It all started with a whitepaper from a mysterious person named Satoshi Nakamoto. They developed a P2P decentralized network that could execute transactions, resist attacks, and dispense with the necessity of a central authority. The nodes that verified transactions would get bitcoin as a reward, and the network’s users would be able to use them as a payment method. Since its creation in 2009, bitcoin has grown in popularity and usage.
Cryptocurrency is the conclusion of decades of efforts to create a digital currency. The whitepaper by Nakamoto alludes to previous eCash and b-money projects. Both failed due to perceived infractions with monetary regulations. As a result, the necessity for anonymity arose. That’s where Hashcash, mentioned in the paper, comes into play.
There is a famous event that happened with cryptocurrency. It’s known as Bitcoin Pizza Day, which occurred on May 22, 2010. A programmer spent 10,000 BTC to buy $30 worth of pizza. The entire affair happened over an internet chat system called IRC Chat.
Many cryptocurrencies have emerged since 2010 to fulfill a variety of needs. Some coins and tokens facilitate payment (BTC, LTC, PTC, XRP). Others implement smart contracts (ETH, EOS, ADA, SOL), domain name ownership (NAMECOIN), decentralized cloud storage (FILECOIN, SIACOIN), and other purposes (energy utility, video streaming, internet advertising, etc.).
Cryptocurrencies and blockchains can be hard to understand. Our goal is to help you understand how they work. This guide will give you a path to finding out more on your own.
What exactly is a cryptocurrency? You might be thinking simply about digital cash and payments. You may be thinking of an online payment service like PayPal. Jan Lansky wrote a paper for a Czech university that outlined seven distinguishing characteristics of cryptocurrency:
- The system does not require a central authority; distributed to achieve consensus on its state.
- The system keeps an overview of cryptocurrency units and their ownership.
- The system defines whether a new cryptocurrency can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
- Ownership of cryptocurrency units can be proven exclusively cryptographically.
- The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
- If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.
- New cryptocurrency units are usually (but not always) put into circulation as a reward for using the computer’s computing power for solving complicated math problems to confirm new transactions among participants.
Cryptocurrencies use a decentralized system (blockchain) to manage transactions, and the people who process them receive new monetary units.
There are two types of cryptocurrency, coins and tokens. The Crypto Novice by Colin Oliva offers a straightforward explanation of the distinctions between coins and tokens. A coin is a type of cryptocurrency that uses its own blockchain. Coins are not interchangeable on other blockchain networks. Plus, most coins serve as currency. A token is something that has value and can be exchanged for goods or services on another platform. It does not want to be a currency, but the units may have an external monetary value.
Blockchain for Dummies
Cryptocurrencies are different from regular money because they aren’t controlled by one person or group of people. They use a network to process transactions and store them in something called a blockchain.
What is a blockchain? It’s usually considered a distributed ledger. DLT (distributed ledger technology) is an “asset database that can be shared across a network of multiple sites, geographies, or institutions” (UK Government Office of Science, Distributed Ledger Technology: Beyond Blockchain). Blockchain comes from the concept of a distributed ledger. The critical difference between blockchain and a distributed ledger is that blockchain guarantees a decentralized network that any organization does not control. A distributed ledger may be centralized (limited permissions, limited transparency, limited usage, etc.).
Blockchain adoption is relatively new, but its social impact can be apparent:
- Everledger provides a limited blockchain (distributed ledger) that assures diamonds’ mining, cut, and trading information.
- Estonia uses a distributed ledger technology to reduce administrative burdens, such as registering businesses and paying taxes, on the state and citizens. Such applications can apply to voting.
- The Economist wrote an article about two owners who disagreed on property rights. The article starts with the story of this problem and how blockchain technology could have resolved the situation.
According to the book Cryptocurrency, there are seven various consensus protocols used with DLTs. Five of them are specific to the blockchain, while two of them are alternatives:
- Proof of Work
- Proof of Stake
- Proof of Burn
- Proof of Importance
- Proof of Signature
We finish by talking about blockchain platforms. These are platforms that companies use to show how they can offer blockchain and distributed ledger technology benefits. However, not all blockchain platforms use cryptocurrency. The ones that do usually issue proprietary coins and tokens (which are decentralized, of course). Here is a list of popular blockchain platforms that are open for public use and adopt a cryptocurrency (based on a list created by the Blockchain Council):
- Ethereum (ETH, ETC)
- Tezos (XTZ)
- NEO (NEO, GAS)
- Stellar (XLM)
- Cosmos (ATOM)
- Cardano (ADA)
- Solana (SOL)
- Elrond (ELG)
There are more things to learn, so you might want to learn more fundamentals about this space from these books: