One way to describe cryptocurrency is that it is simply a digital cash system without a central entity. To realize digital cash you need a payment system with accounts, balances, and transactions. One major problem payment networks have to prevent is double spending: to prevent that one individual who spends the same amount twice. This is usually done by a central authority or body who keeps a record about the balances.
In a decentralized system, there is no one person that is responsible for this. Every single part of the network has to fulfill this function. Every part needs to have a list with all transactions to check if future transactions are valid.
Cryptocurrency and the blockchain
Cryptocurrencies are also simply just limited entries in a database no one can change without fulfilling specific conditions. If you think about it, that can also be used to describe our current monetary system. Money in your bank account is basically entries in a database that can only be changed under specific conditions.
Confirmation of transactions is a critical concept in cryptocurrencies. As long as something is unconfirmed, it leaves it open to forgery or falsification. When a transaction is recorded onto the blockchain, it can no longer be changed and it can’t be reversed.
Peers in the network, or as they have come to be known, miners, can confirm transactions. They take transactions, stamp them as legit and spread them in the network. After a transaction is confirmed by a miner, every node has to add it to its database. It has become part of the blockchain.
Cryptocurrency has derived its namesake from the strong cryptography process used to secure its consensus-keeping system. Cryptocurrencies are built on cryptography. They are not secured by people or by trust, but by math.
Properties of Cryptocurrency
Most cryptocurrencies share a common set of properties, but not all rules are set in stone. Some may focus more on privacy, while others boast faster transaction speeds of lower costs. Below are some of the more common characteristics you will find cryptocurrencies.
- Transactions cannot be reversed – when your bitcoins are sent, there’s no getting them back, unless the recipient returns them to you. They’re gone forever. This makes it difficult to commit the kind of fraud that we often see with credit cards, in which people make a purchase and then contact the credit card company to make a chargeback, effectively reversing the transaction.
- Decentralized – there is no central authority controlling it and that means goverments cant take it away from you.
- Low cost – compared to bank transfers or international transfers, the fees are a lot lower.
- Speedy – you can send money anywhere and it will arrive minutes later, as soon as the network processes the payment.
- Secure and transparent – because all the transaction information is stored on the blockchain, people cannot trick or deceive you about what funds they have. Cryptocurrency funds are locked in a public key cryptography system. Only the owner of the private key can send cryptocurrency.
- Pseudonymous – Neither transactions nor accounts are connected to real world identities.While it is usually possible to analyze the transaction flow, it is not necessarily possible to connect the real world identity of users with those addresses.
- Store of value – Most cryptocurrencies have a limit to the supply of tokens that can be mined or created. Because of this controlled supply, there are no risks of inflation unlike fiat currencies where new money can suddenly be printed.