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 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.
History
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 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, Litecoin 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.
On 6 August 2014, the UK announced its Treasury had been
commissioned to do a study of cryptocurrencies, and what role, if any, they can
play in the UK economy. The study was also to report on whether regulation
should be considered.
Formal definition
According to Jan Lansky, a cryptocurrency is a system that
meets six conditions:
1. The system does
not require a central authority; its state is maintained through distributed
consensus.
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.
In March 2018, the word cryptocurrency was added to the
Merriam-Webster Dictionary.
Altcoin
The term altcoin has various similar definitions. Stephanie
Yang of The Wall Street Journal defined altcoins as "alternative digital
currencies," while Paul Vigna, also of The Wall Street Journal, described
altcoins as alternative versions of bitcoin.
Aaron Hankins of the MarketWatch refers to any cryptocurrencies other
than bitcoin as altcoins.
Crypto token
A blockchain account can provide functions other than making
payments, for example in decentralized applications or smart contracts. In this
case, the units or coins are sometimes referred to as crypto tokens (or
cryptotokens).
Architecture
Decentralized cryptocurrency is produced by the entire
cryptocurrency system collectively, at a rate which is defined when the system
is created and which is publicly known. In centralized banking and economic
systems such as the Federal Reserve System, corporate boards or governments
control the supply of currency by printing units of fiat money or demanding
additions to digital banking ledgers. In case of decentralized cryptocurrency,
companies or governments cannot produce new units, and have not so far provided
backing for other firms, banks or corporate entities which hold asset value
measured in it. The underlying technical system upon which decentralized
cryptocurrencies are based was created by the group or individual known as
Satoshi Nakamoto.
As of May 2018, over 1,800 cryptocurrency specifications
existed. Within a cryptocurrency system,
the safety, integrity and balance of ledgers is maintained by a community of
mutually distrustful parties referred to as miners: who use their computers to
help validate and timestamp transactions, adding them to the ledger in
accordance with a particular timestamping scheme.
Most cryptocurrencies are designed to gradually decrease
production of that currency, placing a cap on the total amount of that currency
that will ever be in circulation. Compared with ordinary currencies held by
financial institutions or kept as cash on hand, cryptocurrencies can be more
difficult for seizure by law enforcement. This difficulty is derived from leveraging
cryptographic technologies.
Blockchain
The validity of each cryptocurrency's coins is provided by a
blockchain. A blockchain is a continuously growing list of records, called
blocks, which are linked and secured using cryptography. Each block typically contains a hash pointer
as a link to a previous block, a timestamp and transaction data. By design, blockchains are inherently
resistant to modification of the data. It is "an open, distributed ledger
that can record transactions between two parties efficiently and in a verifiable
and permanent way". For use as a
distributed ledger, a blockchain is typically managed by a peer-to-peer network
collectively adhering to a protocol for validating new blocks. Once recorded,
the data in any given block cannot be altered retroactively without the
alteration of all subsequent blocks, which requires collusion of the network
majority.
Blockchains are secure by design and are an example of a
distributed computing system with high Byzantine fault tolerance. Decentralized
consensus has therefore been achieved with a blockchain. Blockchains solve the
double-spending problem without the need of a trusted authority or central
server, assuming no 51% attack (that has worked against several
cryptocurrencies).
Timestamping
Cryptocurrencies use various timestamping schemes to
"prove" the validity of transactions added to the blockchain ledger
without the need for a trusted third party.
The first timestamping scheme invented was the proof-of-work
scheme. The most widely used proof-of-work schemes are based on SHA-256 and
scrypt.
Some other hashing algorithms that are used for
proof-of-work include CryptoNight, Blake, SHA-3, and X11.
The proof-of-stake is a method of securing a cryptocurrency
network and achieving distributed consensus through requesting users to show
ownership of a certain amount of currency. It is different from proof-of-work
systems that run difficult hashing algorithms to validate electronic
transactions. The scheme is largely dependent on the coin, and there's
currently no standard form of it. Some cryptocurrencies use a combined proof-of-work/proof-of-stake
scheme.
Mining
Hashcoin Mine
In cryptocurrency networks, mining is a validation of
transactions. For this effort, successful miners obtain new cryptocurrency as a
reward. The reward decreases transaction fees by creating a complementary
incentive to contribute to the processing power of the network. The rate of
generating hashes, which validate any transaction, has been increased by the
use of specialized machines such as FPGAs and ASICs running complex hashing
algorithms like SHA-256 and Scrypt. This
arms race for cheaper-yet-efficient machines has been on since the day the
first cryptocurrency, bitcoin, was introduced in 2009. With more people venturing into the world of
virtual currency, generating hashes for this validation has become far more
complex over the years, with miners having to invest large sums of money on
employing multiple high performance ASICs. Thus the value of the currency
obtained for finding a hash often does not justify the amount of money spent on
setting up the machines, the cooling facilities to overcome the enormous amount
of heat they produce, and the electricity required to run them.
Some miners pool resources, sharing their processing power
over a network to split the reward equally, according to the amount of work
they contributed to the probability of finding a block. A "share" is
awarded to members of the mining pool who present a valid partial
proof-of-work.
As of February 2018, the Chinese Government halted trading
of virtual currency, banned initial coin offerings and shut down mining. Some
Chinese miners have since relocated to Canada. One company is operating data centers for
mining operations at Canadian oil and gas field sites, due to low gas
prices. In June 2018, Hydro Quebec
proposed to the provincial government to allocate 500 MW to crypto companies
for mining. According to a February 2018
report from Fortune, Iceland has become a haven for cryptocurrency miners in
part because of its cheap electricity. Prices are contained because nearly all
of the country's energy comes from renewable sources, prompting more mining
companies to consider opening operations in Iceland.
In March 2018, a town in Upstate New York put an 18-month
moratorium on all cryptocurrency mining in an effort to preserve natural
resources and the "character and direction" of the city.
GPU Price Rise
An increase in cryptocurrency mining increased the demand of
graphics cards (GPU) in 2017. Popular
favorites of cryptocurrency miners such as Nvidia's GTX 1060 and GTX 1070
graphics cards, as well as AMD's RX 570 and RX 580 GPUs, doubled or tripled in
price – or were out of stock. A GTX 1070
Ti which was released at a price of $450 sold for as much as $1100. Another
popular card GTX 1060's 6 GB model was released at an MSRP of $250, sold for
almost $500. RX 570 and RX 580 cards from AMD were out of stock for almost a
year. Miners regularly buy up the entire stock of new GPU's as soon as they are
available.
Nvidia has asked retailers to do what they can when it comes
to selling GPUs to gamers instead of miners. "Gamers come first for
Nvidia," said Boris Böhles, PR manager for Nvidia in the German region.
Wallets
An example paper printable bitcoin wallet consisting of one
bitcoin address for receiving and the corresponding private key for spending
A cryptocurrency wallet stores the public and private
"keys" or "addresses" which can be used to receive or spend
the cryptocurrency. With the private key, it is possible to write in the public
ledger, effectively spending the associated cryptocurrency. With the public
key, it is possible for others to send currency to the wallet.
Anonymity
Bitcoin is pseudonymous rather than anonymous in that the
cryptocurrency within a wallet is not tied to people, but rather to one or more
specific keys (or "addresses"). Thereby, bitcoin owners are not identifiable,
but all transactions are publicly available in the blockchain. Still,
cryptocurrency exchanges are often required by law to collect the personal
information of their users.
Additions such as Zerocoin, Zerocash and CryptoNote have been
suggested, which would allow for additional anonymity and fungibility.
Fungibility
Most cryptocurrency tokens are fungible and interchangeable.
However, unique non-fungible tokens also exist. Such tokens can serve as assets
in games like CryptoKitties.
Economics
Cryptocurrencies are used primarily outside existing banking
and governmental institutions and are exchanged over the Internet.
Transaction fees
Transaction fees for cryptocurrency depend mainly on the
supply of network capacity at the time, versus the demand from the currency
holder for a faster transaction. The currency holder can choose a specific
transaction fee, while network entities process transactions in order of
highest offered fee to lowest. Cryptocurrency exchanges can simplify the process
for currency holders by offering priority alternatives and thereby determine
which fee will likely cause the transaction to be processed in the requested
time.
For ether, transaction fees differ by computational
complexity, bandwidth use, and storage needs, while bitcoin transaction fees
differ by transaction size and whether the transaction uses SegWit. In
September 2018, the median transaction fee for ether corresponded to $0.017,
while for bitcoin it corresponded to $0.55.
Exchanges
Cryptocurrency exchanges allow customers to trade
cryptocurrencies for other assets, such as conventional fiat money, or to trade
between different digital currencies.
Atomic swaps
Atomic swaps are a mechanism where one cryptocurrency can be
exchanged directly for another cryptocurrency, without the need for a trusted
third party such as an exchange.
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