Cryptocurrency Basics
Introduction
Cryptocurrency is a digital or virtual form of currency that uses cryptography for security. It is primarily a decentralized control as opposed to centralized digital currency and central banking systems. The control of each cryptocurrency works through a technology called blockchain, which serves as a public financial transaction database.
History
The first decentralized cryptocurrency, Bitcoin, was created in 2009 by the pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function, as its proof-of-work scheme. Following Bitcoin, several other cryptocurrencies were created, these are frequently called altcoins, as a blend of Bitcoin alternative.
Cryptographic Techniques
Cryptocurrencies use various timestamping schemes to avoid the need for a trusted third party to timestamp transactions added to the blockchain ledger. The primary timestamping scheme used is proof-of-work, but others such as proof-of-stake and proof-of-burn are also used.
Blockchain Technology
The validity of each cryptocurrency's coins is provided by a blockchain. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a hash pointer as a link to a previous block, a timestamp and transaction data. By design, blockchains are inherently resistant to modification of the data.
Mining
Cryptocurrency mining is a process in which transactions for various forms of cryptocurrency are verified and added to the blockchain digital ledger. This process involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle.
Wallets
A cryptocurrency wallet stores the public and private "keys" or "addresses" which can be used to receive or spend the cryptocurrency. With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency.
Security and Privacy
Cryptocurrencies are built on cryptography. They are not secured by people or by trust, but by math. It is more probable that an asteroid falls on your house than that a bitcoin address is compromised. In regards to privacy, cryptocurrencies are usually pseudonymous. While all transactions are visible on the blockchain, the identities of the participants are obscured.
Legal and Regulatory Issues
The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. While some countries have explicitly allowed their use and trade, others have banned or restricted it.
Economic Implications
Cryptocurrencies are a potential tool to evade economic sanctions for example against Russia, Iran, or Venezuela. Some economic analysts predict a big change in crypto is forthcoming as institutional money enters the market.
Criticisms and Controversies
Cryptocurrencies have been criticized for a number of reasons including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. However, they also have been praised for their portability, divisibility, inflation resistance, and transparency.
Future of Cryptocurrency
The future of cryptocurrencies remains uncertain, but they have the potential to revolutionize the financial system in ways we can't yet fully understand. As the technology matures and becomes more widely understood and accepted, we may see a more stable and regulated cryptocurrency market.
