Cryptocurrency: The New Digital Money
Cryptocurrency is a digital currency used as an alternative to the money we are used to. Cryptocurrencies are not an isolated invention. It stems from a radical innovation by Satoshi Nakamoto, the Bitcoin. It was not his intention at all to create a new currency. He wanted to develop a peer-to-peer electronic cash system where double spending of the same money is impossible. A system where there is no server or central authority involved and everything is decentralized.
To use money digitally, it is important to have a payment network with balances, accounts and transactions. A major problem that many payment networks face is preventing ‘double spending’. In today’s society, this is done by a server or central authority that keeps an eye on the balances, such as banks.
In a decentralized network such as Bitcoin, such a server or authority does not exist and therefore each participant must take on this task. Each peer (participant) in the network has a list of all the transactions that are made and checks whether the future transactions are valid or an attempt at double spending. If the peers in the network cannot agree on a balance then the whole transaction does not go through, even if it is a small detail. There must be absolute agreement.
Juan (peer 1) gives x number of Bitcoin to Laura (peer 2). This transaction is signed by Juan’s private key. After the signing, the transaction is included in the peer-to-peer network. The entire network knows almost immediately that the transaction was made, but it takes a while before it is actually approved/confirmed. The approval is the most important part and it can be said that cryptocurrencies are all about approval. As long as this is not there, the transaction will always remain on pending. Once an approval has been given, it will be included in the overview of historical transactions and it cannot be reversed either. This overview of historical transactions is also called the blockchain.
Only miners can approve transactions. This is their job within the cryptocurrency network. They grab transactions, label them as legitimate and distribute them in the network. After the approval, each node will add it to its database since it has become a part of the blockchain. Each computer connected to the currency’s network is called a node. The miner gets a reward for his task in the form of a token/proof of the cryptocurrency.
Cryptocurrencies are so called because the entire process is secured by strong cryptography. It is not secured by people, but by pure mathematics. Therefore, the chances of a bitcoin address being compromised are smaller than a meteorite falling on a house. If we want to describe the properties of cryptocurrencies we have to divide it into transactional and monetary properties.
After approval, a transaction cannot be reversed. By no one, but really no one can do this. Not the bank, not the president of a country and not even Satoshi Nakamoto. So when you send a coin you need to be extra careful that the address is written correctly. It is also important to protect your wallet from hackers. Once a hacker has transferred your money to his/her account it is really gone.
Both transactions and accounts are not related to an identity of a company or person. You receive coins on your own address. This is a randomly assigned address consisting of about 30 characters. It is therefore possible to analyze the transactions of addresses back and forth, but it is not possible to see between which identities they are made.
Fast and global
The transactions are immediately recorded in the network and within a few minutes they are approved/confirmed. Since it is recorded in a global network of computers, no one is aware of where in the world the transaction originated. It also doesn’t matter in terms of speed whether you send a coin to your grandmother in a village or to your travel friend from Alaska.
A cryptocurrency is stored in a public key cryptography system. Only the owner of the coin holds the private key and can use it to receive and send coins. The strong cryptography and the power of large numbers make it impossible to break. A Bitcoin address is more secure than Fort Knox in America.
You don’t have to ask anyone’s permission to use cryptocurrencies. It is free software that anyone can download. After installing it, you can receive and send coins. There is no authority stopping you from doing this.
Most cryptocurrencies limit the supply of coins/tokens. The number of Bitcoins released decreases over time and the last coin will be mined sometime in 2140. At that time, there will be 21 million in circulation. In cryptocurrencies where there is a limit on the number of coins that will be issued, a schedule of this release is written into the currency’s code. This means that the supply of tokens can already be reasonably estimated for the future.
Not a debt but a holder
The Fiat money in your bank account was created by debt. The numbers in your ledger account are nothing more than debt. It is a system of IOU or I Owe You. Cryptocurrencies are not debts. They do not represent debt, they only represent themselves.
The impact is great
This type of digital money has enormous potential over our lives as we know them. Imagine not needing intermediaries for every transaction you make. For example, banks will no longer have a monopoly on intermediating financial transactions. This could mean huge savings for the public. It will probably be many years before cryptocurrency becomes bigger than fiat money (if ever), but should that day arrive, it will have huge consequences for the economy as we know it.