What is Cryptocurrency: Everything You Need To Know [Ultimate Guide]
An in-depth guide by BlockGeeks
What is cryptocurrency: 21st-century unicorn – or the money of the future?
This introduction explains the most significant thing about cryptocurrencies. After you‘ve read it, you‘ll know more about it than most other humans.
Today cryptocurrencies have become a global phenomenon known to most people. While still somehow geeky and not understood by most people, banks, governments and many companies are aware of its importance.
In 2016, you‘ll have a hard time finding a major bank, a big accounting hard, a prominent software company or a government that did not research cryptocurrencies, publish a paper about it or commence a so-called blockchain-project.
“Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.” – Thomas Carper, US-Senator
But beyond the noise and the press releases the terrific majority of people – even bankers, consultants, scientists, and developers – have a very limited skill about cryptocurrencies. They often fail to even understand the basic concepts.
So let‘s walk through the entire story. What are cryptocurrencies?
Where did cryptocurrency originate?
Why should you learn about cryptocurrency?
And what do you need to know about cryptocurrency?
What is cryptocurrency and how cryptocurrencies emerged as a side product of digital cash
Few people know, but cryptocurrencies emerged as a side product of another invention. Satoshi Nakamoto, the unknown inventor of Bitcoin, the very first and still most significant cryptocurrency, never intended to invent a currency.
In his announcement of Bitcoin in late 2008, Satoshi said he developed “A Peer-to-Peer Electronic Cash System.“
His aim was to invent something; many people failed to create before digital cash.
Announcing the very first release of Bitcoin, a fresh electronic cash system that uses a peer-to-peer network to prevent double-spending. It’s fully decentralized with no server or central authority. – Satoshi Nakamoto, nine January 2009, announcing Bitcoin on SourceForge.
The single most significant 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 they all failed.
… after more than a decade of failed Trusted Third Party based systems (Digicash, etc), they see it as a lost cause. I hope they can make the distinction, that this is the very first time I know of that we’re attempting a non-trust based system. – Satoshi Nakamoto in an E-Mail to Dustin Trammell
After eyeing all the centralized attempts fail, Satoshi attempted to build a digital cash system without a central entity. Like a Peer-to-Peer network for file sharing.
This decision became the birth of cryptocurrency. They are the missing lump Satoshi found to realize digital cash. The reason why is a bit technical and elaborate, but if you get it, you‘ll know more about cryptocurrencies than most people do. So, let‘s attempt to make it as effortless as possible:
To realize digital cash you need a payment network with accounts, balances, and transaction. That‘s effortless to understand. One major problem every payment network has to solve is to prevent the so-called dual spending: to prevent that one entity spends the same amount twice. Usually, this is done by a central server who keeps record about the balances.
In a decentralized network, you don‘t have this server. So you need every single entity of the network to do this job. Every peer in the network needs to have a list with all transactions to check if future transactions are valid or an attempt to dual spend.
But how can these entities keep a consensus about this records?
If the peers of the network disagree about only one single, minor balance, everything is violated. They need an absolute consensus. Usually, you take, again, a central authority to proclaim the correct state of balances. But how can you achieve consensus without a central authority?
Nobody did know until Satoshi emerged out of nowhere. In fact, nobody believed it was even possible.
Satoshi proved it was. His major innovation was to achieve consensus without a central authority. Cryptocurrencies are a part of this solution – the part that made the solution thrilling, fascinating and helped it to roll over the world.
What are cryptocurrencies indeed?
If you take away all the noise around cryptocurrencies and reduce it to a elementary definition, you find it to be just limited entries in a database no one can switch without fulfilling specific conditions . This may seem ordinary, but, believe it or not: this is exactly how you can define a currency.
Take the money on your bank account: What is it more than entries in a database that can only be switched under specific conditions? You can even take physical coins and notes: What are they else than limited entries in a public physical database that can only be switched if you match the condition than you physically own the coins and notes? Money is all about a verified entry in some kind of database of accounts, balances, and transactions.
How miners create coins and confirm transactions
Let‘s have a look at the mechanism ruling the databases of cryptocurrencies. A cryptocurrency like Bitcoin consists of a network of peers. Every peer has a record of the finish history of all transactions and thus of the balance of every account.
A transaction is a file that says, “Bob gives X Bitcoin to Alice“ and is signed by Bob‘s private key. It‘s basic public key cryptography, nothing special at all. After signed, a transaction is broadcasted in the network, sent from one peer to every other peer. This is basic p2p-technology. Nothing special at all, again.
The transaction is known almost instantly by the entire network. But only after a specific amount of time it gets confirmed.
Confirmation is a critical concept in cryptocurrencies. You could say that cryptocurrencies are all about confirmation.
As long as a transaction is unconfirmed, it is pending and can be forged. When a transaction is confirmed, it is set in stone. It is no longer forgeable, it can‘t be reversed, it is part of an immutable record of historical transactions: of the so-called blockchain.
Only miners can confirm transactions. This is their job in a cryptocurrency-network. They take transactions, stamp them as legit and spread them in the network. After a transaction is confirmed by a miner, every knot has to add it to its database. It has become part of the blockchain.
For this job, the miners get rewarded with a token of the cryptocurrency, for example with Bitcoins. Since the miner‘s activity is the single most significant part of cryptocurrency-system we should stay for a moment and take a deeper look on it.
What are miners doing?
Principally everybody can be a miner. Since a decentralized network has no authority to delegate this task, a cryptocurrency needs some kind of mechanism to prevent one ruling party from manhandling it. Imagine someone creates thousands of peers and spreads forged transactions. The system would break instantly.
So, Satoshi set the rule that the miners need to invest some work of their computers to qualify for this task. In fact, they have to find a hash – a product of a cryptographic function – that connects the fresh block with its predecessor. This is called the Proof-of-Work. In Bitcoin, it is based on the SHA two hundred fifty six Hash algorithm.
You don‘t need to understand details about SHA 256. It‘s only significant you know that it can be the basis of a cryptologic puzzle the miners contest to solve. After finding a solution, a miner can build a block and add it to the blockchain. As an incentive, he has the right to add a so-called coinbase transaction that gives him a specific number of Bitcoins. This is the only way to create valid Bitcoins.
Bitcoins can only be created if miners solve a cryptographic puzzle. Since the difficulty of this puzzle increases the amount of computer power the entire miner’s invest, there is only a specific amount of cryptocurrency token than can be created in a given amount of time. This is part of the consensus no peer in the network can break.
If you truly think about it, Bitcoin, as a decentralized network of peers which keep a consensus about 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 which can be switched by people you don‘t see and by rules you don‘t know?
“It is that narrative of human development under which we now have other fights to fight, and I would say in the field of Bitcoin it is mainly the separation of money and state.”
Basically, cryptocurrencies are entries about token in decentralized consensus-databases. They are called CRYPTOcurrencies because the consensus-keeping process is secured by strong cryptography. Cryptocurrencies are built on cryptography. They are not secured by people or by trust, but by math. It is more probable that an asteroid falls on your house than that a bitcoin address is compromised.
Describing the properties of cryptocurrencies we need to separate inbetween transactional and monetary properties. While most cryptocurrencies share a common set of properties, they are not carved in stone.
1.) Irreversible: After confirmation, a transaction can‘t be reversed. By nobody. And nobody means nobody. Not you, not your bank, not the president of the United States, not Satoshi, not your miner. Nobody. If you send money, you send it. Period. No one can help you, if you sent your funds to a scammer or if a hacker stole them from your computer. There is no safety net.
Two.) Pseudonymous: Neither transactions nor accounts are connected to real world identities. You receive Bitcoins on so-called addresses, which are randomly seeming chains of around thirty characters. While it is usually possible to analyze the transaction flow, it is not necessarily possible to connect the real world identity of users with those addresses.
Three.) Rapid and global: Transaction are propagated almost instantly in the network and are confirmed in a duo of minutes. Since they happen in a global network of computers they are entirely indifferent of your physical location. It doesn‘t matter if I send Bitcoin to my neighbour or to someone on the other side of the world.
Four.) Secure: Cryptocurrency funds are locked in a public key cryptography system. Only the possessor of the private key can send cryptocurrency. Strong cryptography and the magic of big numbers makes it unlikely to break this scheme. A Bitcoin address is more secure than Fort Knox.
Five.) Permissionless : You don‘t have to ask anybody to use cryptocurrency. It‘s just a software that everybody can download for free. After you installed it, you can receive and send Bitcoins or other cryptocurrencies. No one can prevent you. There is no gatekeeper.
1.) Managed supply : Most cryptocurrencies limit the supply of the tokens. In Bitcoin, the supply decreases in time and will reach its final number somewhere in around 2140. All cryptocurrencies control the supply of the token by a schedule written in the code. This means the monetary supply of a cryptocurrency in every given moment in the future can toughly be calculated today. There is no surprise.
Two.) No debt but bearer : The Fiat-money on your bank account is created by debt, and the numbers, you see on your ledger represent nothing but debts. It‘s a system of IOU. Cryptocurrencies don‘t represent debts. They just represent themselves. They are money as hard as coins of gold.
To understand the revolutionary influence of cryptocurrencies you need to consider both properties. Bitcoin as a permissionless, irreversible and pseudonymous means of payment is an attack on the control of banks and governments over the monetary transactions of their citizens. You can‘t hinder someone to use Bitcoin, you can‘t prohibit someone to accept a payment, you can‘t undo a transaction.
As money with a limited, managed supply that is not changeable by a government, a bank or any other central institution, cryptocurrencies attack the scope of the monetary policy. They take away the control central banks take on inflation or deflation by manipulating the monetary supply.
“While it’s still fairly fresh and unstable relative to the gold standard, cryptocurrency is certainly gaining traction and will most certainly have more normalized uses in the next few years. Right now, in particular, it’s enlargening in popularity with the post-election market uncertainty. The key will be in making it effortless for large-scale adoption (as with anything involving crypto) including developing safeguards and protections for buyers / investors. I expect that within two years , we’ll be in a place where people can shove their money under the virtual mattress through cryptocurrency, and they’ll know that wherever they go, that money will be there.” – Sarah Granger, Author, and Speaker.
Cryptocurrencies: Dawn of a fresh economy
Mostly due to its revolutionary properties cryptocurrencies have become a success their inventor, Satoshi Nakamoto, didn‘t dare to desire of it. While every other attempt to create a digital cash system didn‘t attract a critical mass of users, Bitcoin had something that provoked enthusiasm and fascination. Sometimes it feels more like religion than technology.
Cryptocurrencies are digital gold. Sound money that is secure from political influence. Money that promises to preserve and increase its value over time. Cryptocurrencies are also a swift and convenient means of payment with a worldwide scope, and they are private and anonymous enough to serve as a means of payment for black markets and any other outlawed economic activity.
But while cryptocurrencies are more used for payment, its use as a means of speculations and a store of value dwarfs the payment aspects. Cryptocurrencies gave birth to an exceptionally dynamic, rapid growing market for investors and speculators. Exchanges like Okcoin, poloniex or shapeshift enables the trade of hundreds of cryptocurrencies. Their daily trade volume exceeds that of major European stock exchanges.
At the same time, the praxis of Initial Coin Distribution (ICO), mostly facilitated by Ethereum‘s wise contracts, gave live to amazingly successful crowdfunding projects, in which often an idea is enough to collect millions of dollars. In the case of “The DAO” it has been more than one hundred fifty million dollars.
In this rich ecosystem of coins and token, you practice extreme volatility. It‘s common that a coin gains ten percent a day – sometimes one hundred percent – just to lose the same at the next day. If you are fortunate, your coin‘s value grows up to one thousand percent in one or two weeks.
While Bitcoin remains by far the most famous cryptocurrency and most other cryptocurrencies have zero non-speculative influence, investors and users should keep an eye on several cryptocurrencies. Here we present the most popular cryptocurrencies of today.
The one and only, the very first and most famous cryptocurrency. Bitcoin serves as a digital gold standard in the entire cryptocurrency-industry, is used as a global means of payment and is the de-facto currency of cyber-crime like dark net markets or ransomware. After seven years in existence, Bitcoin‘s price has enhanced from zero to more than six hundred fifty Dollar, and it‘s transaction volume reached more than 200.000 daily transactions.
There is not much more to say: Bitcoin is here to stay.
The brainchild of youthful crypto-genius Vitalik Buterin has ascended to the 2nd place in the hierarchy of cryptocurrencies. Other than Bitcoin its blockchain does not only validate a set of accounts and balances but of so-called states. This means that Ethereum can not only process transactions but sophisticated contracts and programs.
This plasticity makes Ethereum the flawless instrument for blockchain -application. But it comes at a cost. After the Hack of the DAO – an Ethereum based brainy contract – the developers determined to do a hard fork without consensus, which resulted in the emerge of Ethereum Classic. Besides 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.
Maybe the less 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 the cryptocurrency itself. XRP, the currency, doesn‘t serve as a medium to store and exchange value, but more as a token to protect the network against spam.
Ripple Labs created every XRP-token, the company running the Ripple network, and is distributed by them on will. For this reason, Ripple is often called pre-mined in the community and dissed as no real cryptocurrency, and XRP is not considered as a good store of value.
Banks, however, seem to like Ripple. At least they adopt the system with an enhancing rhythm.
Litecoin was one of the very first cryptocurrencies after Bitcoin and tagged as the silver to the digital gold bitcoin. Quicker than bitcoin, with a larger amount of token and a fresh mining algorithm, Litecoin was a real innovation, ideally tailored to be the smaller brother of bitcoin. “It facilitated the emerge of several other cryptocurrencies which used its codebase but made it, even more, lighter“. Examples are Dogecoin or Feathercoin.
While Litecoin failed to find a real use case and lost its 2nd place after bitcoin, it is still actively developed and traded and is hoarded as a backup if Bitcoin fails.
Monero is the most prominent example of the cryptonite algorithm. This algorithm was invented to add the privacy features Bitcoin is missing. If you use Bitcoin, every transaction is documented in the blockchain and the trail of transactions can be followed. With the introduction of a concept called ring-signatures, the cryptonite algorithm was able to cut through that trail.
The very first implementation of cryptonite, Bytecoin, was strongly premined and thus rejected by the community. Monero was the very first non-premined clone of bytecoin and raised a lot of awareness. There are several other incarnations of cryptonote with their own little improvements, but none of it did ever achieve the same popularity as Monero.
Monero‘s popularity peaked in summer two thousand sixteen when some darknetmarkets determined to accept it as a currency. This resulted in a sustained increase in the price, while the actual usage of Monero seems to remain disappointingly puny.
Besides those, there are hundreds of cryptocurrencies of several families. Most of them are nothing more than attempts to reach investors and quickly make money, but a lot of them promise playgrounds to test innovations in cryptocurrency-technology.
What is the future of Cryptocurrency?
The market of cryptocurrencies is swift and wild. Almost every day fresh cryptocurrencies emerge, old die, early adopters get wealthy and investors lose money. Every cryptocurrency comes with a promise, mostly a big story to turn the world around. Few sustain the very first months, and most are pumped and dumped by speculators and live on as zombie coins until the last bag holder loses hope ever to see a come back on his investment.
“In two years from now, I believe cryptocurrencies will be gaining legitimacy as a protocol for business transactions, micropayments, and overtakingWestern Union as the preferred remittance implement. Regarding business transactions – you’ll see two paths: There will be financial businesses which use it for it’s no fee, nearly-instant capability to budge any amount of money around, and there will be those that utilize it for its blockchain technology. Blockchain technology provides the largest benefit with trustless auditing, single source of truth, brainy contracts, and color coins.”
Markets are dirty. But this doesn‘t switch the fact that cryptocurrencies are here to stay – and here to switch the world. This is already happening. People all over the world buy Bitcoin to protect themselves against the devaluation of their national currency. Mostly in Asia, a vivid market for Bitcoin remittance has emerged, and the Bitcoin using darknets of cybercrime are flourishing. More and more companies detect the power of Brainy Contracts or token on Ethereum, the very first real-world application of blockchain technologies emerge.
The revolution is already happening. Institutional investors embark to buy cryptocurrencies. Banks and governments realize that this invention has the potential to draw their control away. Cryptocurrencies switch the world. Step by step. You can either stand beside and observe – or you can become part of history in the making.
“If the trend resumes, the average person will not be able to afford to purchase one entire bitcoin in two years. As global economies inflate and markets exhibit signs of recession, the world will turn to Bitcoin as a hedge against fiat turmoil and an escape against capital controls. Bitcoin is the way out, and cryptocurrency as a entire is never going away, it’s going to grow in use and acceptance as it matures.”
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