Cryptocurrencies are now a global phenomenon, but few understand what they are. Banks, governments, and many companies, however, have already understood their importance. Today, you would be hard-pressed to find a major economic or technological body which does not research the applications of cryptocurrencies or blockchain.
WHERE IT ALL GOT STARTED?
“I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.
The paper is available at: http://www.bitcoin.org/bitcoin.pdf
The main properties:
- Double-spending is prevented with a peer-to-peer network.
- No mint or other trusted parties.
- Participants can be anonymous.
- New coins are made from Hashcash style proof-of-work.
- The proof-of-work for new coin generation also powers the network to prevent double-spending.
Bitcoin: A Peer-to-Peer Electronic Cash System
Abstract. A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without the burdens of going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as honest nodes control the most CPU power on the network, they can generate the longest chain and outpace any attackers. The network itself requires minimal structure. Messages are broadcasted on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.
Full paper at: http://www.bitcoin.org/bitcoin.pdf
With this rather unassuming (and for non-cryptographers confusing) message on a cryptography mailing list, the launch of Bitcoin was announced. The creator, under the alias of Satoshi Nakamoto (who’s true identity is still unknown), intended to successfully do what many failed at: create digital cash. Unlike the previous centralized attempts where a single computer or server was responsible for transaction approval, he based his new creation on a decentralized Peer-to-Peer network like those used for file sharing. And so Cryptocurrencies were born.
For Nakamoto, Cryptocurrencies were the missing piece in the digital cash puzzle.Digital cash has to exist within a network with accounts, balances, and transactions. Which is simple to understand. The problem, however, is that these payment networks tend to have a serious problem: double spending. The prevention of double charges is usually done by a central server that keeps the record of all the balances. But what do you do when the server is compromised? To avoid this, Satoshi introduced the blockchain network which contains many nodes instead of single server with all nodes keeping a record of all transactions. To create a transaction one needs the consensus of the entire network. This record eliminates the chance for a double spend.
HOW TRANSACTIONS ARE CREATED AND CONFIRMED?
As previously mentioned, every node on the network has a record of all transactions. A transaction is an entry that says, for example, “Simon gives X Bitcoin to Maria” and is signed by Simon’s key. When the transaction is complete it is spread through the nodes in the network.
Though a transaction is know by the entire network instantly, it takes it a specific time to get confirmed. Confirmation is paramount to cryptocurrencies. It is only when a transaction is confirmed that it gets stored on the transaction record or ledger, which is shared by all nodes on the network – what we call the blockchain.
But who approves transactions? Miners are those who approve transactions by solving a complex puzzle for which they get rewarded with cryptocurrency tokens. Without the miners, cryptocurrencies cannot exist.
Though everyone can become a miner due to the decentralized nature of the network, there are certain conditions. Miners are expected to invest some work and find a hash – a product of cryptographic function – that connects the new block, or ledger entry, to its predecessor.
Though the best known use for cryptocurrencies is payment, Bitcoin and Co. can also be usedas a means of speculation and a store of value. With a daily trade volume greater than some major exchanges, it is no surprise that a new practice for crowd funding was also formed through them. ICOs or Initial Coin Offerings, which operate mostly on the Ethereum network, are allowing entrepreneurs to gather millions of dollars for their projects.
Bitcoin and Co.
Bitcoin – the father of all cryptocurrencies and the largest and most famous of them all. Bitcoin is the gold standard for all the rest. Since 2009, when mining started, it has managed to rise to 20,000 dollars and fall back to under 10,000 dollars with trading volumes that would shame most established assets.
Ethereum – the second largest cryptocurrency, and the first to introduce a certain versatility which allows not only the transaction ledger but also the formation of DAPPs (Decentralized Application) and smart contracts. Ethereum has the potential to not only revolutionize how we pay but also how form contracts, potentially replacing existing intermediaries.
Ripple – with it’s odd cryptocurrency XRP, Ripple Labs broke from the decentralized tradition set up by Bitcoin, creating more of a transaction system than a currency. The nature of Ripple has also made it more attractive to banks while making it less attractive as a store of value.
Litecoin – Bitcoins little brother. Faster, cheaper, and lighter, Litecoin opened the flood doors to the formation of new Cryptocurrencies. Though it lost it’s prime place in the Crypto pecking order, it remains highly traded with a strong community of developers behind it.
Monero – based on the Cryptonite Algorithm, Monero added privacy features which Bitcoin was missing, cutting the trail most Cryptocurrency transactions leave behind on the blockchain.
What’s on the Horizon for Crypto?
The revolution is here, but it is hard to tell how long it will take for Cryptocurrencies to be fully accepted and used. We can already see major companies and Governmental entities looking at ways to use them and the blockchain technology behind them. With new cryptographic solutions such as “Tangle” improving and solving existing problems, it’s safe to say: Crypto is her to stay!