Cryptocurrency is digital money that was invented to be secure. It is basically associated with the Internet that makes use of cryptography, a process of converting readable information into an unbreakable code to keep track of all transactions including transfers and purchases. Cryptography was designed to tailor to the need for secure communication during the Second World War. Since then, it has completely evolved in the digital world with important elements of mathematical theory and computer technology to become a secure way to carry out information, communications, and financial transactions online.
In present time, cryptocurrencies have become a universal phenomenon. While it is still geeky and not understandable to many people, financial institutions and governments are familiar with its importance. It’s really hard to find a major bank or large financial institute that did not conduct research about virtual currencies or publish a paper about them. There are even many accounting firms that have started so-called blockchain projects to educate people about blockchain.
However, beyond all the above efforts, the majority of people including bankers, scientists, developers, and consultants know very limited about virtual currencies. Most of them often fail to even understand the basic ideas of any cryptocurrency available today. In this article, we will walk through the whole section about cryptocurrencies to learn about where they originate from, how they work, and how they emerged as an important product of virtual cash.
What actually Cryptocurrencies are
In simple definition, cryptocurrencies are limited entries in a database that cannot be changed until someone meets the specific conditions. Units of digital currency are generated with a process known as mining which uses a computer and internet to solve complex mathematical problems that create coins. You can also purchase virtual currencies from brokers and store or use them through cryptographic wallets.
Financially, virtual currencies and applications of blockchain technology continue to be promising and expect more users to avail their benefits. According to experts, there is a strong likelihood of other transactions such as stock, bonds and other financial assets to be operated through blockchain technology. The cryptocurrency market is pretty fast and wild. However, no one can deny the risk of experiencing extreme validity in this rich ecosystem of coins. It is very common that a currency gains 20 percent a day, sometimes 100 percent and loses the same on very next day.
Bitcoins – The First Cryptocurrency
Created in 2009, bitcoin is the first form of digital currency which is still the best known to many people. Satoshi Nakamoto was the unknown inventor of the first cryptocurrency who never planned to invent virtual money. He built a peer-to-peer electronic cash system with the intention to invent something that many people could not create before cryptocurrency. According to Satoshi Nakamoto, this electronic cash system will use a peer-to-peer network for preventing double spending. It is an entirely decentralized system and functions without any server or central authority. Satoshi’s decision to make a peer-to-peer cash system resulted in the invention of cryptocurrency. Although bitcoins are complex and a bit technical, having a proper knowledge about them can make it as easy as ABC.
Peer-To-Peer Electronic Cash System
In order to work with mainstream cash, you need to have a payment system with an account, balance, and transactions. Almost all payment networks need to prevent double spending in order to help users prevent spending the same amount twice. This is usually done with the help of a centralized server which tracks record about the balance.
With a decentralized payment network, on the other hand, you do not have a centralized server. For that reason, every single entity of the network is recorded in order to carry out this job. All peers in the network need to have a list of each transaction to see if future transactions are legitimate or an attempt to double spending. At this point, it is interesting to understand how these entitles can keep a consensus about financial transaction records.
If a peer of the payment network disagrees about only single entity of minor balance, it causes everything to break. It needs an outright consensus to be rightly on the track. As a matter of fact, you would need to use a centralized authority in order to declare the correct status of balances. But Satoshi made it possible to achieve consensus without needing to have a central authority. Virtual currencies are important segment of this solution that make it truly fascinating and help it rolling over the world.
Aside from bitcoins that was the first and the most important digital currency to date, there are also many other cryptocurrencies that have taken the world by storm. These include:
As the first cryptocurrency, bitcoin is the most commonly traded digital currency up to the present time. During it turbulent journey, bitcoin has also witnessed a time when it was soaring as high as $20,000 in the end of 2017 before it crashed down to $6000. As of May 2018, bitcoin has a market capitalization of around $128 billion.
Used in the ethereum blockchain, this is the second most popular form of digital money. Ethereum was invented in 2015, and has a market capitalization of about 56 billion dollars in present time. With the latest market value of $1300, this cryptocurrency has gone through a stormy history. Due to a major hacking event two years back, ethereum torn apart into two different virtual currencies and briefly brought down its value to as low as 10 cents. However, ethereum is stable now and has been proved hugely popular as a landmark for other virtual currencies using the code of ethereum blockchain.
Developed in 2012, ripple is another famous distributed record system. It can be used to keep record of many sorts of transactions beyond cryptocurrencies, the developers of ripple has a working history with major financial institutions like Santander. Currently, the market capitalization of ripple has reached around $24 billion.
Litecoin is very much alike bitcoin but has faster moved ahead to bring different innovations such as faster payments and easier transaction processes. At this point, the market capitalization of litecoin is around $6 billion.
What Miners Do
Everyone can be a cryptocurrency miner. Having said that a decentralized network cannot delegate this task, cryptocurrencies need some sort of mechanism to prevent individuals from abusing them. The inventor of bitcoin set a rule for miners wherein they are needed to use their computer to qualify for this job. In, fact, they need to find a hash – an important product of cryptographic function that will connect the new block to its predecessor. This process is known as the proof-of-work and is based on the SHA 256 hash algorithm in bitcoin.
Mostly, there is no need to understand details about hash algorithm beyond that they can be the base of a cryptographic puzzle. You can only create bitcoins if you solve a cryptographic puzzle – a series of complicated mathematical problems. Once you have found a solution, you can build a block and store it in the blockchain. You can also add a coinbase transaction that can give you a particular number of bitcoins. As the difficulty of cryptographic puzzle increases the constant of computer power you invest, there is only a precise amount of crypto coins that can be generated in the given amount of time.
Cryptocurrencies consists of a peer-to-peer network. All peer have records of the complete history of each transaction and so the balance of each account. In this system, a transaction serves as a file that says, “Jamaica gives X bitcoin to Mark”, and is signed by Jamaica’s private key which is a basic public cryptography key. Once signed, the transaction is broadcasted within the network and sent from one peer to all other peers. All this works according to rule of a basic peer-to-peer technology.
Confirmation is a highly important part of cryptocurrency transactions. While the transaction is recognized almost immediately by each peer, it takes a specific amount of time before getting confirmed. An unconfirmed transaction not only remains pending but can also be forged. A confirmed transaction is set in record and is not reversible. Furthermore, confirmed transactions are part of an immutable record of historical transactions of blockchain.
Why Invest in Cryptocurrency
As a new form of money, the markets of cryptocurrencies have boomed suddenly which means your small investment can turn into a large money overnight. This attribute has also led professionals and unprofessional risk-takers investing in cryptocurrencies, finding them a quick way to make money or an important part of their investment portfolio.
Cryptocurrencies are secure and provide a level of anonymity. Their transactions cannot be reversed or faked. Moreover, there is a low transaction fee that makes virtual currencies more reliable than mainstream money. With the decentralized natural of cryptocurrencies, everyone can avail them. However, they can be difficult to set up and only some stores are accepting them for spending.
Investing in cryptocurrency can also work the other way. Like other currencies, the markets of virtual currencies go through instability phases and have dropped significantly many times. For that reason, you should be aware of the potential risks when investing in crypto coins.
Properties of Cryptocurrencies
Principally, cryptocurrency is all about token entries in a decentralized consensus database. The most interesting part of virtual currencies is that they are created on cryptography and strongly secured by math. They process of consensus-keeping is secured with strong cryptography.
Cryptocurrencies can be spilt into transactional and financial properties. For the most part, all forms of digital currencies share a common group of properties. Let’s start with transactional properties here.
Crypto coins are protected through a public cryptographic key system. Only the miner can use this key and send cryptocurrency. Since cryptography is a strong key of big numbers, it is almost impossible to break its idea.
Once confirmed, a cryptocurrecny transaction cannot be reversed by anyone. Once you sent money, it’s gone. Unfortunately, there is no safety net to help you prevent such situations.
In cryptocurrencies, transactions and accounts are not connected to real-world identities. You can make a specific address made up of 30 characters to receive bitcoins. Even though cryptocurrencies allow you to evaluate transaction flow, there is actually no need to connect to the real-world identity of miners with those addresses.
Transactions can be confirmed by the miner only. It’s their job to take transaction, verify them as legit and broadcast them within the network. Once a transaction is confirmed, the miner adds its record to the database to make it a part of the blockchain.
No Need of Permissions
Digital currencies can be used without permissions. You just need a software program which can be downloaded for free to use. Once you have downloaded it, you can mine bitcoins and do desired transactions.
Cryptocurrency transactions are broadcasted almost immediately within the network and are usually confirmed in a matter of minutes. They take place in a global network of systems and are completely indifferent from your physical location.
Below are descriptions of monetary properties of cryptocurrencies.
No cryptocurrency represent debt as it just represents itself. It is quite unlike the fiat money on your bank account which is created by debt.
There is a specific limit of supply of the token in almost each cryptocurrency available today. As a rule of thumb, the supply of token is controlled by a schedule written in the code.
While they are still fairly new and unstable form of assets, cryptocurrencies are definitely gaining traction and are most likely to have more standardized uses in coming years. With its revolutionary properties, virtual currencies work like digital gold. The cryptographic key will most certainly make it easy for large-scale adoption including developing protection for investors. Cryptocurrencies are currencies that are free from political influence, promise to maintain and increase their value over the time.