What is Cryptocurrency?

Samantha Standish
Dec 5, 2018 · 5 min read

Cryptocurrency is a method to document transactions. The cryptocurrency network has no physical boundaries. It can be engaged anywhere in the world by anyone.

Intent

The intent of cryptocurrency is to allow direct transactions between people, person to person. If there’s someone that can deny access to the cryptocurrency network, it isn’t a cryptocurrency. It’s digital money.

The Structure

To function, cryptocurrency requires:

  1. Hardware,
  2. Software, and
  3. Communication.

Hardware

Hardware is a type of machine that can run the cryptocurrency software. There are three types of hardware in cryptocurrency:

  1. Transaction hardware,
  2. Facilitating hardware, and
  3. User hardware.

Transaction hardware is a computer that can run the software that enables transactions to take place. Facilitating hardware is a computer that can run the software to help the system function. User hardware is a computer or cell phone that can run the software to access the network.

Transaction hardware is called a mining computer. Facilitating hardware is called a computer node. User hardware is called a computer or cell phone. Any person on the planet can run transaction, facilitating, and user hardware. No one has to ask anyone for permission to participate and, in fact, there are people all over the planet using these networks together.

Software

There are three types of software in cryptocurrency. These software programs contain the protocol (rules) that make the cryptocurrency. The protocol is part of the software that then creates a ledger of transactions. Each transaction entails:

  1. Encryption,
  2. A time stamp,
  3. The data that’s being recorded,
  4. An address, and
  5. The address that sent data to the current address.

The transaction is added to a block of information on the ledger.

Many computers (nodes) have copies of the ledger, and those nodes compare with one another so that no one can create false information on the ledger because inconsistent copies of the ledger are discarded.

There are three types of software that use the cryptocurrency protocol. This allows for three types of participation with the network. These are:

  1. Transaction software,
  2. Facilitating software, and
  3. User software.

User software is called a “wallet.” You download a wallet on your computer or cell phone. The wallet allows you to initiate a transaction on that network. Miners and nodes then work together to complete a transaction on the network and add a block to the ledger which is then distributed to all of the nodes in the network to store as a permanent record.

Anyone on the planet can run transaction, facilitating, and user software. Anyone on the planet can develop transaction, facilitating, and user software if they know the protocol for that cryptocurrency.

Communication

To have a cryptocurrency network, you have to have a means to connect the users, nodes, and miners so that the software can communicate. The network requires access to the Internet so that the information in the software can be sent between the users, the nodes, and the miners.

In sum, cryptocurrency is a group of people using software to communicate semi-anonymously to document verifiable, public transactions.

Decentralization

It’s only a cryptocurrency if the intent is intact. The intent of cryptocurrency is to facilitate verifiable transactions, person to person. To do this, miners and nodes (the computers holding copies of the ledger) can’t all be in one place or under the control of one person or a group of people that can dominate because then those people can manipulate the ledger thereby defeating the integrity and purpose of the cryptocurrency.

Many companies claim to be creating cryptocurrencies, but they own all, or most, of the nodes and mining in the network. So, the network is centralized. If the nodes or mining in a cryptocurrency network are centralized, it’s digital money and not cryptocurrency, no matter how it’s being labeled. Digital money is a control structure that writes the rules for who can do what and who can have what. Cryptocurrency eliminates those control structures. For most people, all that’s required to use cryptocurrency is a cell phone and a wallet or a computer and a wallet. There’s no need for control structures.

The more nodes there are that are run by separate individuals, the greater the decentralization and the stronger the cryptocurrency network. Decentralization makes or breaks cryptocurrency.

Cryptocurrency Coins and Tokens

Symbols of value in the cryptocurrency system are called “coins” and “tokens.” These are notations on the ledger. Generally, but not always, the coins or tokens are issued through a rewards system to miners because miners enable the system to function by adding blocks of information to the ledger.

Anyone can be a miner, run the software that enables transactions, and be rewarded in coins or tokens. However, it’s more cost efficient for most people to buy coins or tokens. This is done through a trusted exchange, a Bitcoin machine, or by selling a good or service for which someone will pay you in cryptocurrency. This is how people invest and start participating with the system.

Unlike money issued from a government, coins and tokens are not always in whole numbers. You can own a tiny fraction of a Bitcoin, for example, and then you can trade it for a completely different type of cryptocurrency such as DigiByte. The cryptocurrency world is different from today’s financial world in many, many ways. The most significant difference is that these coins and tokens are merely notations on a public ledger. Each cryptocurrency has its own ledger.

Your coins and tokens aren’t stored in your wallet though you can view them there. Your coins and tokens are notations on the ledger stored on nodes, and you access them through cryptography which entails a public and private key that’s uniquely yours generated from your user software (your wallet).

If you get involved in this arena, it’s crucial that you look at any cryptocurrency and study it to make sure it is a cryptocurrency first, that it meets all of the elements required to make it a cryptocurrency. Proper research is a survival skill. Be forewarned, the learning curve is steep. Just because it’s on a cryptocurrency exchange, that doesn’t mean it’s actually a cryptocurrency. What’s more, just because you buy a cryptocurrency on an exchange, that doesn’t mean you own it. There’s a saying in the cryptocurrency world: “Get your cryptocurrency off the exchange and into your wallet.” There are many other sayings.

Tread Carefully

Cryptocurrency is in its infancy. It’s not ready for mass adoption. However, a safe way to get to know how some of it works is to download an Exodus wallet and take a tour of its features. It’s free, and it’s an education. No investment is required, and it gives you a peek into this developing world.

A Final Word

I wrote this summation for those individuals that have no knowledge of cryptocurrency so that they could get a very general, simplified overview of the structure. For that reason, it’s missing a great deal of information. If you should choose to involve yourself in cryptocurrency, I leave you with the most important bit of information that you’ll need as you move forward and learn more:

“In the cryptocurrency world, if you aren’t in possession of your private key, you don’t own your money.”

Samantha Standish

Written by

I’m a writer. I focus on the why behind the what. www.samanthastandish.com.

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