What is cryptocurrency?
Cryptocurrency, also known as crypto-currency or just crypto is a relatively new form of digital money. Although not quite the same as traditional currencies, cryptocurrency is now an accepted form of payment for some transactions.
Cryptocurrency and the technology behind it were designed to revolutionize modern payment systems. The tech minds behind this digital currency have noted a number of issues with currently established payment solutions, such as:
- Physical cards and transfers systems are outdated.
- As most transactions require some sort of third party to either authenticate or action the payment, most payments still incur fees making them unnecessarily expensive.
- Because of the above points many people still do not have access to financial services, and financial inclusion is still a long way off for many people.
How does it work?
Fiat currency is your standard government backed monetary system, for example, the Euro. This type of currency is known as centralized, meaning that it is controlled by a certain entity. Cryptocurrency is the opposite and is what is known as decentralized as there is no single entity in charge of it. This decentralized system is called blockchain and is the technology behind crypto.
A blockchain is a data structure used to create digital register of data that can be shared to a network of independent parties. The three main types of blockchain are:
- Public blockchains are large networks that are represented by a token, such as Bitcoin. Anyone can participate at any level. Public blockchains use an open-source code (publicly accessible code) that their community maintains. This means that anyone can use, distribute, modify, or contribute to the project
- Permissioned blockchains are similar to open-source, only they have a hierarchy system, where roles are assigned to members of the community. Like open-source they are also represented by a token.
- Private blockchains tend to be smaller and are not represented by a token. Transactions are untraceable and their networks usually consist of a limited number of trusted members.
Blockchains create “permanent” records that will remain in existence for as long as the network does. In order for a transaction to be verified it must be approved by all members of the network with validation control. This means that in order for any information to change on the blockchain it would need to be verified by a large portion of the community making it impossible for a single user to make changes. These additions to the chain are known as a transaction or an entry.
Where it all started
Various barter and payment systems have been used throughout the last 8000 years. Beginning with the barter system in around 6000BC to the introduction of the gold coin in around 700BC. Next came the implementation of the gold standard in the early 1800’s.
The gold standard bought a level of stability to the value of currency as it was literally backed by its value in gold. This lent a level of trustworthiness to the currency.
The value of fiat currency depends on a number of things, most importantly:
- Recognition – It is widely recognized as an accepted form of payment
- Circulation – How much of it is out there
- Trust – People need to believe in the value of the currency and the security of that value.
Money and the way we use it has changed a great deal in recent years with the introduction of digital payments. First credit and debit cards and now mobile wallets, have changed the way we interact with money and financial institutions.
Everyone, even if they don’t really understand what it is, has heard of Bitcoin. Bitcoin was the first product of the first blockchain and is currently the most expensive and therefore valuable of the cryptocurrency market. It has been stated that there will only ever be 21 million Bitcoins and there are approximately 2 million left to mine. Experts believe that they will all be in circulation by 2140. Bitcoin was developed by an anonymous person using the name Satoshi Nakamoto.
Released in 2008 Bitcoin was marketed as a peer-to-peer version of electronic money.
How do you acquire cryptocurrency?
The process of acquiring cryptocurrencies is called mining. This involves a lot of time, energy and an extremely powerful computer.
Bitcoin held its crown as the only cryptocurrency until 2011 when Litecoin was introduced. Litecoin was designed with Bitcoins flaws in mind, with the aim to improve aspects such as:
- Security
- Anonymity
- Speed
Today there are nearly 10,000 cryptocurrencies available on the market!
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