Cryptocurrencies, or virtual currencies, are digital means of exchange that uses cryptography for security. The word ‘crypto’ comes from the ancient greek word, ‘kryptós’, which means hidden or private. A digital currency that is created and used by private individuals or groups has multiple benefits.
Cryptocurrencies challenge the orthodoxy of how a currency works in ways that excite some and worry others. So, what exactly is cryptocurrency and why is it different? Unlike other currencies, all cryptocurrencies are entirely digital. No cryptocurrency prints money or mints coins. Everything is done online. Conventional forms of currency are generated by government and then circulated in the economy, via banks.
Cryptocurrencies do not rely on either of these institutions. Instead, cryptocurrency is decentralized. In other words, it is created, exchanged and regulated by its users. Cryptocurrencies are digitally mined. Mining precious metals has been used as a means of giving value to money. The question of how cryptocurrencies have value is complex, and reveals that any currency derives its worth from faith in its purchasing power. All currencies require a system that guards against misuse and fraud.
In banking, this is done with ledgers which track the flow of money through accounts. With cryptocurrency, the task is undertaken with blockchain using a form of maths called cryptology. Blockchain is a secure record of every single transaction made using a cryptocurrency. Verified transactions are added to the blockchain as part of the mining process. Mining is therefore not just about creating new money but also validating transactions. While it’s possible to buy cryptocurrency– all you need is a digital wallet as part of a free app or a cryptocurrency tax software — finding places that will accept it, the variable transaction charges and volatile exchange rates make buying and selling with it difficult.
Cryptocurrency could transform the way we do transactions. The so-called distributed ledger technology behind blockchain can be integrated into all sorts of business processes that require trust among multiple parties. That’s because blockchains store information that are both secure and transparent. Pretty exciting, but how is that possible? For one thing, because of the blocks themselves. Now, rather than a long string of records, information in a blockchain is cut up into sealed blocks. Thanks to the use of cryptography, it is impossible to change or counterfeit the records in the block. But what’s inside these blocks?
Each block contains certain data, for example when selling an exclusive painting you want the block to have information on the name of the painting, the artist the previous owner, the new owner, the time of the sale and transaction. Next to the data, each block has an identifiable hash. This is a unique code, that functions like a fingerprint.
The defining benefit of cryptocurrency is that it is not governed by any central authority or financial institution, rendering them immune to government interference or manipulation. This is called having a decentralized system. A centralized economic system, however, consists of government or corporate control of currency. The government and central banks control the supply of currency by printing units of fiat money and controlling their values as well as transaction cost. In a decentralized economic system, the supply and value of virtual currencies are controlled by the users themselves, through highly complex protocols using peer-to-peer network.
In 2009, Satoshi Nakamoto, a pseudonymous individual or group, proposed an electronic payment system that is based on peer-to-peer network which is supported by cryptographic proof instead of relying on trust or a third party system. To prevent problems such as double spending, bitcoin transactions are recorded on a public ledger using blockchain technology so everyone in the world can verify who gets paid first. Each transaction is seen as a case-sensitive address which anyone can generate in order to receive the coins.
Today, there are many Bitcoin alternative coins called altcoins. Most altcoins hope to either replace or improve upon Bitcoin or even with each other. Altcoins can vary widely from each other and each altcoin promises features such as faster transaction speed, more secure privacy, proof-of-stake and many more.
Overall, cryptocurrencies still have a long way to go before they can replace today’s form of money and be truly accepted in the global commerce. Only time will tell when the rest of the world is ready to accept cryptocurrencies as the everyday means of payment.