What is a cryptocurrency: 21st century unicorn or money from the future?

This introduction explains the most important thing about cryptocurrencies. After reading it, you’ll know more about this than most of the rest.

Current cryptocurrencies have become a worldwide phenomenon known to most. While it is something geek and not understood by the majority, people, banks, governments and many companies are aware of its importance.

In 2016, it will be difficult for you to find an important bank, an accounting firm, a leading software company, or a government that has not investigated cryptocurrencies, published a technical documentation on it or started a so-called blockchain- based project . (Take our  blockchain courses  to learn more about blockchain)

“Virtual currencies, perhaps in particular Bitcoin, have captured the imagination of some, instilled fear among others, and confused the rest of us.” – Thomas Carper, United States Senator

But beyond the noise and press releases, the vast majority of people – including bankers, consultants, scientists, and developers – have very limited knowledge about cryptocurrencies. They often fail to understand the basics.

So we go through the whole story. What are cryptocurrencies?

  • Where did the cryptocurrencies originate?
  • Why should you learn about cryptocurrencies?
  • And what do you need to know about cryptocurrencies?

What is a cryptocurrency and how did it emerge as a secondary product of digital cash

Few know it, but cryptocurrencies emerged as a byproduct of another invention. Satoshi Nakamoto, the unknown inventor of  Bitcoin , the first and even more important cryptocurrency, never intended to invent a currency.

In his Bitcoin announcement in late 2008, Satoshi said he developed “An electronic peer-to-peer cash system.”

His goal was to invent something: many people failed to create digital cash before.

Announcing the first launch of Bitcoin, a new electronic cash system that uses a peer network to avoid double-spending. It is completely decentralized without a server or central authority. – Satoshi Nakamoto, January 9, 2009, announcing Bitcoin on SourceForge.

The most important part of Satoshi’s invention was that he found a way to build a decentralized digital cash system. In the nineties, there have been many attempts to create digital money, but all failed.

After more than a decade of systems based on Third Party Trust (Digicash, etc.), they see it as a lost cause. I hope you can make a distinction, that this is the first time I know that we are testing a system that is not based on trust. – Satoshi Nakamoto in an email to Dustin Trammell

After seeing all centralized attempts fail, Satoshi attempted to build a digital cash system without a central entity. As a peer network  to share files.

This decision became the birth of a cryptocurrency. They are the missing part that Satoshi found to make digital cash a reality. The reason why it is something technical and complex, but if you understand it, you will know more about cryptocurrencies than the rest knows. So, let’s try to make it as simple as possible:

To make digital cash a reality you need a payment network with accounts, balances, and transactions. That is easy to understand. A big problem that every payment network has to solve is avoiding the so-called double expense: preventing an entity from spending the same amount twice. Usually, this is done by a central server that keeps track of balances.

In a  decentralized network , you don’t have this server. So you need each network entity to do this job. Each pair in the network needs to have a list of all transactions to check if future transactions are valid or a double-spending attempt.

But how can these entities maintain a consensus on this record?

If the network peers do not agree on only one, minor balance, everything is broken. They need an absolute consensus. Usually, you take, again, a central authority to declare the correct balance status. But how can you achieve consensus without a central authority?

No one knew until Satoshi appeared out of nowhere. In fact, nobody believed it was possible.

Satoshi proved that it was. His most important innovation was to reach a consensus without a central authority. Cryptocurrencies are a part of this solution – the part that made the solution exciting, fascinating and helped her go around the world.

 What are cryptocurrencies really?

If you remove all the noise around the cryptocurrencies and reduce it to a simple definition, you discover that they are only limited entries in a database that nobody can change without fulfilling specific conditions. This may seem ordinary, but, believe it or not: this is exactly how you can define a currency.

Think about the money in your bank account: What is beyond entries in a database that can only be changed under specific conditions? You can even consider physical coins and bills: What is beyond limited entries in a physical and public database that can only be changed if you meet the condition that you physically possess coins and bills? The money is a verified entry in some kind of database of accounts, balances, and transactions.

How miners create coins and confirm transactions

Let’s take a look at the mechanism that governs cryptocurrency databases. A cryptocurrency like Bitcoin consists of a peer network. Each pair has a record of the complete history of all transactions and therefore of the balance of each account.

A transaction is a file that says, “Daniel gives Alicia X Bitcoin” and is signed by Daniel’s private key. It’s basic public key cryptography, nothing special at all. After being signed, a transaction is issued on the network, sent from one pair to the rest of the pairs. This is basic peer technology. Again, nothing special at all.

The transaction is known almost immediately throughout the network. But only after a specific period of time is it confirmed.

Confirmation is a critical concept in cryptocurrencies. You could say that cryptocurrencies are only about confirmations.

As long as a transaction is not confirmed, it is pending and can be forged. When a transaction is confirmed, it is permanently fixed. It is no longer forgeable, it cannot be reversed, it is part of an immutable record of historical transactions: the so-called blockchain.

Only miners can confirm transactions. This is your job in a network of cryptocurrencies. They take transactions, seal them as legitimate and spread them on the web. After a transaction is confirmed by a miner, each node has to add it to its database. It has become part of the blockchain.

For this work, miners are rewarded with a cryptocurrency totem, for example with Bitcoins. Since the activity of miners is the most important part of the cryptocurrency system, we should stay and take a closer look.

“In the coming years, we are going to see national governments take great steps towards the institution of a cashless society where people make transactions using centralized digital currencies. Simultaneously, decentralized cryptocurrencies – which some see as more complicated money – will see an increase in their use by all sectors. ”- Caleb Chen  London Trus Media

What are the miners doing?

Mostly anyone can be a miner. Since a decentralized network has no authority to delegate this task, a cryptocurrency needs some kind of mechanism to prevent a ruling party from abusing this. Imagine that someone creates thousands of pairs and spreads counterfeit transactions. The system would break immediately.

Then, Satoshi established the rule that miners need to invest some work from their computers to qualify for this task. In fact, they have to find a hash – a product of a cryptographic function – that connects the new block with its predecessor. This is called  proof of work . In Bitcoin, it is based on the  SHA 256 Hash algorithm .

You do not need to know the details about SHA 256. It is only important that you know that it can be the basis of a  cryptological puzzle  that miners compete to solve. After finding a solution, a miner can build a block and add it to the blockchain. As an incentive, you have the right to add a so-called coin base transaction that gives you a specific number of Bitcoins. This is the only way to create valid Bitcoins.

Bitcoins can only be created if the miners solve a cryptographic puzzle. Since the difficulty of this puzzle increases the amount of computing power that miners invest, there is only a specific amount of cryptocurrency tokens that can be created in a given period of time. This is part of the consensus that no peer in the network can break.

Revolutionary properties

If you really think about this, Bitcoin, as a decentralized network of peers that maintain a consensus on accounts and balances, is more a currency than the numbers you see in your bank account. What are these numbers more than entries in a database – a database that can be changed by people you don’t see and rules you don’t know?

“It is that narrative of human development under which we now have other battles to fight, and I would say that in the field of Bitcoin it is mainly the separation of money and the state.” 

– Erik Voorhees, cryptocurrency  entrepreneur

Basically, cryptocurrencies are entries on tokens in decentralized consensus databases. They are called Cryptocurrencies because the process to maintain consensus is ensured by strong cryptography. Cryptocurrencies are built on  cryptography . They are not insured by people or trust, but by mathematics. An asteroid is more likely to fall into your home than a Bitcoin address is compromised.

In describing the properties of cryptocurrencies, we need to separate them between transactional and monetary properties. While most cryptocurrencies share a common set of properties, they are not engraved in stone.

Transactional Properties:

1.)  Irreversible:  After confirmation, a transaction cannot be reversed. By anyone. And nobody means nobody. Neither you, nor your bank, nor the president of the United States, nor Satoshi, nor your miner. No one. If you send money, you send it. Point. No one can help you, if you sent your money to a scammer or if a hacker stole it from your computer. There is no safety net.

2.)  Pseudonyms:  Neither transactions nor accounts are connected to real-world identities. You receive Bitcoins in the so-called addresses, which are random strings apparently of around 30 characters. While it is usually possible to analyze the flow of transactions, it is not necessarily possible to connect the real-world identity of the users of those addresses.

3.)  Fast and global:  Transactions are propagated almost instantaneously on the network and are confirmed in a few minutes. Since they occur in a global network of computers, they are completely indifferent to your physical location. It doesn’t matter if I send Bitcoins to my neighbor or someone on the other side of the world.

4.)  Insurance:  Cryptocurrency funds are locked in a public key cryptography system. Only the owner of the private key can send cryptocurrencies. A strong cryptography and the magic of large numbers makes it impossible to break this scheme. A Bitcoin address is more secure than Fort Knox.

5.)  Without permissions : You don’t need to ask anyone to use cryptocurrencies. It is just software that anyone can download for free. After installing it, you can receive and send Bitcoins or other cryptocurrencies. No one can stop you. There is no guardian.

What is a cryptocurrency: Monetary properties

1.)  Controlled supply : Most cryptocurrencies limit the supply of the tokens. In Bitcoin, the supply decreases over time and will reach its final number around the year 2140. All cryptocurrencies control the supply of the tokens by a calendar written in the code. This means that the monetary supply of a cryptocurrency at any time in the future can be calculated today approximately. There are no surprises.

2.)  No debt but bearer : The fiat money in your bank account is created by debt, and the numbers, which you see in your ledger do not represent more than debts. It is an IOU system (I must). Cryptocurrencies do not represent debts. They only represent themselves. They are money as gold coins are.

To understand the revolutionary impact of cryptocurrencies you need to consider both properties. Bitcoin as a means of payment without permits, irreversible and pseudonym is an attack on the control of banks and governments over the monetary transactions of their citizens. You cannot prevent someone from using Bitcoin, you cannot prohibit someone from accepting a payment, you cannot undo a transaction.

As money with a limited and controlled supply that is not exchangeable by a government, a bank or any other central institution, cryptocurrencies attack the realm of monetary policies. They take away the control that banks take in inflation or deflation by manipulating the money supply.

“While it is still fairly new and unstable compared to standard gold, the cryptocurrency is definitely gaining traction and will certainly have more standardized uses in the coming years. Now, in particular, its popularity is increasing with the post-election uncertainty of the market. The key will be to facilitate large-scale adoption (as well as everything that involves cryptos) including the development of safeguards and protections for buyers / investors. I hope that in two years, we will be in a place where people can hide their money under virtual mattresses through cryptocurrencies, and they will know that wherever they go, the money will be there ”- Sarah Granger, Author, and Speaker .

 Cryptocurrencies: Dawn of a New Economy

Mainly due to its revolutionary properties, cryptocurrencies have become a success that its inventor, Satoshi Nakamoto, did not dare to dream. While no other attempt to create a digital cash system attracted a critical mass of users, Bitcoin has something that caused enthusiasm and fascination. Sometimes it feels more like religion than technology.

Cryptocurrencies are digital gold. Solid money that is sure of political influence. Money that promises to preserve and increase its value over time. Cryptocurrencies are also a fast and convenient means of payment of global reach, and are private and anonymous enough to serve as a means of payment for black markets and any other economic activity outside the law.

But while cryptocurrencies are more used for payments, their use as a means of speculation and reserve of value dwarfs the payment aspects. Cryptocurrencies gave rise to an incredibly dynamic and fast-growing market for investors and speculators. Bags like Okcoin,  poloniex  or shapeshift allow the operation of hundreds of cryptocurrencies. Its daily volume of operations exceeds that of the European stock exchanges.

At the same time, the practice of  Initial Coin Offering  (ICO), mainly facilitated by Ethereum’s smart contracts, gave life to incredibly successful collaborative financing projects, in which often an idea is enough to collect millions of dollars. In the case of “The DAO” has been more than 150 million dollars.

In this rich ecosystem of coins and tokens, you experience extreme volatility. It is common for a coin to earn 10 percent per day – sometimes 100 percent – to lose the same the next day. If you are lucky, the value of your currency grows up to 1000 percent in one or two weeks.

While  Bitcoin  remains by far the most famous cryptocurrency and most of the rest has no non-speculative impact, investors and users should be aware of several cryptocurrencies. Here we present the most popular current cryptocurrencies.

Source:  coinmarketcap

Bitcoin

The only, the first and most famous cryptocurrency. Bitcoin serves as a digital gold standard throughout the cryptocurrency industry, is used as a global means of payment and is the de facto currency of cybercrime such as darknet or ransomware markets. After seven years of existence, the price of Bitcoin has increased from zero to more than $ 650, and its transaction volume reached more than 200,000 daily transactions.

There is not much else to say: Bitcoin is here to stay.

Ethereum

The creation of the young cryptogen Vitalik Buterin has risen to second place in the cryptocurrency hierarchy. In addition to Bitcoin, its blockchain not only validates a set of accounts and balances but also the so-called states. This means that Ethereum can not only process transactions but also complex contracts and programs.

This flexibility makes Ethereum the perfect instrument for the blockchain application. But this has a cost. After the DAO Hack – a smart contract based on Ethereum – the developers decided to do a hard fork (in English hard fork) without consensus, which resulted in the emergence of  Ethereum Classic . In addition to this, there are several clones of Ethereum, and  Ethereum itself is a host of several Tokens  like DigixDAO and Augur. This makes Ethereum more a family of cryptocurrencies than a single currency.

Ripple

Perhaps the least popular – or most hated – project in the cryptocurrency community is Ripple. While Ripple has a native cryptocurrency – XRP – it is more about a network to process IOUs than a cryptocurrency itself. XRP, the currency, does not serve as a means to reserve and exchange value, but more as a totem to protect the network against spam.

Ripple Labs created each XRP token, the company that operates the Ripple network, and they are distributed by them at will. For this reason, Ripple is often called preminded in the community and despised saying that it is not a real cryptocurrency, and XRP is not considered a good store of value.

Banks, however, seem to like Ripple. At least they adopt the system with an increasing rate.

Litecoin

Litecoin  was one of the first cryptocurrencies after Bitcoin and was labeled as silver to Bitcoin digital gold. Faster than Bitcoin, with a greater number of tokens and a new mining algorithm, Litecoin was a real innovation, perfectly adapted to be Bitcoin’s younger brother. “It facilitated the emergence of several more cryptocurrencies that used their code base, but made it even lighter.” Examples are Dogecoin or Feathercoin.

While Litecoin failed to find a real use case and lost its second place after Bitcoin, it is still actively developed and traded and is treasured as a backup in case Bitcoin fails.

Monero

Monero is the most prominent example of the CryptoNight algorithm. This algorithm was invented to add the privacy features that Bitcoin lacks. If you use Bitcoin, each transaction is documented in the blockchain and the transaction path can be followed. With the introduction of a concept called circle signatures, the CryptoNight algorithm was able to cut that route.

The first implementation of CryptoNight, Bytecoin, was strongly anticipated and therefore rejected by the community. Monero was the first unpremeditated clone of Bytecoin and created a lot of awareness. There are several more incarnations of CryptoNight with its own minor improvements, but none of these achieved the same popularity as Monero.

Monero’s popularity peaked in summer 2016 when some Darknet markets decided to accept it as currency. This resulted in a constant increase in price, although the current use of Monero seems to remain disappointingly low.

In addition to these, there are hundreds of cryptocurrencies of several families. Most are nothing more than attempts to reach investors and earn money quickly, but many of them promise playing fields to test innovations in cryptocurrency technology.

What is a cryptocurrency: Conclusion

The cryptocurrency market is fast and rampant. Almost every day new cryptocurrencies emerge, the old ones die, the first users become rich and investors lose money. Every cryptocurrency comes with a promise, mostly a great story to revolutionize the world. Few survive the first months, and most suffer from pump and dump by speculators and live like zombie coins until the last carrier loses hope of ever seeing income on his investment.

“In 2 years from now, I believe that cryptocurrencies will gain legitimacy as a protocol for commercial transactions, micropayments, and will exceed Western Union as the preferred remittance tool. With respect to commercial transactions – you will see two paths: There will be financial markets that use it for its ability to move any amount of money without cost and almost instantly, and there will be those that use it for its blockchain technology. Blockchain technology provides the biggest benefit with trustless auditing, the only source of truth, smart contracts, and colored coins. ”

–  Cody Littlewood,  and I am the founder and CEO of Codelitt

The markets are dirty. But this does not change the fact that cryptocurrencies are here to stay – and here to change the world. This is already happening. People around the world buy Bitcoin to protect against the devaluation of their national currency. Mostly in Asia, a bright market for sending Bitcoin emerged, and Bitcoin using Cybercrime Darknet are flourishing. More and more companies discover the power of  Smart Contracts or Token in Ethereum, the first real-world application of blockchain technologies emerges.

The revolution is already happening. Institutional investors start buying cryptocurrencies. Banks and governments realize that this invention has the potential to take away control. Cryptocurrencies change the world. Step by Step. You can stand aside and observe – or you can become part of the historical process.

“If the trend continues, the average person will not be able to buy a Bitcoin in 2 years. As global economies suffer from inflation and markets show signs of recession, the world will see Bitcoin as a hedge against fiduciary turmoil and an escape against capital controls. Bitcoin is the way out, and cryptocurrencies as a whole will never disappear, it will grow in use and acceptance as it matures. ”