A cryptocurrency is a type of digital currency, that is based on cryptographic methods. Generally, cryptocurrencies are decentralized and powered by technologies like blockchain, Directed Acyclic Graph, and Consensual Register. Information about transactions is usually not encrypted and is available in a human-readable format. Cryptographic elements are used to ensure the stability of the distributed database holding the chain of transactions.
New cryptocurrencies can be created as a fork of already existing currencies, sharing a common transaction history up to the time of separation.
Cryptocurrency units can be emitted through mining or forging. Another way for a cryptocurrency to be issued is during an ICO.
The economic essence and legal status of the cryptocurrencies are uncertain. In different countries, cryptocurrencies are considered as a payment instrument or may have turnover restrictions (for example, banking institutions can be prohibited from using crypto for transactions ).
The critical feature of cryptocurrency is the absence of any internal or external administrator. Therefore, banks, tax, judicial and other public or private bodies can not influence the transactions of any participants of the payment system. The transfer of cryptocurrency is irreversible – no one can cancel, block, challenge or force a participant to make a transaction.
The concept of cryptocurrency proceeds from the fact that the network does not have a trusted node whose actions are guaranteed to be accurate and who can confirm the correctness of other people’s operations. To store data, transactions are combined into blocks, from which a continuous chain ( blockchain ) is formed. Continuity is provided not necessarily by numbering but rather by including the hash of the previous block in the current block, which does not allow changing the information in the block without changing hashes in all subsequent blocks.
Most crypto-currencies provide pseudonymity – all transactions between all addresses are public, but there is no data about address owners.
History of cryptocurrencies
Cryptography for confidential payments was first used in 1990 in the DigiCash system of David Chom, whose company went bankrupt in 1998. This payment system was centralized.
The term “cryptocurrency” was first used in relation to the Bitcoin payment system, which was developed in 2009 by a person or a group of people under the pseudonym of Satoshi Nakamoto.
Until July 2013, the software of all cryptocurrency, except for Ripple, was based on the open source code of Bitcoin. Starting in July 2013, other platforms began to appear, which, in addition to cryptocurrency, support a variety of infrastructure – exchange trading, shops, messengers, and so on. Such cryptographic platforms include BitShares, Mastercoin, and Nxt.
Altcoins or alternative coins are all cryptocurrencies that appeared after Bitcoin.
The first altcoins appeared in 2011 – Litecoin and Namecoin. Their developers have sought to overcome a number of problems inherent in Bitcoin (for example, Litecoin has a higher transaction speed ) or use the blockchain technology in other areas.
Many of the Altcoins are very similar in appearance to Bitcoin, they have similar characteristics. However, some cryptocurrencies have significant differences. Ethereum has become a crypto platform due to the use of “smart contracts.” Even more independence from Bitcoin is visible in Ripple, which is actually a centralized system. Some crypto-currencies, such as Dash, have emphasized the strengthening of anonymity.
Cryptography is a technology on which cryptocurrencies are based. It is a science of ensuring confidentiality, the integrity of data, authentication, and authorship. For example, cryptography is used in Bitcoin to generate unmatchable private keys – the primary means of security in the cryptocurrency.
Blockchain is a continuous sequential chain of blocks ( also called a linked list ) that contains information. Most often, copies of blockchain are stored on a variety of different computers independently of each other. Blockchain is the underlying technology that is used by all existing cryptocurrencies.
Cryptocurrencies are decentralized meaning that transaction data is stored wholly or partially on all participating nodes of the network. This approach allows not only to reach very high levels of security but also makes cryptocurrencies transparent since data about all transactions is available to everyone and can not be altered or affected by anybody.
Mining is a process needed for maintenance and functioning of blockchains. The method of mining requires performing a series of calculations with a search of parameters for finding a hash with given properties, allowing to collect recent transactions into a block and append it to the chain. Transaction fees are provided to the miner as an incentive to spend computing power and support the operation of the network. New cryptocurrency units are issued during the mining process.
A token is a unit of accounting that is not a cryptocurrency, intended to represent a digital balance in a particular asset. Tokens are usually issued in an ICO and sold to investors in exchange for cryptocurrency. Later, tokens can be used as a payment medium in the project that issued them. Most of the existing tokens are generated on the Blockchain protocol or Ethereum.
Exchanges and trading
Cryptocurrency can be traded on specialized online platforms called Cryptocurrency exchanges. Trading can be conducted in pairs with other cryptocurrencies or fiat currencies such as Euro or Dollar. The cryptocurrency trading market volume of just one Bitforex exchange reaches over 5 billion USD daily according to Coinmarketcap.com.
Top 10 cryptocurrencies by capitalization
- Bitcoin Cash