What is Cryptocurrency ?
Cryptocurrency is one of the hottest topics of today – with opinion seemingly split between it being a giant scam or bubble, and it being the future of money and a concept that’s revolutionising how the world works.
By reading this, you will get clear on and know more than most people about what cryptocurrency is, what Bitcoin is, what Blockchain is, and how they all relate to each other.
You will learn here about the following points, and by clicking on the tabs you can go directly to these subjects.
- What is Cryptocurrency?
- Some Key Features of Cryptocurrency
- How did Cryptocurrency come about?
- How is Cryptocurrency related to Blockchain?
What is Cryptocurreny
Cryptocurrencies are built on cryptography- which is far more secure than relying on people. In the simplest terms, cryptocurrencies are digital currencies that are secured by cryptography and are built on blockchain technology. This encryption from the cryptography adds the ‘crypto’ to currencies to form their name.
Cryptocurrencies exist to be able to send transactions, or value, and these transactions are secured by cryptography and entered on the blockchain- this means that there is no risk of relying on human error and no delays or costs added by third party companies- you can make transactions entirely independently. Once a cryptocurrency transaction has been confirmed (by miners) there is no way of undoing or reversing the transaction.
All cryptocurrencies work on the blockchain, but there are currently over 1600 different cryptocurrencies – this number is ever growing, with new cryptocurrencies constantly being created via ICOs (Initial Coin Offerings) and some old coins or so called ‘shitcoins’ dying.
All of these cryptocurrencies serve different purposes and are used in different ways. Some, such as Bitcoin, are used as digital gold, as stores of value. Others, such as Bitcoin Cash, are intended to be used as digital cash, on the blockchain. Etheruem is mostly used for the creation of smart contracts and for launching ICOs on. Many different blockchain platforms and protocols have their own cryptocurrency. Some cryptocurrencies are intended to be used in gaming, in casinos, or as the currency to be used in dapps.
Many, if not most cryptocurrencies serve little purpose other than seemingly as a get rich quick scheme for their creators. However, there are some cryptos and coins of blockchain platforms that could well be the digital currencies of the future.
Cryptocurrencies work differently to fiat money. They are accessed via crypto wallets, and are sent by use of public and private keys- which act as secure passwords. These crypto wallets can be online, offline, in physical protector cases that you can store away safely, or even written in paper form. You can store your crypto in these wallets without needing an account or anyone’s permission, unlike with traditional banking.
Some Key Features of Cryptocurrency
Irreversible – With cryptocurrencies, transactions are irreversible. This means that once that transaction has been sent and confirmed, it can’t be disputed or reversed and it has become part of the blockchain.
Global – not dependant on Borders. Unlike sending money by banks or remittance companies, cryptocurrency can be sent anywhere worldwide, irrespective of jurisdiction.
Secure – cryptocurrencies are accessed and sent by use of private keys- these are like very secure passwords – only the owners of the private keys can access their funds or do transactions. There has never been a security breach on Bitcoin or any other leading cryptocurrency because of the code- all security issues have been as a result of human error.
Encrypted – cryptocurrencies are built on cryptography, which is nearly impossible to hack.
Pseudonymous – You don’t have to give your identity to buy cryptocurrencies. Whilst some exchanges insist on this – that is a feature of the exchanges and third party bodies, not of cryptocurrency. there are always other means of buying crypto – such as Local Bitcoins among others
Permissionless – Anyone can buy, use or send cryptocurrency – it’s not like with banks where you need to apply for a bank account. Although some countries have made crypto illegal, there is no one who can technically stop you from buying or using crypto.
Digital – Cryptocurrencies only exist in digital form, there are no coins or banknotes. Whilst some are pegged to real world assets, by holding the cryptocurrency, you only hold that digitally and do not get any rights to the real-world assets.
Decentralised – There is no centralised authority- such as a company, a person, or a bank, controlling cryptocurrencies. All cryptocurrencies operate on the blockchain where nodes that process the transactions are on many computers all around the world, and no one node can make any changes to the blockchain of that cryptocurrency. Some cryptocurrencies, such as Ethereum, which is run by a small team of people, are less decentralised than others, such as Bitcoin.
Peer to Peer – because they are decentralised, with cryptocurrency, transactions can be done peer to peer, without needing a third party. Whilst today many crypto transactions are still done on exchanges, the future of crypto will most likely be peer to peer trading.
Trustless – cryptocurrencies don’t rely on third parties to confirm transactions or oversee the network- you don’t have to trust any individual or company at all. Rather they run on the blockchain.
How did Cryptocurrency come about?
There have been people working on creating cashless, digital currencies since the 1970s. Banks and third parties limit who has access to their services, charge high fees, control and delay transactions, and are centralised- and thus can make mistakes. Libertarians and cryptographers have been looking for ways to send money digitally, without relying on banks or other third parties. There were several attempts at creating digital and encrypted currencies, but none of them solved all of the problems, and none of the first attempts really succeeded – see about the history of cryptocurrencies here.
None of the preceding attempts had solved the problem of double spending. This is when the same amount of money can be sent twice. Normly, this is prevented by having banks and third parties monitor for this and keeping records of accounts. Cryptographers were looking for a way to send money digitally without the possibility of double spending.
Satoshi Nakamoto is the first person (or group) to develop a cryptocurrency – Bitcoin- that solved all of the problems posed by other means of sending money. Bitcoin allowed for anyone to be able to send Bitcoins over the Bitcoin blockchain, where transactions would be publicly recoded, and without allowing for double spending.
Satoshi Nakamoto announced Bitcoin in January 2009, describing it as ‘a new electronic cash system that uses a peer-to-peer network to prevent double-spending. It’s completely decentralized with no server or central authority’.
Bitcoin is just the first of the cryptocurrencies around today. On many exchanges, one has to buy Bitcoin to be able to buy and sell between other cryptocurrencies, known as Altcoins. Because of these two facts, Bitcoin is the most famous and most used cryptocurrency, and has the largest market cap, or value.
How is Cryptocurrency related to Blockchain?
Blockchain is the technology that cryptocurrencies are built on. Blockchain is simply a distributed ledger technology (like data accounts files that are stored over lots of computers, so that they can’t be changed or corrupted), that store data in chains of blocks, that are always being added to. This means that data stored is safe and can’t be corrupted or changed after being recorded. Blockchain technology now has many uses by industries and companies all over the world, as an improved way of storing data or organising logistics, as well as many other possible use cases. A more detailed explanation of blockchain is available here.
Cryptocurrency relates to the tokens or ‘currencies’ that are built and based on top of the blockchain. Some cryptocurrencies have their own blockchain, such as Bitcoin and Ethereum. Most of the cryptocurrencies built on their own blockchain, such as Icon or Stellar Lumens, for example, form part of a category of cryptocurrencies known as ‘blockchain tokens’.
The majority of cryptocurrencies however, are built on other blockchains, with Ethereum being the most commonly used as of now.<
Cryptocurrencies built on other blockchains are known as ‘tokens’, unlike Bitcoin and other blockchain cryptos which are known as ‘coins’. Cryptocurrencies or ‘tokens’ built on top of Ethereum, for example, are called ERC-20 tokens.
Some cryptocurrencies, are named for both the cryptocurrency, and the Blockchain they are built on. For example, both Bitcoin and Ethereum, the two largest and most famous cryptocurrencies, are the names of both their respective cryptocurrencies, as well as the name of the Bitcoin blockchain and the Ethereum blockchain.
Some blockchain cryptocurrencies have been created mostly to raise money for the blockchain project, by selling their coins in the form of an ICO, or Initial Coin Offering. See more about ICOs here.