A cryptocurrency is a digital or virtual currency designed to function as a medium of exchange. It utilises cryptography to secure, verify and validate transactions as well as to control the creation of new units of a specific cryptocurrency. In a nutshell, cryptocurrencies are limited entries in a database that nobody alter unless some required conditions are satisfied.
The history of cryptocurrency dates back to the tech boom period of the 90s with systems like Digicash, Beenz and Flooz emerging on the market, although failing. Many factors necessitated their failures and they include: financial issues, susceptibility of the systems to fraud, unhealthy relationships between companies’ and their employees. Notably, all of those systems used a Trusted Third Party approach which implies that the companies behind them verified and facilitated the transactions. Due to these failures, the creation of a digital cash system was seen as a lost cause for a very long time.
The dream of creating a digital cash system remained elusive until the 21st century. During the first decade of the century, in 2009 to be specific, an anonymous programmer or a group of programmers popularly known in the cryptoverse as Satoshi Nakamoto introduced Bitcoin. Nakamoto described it as a ‘peer-to-peer electronic cash system.’ It is totally decentralised meaning that no servers are involved and absence of any central controlling authority.
One of the difficulties faced by any payment network is the problem of double-spending. It entails fraudulently spending the same amount twice or more. The traditional solution to this problem in the world’s current financial system (for example, modern day banking system) is the use of a trusted third party central server – that kept records of all the balances and transactions. Nonetheless, this method always required an authority basically having control of your funds with all your personal information and details on hand.
This is not the case in a decentralised network. In a decentralised network like bitcoin, every participant needs to perform such task. This is done with the help of the blockchain technology. In clear terms, the blockchain can be described as a public ledger of all transactions that ever occurred within the network, available to everyone. This means that everyone in network can see every account’s balance.
Every transaction is a file that consists of the sender’s and recipient’s public keys (wallet addresses) and the amount of coins involved. The transaction also needs to be signed off by the sender(s) with their private key(s). Eventually, the transaction is broadcast in the network where it will be validated and confirmed. Within the network, only miners can confirm transactions by solving a cryptographic puzzle. They take transactions, mark them as legitimate and spread them across the network to be confirmed. Once the transaction is confirmed, it becomes unforgeable and irreversible and a miner receives a reward for solving the cryptographic puzzle, plus the transaction fees.
Essentially, any cryptocurrency network is based on the absolute agreement of all the participants regarding the legitimacy of balances and transactions. If nodes of the network disagree on a single balance, the system would basically break. However, this will not happen because the network operates with pre-built and programmed rules.
Cryptocurrencies are so designed because the consensus-keeping process is facilitated and ensured with strong cryptography. This, along with aforementioned factors, makes the need for trusted third parties and blind trust for the blockchain to operate completely irrelevant.
Truly, the blockchain technology is a welcomed development in world’s financial system and has come to solve a wide-variety of real life problems. Hence, embracing it would be a good decision.