Cryptocurrencies

Here we’ll tackle the important topics to get you started on blockchain technology and cryptocurrencies. The posts should give you a beginner level understanding of the cryptocurrency space with the resources to learn more.

  • 1: What is Blockchain?
  • 2: What are cryptocurrencies? What is Bitcoin?
  • 3: What are altcoins? (Part 1)
  • 4: What are altcoins? (Part 2)
  • 5: Who are the big movers and shakers in the cryptocurrency space?
  • 6: What tools are individuals and institutions using the get more involved or invest?
  • 7: What is legal and/or illegal within blockchain and cryptocurrencies? What are the taxes and regulations
  • 8: What is missing in the space? How can we bridge the centralized and decentralized worlds?
Photo by Dmitry Demidko on Unsplash

Cryptocurrency

Cryptocurrency Defined

To recap, Blockchain is a distributed, decentralized, public ledger that consists of blocks used to record transactions across many computers. This is an important part of the cryptocurrency discussion because, while not all cryptocurrencies use blockchain (e.g., IOTA) and not all blockchain are cryptocurrencies (e.g., leveraging blockchain for medical records), they are inherently linked.

A cryptocurrency (or “crypto”) is a digital currency that uses cryptography to secure transactions, and can be exchanged for goods and services as a form of payment. Cryptos work as medium of exchange and are sometimes called “tokens.” The payments or transactions are stored in a ledger and are typically not issued or controlled by a central authority.

Sounds familiar, right? Well, these cryptocurrencies leverage distributed ledger technology (DLT), typically blockchain, to record and manage transactions.

Cryptocurrency Values

According to Jan Lansky, a cryptocurrency researcher, there are six requirements to define a cryptocurrency¹:

(1) The system does not require a central authority, distributed achieve consensus on its state.

(2) The system keeps an overview of cryptocurrency units and their ownership.

(3) The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.

(4) Ownership of cryptocurrency units can be proved exclusively cryptographically.

(5) The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.

(6) If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.

If we simplify these, we can see a lot of the same values of blockchain: decentralization, transparency, and immutability. Advocates for cryptocurrencies appreciate the lack of central authority, ease at which transfers occur digitally, and the peer-to-peer nature (lack of trusted third-party to confirm transaction, e.g., bank). Speculators, on the other hand, point to the lack of central authority as a risk if the cryptocurrency fails (e.g., no consumer protection), and point to the host of illegal activities, such as money laundering and tax evasion, which occur using cryptocurrencies.

Cryptocurrency Mining

There exists a way to “digitally print” new tokens of a cryptocurrency by mining. Mining is a method of being rewarded with cryptos by engaging in the cryptocurrencies cryptography and solving complex problems.

The video below does an excellent job quickly explaining how cryptocurrencies work, public keys and private keys, and crypto mining:

Crypto and Crypto Mining

In depth explanation of crypto mining:

Bitcoin

In the first series, we mentioned that Bitcoin was first implementation of the Blockchain idea. Bitcoin was also the first cryptocurrency. Let’s dive into the history…

Bitcoin’s History

Bitcoin was created in 2009 by Satoshi Nakamoto. Fascinatingly, we still don’t know who Satoshi is or if Satoshi is a group of people. But before Satoshi published his paper, “Bitcoin: A Peer-to-Peer Electronic Cash System,” other individuals designed decentralized currencies.

David Chaum, as written about in the previous article, designed e-Cash in 1990 to facilitate anonymous digital transactions.

Wei Dai, a computer engineer, proposed b-money as “a scheme for a group of untraceable digital pseudonyms to pay each other with money and to enforce contracts amongst themselves without outside help.” ²

Nick Szabo, a computer scientist, designed “bit gold.” It was never implemented, but like Chaum’s and Dai’s propositions, it was ahead of its time.

Nine years later, in 2008, Satoshi registered Bitcoin.org and produced the following paper:

In the beginning of 2009, the genesis block was mined, and Bitcoin was live.

Bitcoin Defined

Bitcoin, as Satoshi had written, is a “new electronic cash system that’s fully peer-to-peer with no trusted third party.”

Bitcoin is governed by a decentralized authority — independent individuals and/or companies choose to use their CPU to process transactions on the blockchain; they opt-in to participate in the network. These members of the community are miners, and receive bitcoins as rewards for their participation in a pre-defined rate. Each transaction is logged on the DLT (blockchain), and Bitcoin’s digital signature on the transactions doesn’t record individuals or company’s names, thus keeping their anonymity.

There are no “trusted third parties” that confirm transactions, no central authority that can change the total supply of Bitcoin, and no governing body that can change the release rate of bitcoins to miners.

Bitcoin Values

If we follow Jan Lansky’s framework:

(1) Bitcoin doesn’t require a central authority

(2) Bitcoin digital signatures keeps an overview of cryptocurrency units and their ownership

(3) Bitcoin’s system defines how bitcoins can be created and defines their origins as incentives for the “block” creators

(4) Ownership of bitcoins can be proved exclusively cryptographically

(5) Bitcoin’s use of digital signature provides proof of ownership

(6) Bitcoin’s peer-to-peer network timestamps transactions by hashing them into an ongoing chain that serves as proof of the sequence of events

Please check out the below article for some frequently asked questions regarding blockchain and cryptocurrencies:

Bitcoin Storage

Because Bitcoin is digital one cannot use a pocket wallet or purse to claim ownership or “carry” bitcoins. Instead, there exists “digital wallets,” both software and hardware, to store bitcoins (and other cryptocurrencies).

Investopedia details the best Bitcoin wallets of 2021

Bitcoin Price

As of writing this, Bitcoin’s price is >$59,000. But Bitcoin is known to have a lot of volatility.

See the history of Bitcoin’s biggest swings (written as of 2018):

Altcoins

Since the creation of Bitcoin, other cryptocurrencies have been created as mediums of exchange or to solve other use cases. In the next published article, we’ll dive into different cryptocurrencies (e.g., Ethereum, Litecoin, Stablecoins).

[1] “Possible State Approaches to Cryptocurrencies,” Jan Lansky

[2] “b-money” http://www.weidai.com/

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Adam Schneebaum

Adam Schneebaum

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