Tales from the crypto: understanding decentralized currency

What is cryptocurrency?

A cryptocurrency (or crypto currency) is a digital asset (think money you spend online) designed to work as a medium of exchange that uses cryptography (coded for security or privacy) to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. Think of it as a ledger that is shared by thousands of people who keep tabs on who is paying whom.

Earlier this year (in March), the word “cryptocurrency” was added to the Merriam-Webster Dictionary. But not before they explored the full and thorough definition of the word.

According to Jan Lansky, a cryptocurrency is a system that meets six conditions, namely:

1. The system does not require a central authority, distributed achieve consensus on its state [sic].
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.

Lansky is a scholar in many matters mathematical. He currently works at the Department of Computer Science and Mathematics, The University of Finance and Administration. The professor does research in Cryptocurrencies, Databases, and Software Engineering.

The New York Times explains what goes on behind the scenes when using Bitcoins

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Now let’s look at the words that Lanksys’ neat 6-pointer definition use; ownership and distribution.

What do you mean ‘decentralised’?

Cryptocurrencies use decentralized control. Consider this as opposed to centralized electronic money through the central banking systems. The decentralized control of each cryptocurrency works through a Blockchain (another hot buzzword), which is a public transaction database, functioning as a distributed ledger. So the transaction is private because it is encoded even though it is public in the sense that it is witnessed by a collective of computer accounts.

Here’s the BBC explaining the difference between decentralized versus traditional finance systems

 

What happens when a crypto transaction is made?

While it does sound like a crypto-miner is someone who needles away at code with a pick-axe to unravel the treasure of bitcoins, it’s really a little (read very) different.

Cryptocurrency mining, or cryptomining, is a process in which transactions for various forms of cryptocurrency are verified and added to the blockchain digital ledger. Also known as cryptocoin mining, altcoin mining, or Bitcoin mining, cryptocurrency mining has increased both as a topic and activity as cryptocurrency usage itself has grown exponentially in the last few years.

Here’s what happens: each time a cryptocurrency transaction is made, a cryptocurrency miner is responsible for ensuring the authenticity of information and updating the blockchain with the transaction. The mining process itself involves competing with other cryptominers to solve complicated puzzles (mathematical problems with cryptographic hash functions) that are associated with a block containing the transaction data. The first cryptocurrency miner to crack the code is rewarded by being able to authorize the transaction, and in return for the service provided, cryptominers earn small amounts of cryptocurrency of their own. In order to be competitive with other cryptominers, though, a cryptocurrency miner needs a computer with specialized hardware.

IBM Think Academy explains how Blockchain works in a cryptocurrency transaction

 

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The most famous cryptocurrency

No points here for guessing it right. Bitcoin, created in 2009, was the first decentralized cryptocurrency.  Since then, numerous other cryptocurrencies have been created. These are frequently called altcoins, as a blend of alternative coin.

The daddy of Bitcoins, the creator of the most famous cryptocurrency, is a mystery. Here’s how things went down; on  August 18^th, 2008, the domain name bitcoin.org was registered.  Later that year, a link to a paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list in October. This paper detailed methods of using a peer-to-peer network to generate what was described as “a system for electronic transactions without relying on trust”. In  January 2009, the bitcoin network came into existence with Satoshi Nakamoto mining the genesis block of bitcoin (block number 0), which had a reward of 50 bitcoins.

But there’s more…

Embedded in the coinbase of this block was the text: The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.

The text refers to a headline in The Times published on 3 January 2009. This note has been interpreted as both a timestamp of the genesis date and a derisive comment on the instability caused by fractional-reserve banking.

The media chased this story as the value of the Bitcoin grew exponentially. Australian entrepreneur Craig Wright claimed he was the inventor of the digital currency while other news channels had theories about Elon Musk being the Bitcoin Batman by night. The real identity of Nakamoto is still fuzzy.

But either way, the Bitcoin had started a revolution. They even put their code online in a Github file for others to share: https://github.com/bitcoin/bitcoin. Since then, numerous cryptocoins have been created. Explaining what cryptocurrencies are made of and the potential in those blocks isn’t easy. In fact, here’s a video of Gavin Wood, the founder of Ethereum explaining what he created.

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