What is cryptocurrency?
Investing in cryptocurrency has been all the rage in the last few years, with both booms and busts being heavily featured even in mainstream media. There are also quite a few vendors worldwide – online and offline – that accept one or more cryptocurrencies as payment for goods and services, so cryptocurrency is definitely not for speculation only.
But before we decide to throw our hard-earned fiat currency into the whimsical world of cryptomoney, it would behoove us to learn a bit more about what cryptocurrencies really are, when we look behind the headlines and the buzz-words.
On this site, we will take a closer look at some of the world’s most famous cryptocurrencies and learn more about the systems that make them work and how they came into being.
Cryptocurrency systems use strong cryptography to secure and verify financial transactions within the system and manage the creation of additional currency units. Unlike traditional currencies, such as national currencies controlled by a central banking system, a cryptocurrency control system is decentralized.
With cryptocurrencies, the decentralized control typically works through distributed ledger technology, such as a blockchain.
As of 2019, several thousand cryptocurrencies have been created, but only a handful of them have become household names and attained any major circulation and capitalization. One of the most famous cryptocurrencies is Bitcoin (which was launched in 2009), and many other cryptocurrencies depend on the same technology as Bitcoin.
Examples of famous cryptocurrencies
All the cryptocurrencies listed below rely internet for their network to function properly.
Jan Lansky’s definition of a cryptocurrency
This is Jan Lansky’s definition of a cryptocurrency. Naturally, it is not uncontested.
According to Lansky, a cryptocurrency system meets all of the following six criteria:
- The system does not require a central authority, its state is maintained through distributed consensus.
- The system keeps an overview of cryptocurrency units and their ownership.
- The system defines whether new cryptocurrency units 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 proved 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.
The history of currencies that aren’t tied to any central bank controlled by a sovereign nation is very long, but the history of electronic money systems utilizing cryptography is very short.
One notable step in the early history of cryptocurrency took place back in the early 1980s, when the United States cryptographer David Chaum conceived a system for cryptographic electronic money that could be transferred anonymously. Chaum called this currency ecash. This was well before the widespread use of the Internet, and Chaum couldn’t implement his system until 1995, when he launched Digicash.
In 1996, the U.S. National Security Agency (NSA) published their seminal paper “How to Make a Mint: the Cryptography of Anonymous Electronic Cash”. This paper contained a detailed description of how a cryptocurrency system could work. The paper was made semi-public in an MIT mailing list in 1996, and then reached a wider audience the following year when it was reprinted in an issue of The American Law Review (Vo. 46, Issue 4).
Examples of early researchers that wrote about cryptocurrencies and helped pave the way for their creation are Wei Dai (of “b-money” fame) and Nick Szabo. Dai wrote about how an anonymous, distributed electronic cash system could work, while Szabo developed the idea of an electronic currency system where users were required to complete a cryptographical Proof-of-Work function. Later, the researcher Hal Finney developed this idea into a system based on a reusable Proof-of-Work feature.
Examples of important milestones:
- Bitcoin was launched in January 2009, using the cryptographic hash function SHA-256 as its Proof-of-Work scheme.
- Launched in October 2011, Litecoin was the first successful cryptocurrency to use scrypt as its hash function instead of SHA-256.
- Peercoin was the first cryptocurrency to use a hybrid of Proof-of-Work and Proof-of-Stake.