Cryptocurrency 101 | What is Cryptocurrency?

Cryptocurrency, by and large, does what it says on the tin. It’s a digital asset, used as a medium of exchange that’s secured by cryptography. Cryptocurrency is known as an alternative currency, and it’s caught the attention of techies, investors and financiers worldwide.

It exists online and is difficult to counterfeit because of the cryptography used to underpin its security. It’s also not issued by any central authority, unlike the British Pound or US Dollar for instance, which means it’s theoretically immune to government interference.

Where did cryptocurrency come from?

As early as 1998, computer engineer Wei Dai published his theory and description of ‘b-money’. This was an anonymous and distributed cash system. This was then followed by ‘Bit Gold’ a currency created by Nick Szabo and based on a ‘proof of work’ system. This was shortly followed by a reusable proof of work currency system created by Hal Finney.

But cryptocurrency didn’t really take off until arguably the most famous cryptocurrency, Bitcoin, was created. Funnily enough, its creator, Satoshi Nakamoto, never set out to invent a currency – he intended to create a decentralized digital cash system, and in doing so, created Bitcoin as a by-product.

Nakamoto’s concept, a Peer-to-Peer network, became the missing puzzle piece needed to make cryptocurrency what it is today.

Since Bitcoin was created in 2009, numerous other cryptocurrencies have followed in its footsteps. These are sometimes known as ‘altcoins’ – a blend of the name Bitcoin and alternative. Some popular cryptocurrency available today include Litecoin, Ethereum, Ripple, and Dash.

The technology behind cryptocurrency

The decentralized nature of current cryptocurrencies is largely enabled thanks to blockchain, a type of distributed database that’s used to record transactions. It’s shared and continuously updated across the network. Because the database isn’t stored in a single location, its records are completely public and verifiable. Millions of computers worldwide host this database, so there’s no central location where hackers could potentially exploit and corrupt the blockchain. In other words, there’s no single point of failure.

The security of blockchain and similar ledgers is also underpinned by the idea that the people who create and confirm each cryptocurrency and related transaction, miners, will try to honestly maintain each ledger, thanks to the financial incentive involved.

Because blockchain and other databases are distributed, everyone involved has a complete history of all transactions that have ever been carried out, along with the balance of every account.

So, if a young man called Bob wishes to buy a contraband book from a girl called Alice, he will give her X amount of a cryptocurrency – let’s say Bitcoin – sent to her Bitcoin Wallet (the cryptocurrency equivalent of a bank account). This is signed by Bob’s private key and after it’s signed, the transaction is broadcast to the network. The transaction is then confirmed after a specific amount of time, and it’s this confirmation that is critical to cryptocurrencies.

As long as a transaction remains unconfirmed, it is pending and can be forged. Once confirmed, it is set in stone within the blockchain, meaning it cannot be forged or reversed. Only miners can confirm transactions, stamping them as legit and spreading them across the network.

Not all cryptocurrencies are entirely the same, however, they do share common characteristics. Notably, cryptocurrency transactions are irreversible. Unfortunately, this does mean that if you send money to a scammer, you cannot possibly get it back. Likewise, transactions and accounts are pseudonymous, meaning they aren’t linked to a real-world identity. Some sleuthing could uncover the person (or people) behind each account, but it’s not easy and some cryptocurrencies make it nearly impossible without some heavy-handed data mining. Transactions are spread across the network almost instantly, and confirmed within a few minutes. Cryptocurrencies are locked in a public key cryptography system, with only the owner of a private key able to send funds. Coupled with strong cryptography and a lot of numbers, this makes cryptocurrency extremely secure. Although, not entirely fool-proof, as recent hacks on the CoinDash Initial Coin Offering (ICO) and Ethereum Wallets have sadly proven.

Most cryptocurrencies limit the supply of each currency, placing an ultimate cap on the amount that can be in circulation, much like precious metals. Bitcoin is expected to reach its final number around the year 2140. Limited supply of cryptocurrency means coins/tokens can increase in value rapidly, according to demand. Coins and tokens can commonly increase by 10% of its value in a day, occasionally 100%, only to decrease by the same the following day. Some lucky people see their coin’s value increase by up to 1000% in just a few weeks – usually following a listing on an exchange or some other action that increases demand for the cryptocurrency.

Who uses cryptocurrency?

You don’t need permission to use a cryptocurrency, it is open to everyone. Which means that different cryptocurrencies can be used for many different things. Thanks to its pseudonymous nature, cryptocurrency is used for nefarious purposes like drug dealing or buying arms. However, there are many other legal or more ethical uses for it too – like buying banned books and media in dictator-led countries, or the more light-hearted Dash vending machine.

Apart from their use as a form of payment, cryptocurrencies are also used by investors to speculate. Exchanges like Poloniex, OKcoin and Shapeshift enable trade of cryptocurrencies and it is a very fast growing, dynamic market with a daily trade volume that exceeds many major European stock exchanges. There are also ICOs (as mentioned above) which have given rise to some incredibly successful crowdfunding projects. Supercomputer project Golem’s crowdfunding through its Golem Network Token raised more than $8.6million in under half an hour.

Returning to Bitcoin, the cryptocurrency now has a physical presence across the world, with 1189 Bitcoin ATMs currently in operation. In May this year, an average of 3 Bitcoin ATMs were being installed every day – testament to the cryptocurrency’s huge growth and popularity across the globe.

Cryptocurrency doesn’t just have to make users money either. The Dogecoin Foundation, centred around the cryptocurrency Dogecoin, is a charitable organization that has raised money to address Kenya’s water crisis, help send the Jamaican bobsled team to the 2014 Olympic games and provide service dogs to children in need.

Which highlights one last aspect of cryptocurrency: that each and every one is as diverse and unique as the users behind it and the many uses it powers.