What is cryptocurrency? In one simple sentence, cryptocurrency is a form of currency that is typically built on a globally distributed ledger called a blockchain.
Everybody has heard of Bitcoin. If they hadn’t a few months ago, for surely they have now- primarily due to the success of Bitcoin’s value. However there are several cryptocurrencies operating in the market and are commonly referred to as altcoins.
Cryptocurrency is a decentralised digital currency that works through the use of cryptography in a peer-to-peer network which contains millions of nodes that process the transactions. It is ‘decentralised‘ as there is no single government, institution, company, central reserve, or individual looking after or controlling the supply of the currency.
Every transaction conducted using the cryptocurrency is held in the public ledger.
When ever the ledger is updated (due to a new transaction), the transaction is broadcast to the entire network. Every node on the network will therefore have an identical copy of the ledger.
Cryptocurrency is very different from traditional (fiat) currency. With something like Bitcoin, there will only ever be 21 million of it ever be produced. As such, and similar to gold, it is a finite amount. Other currencies aren’t capped necessarily, such as Ethereum. It is currently unknown how much supply of Ethereum will exist.
WIth fiat currency on the other hand, no one can really know how much fiat currency is circulating and no one can tell when new money will be printed. The reserve decides when and how much to print. Most reserves aim to focus on controlling the inflation rate. On average they aim to be around 1-3 percent per annum.
In contrast, cryptocurrency is generally regarded as a deflationary currency. It is worth more over time instead of less- like gold- because there is a finite amount of it (in most cases).
Why are digital currencies called cryptocurrencies?
Cryptocurrencies use a form of mathematics and problem solving using cryptography. On top of this the system allows participants to have a unique address called a ‘wallet’. Like a bank account. The difference is that only individuals have access to their wallet.
This address mathematically proves currency sent to or received in the wallet is valid using cryptography and is going to the right person. It cannot be altered or tampered in any way.
What is cryptocurrency blockchain?
Cryptocurrencies operate on top of the blockchain. A blockchain is a decentralised peer to peer system that transfers a list of transactions. But before you continue reading, have you read what Bitcoin and Blockchain is in layman’s terms? here is an ELI5 explanation.
As described earlier the system is made up of millions of computers that all agree on the global record of all the transactions that have ever taken place. This record is called a distributed ledger.
When you place a transaction using a cryptocurrency it is broadcast across the entire network so that everyone knows about it. Because it’s being seen and validated by millions of computers, it is extremely hard to cheat, duplicate, or run fraud against.
People looking after these ledgers are called ‘miners’. They use computers to solve complex problems on how these transactions are put together. Each time a problem is solved, it is called a block.
Each block holds a finite amount of transactions. The blocks are also in sequence when the solution to the problem is found, hence called a blockchain.
Advantages of cryptocurrency
Cryptocurrencies are (mostly) decentralised. There is no single middleman, bank, nor company running it. Middlemen usually aggregate wealth and power, are able to manipulate the market, and imply individual or political will. Cryptocurrency requires mass numbers of users and transactions, as well as the assistance of millions of miners to make it run.
Another advantage to decentralised currency is that it is harder to hack. Blockchain is almost impossible to hack. To hack just one block, you have to hack not just that block, but all the ones before it, as well as compete against the millions of miners working in honesty.
Not everything is secure though. This is especially true for third party services such as exchanges and online wallets. So far a majority of the hackings that have occurred have occurred by hacking exchanges. Not the blockchain it self. Here are five examples of some of the infamous hacks or thefts that have occurred on exchanges.
An exchange allows the transfer of cryptocurrency and access to a users wallet, but it is also much easier to hack as it is a website. Remember that most exchanges are centralised entities! This is likely to change with the adaptation of blockchain technology. We will start to see peer-to-peer exchanges or decentralised exchanges in the near future.
You can on the other hand secure your own crypto quite easily. Here is a list of backup and storage methods for crypto.
There is also a low barrier to entry and exit when trading or using cryptocurrencies. The network is extremely efficient. There are no bank accounts and no (or minimal) fees. Only an internet connection and software is required to be able to transfer currencies.
Cryptocurrency exchange fees are extremely low compared to a traditional stock exchange.
With fiat currency and for anyone that has done it in the past, they know it’s extremely hard and expensive to transfer money overseas.
On the other hand transferring crypto internationally is extremely fast. It is very efficient in terms of costs and speed. Instead of taking days, it takes a few minutes. Instead of taking an exorbitant amount in bank fees, it takes a small mining fee that works as an incentive for miners to work on the network.
This guide describes how to buy, sell or trade cryptocurrency.
Finally, cryptocurrency and blockchain technology is extremely transparent. It allows for a high level of audit-ability and trace-ability. Because it’s transparent, anyone can see what transaction is going to what wallet at any time.
Bitcoin is regarded as a pseudonymous coin. That is, it maintains partial anonymity while providing full traceability of a transaction. Although not impossible, it is extremely hard to know the Bitcoin owner’s actual identity. It’s pseudonymous because every transaction that occurs on the network can be traced to the time and wallet address.
So where is Cryptocurrency heading?
The use of cryptocurrency and the blockchain technology is growing. Interest is also growing from not only individual users but also from companies to governments. The rapid growth in value of crypto has seen it’s popularity grow exponentially.
Small startups have really made use of ICOs and cryptocurrencies to fund their ventures. However larger companies and institutes are now also realising the value that blockchain brings and the vast potential for it.
But this area is still new. No one really knows the future, the downsides, or the potential hurdles that will arise. There is a lot to learn. A lot of learning will be done the hard way. But one thing is sure, this is just a start, and it’s just about to take off.
The technology to have the greatest impact has arrived…it’s the underlying technology of digital currencies… called blockchain. Block. Chain. – Dan Tapscott