A cryptocurrency can be defined as online digital money. This kind of money uses cryptography as form of security. The use of cryptography is very important because this technology offers the security against falsification and double spending. The most important property of a cryptocurrency lies in its decentralized form. This decentralized property uses a Blockchain network of computers and has no owner. This Blockchain technology can be described as a distributed ledger enforced by a disparate network of computers. The main difference compared to fiat money used by our banks today is in its deflationary form. Fiat currency has no limit in the circulation of money and central banks all over the world use this inflation mechanism to print more over time. Cryptocurrency however, has a limited supply and you can say its deflationary. Another important difference is the central owner ship or the lack of with no central governance. This is the most important feature of cryptocurrency and is theoretically immune for government intervention or manipulation.
The first blockchain
The first Blockchain based cryptocurrency ever created is Bitcoin which is still the most popular and the one with the biggest network volume. Also the supply of Bitcoin is limited and is capped to a maximum of 21 million ever created. Bitcoin gained much in popularity and this resulted in other cryptocurrencies being created. Most of these newly created coins are just clones of the original(Bitcoin) and only differ in supply. These new clones are called ‘forks’ and are new created Blockchains that have the same codebase but split off on a new chain(network).
Cryptocurrency is not only about money, but the technology and network behind it is mainly focused on transactions. To allow secure payments the underlying Blockchain network has to handle the transactions. This is done in the form of digital tokens which can be used to transfer value across the network. Instead of cryptocurrency, ‘crypto’ is mainly used to define this form of cryptographic money. Crypto refers to the fact that various encryption algorithms and cryptographic techniques are being used. For example, elliptical curve encryption, public-private key pairs and hashing functions.
Satoshi Nakamoto, the infamous founder of bitcoin, launched this first Blockchain project ever back in 2009. This person is quite mysterious because until today nobody exactly knows the identity of this person. There are a lot of rumors going on in the Bitcoin community and insiders think it could also be a group of people. As of writing, there are over 17.62 million bitcoins in circulation with a total market value of around $87 billion. This new kind of internet money is a relative young market and this comes with a lot of price fluctuations. Bitcoin has a lot of competitors which are called ‘altcoins’. One of the most succeeded out there are Litecoin, Ethereum, Ripple, EOS or Ethereum Classic. Today there are literally thousands of cryptocurrencies in existence, with a total market capitalization of over $170 billion. Currently, Bitcoin has more than 50% of this market value according to popular crypto website coinmarketcap.
By the use of cryptocurrencies it makes it easier to transfer funds directly between two parties. These transfers are instant and without the need of trusted third party like a bank or credit card company. Facilitation of these transfers happens by the use of public and private keys to make the transaction secure. A public key can be used as a “wallet” and one can receive funds on this address. A private key is needed to setup a new transaction which the user uses to sign it. Fund transfers can be done with minimum to zero processing fees, which disrupts the transaction fees model currently used by banking systems.
Blockchain as distributed ledger
The Blockchain network has a central role in this transaction process. It uses to store an online ledger of all the transactions that have ever been processed on the network. All these transactions are stored in ‘blocks’ and blocks are constantly added to the chain within the network. All the computers on the network(called nodes) store the exact same copy of all these blocks on their hard drive. This decentral sharing is very important because it reduces possible hacks to zero. Every new block that is added to the chain will be verified by all nodes on the chain and this makes illegal transactions or double spending impossible. Also this distributed ledger of transactions is very transparent. One can search back to the very beginning of where transaction started.
Many experts say this Blockchain technology can be used in voting systems and crowdfunding, but there are many more use cases. JP Morgan Chase, a big financial institution, sees potential in Blockchain for processing payments and reducing transaction fees. However, cryptocurrencies have no central authority and if someone loses his/her private keys all funds will be lost forever.
Cryptocurrency transactions are considered as anonymous transactions which can be traced but not identified. This comes with a downside because this nature gives criminals the opportunity to practice money laundering activities. Also, financial and corporate companies could profit from this by practicing tax evasion. However, cryptocurrency advocates often value anonymity highly. Some cryptocurrencies are more private than others. Bitcoin, for instance, won’t help criminals much by practicing money laundering. Forensic analysis done by the police has helped them a lot to track illegal transactions on the Blockchain. Still, if criminals want to use it, other privacy-oriented coins do exist, such as Dash, Zcash or Monero.
I explained earlier that a Blockchain network comes with the highest security. Still, there are other elements in the cryptocurrency ecosystem which are less secure. Crypto exchanges, for example, are being attacked on a regular basis and a lot of hacks occurred in the past 10 years cryptocurrency came to existence. One of the most famous hacks is the one which took place at MtGox in 2013. This was the first big exchange in cryptocurrency and at that time 750000 bitcoins have been stolen. Today these 750000 bitcoins would be worth 3.75 billion US Dollar! Cryptocurrency enthusiasts are still very optimistic about the future of bitcoin. They believe that a new currency has been created which preserves value, facilitates exchange, is borderless and has no central authority.