In the midst of the Financial Crisis 2008, an anonymous individual or a group of individuals named Satoshi Nakamoto invented the first cryptocurrency, Bitcoin, with the publication of a whitepaper entitled, “Bitcoin: A Peer-to-Peer Electronic Cash System.” Very few people took notice of this game-changing innovation of currency back then.
The advancement of cryptography technique and blockchain technology has made cryptocurrency an alternative medium of exchange. Since its launch on 2009, the existence of cryptocurrency is becoming increasingly well-known throughout the world. It has attracted so much attention due to its unique characteristics.
In order to fully grasp into the cryptocurrency revolution, it’s important to understand the fundamental aspects of cryptocurrencies and blockchain technology that make it so revolutionary and game-changer.
Bitcoin: The first ever-known cryptocurrency
Bitcoin is a cryptographically secure currency that was created to be used universally for payments, similar to cash. It is a decentralized digital currency that can be sent from user-to-user on a peer-to-peer network as a medium of exchange of value without the need for intermediaries or central regulatory authority.
Cryptocurrencies uses cryptography to verify and secure transactions. Bitcoin is the first-ever cryptocurrency designed to create an independent and decentralized electronic payment system. Bitcoin uses cryptography, mathematical proofs (proof of work) and economic incentives (mining) to solve the problem of “double spending” (digital assets can easily be copied and re-used) and to verify and process transactions.
The Bitcoin protocol is open-source and any developer can review and contribute to its development; thus, people have been creating their own versions of Bitcoin, also known as, “altcoins or alternative coins” for the past few years.
The vision of Bitcoin replacing all fiat currency is becoming less realistic with Bitcoin’s current dominance at 45% (less than half) of the total cryptocurrency market. However, Bitcoin and altcoins share very similar blockchain technology and the 4 key features also apply across the board (in most cases).
Here are the 4 key characteristics of cryptocurrency:
1) Decentralized (No Central Authority)
In traditional fiat currencies, central authorities and banks, control the financial system. However, with Bitcoin and other cryptocurrencies, these transactions can be processed and validated by a distributed and open network, that is owned by no-one. In all cases, that central authority becomes the central weakness that leads to the demise of the currency.
Most cryptocurrencies are decentralized on distributed networks of computers that are spread around the world, also known as nodes. Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain. The transaction is propagated across the peer-to-peer network and is replicated by every node, reaching a large percentage of the nodes within a few seconds. Everyone on the network has a copy of the ledger so we no longer need to trust a single entity/organization/third-party because there is no need to trust when you can just verify against this ledger because you have a copy of it. The decentralized ledger is known as the blockchain.
Although we are still figuring out exactly how we use cryptocurrencies and what for, they are here to stay. Aside from the other major benefits of cryptocurrencies and blockchain technology, solving the centralized trust issue alone is a big enough innovation to give cryptocurrencies like Bitcoin their staying power.
2) Irreversible and Immutable (Cannot be Undone)
Immutability in regards to blockchain and cryptocurrency should follow 3 principles:
· It should be highly improbable or difficult to rewrite history.
· It should be impossible for anyone but the owner of a private key to move funds.
· All transactions are recorded on the blockchain (to guarantee the above 2 principles)
The irreversible and immutable features of cryptocurrency mean that it is impossible for anyone but the owner of the respective private key to move their digital assets and that transactions cannot be changed once it is recorded on the blockchain.
As we have already seen that the elements of centralization and trust are removed from cryptocurrency, there is no longer a third party for us to trust to do these things. Therefore, transaction records are made public and unchangeable (immutable).
Although it isn’t impossible to change the transaction ledger, cryptographic security makes it extremely difficult. It requires you to compromise the entire network of cryptocurrency users.
Since there is no need for a central authority, users do not need to identify themselves when transacting with cryptocurrency. When a transaction request is submitted, the decentralized network will check the transaction and verify it and record it on the blockchain accordingly. Cryptocurrencies, like Bitcoin, uses a private key and public key system to authenticate these transactions. This means users can create anonymous digital identities and digital wallets to transact on the decentralized system and still be able to securely authenticate their transactions.
4) Limited Supply and Scarcity
Fiat currencies have an unlimited supply, as the central banks can issue and/or print as much fiat currencies as they want. Central banks often manipulate the value of the countries’ currencies as part of their economic policies. The inflationary nature of fiat currencies would mean a decrease in the value of the currency over time.
On the other hand, most cryptocurrencies have a limited and pre-determined supply of the cryptocurrency that is coded into its underlying algorithm when it is created.
With cryptocurrency, however, no individual or consortium is able to affect the supply of currency or exert significant influence over it without the approval of the majority. Leading cryptocurrencies feature maximum token supply caps or infinite supply with pre-defined production parameters.
Many top cryptocurrencies such as Bitcoin, Litecoin and Dash have a maximum supply, making them deflationary by nature. Any increase in the demand or adoption of the cryptocurrency will cause a corresponding increase in the price.
There you have them, the four key characteristics of cryptocurrency and the reasons why do they matter. We do hope this article has helped you, in one way or another, in exploring even deeper the overwhelming, yet exciting world of cryptocurrencies. Have fun!