What is it?听听
Cryptocurrencies are听decentralized听digital听currencies, which听use听encryption techniques to verify transactions and听regulate the available supply听of听digital听coins.听These electronic听coins听consist听of听chains听of digital听signatures that听change hands when the owner signs away the coin to the next owner.听The听main听idea听behind these digital听currencies听is that transactions are听completed听on a peer-to-peer basis听without the need for听a听centralized听regulatory听authority.听听
In our current听financial system,听the government issues听currency,听and听banks听or听electronic cash systems听such as PayPal听oversee听electronic听transactions to make sure they are legitimate.听Cryptocurrency removes these authorities.听A听decentralized cash system听would appear to be听impossible听without any听type of听authorities听verifying听transactions.听What would stop someone from听sending听the same electronic coin听to听two people,听since听digital information can be readily reproduced?听听听
The听solution to听this problem听was听proposed听in the paper听鈥淏itcoin: A Peer-to-Peer Electronic Cash System鈥�,听which was听published in 2009听by an un-identified individual听under听the听alias听Satoshi听Nakamoto.听The paper听cleverly proposed听a way to combine听existing technologies听to create听a听secure听electronic cash system听that听does not rely on trust听[闭.听The system听allows听transactions to go from one party to another without a financial institution听acting as an intermediary.听听
Contained within the听first 50 Bitcoin blocks was the听message听鈥淭he Times 03/Jan/2009 Chancellor on brink of second bailout for banks鈥�.听This message would imply that听Nakamoto听was听motivated by the听repercussions of the听2008 financial crisis,听and听that听cryptocurrencies听were created听in order to听start听a major shift听away from banks听that were involved听in the crisis听[闭.听
The听genius of cryptocurrencies,听and听one of the main benefits of a decentralized coin,听is that you own it.听The design is听such听that there is no single听entity that can seize听or听freeze funds,听make changes to听the听inflation rate, or听implement new policies.听Furthermore, there is a greater level of anonymity, identity theft is next to impossible, and transactions are generally quicker and processed with little or no听fees. Since the start听of Bitcoin hundreds of 鈥渁ltcoins鈥� (alternative Bitcoins) have been created,听each听hoping to grow in popularity听enough听to one day听become听the world鈥檚 primary听form of听online currency [].
How It works听听
If you are thinking about听starting to use听cryptocurrencies,听it is a good idea to understand what you are investing in.听To start off,听let鈥檚听look at听digital听signatures听and how they are used to verify information.听To be able to perform听a transaction the first thing you need is a private and public key. Cryptocurrency exchanges monitor and keep track of the听public听keys to make it easier for you to engage in digital currency exchange.听The听private and public听keys are听generated together听and听are听mathematically related. A private key, also known as a secret key,听is a long list of听random听numbers that听must be kept听secret听to protect your digital wallet,听and the public key听is publicly known because it is necessary in order to have currency sent to your wallet.听听
A听digital signature听depends on both your private key and the contents of the message you are听sending.听In the message, the party sending cryptocurrency to another party specifies the instructions for that particular exchange:听the address it听is听being sent听to and the fee听amount being sent.听Before the听other party receives the message,听and thus payment,听the听signature,听is听verified by听the cryptocurrency system by听inputting听the听public key, signature,听and message into a verification function.听The verification function confirms that only the owner of the private key could have generated the signature.听This makes sure that the听sender of听the cryptocurrency听is actually who they say they are.听The cryptocurrency system also verifies听that there is enough cryptocurrency to complete the transfer. These verifications听stop听overspending听and听prevent听identity theft.听听
If听the slightest听change was made to the听contents of the听message, such as the receiving party setting the amount higher in the message, or just copying the message to receive the payment twice,听a听different signature听would听be created. Since it is generated based on听the听secret key and the unique message,听any message that was changed or just copied听would not pass after being inputted into the verification function; the result would be a failed transaction.听For this reason,听the听signature听could听never be plagiarized and the contents of the message cannot be听modified unless someone were to gain access to听the听private key.听The听cryptocurrency听signature听is actually a lot more secure than听an ink听signature, because听the digital signature听changes with every message and relies on your听private听key. The private听key is听next to impossible to guess and any fraudulent transaction would fail to be verified without it.听听
Each cryptocurrency is set听up a little differently,听but what all current cryptocurrencies have in common is the use of听Blockchain听technology. A听Blockchain听is basically a听comprehensive听ledger consisting of every transaction that has been made since the creation of that cryptocurrency鈥檚 unique听coin. It is publicly available and anyone can look听through it. Each block in the听Blockchain听is linked to the one before it,听so that any change听would alter听the entire chain from then on. That way听the chain听is resistant to modification,听as everyone has a copy of the ledger and any chain that differs from the majority听will be听rejected.听听
This devalues fraudulent entries into听a听ledger. Fraudulent entries would not be confirmed听and听would not听result in a change to the听Blockchain. This is evident to everyone else, as there would be no change to the听Blockchain听detailed on their ledger, only on the ledger of the person who added an entry to their ledger about a supposed transaction. This also means that the ledger doesn't have听to be hosted anywhere, as everyone has their own individual copies; this provides more autonomy.听A block consists听of all听transactions听which have occurred within a pre-determined amount of time,听and听in Bitcoin鈥檚 case,听each block contains every transaction which听was made in the last 10 minutes. Remember that each individual transaction听included in this block听needs to be听verified听by inputting the public key, message, and signature into a verification function.听听
A听block is only considered valid and added to the听chain if it has a corresponding听proof of work.听This听proof of work听is computationally expensive to find, meaning听it would take a LOT of computer听power to find by anyone听trying to submit a modified听block听to the block chain.听There is much more to be said听about听the inner workings of cryptocurrencies and if you would like a more in depth view听of this information it鈥檚 source is this听YouTube video on Bitcoin and other cryptocurrencies:听
听Bitcoin听听
Bitcoin was the first cryptocurrency,听and is,听without a doubt,听the most widely known and recognized听digital听coin. With a听market cap听of 42 billion听dollars,听at the time听this article was written,听it makes up half of the entire crypto market. As mentioned previously in this article,听there are hundreds of other 鈥渁ltcoins鈥� which have since听been听created. Why is Bitcoin so much bigger than the rest听then? The main reason is that Bitcoin is established, secure,听and becoming increasingly adopted as an official form of payment. Over the听years,听companies such as听Microsoft, Dell, Subway, Expedia.ca and many听other have all started听to accept Bitcoin听as payment.听听
It isn鈥檛 just companies听that听are adopting Bitcoin. As of April 2017 Japan听announced a new law making Bitcoin a听legal method of payment听[闭.听听All cryptocurrencies are only as valuable as听the value that听people听assign听to them.听You could make your own cryptocurrency but no one听would听buy it if they听can鈥檛听do anything with it. The easier听it is for a coin to听be exchanged for real life products or cash, the more useful and hence more valuable听it becomes. Prices听for coin听have increased over 300% since the start of the year leaving many people wondering how high the ceiling really is.听听
The Future of cryptocurrencies听听
It听is impossible to say for sure what will happen听with听cryptocurrencies in the future,听but what we can look at is the potential the technology has.听Cryptocurrencies and听Blockchain听technology have听the potential听to revolutionize听many industries by providing a听platform to confidently share information that听is incorruptible, transparent, and robust [闭.听Many altcoins which are now in circulation are powering ambitious projects听which take advantage of听Blockchain听technology.听Golem is a good example of such听a project听that, like many others, is pushing towards decentralized computing. If successful, Golem听would听revolutionize current off-site data storage by听allowing听users to store fragmented data across all听participating听computers on the network.听People would no longer have to feel uncomfortable surrendering their information to an off-site data storage company听under听the terms of听their听privacy agreements.听Your files could never get stolen and you听would truly be the only person that could ever access听your property.听Many of these projects are in very early alpha stages听however,听the possibilities and freedom that this technology allows is听truly听exciting and听very real.听听
References听
[1]听Nakamoto, S. (2009).听Bitcoin: A Peer-to-Peer Electronic Cash System.听Bitcoin. Retrieved from听.听
[2]听Bustillos, M. (2013, April 1). The Bitcoin Boom.听The New Yorker.听Retrieved from听.听
[3]听Rosic, A. (2016, June 28). 5 Benefits of Cryptocurrency: A New Economy For the Future.听Ameerrosic. Retrieved from听.听听
[4]听Gautham. (2017, April 2). Japan Officially Recognises Bitcoin as Currency Starting April 2017.听NewsBTC. Retrieved from听.听听
[5]听What is听Blockchain听Technology? A Step-by-Step Guide for Beginners. (n.d.).听Blockgeeks. Retrieved from听.听听
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