What is a cryptocurrency?

Author: Jason King

Bitcoin. Ether. Mining. Blockchain. Litecoin. Ledger. ICO. Token Sale While throwing these words around at the office may make people seem savvy, what does it all really mean? Bitcoin, along with its counterparts like Ethereum and Litecoin, are all cryptocurrencies: digital currency with built-in encryptions that protect and verify transactions.

Origin

Bitcoin — the most successful, though not the first cryptocurrency — was launched in 2009. Intending to create a peer-to-peer electronic cash system, Bitcoin eliminated the need for transactions to pass through a financial institution. Instead, the responsibility of maintaining the ledger of money movement between parties became a public duty. Since then, this model of transparent, cooperative exchange has been utilized by other currencies like Ethereum and has come to characterize just how cryptocurrencies operate. Here’s how it works:

How it works

Exchanges of bitcoin and other cryptocurrencies work much the same way a physical transaction works. Two parties agree to a transfer of funds and, for good measure, they have someone else verify the sale. In the case of crypto, the third party is more than just someone; it’s everyone.

Anyone with bitcoin, for example, shares the opportunity to ensure the decentralized, public ledger is genuine and accurate. The ledger tracks each coin’s unique stamp to make sure it doesn’t exist in more than one place at a time, that is more than one person’s wallet at a time. Additionally, cryptography maintains both a public and private ledger that must match up for transactions to be deemed legitimate and funds to be considered authentic. Transactions can’t be changed, erased, faked, or copied. The ledger would show it, and everyone would know.

But verifying transactions takes a bit more than a glance at the ledger and a nod of approval. Blockchain powers cryptocurrencies. Think of each transaction as a block. Put several together and they make a chain. The blockchain produced serves as a bundled history of the currency’s transactions.

Whenever someone wants to initiate an exchange, the race begins to add the next block. Computers called miners undertake the task of verifying the sender’s wallet balance, then the real work begins. Miners race to be the first that solves an elaborate math problem which requires immense computing power. When successful, that miner is rewarded with bitcoin. The value of a single bitcoin is well above $10,000, making mining an attractive, though strenuous, prospect.

For similar reasons, hackers have little incentive to defraud the ledger. It’s simply too costly. Futurism recently reported the findings of a PowerComparestudy that found the average amount of energy used to mine bitcoin in 2017 was more than the annual energy consumption of nearly 160 countries. The cost a hacker would incur in energy output alone is a steep deterrent, but the most dissuasive element of the equation harkens back to the public ledger: power is with everyone. Should people become aware of the hack, the price of bitcoin would likely decline as interest in it dwindled. It just isn’t worth the resource dump required to hack the ledger.

How it’s valued

Like any other marketplace, the value of a coin is determined based on supply and demand. Because there are only ever going to be 21 million bitcoin created, for example — and only 17 million have been mined so far — bitcoin comes with a built-in scarcity. Other currencies come with their own supply limitations, feeding the independent fluctuation of each currency’s value. One thing is universal, though: should the public decide that the transparency and security of blockchain-enabled currency are worthwhile, then the demand for bitcoin, ethereum, litecoin and other currencies utilizing the blockchain system will grow. Increased interest equals increased prices.

Parting Thoughts

We’ve only scratched the surface. It is important to note that there are still more intricacies to cryptocurrency than what’s been outlined here. A few things to consider:

• There is more than one cryptocurrency and they each come with their own set of rules. Ethereum, for instance, offers the same freedoms as bitcoin, but users can code conditional statements into planned transactions.

• Blockchain goes beyond the financial sector. Companies, governments, and institutions throughout the world have plans to use it to encourage humanitarian aid transparency, improve gaming, and provide identification to those without it.

• It’s not in the background anymore. Japan now accepts bitcoin as legal currency and retailers like Overstock and Expedia allow customers to pay with crypto.

Jason King is a Humanitarian Hacker, feeding the hungry as the Executive Director of Unsung.org. Known for running across the country to raise bitcoin for the homeless in 2014, King is a long-standing member of the crypto community and continues to solve to the sector’s most pressing problems as Co-Founder of Kingsland University — School of Blockchain, the world’s first university-accredited blockchain training program. Find out more about Kingsland’s leading-edge education at KingslandUniversity.com