A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. Cryptocurrencies are a kind of alternative currency and digital currency (of which virtual currency is a subset). Cryptocurrencies use decentralized control as opposed to centralized digital currency and central banking systems. The decentralized control of each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database. Bitcoin, first released as open-source software in 2009, is generally considered the first decentralized cryptocurrency. Since the release of bitcoin, over 4,000 altcoins (alternative variants of bitcoin, or other cryptocurrencies) have been created. In 1983, the American cryptographer David Chaum conceived an anonymous cryptographic electronic money called ecash Later, in 1995, he implemented it through Digicash, an early form of cryptographic electronic payments which required user software in order to withdraw notes from a bank and designate specific encrypted keys before it can be sent to a recipient. This allowed the digital currency to be untraceable by the issuing bank, the government, or any third party. In 1996, the NSA published a paper entitled How to Make a Mint: the Cryptography of Anonymous Electronic Cash,describing a Cryptocurrency system first publishing it in a MIT mailing list and later in 1997, in The American Law Review (Vol. 46, Issue 4). In 1998, Wei Dai published a description of "b money", characterized as an anonymous, distributed electronic cash system. Shortly thereafter, Nick Szabo described bit gold. Like bitcoin and other cryptocurrencies that would follow it, bit gold (not to be confused with the later gold-based exchange, BitGold) was described as an electronic currency system which required users to complete a proof of work function with solutions being cryptographically put together and published. A currency system based on a reusable proof of work was later created by Hal Finney who followed the work of Dai and Szabo. The first decentralized cryptocurrency, bitcoin, was created in 2009 by pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function, as its proof-of-work scheme In April 2011, Namecoin was created as an attempt at forming a decentralized DNS, which would make internet censorship very difficult. Soon after, in October 2011, Bitcoin was released. It was the first successful cryptocurrency to use scrypt as its hash function instead of SHA 256. Another notable cryptocurrency, Peercoin was the first to use a proof-of work/proof-of-stake hybrid.
The creation of Bitcoins began in 2009 by a man allegedly named Satoshi Nakamoto. Satoshi created a formula so sophisticated that when it is solved (using computer processing power), it creates a "block" of data which contains Bitcoins. There is a maximum amount of Bitcoins that will exist, and there is diminishing returns built into the system. For example, users were formerly able to create 50 Bitcoins in one block, but since the end of 2012, the amount created reduced to 25. Bitcoin is also unique in its creation: anyone can create their own Bitcoins. This process is called mining and requires an excessive amount of computer power in order to do efficiently. Since mining requires so much computing power, users will frequently collaborate and create 'mining pools' to collectively create new blocks and split the newly created Bitcoins. Virtual currency entrepreneurs have also created hardware with a sole purpose of efficiently mining Bitcoins. An interesting note is Satoshi's identity, or lack thereof. Satoshi is an unknown figure. He allegedly helped with the first Bitcoin transactions in 2010, but soon disappeared.
Bitcoin has carved out a name for itself as the world's most popular cryptocurrency since arriving on the scene ten years ago. However, the workings of the premier digital cash system remain something of a mystery to the general public.
Bitcoin is the world's most widely used cryptocurrency, and is generally credited with bringing the movement into the mainstream. Its market cap and individual unit value consistently dwarf (by a factor of 10 or more) that of the next most popular cryptocurrency. Bitcoin has a programmed supply limit of 21 million Bitcoin. Bitcoin is increasingly viewed as a legitimate means of exchange. Many well-known companies accept Bitcoin payments, though most partner with an exchange to convert Bitcoin into U.S. dollars before receiving their funds.
Launched in 2015, Ethereum makes some noteworthy improvements on Bitcoin's basic architecture. In particular, it utilizes “smart contracts” that enforce the performance of a giv transaction, compel parties not to renege on the agreements, and contain mechanisms for refund should one party violate the agreement. Though "smart contracts” represent an important move toward addressing the lack of chargebacks and refunds in cryptocurrencies, it remains to be see whether they're enough to solve the problem completely.
Cryptocurrency is an exciting concept with the power to fundamentally alter global finance for the better. But while it's based on sound, democratic principles, cryptocurrency remains a technological and practical work in progress. For the foreseeable future, nation-states' near-monopoly on currency production and monetary policy appears secure.
In the meantime, cryptocurrency users (and nonusers intrigued by cryptocurrency's promise) need to remain ever-mindful of the concept's practical limitations. Any claims that a particular cryptocurrency confers total anonymity or immunity from legal accountability are worthy of deep skepticism, as are claims that individual cryptocurrencies represent foolproof investment opportunities or inflation hedges. After all, gold is often touted as the ultimate inflation hedge, yet it's still subject to wild volatility - more so than many first-world fiat currencies.