someone and they spread forged transactions, it would cause the system to break down. Therefore, Satoshi came up with a rule that miners would only quality for this task by investing some of their PCs. As a matter of fact, miners have to find a product of a cryptographic function called hash. This product connects the new block mined with its predecessors and this is referred to as Proof of Work.
The SHA 256 Hash algorithm is used for Bitcoin, but there is no need to understand it. The only thing that people need to know is that it forms the basis of the cryptologic puzzle that miners are competing to solve. When a miner finds a solution, they build a block, which is then added to the blockchain. He is given a specific number of Bitcoins as an incentive and this is the only way of creating valid Bitcoins.
Hence, solving a cryptographic puzzle is how miners can create Bitcoin. They can only create a specific number of cryptocurrency token in a certain amount of time because the difficulty of the puzzle increases the computer power that needs to be invested by the miner.
Properties of Cryptocurrencies
In simple terms, cryptocurrencies are entries about tokens that are made in a decentralized database. The term ‘CRYPTO’ is used because strong cryptography is used for securing the consensus-keeping process. This means that instead of being secured by trust or by people, math is used for securing cryptocurrencies. The chances of an asteroid falling on your house are higher as opposed to a Bitcoin address being compromised.
There are monetary properties of cryptocurrencies as well as transactional properties that make them different from other digital currencies and payment systems. Let’s take a look at the transactional properties first:
Irreversible
First things first, cryptocurrency transactions are irreversible. Once they have been confirmed, there is nothing you can do for reversing them. There is no one who can do it for you either, whether it is the creator the cryptocurrency, your bank or even the miner. The transaction is set in stone. If you have accidentally sent your money to a scammer or if the funds were stolen from your computer, nothing can be done as there is no safety net available.
Pseudonymous
Neither the cryptocurrency accounts nor their transactions are connected to the real-world identities of people. Cryptocurrencies are sent or received on so-called addresses, which appear to be random chains of 30 characters. While the transaction flow can be analyzed by someone, it is not possible to connect the addresses with the real identity of their users.
Global and Fast
One of the major features of cryptocurrency transactions is that are propagated almost instantly in a network and confirmation can be done in a couple of minutes. As these transactions are conducted in a global network of computers, your physical location is not really relevant in this regard. It doesn’t matter whether you are sending Bitcoins to your neighbor or to a friend in a different part of the world; the transaction will be quick.
Permission-less
There is no need for you to obtain anyone’s permission when you are interested in using cryptocurrency. It is simply a software that can be downloaded by everyone without incurring any cost. Once it has been installed, people can send or receive any cryptocurrency and since there is no gatekeeper, it means that no one can stop or prevent you from doing so.
Secure
A public key cryptography system is used for locking all cryptocurrency funds. The cryptocurrency can only be sent by the owner of the private key. The magic of big numbers and strong cryptocurrency makes it impossible for anyone to break this scheme. As a matter of fact, a Bitcoin address boasts more security than Fort Knox and as stated by Guy Galboiz, this is one of the most appealing properties of cryptocurrencies.
The monetary properties of cryptocurrency are outlined below:
Controlled Supply
The supply of tokens is limited in most cryptocurrencies, including Bitcoin. The supply of the pioneer cryptocurrency will also decrease over time and it is expected that it will reach its cap of 21 million sometime around 2140. The supply of tokens by all cryptocurrencies is controlled by a schedule that has been written in the code.
How is this helpful? It means that a cryptocurrency’s monetary supply in the future at any given moment can be roughly calculated today.
No debt but bearer
Debt creates the Fiat-money on your bank account and the numbers visible on the ledger are an indication of your debt. Defined simply, it is a kind of IOU. On the other hand, cryptocurrencies don’t indicate any debt and they are simply money, in the same way as gold.
Both transactional and monetary properties need to be understood if you want to comprehend the revolutionary impact that cryptocurrencies have had. As an irreversible, permission-less and pseudonymous means of payment, cryptocurrencies are essentially an attack on the control of governments and banks over the monetary transactions conducted by people. No one can be prohibited or prevented from using cryptocurrency and transactions cannot be cancelled. Furthermore, they also have an impact on the scope of monetary policy because they have a controlled and limited supply that cannot be changed by a government. Thus, cryptocurrencies eliminate the control central banks have of manipulating the monetary supply through inflation or deflation.
As Guy Galboiz has said, these revolutionary properties have made cryptocurrencies a huge success; something their inventor, Satoshi Nakamoto, hadn’t even dreamt about. Other attempts at creating a digital cash system were not able to attract a large number of users, but the introduction of Bitcoin provoked fascination and enthusiasm. Cryptocurrencies have become the digital alternative of gold and they are free from any kind of political influence. They are a kind of money that can preserve and even increase their value with time. In addition, they have also become a comfortable and fast means of payment that have a worldwide scope.
While Bitcoin is still the most popular and renowned cryptocurrency all over the world, a number of others have also sprung up. Some of the popular ones out there, other than Bitcoin, are:
Ethereum
In the hierarchy of cryptocurrencies, Ethereum has moved to second place and it is the invention of crypto-expert Vitalik Buterin. The blockchain of this cryptocurrency doesn’t just validate a set of balances and accounts, but also of so-called states. This means that not only can Ethereum process transactions, but also do the same for complex programs and contracts. Due to this flexibility, Ethereum has become the ideal instrument for blockchain application.
Ripple
This may be less popular in the cryptocurrency community, but it has a native cryptocurrency called XRP. Ripple itself is more about a network of processing IOUs than cryptocurrency itself. XRP, on the other hand, is not a medium for exchanging or storing value, but is more like a token designed to offer the network protection against spam. XRP tokens are distributed by Ripple on will due to which it is often referred to as pre-mined.
Litecoin
One of the first cryptocurrencies that were introduced after Bitcoin was Litecoin and is referred to as the silver to Bitcoin’s gold. It is considerably faster than the pioneer cryptocurrency and has a larger amount of token with a new mining algorithm. Hence, Litecoin is regarded as an excellent innovation, which has been designed to be Bitcoin’s smaller brother. Several other cryptocurrencies were also introduced as a result such as Feathercoin and Dogecoin and they are even lighter.
There are plenty of other cryptocurrencies out there and as per Guy Galboiz, more will be introduced since this market is wild and fast. Almost every day, new cryptocurrencies emerge and some old ones die out. They are being traded all over the world and new innovations are being made in almost every industry due to these cryptocurrencies. In a nutshell, as stated by Guy Galboiz and other experts, cryptocurrency are an investment of the future.
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