Chapter 1 - Cryptocurrency 101
Contents
- What is cryptocurrency?
- What makes cryptocurrency unique?
- What is the difference between cryptocurrencies and tokens?
- Public-key cryptography and crypto wallets?
What is cryptocurrency?
A cryptocurrency (or simply called crypto) is a form of digital cash that enables individuals to send value in a digital system.
The difference between these systems and others like PayPal or digital banking is that although they might appear to serve the same use cases on the surface cryptocurrencies have less friction and can not be stopped by anyone.
The term “cryptocurrency” is a portmanteau of cryptography and currency. This is simply because cryptocurrency makes extensive use of cryptographic techniques to secure transactions between users.
What makes cryptocurrency unique?
Cryptocurrency is unique for many reasons. Amidst its several functions, crypto primarily serves as a store of value system which enables boundless electronic cash transfer.
A proper cryptocurrency well decentralized. There isn’t a central bank or subset of users that can change the rules without reaching agreement with the majority of the network. The network participants run software that connects them to other participants so that they can share information.
Centralized vs. decentralized networks.
The left side of the above pictures show you how banks and other traditional institutions build their technology infrastructure. It shows that users must communicate via the central server. On the right of the picture, we see that there is no hierarchy: nodes are interconnected and relay information between themselves.
The decentralization of cryptocurrency networks makes them highly resistant to shutdown or censorship. If a bank had its database wiped and there were no backups, it would be very difficult to determine users’ balances. But in cryptocurrency, every node keeps a copy of the database. Everyone effectively acts as their own server. Individual nodes can go offline, but their peers will still be able to get information off of other nodes.
Therefore, Cryptocurrencies function 24 hours a day, 365 days a year and allow for value transfer to anywhere around the world without any intervention or mediators.
There have been some attempts to create digital cash systems over the years, but the first full application of cryptocurrencies is Bitcoin. It was released in 2009 by a person or group of people using the pseudonym Satoshi Nakamoto. To this day, the true identity remains unknown.
What is the difference between cryptocurrencies and tokens?
It seems that cryptocurrencies and tokens appear to have similar meaning and both are traded on exchanges, (such as Binance) and can be sent between blockchain wallet addresses.
Cryptocurrencies are designed to serve as money, inform of a medium of exchange, a store of value and to remain a unit of account. Each unit is functionally fungible, meaning that one coin is worth as much as another.
Blockchains like the Bitcoin network and other early networks were limited. They were only designed to store value in a peculiar way, but later blockchains sought to do more. Ethereum Blockchain went beyond just provide currency functionality to allowing software developers to run code called Smart Contracts. These types of contracts enabled the creation of digital tokens for a variety of Decentralized Applications.
Although tokens can be used like cryptocurrencies, they are built on top of cryptocurrencies. Blockchains are majorly sustained by their native cryptocurrencies but tokens are extra values that can be created on a blockchain and it depends on the native cryptocurrency of that blockchain.
Public-key Cryptography and crypto wallets?
Public-key, PK, cryptography is a key technique used by Blockchain networks. It’s what everyone on the network relies on in identifying if someone says he is. In this way, PK allows for someone to send and receive money or even messages on the network.
In a public-key cryptography scheme, you have a public key and a private key. A private key is essentially a massive number that would be impossible for anyone or computer to guess. With current computers, you wouldn’t even be able to crack someone’s key before the heat death of the universe.
As the name suggests, you need to keep your private key secret. But from this key, you can generate a public one. The public key can safely be handed out to anyone. It’s feasibly impossible for anyone to reverse-engineer the public key to get your private one.
In cryptocurrencies, you can only spend the funds which you have the corresponding private key. When you make a transaction, you’re announcing to the network that you want to move your money. This is announced in a message (i.e., transaction), which is signed and added to the cryptocurrency’s database (the blockchain). As mentioned, you need your private key to create the digital signature. And since anyone can see the database, they can check that your transaction is valid by checking the signature.
Basically, a cryptocurrency wallet is a software that should be able to hold your private keys safe and allow you to sign transactions in a secure way. It can be extended and built for devices.
There are several kinds of wallets, and they include: hardware wallets, application wallets for PCs or smartphones, paper wallets, browser wallets, online and offline wallets etc. These wallets are majorly categorized into Custodial and Non-custodial wallets.
Wallets are the interface that most users will rely on to interact with a cryptocurrency network. For security, hardware wallets are virtually unmatched in their ability to keep private keys off line, off the internet.
Conclusion
Cryptocurrency has come to stay. This technology is still very young but a lot about it is under active development. We are pulling our resources together in order to create a different asset class which always helps us to interact and coordinate our human activities like never before.
