A cryptocurrency is a digital or virtual currency that uses cryptography to secure and verify transactions as well as to control the creation of new units of a particular cryptocurrency. Essentially, cryptocurrencies are limited entries in a database that no one can change unless specific conditions are fulfilled. Cryptocurrencies can be sent directly between two parties via the use of private and public keys. These transfers can be done with minimal processing fees, allowing users to avoid the steep fees charged by traditional financial institutions.
Today cryptocurrencies have become a global phenomenon known to most people.The first blockchain-based cryptocurrency was Bitcoin, launched in 2009, which still remains the most popular and most valuable.
There have been many attempts at creating a digital currency during the 90s tech boom, with systems like Flooz, Beenz, and DigiCash emerging on the market but inevitably failing. Then an anonymous programmer or a group of programmers under an alias Satoshi Nakamoto introduced Bitcoin. In his announcement of Bitcoin, Satoshi said he developed “A Peer-to-Peer Electronic Cash System.“ It is completely decentralized, meaning there are no servers involved and no central controlling authority.
… after more than a decade of failed Trusted Third Party based systems (Digicash, etc), they see it as a lost cause. I hope they can make the distinction, that this is the first time I know of that we’re trying a non-trust based system. – Satoshi Nakamoto in an E-Mail to Dustin Trammell
Soon after, in October 2011, LiteCoin was released. It was the first successful cryptocurrency to use a script as its hash function instead of SHA-256.
How cryptocurrency works?
One major problem every payment network has to solve is to prevent the so-called double spending: to prevent that one entity spends the same amount twice. However, this method always entailed an authority basically in control of your funds and with all your personal details on hand. In a decentralized network like Bitcoin, every single participant needs to do this job. This is done via the Blockchain. Every transaction is a file that consists of the sender’s and recipient’s public keys (wallet addresses) and the amount of coins transferred. The transaction also needs to be signed off by the sender with their private key. All of this is just basic cryptography.
How miners create coins and confirm transactions?
Let‘s have a look at the mechanism ruling the databases of cryptocurrencies. A cryptocurrency like Bitcoin consists of a network of peers. Only miners can confirm transactions by solving a cryptographic puzzle. They take transactions, mark them as legitimate and spread them across the network.
Understanding cryptocurrency properties
Most common cryptocurrencies
- Bitcoin — The first ever cryptocurrency that started it all.
- Ethereum — A Turing-complete programmable currency that lets developers build different distributed apps and technologies that wouldn’t work with Bitcoin.
- Ripple — Unlike most cryptocurrencies, it doesn’t use a Blockchain in order to reach a network-wide consensus for transactions. Instead, an iterative consensus process is implemented, which makes it faster than Bitcoin but also makes it vulnerable to hacker attacks.
- Bitcoin Cash — A fork of Bitcoin that is supported by the biggest Bitcoin mining company and a manufacturer of ASICs Bitcoin mining chips. It has only existed for a couple of months but has already soared to the top five cryptocurrencies in terms of market cap.
- NEM — Unlike most other cryptocurrencies that utilize a Proof of Work algorithm, it uses Proof of Importance, which requires users to already possess certain amounts of coins in order to be able to get new ones. It encourages users to spend their funds and tracks the transactions to determine how important a particular user is to the overall NEM network.
- Litecoin — A cryptocurrency that was created with an intention to be the ‘digital silver’ compared to Bitcoin’s ‘digital gold.’ It is also a fork of Bitcoin, but unlike its predecessor, it can generate blocks four times faster and have four times the maximum number of coins at 84 mln.
- IOTA — This cryptocurrency’s breakthrough ledger technology is called ‘Tangle’ and it requires the sender in a transaction to do a Proof of Work that approves two transactions. Thus, IOTA has removed dedicated miners from the process.
- NEO — It’s a smart contract network that allows for all kinds of financial contracts and third-party distributed apps to be developed on top of it. It has many of the same goals as Ethereum, but it’s developed in China, which can potentially give it some advantages due to improved relationships with Chinese regulators and local businesses.
- Dash — It’s a two-tier network. The first tier is miners that secure the network and record transactions, while the second one consists of ‘masternodes’ that relay transactions and enable InstantSend and PrivateSend type of transaction. The former is significantly faster than Bitcoin, whereas the latter is completely anonymous.
- Qtum — It’s a merger of Bitcoin’s and Ethereum’s technologies targeting business applications. The network boasts Bitcoin’s reliability, while allowing for the use of smart contracts and distributed applications, much how it works within the Ethereum network.
- Monero — A cryptocurrency with private transaction capabilities and one of the most active communities, which is due to its open and privacy-focused ideals.
- Ethereum Classic — An original version of Ethereum. The split happened after a decentralized autonomous organization built on top of the original Ethereum was hacked.
The market of cryptocurrencies is fast and wild.Cryptocurrencies’ blockchains are secure, but other aspects of a cryptocurrency ecosystem are not immune to the threat of hacking. In Bitcoin’s 10-year history, several online exchanges have been the subject of hacking and theft, sometimes with millions of dollars worth of ‘coins’ stolen. Still, many observers look at cryptocurrencies as hope that a currency can exist that preserves value, facilitates exchange, is more transportable than hard metals, and is outside the influence of central banks and governments.
The revolution is already happening. Institutional investors start to buy cryptocurrencies. Banks and governments realize that this invention has the potential to draw their control away. Cryptocurrencies change the world. Step by step. You can either stand beside and observe – or you can become part of history in the making.