From Cryptocurrency wiki
Jump to navigation Jump to search

Not to be confused with Virtual currency or Digital currency. When we say cryptocurrency, we usually mean Privately issued cryptocurrency.

A cryptocurrency IS:

a digital asset that lives on a blockchain.

digital file. The files are created using the same ways as cryptography (the science of hiding information). Digital signatures can be used to keep the transactions safe, and let other people check that the transactions are real.

The first cryptocurrencies were made to be free of government-given currencies.

Cryptocurrencies use 'decentralized control', which means that they aren't controlled by one person or government. This is different to 'centralized' electronic money and central banks. The control of each cryptocurrency works through a distributed ledger (a list of transactions shared by everyone), usually a blockchain, that serves as a public financial transaction database.

A cryptocurrency is NOT:

type of currency

form of money

exist in physical form (like paper money or metal coins)

A cryptocurrency CAN (but is not a must):

be issued by a central authority

use decentralized protocol

The point of cryptocurrency

First cryptocurrencies were made to be free of government-given currencies.

Bitcoin, first released as open-source software in 2009, is the first decentralized cryptocurrency.[1] Since the release of bitcoin, many other cryptocurrencies have been created.

The value problem

In many cases, cryptocurrencies cannot be converted to real currencies; it is only possible to convert them to other cryptocurrencies, or to use them to buy things. Some cryptocurrencies can be converted to real currencies: They usually have a high volatility, and using them carries a high risk.[2] They are also a target for so-called Pump-and-Dump-Attacks.[3] They act like a big distributed economic system: As they are not issued or controlled by central banks, their value is difficult to influence: For this reason, they cannot really take the place of a stable currency.[4]

Cryptocurrencies[5] are prone to speculation, which makes building a system of more or less stable exchange rates very difficult.[6] Another problem is the inequality of distribution: Many cryptocurrencires are held by only few people. As an example: about 1.000 people hold half of the total amount of bitcoins in the world. This means that if any of these persons starts using their cryptocurrency, this has an effect on the exchange rate. It also means that these people have a great influence on the value of the currency, and are able to change its value easily.[7] The currency itself only documents ownership changes. Exchange rates of cryptocurrencies are established outside the system. Exchange rates are issued by brokers and traders; their indication is no guarantee that the currency is traded at the value proposed. In itself, the unit of cryptocurrency has no value.[8]

In contrast to cyptocurrencies, real currencies are issued and controlled by central banks. Certain econnomic phenomena such as inflation or deflation may change the value (and exchange rate) of a currency. The people who own units of the currency have no direct influence on its value.

Formal definition

According to Jan Lansky, a cryptocurrency is a system that meets six conditions:[9]

  1. The system does not require a central authority, distributed achieve consensus on its state Template:Sic.
  2. The system keeps an overview of cryptocurrency units and their ownership.
  3. The system defines if new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the how to create new units, and how to determine the ownership of these new units.
  4. Ownership of cryptocurrency units can be proved exclusively cryptographically.
  5. The owner of a unit of cryptocurrency can transfer this unit. For this transfer to be successful, the current owner must prove the ownership.
  6. If two different instructions for changing the ownership of the same cryptographic units are entered at the same time, the system performs at most one of them.

In March 2018, the word "cryptocurrency" was added to the Merriam-Webster Dictionary.[10]

Crypto Mining

The term crypto mining means gaining cryptocurrencies by solving cryptographic equations through the use of computers. This process involves validating data blocks and adding transaction records to a public record (ledger) known as a blockchain.[11]