Cryptocurrency is a digital currency that is designed to serve as a medium of exchange. It uses a special computational process known as cryptography to secure and verify transactions and control new units’ creation. Categorically, cryptos are limited entries in a database with no one capable of changing these entries unless specified conditions are met.
Cryptocurrency does not exist in a physical form like paper currency and is not issued by any central authority. Today, cryptocurrency has become a global phenomenon that is known to a great number of people. This chapter will tell you everything you need to know about cryptocurrencies and their potential impact on the global economic system. It isn’t easy to see a major bank, financial institution, a prominent software company, or a government that has not researched cryptocurrencies. Most of these entities have gone on to publish a paper about cryptos or start a blockchain project.
When we look beyond the buzz and different press releases, it is obvious that most people, including bankers, consultants, and even developers, have limited knowledge about cryptocurrencies. Most of these people fail to understand the basic concepts of cryptocurrency.
The Origin of Cryptocurrency
In 1983, David Chaum, an American cryptographer, conceived anonymous electronic money known as ecash. In 1995, Chaum implemented it through Digicash. Digicash was an early form of cryptographic electronic payment that required user software to withdraw notes from a bank and designate special encrypted keys before they can be sent to a recipient. This approach made it possible for the digital currency to be untraceable by the issuing bank, the government, or a third party. The United States National Security Agency (NSA) published a paper in 1998 titled “How to Make a Mint: the Cryptographic of Anonymous Electric Cash.” The paper described a cryptocurrency system and was first published in an MIT mailing list and later in The American Law Review. In 1998, Wei Dai published a paper that described b-money. B-money was characterized as an anonymous, distributed electronic cash system. After Wei Dai, Nick Szabo described bit gold. Bit gold had an electronic system that required users to complete a proof of work function. The solutions were cryptographically compiled and published.
Not many people know that cryptocurrency was accidental as it was a side product of a different invention. Satoshi Nakamoto, the pseudonym behind Bitcoin’s creation, announced in 2008 that it had developed a peer-to-peer electronic cash system. Satoshi’s target was to invent something that many have failed to create before digital cash. In the 90s, there were many attempts to create a digital currency during the tech boom. Systems like Flooz, Beenz, and DigiCash emerged on the market, but they all inevitably failed. Many factors contributed to these systems’ failures, such as fraud, financial problems, and friction between companies’ employees and their employers. These systems made use of a Trusted Third Party, which implies that companies behind the scene verified and facilitated the transactions. Once the companies failed, a digital cash system’s development was seen as a lost cause for a long period.
However, in early 2009, an anonymous programmer under the alias Satoshi Nakamoto introduced Bitcoin. This electronic cash system is completely decentralized; thus, there are no servers and no central controlling authority. Satoshi’s concept closely resembles peer-to-peer networks for file sharing. Double spending is one of the major problems that any payment network must solve. The traditional financial institutions used a trusted third party, such as a server, to keep records of balances and transactions. The downside of this method is that a central authority will control your funds and access your personal information. Unlike this traditional solutions, a decentralized network like Bitcoin requires every participant to checkmate double-spending. The participants can do this through the blockchain, a public ledger of all transactions within the network. We will discuss the blockchain in the article. This public ledger is made available to every participant on the network, and everyone can see every account’s balance. Within a cryptocurrency network, miners are the only ones that can confirm a transaction by solving a cryptographic puzzle. These miners mark legitimate transactions and spread them across the network. Once every node of the network has added it to its database, the transactions become unforgeable and irreversible. The miner receives a reward plus the transaction fees. Therefore, the cryptocurrency network is based on all participants’ total consensus concerning the legitimacy of balances and transactions. If there is a disagreement between the nodes of the network, the system will break. To prevent this from happening, there are lots of rules pre-built and programmed into the network. The name cryptocurrency comes from the fact that the consensus-keeping process is ensured with strong cryptography. This consensus keeping process makes third parties and the concept of trust redundant.
Bitcoin, the first cryptocurrency, used SHA-256 as the cryptographic hash function for its proof of the work scheme. In April 2011, Namecoin was created to form a decentralized DNS, which will make it very difficult to censor the internet. Later in October of the same year, Litecoin was created. Litecoin became the first cryptocurrency to use scrypt as its hash function instead of SHA-256 successfully. Peercoin was the first notable cryptocurrency to combine proof-of-work and proof-of-stake consensus protocol.
What Can You Do With Cryptocurrency?
There are several ways you can use cryptocurrency, and we shall explore some of these use cases.
Buying goods and services
Many merchants; both online and offline, accept cryptocurrencies like Bitcoin as a form of payment. These merchants range from massive online retailers to small local shops. Bitcoin can serve as payment for hotel accommodation, flights ticket, etc. There are Gift Card selling websites that accept up to 20 different cryptocurrencies. You can buy anything with cryptocurrency through Gift Cards.
Some believe that cryptocurrencies are the hottest investment opportunity at the moment. People have become millionaires through their investments in Bitcoin, which is the most recognized cryptocurrency. Ethereum, which is the second-largest cryptocurrency by market capitalization, recorded the fastest rise of a cryptocurrency ever. Since May 2016, the value of Ethereum has increased by about 2,700 percent. The market capitalization of all cryptocurrencies combined increased by more than 10,000 percent since 2013. However, it is important to point out that cryptocurrencies are a high-risk investment, and their market value is so volatile. It fluctuates like no other asset in the market. Since cryptos are partly unregulated, there is always a chance that they can be outlawed in certain places. Another factor is the possibility that cryptocurrency exchanges can be hacked. Today, if you wish to invest in cryptocurrency, you should put aside many options aside from Bitcoin and Ethereum.
What is the Legality of Cryptocurrency?
As cryptocurrencies become more mainstream, legal regulators worldwide seek to understand the concept of digital coins and where they fit in already existing regulations and legal frameworks. The introduction of Bitcoin created a new paradigm. The fact that cryptocurrency is decentralized, without any physical form, and self-sustained makes it cause an uproar among regulators. There have been many concerns over the decentralized nature of cryptocurrency and its ability to be used almost completely anonymously. Governments worldwide are worried that cryptocurrencies appeal to the traders who trade contraband goods and services. Regulators are also worried about the use of digital currencies in money laundering and tax evasion schemes. Today, Bitcoin can be used in the United States, UK, China, Russia, and many developing countries. Although most of these countries allow cryptos, the level of regulations depends on the country.