While cryptocurrencies have been around several years, they only rose to fame in the late half of 2017. The rapid rise of Bitcoin that year saw a rapid influx of new investors. This helped to further fuel the coin’s astronomical growth.
While their popularity continues to grow year after year, cryptocurrencies are still widely misunderstood. Many believe that the subject is just too complicated, so they never take the time to learn about it. However, nothing could be further from the truth. In this article, I will explain the concept of these magical digital currencies in a way that you can easily understand – you won’t even need a computer science degree!
What Is a Cryptocurrency?
The term ‘cryptocurrency’ comes from the combination of two words: cryptographic and currency. Cryptographic, meaning secure for digital transmission, and currency, a medium that can be exchanged for goods or services. When these two concepts are put together, we can describe cryptocurrencies as secure digital money (or assets).
All cryptocurrencies can be classified as either:
Coins: Currencies which can be used to purchase goods or services (just like the paper currency in your wallet), or
Tokens: Currencies used to access specific products or services (think of an arcade or slot machine token). They can also be used to represent stakes in a property, company, or any other third-party asset (like stocks).
Whether a cryptocurrency is classified as a coin or token, there is one main thing that makes them unique – their use cryptography. Cryptography is a mathematical process used to:
- Secure digital transactions.
- Verify the transfer of digital assets.
History of Failed Digital Currencies
To better understand cryptocurrencies, it is worthwhile to look at the history of other past, unsuccessful digital currencies. During the technology boom of the 1990s, there were many failed attempts at creating various types of digital currencies.
Beenz, Flooz, and DigiCash are just some examples of digital currencies that fell flat. These early currencies failed due to various reasons, including lack of demand, fraud, and company mismanagement.
While the reasons for failure were varied, all these digital currencies had one major flaw in common – they were centralized. In other words, they were all owned and operated by a single third-party company. These companies performed several important functions, including:
- Verifying transactions
- Confirming user identities
- Financial settlements, and
- Record keeping
Since all these responsibilities were assigned to a single body, when the company died, the currency went with it. Over time, as each of these companies bit the dust, so too did the vision for mainstream digital currencies.
Blockchain and the Dawn of a New Era
Then, in early 2009, an anonymous person (or group of people), known only as ‘Satoshi Nakamoto,’ created something special. In their whitepaper, they described their invention as a “Peer-to-Peer Electronic Cash System.”
The most crucial aspect of this invention was that they found a way to create a digital cash system that was fully decentralized. In other words, the system would allow persons to transact directly with each other without a governing third-party.
The key element of this decentralization was creating a system where transaction records would be secured and distributed among numerous global participants. Each of these participants also donates their computing power, which is used to run and maintain the cryptocurrency network. This type of system is what we know as the blockchain.
What Makes Cryptocurrencies Unique?
All true cryptocurrencies possess several distinguishing characteristics. These include:
Decentralized – This is the most critical feature of all cryptocurrencies. All transactions are confirmed, verified, recorded, and secured on a system that is run by a network of computers owned by individuals worldwide. A single company does not own the network; therefore, there is no single point of failure.
Anonymous – Transactions and accounts are not tied to real-world identities. Instead, strings of random alphanumeric characters, known as addresses, are used to represent individuals.
Irreversible – Transactions written to the blockchain are permanent and cannot be reversed by anyone. Once cryptocurrency is sent to a wallet address, not even Satoshi Nakamoto himself can change it.
Permissionless – Cryptocurrencies can be used by anyone, anywhere with an internet connection. Once you have a wallet address, you are free to send or receive cryptocurrencies anywhere in the world without restrictions.
Secure – Cryptocurrency transactions are secured using strong cryptography. It is, therefore, extremely difficult for anyone to hack, steal, or manipulate data.
Controlled Supply – The maximum amount of any given coin or token is written in the code from inception. Additional currency cannot simply be printed or created.
