A BRIEF HISTORY
Against the backdrop of many unsuccessful attempts to create a decentralized digital cash system in the 1990s, a mysterious fellow named Satoshi Nakamoto in 2008 invented the “Bitcoin,” an electronic cash system by utilizing a peer-to-peer network that is normally used for file sharing. As a consequence, the first Cryptocurrency was born and its basic feature is the electronic cash system without a central authority or entity, which, in other words, means it is decentralized!
For digital cash to be viable there is a need for valid accounts, balances and transaction records, but a major issue with payment networks is the challenge of preventing double spending. Double spending occurs when an entity spends the same amount twice and is often prevented by the action of a central server that maintains all balances on the network.
However, when you take away the server, then the entire system becomes decentralized and every entity on the network has to perform the work of a server which is basically to maintain balances and transaction records. In essence, each peer on the network must have a list of all transactions and be able to confirm if future transactions are valid or are indeed, attempts to double spend. Therefore, it becomes imperative that all the entities on the network must reach a consensus about these records.
Being in agreement on every transaction and balance is critical for success, because should the entities on a peer-to-peer network fail to agree on a minor balance then everything grinds to a halt. Again, since a central authority is needed to affirm the state of balances, then how can entities on peer-to-peer network achieve the much-needed consensus in a decentralized system? For a long time, the answer to this question eluded everybody until Satoshi Nakamoto came along with his novel way to achieving a consensus which doesn’t need a central authority.
Cryptocurrencies may simply be regarded as some database entries that can’t be altered by anybody without fulfilling some specific conditions. The same logic applies to the tangible currency people use every day because the money in their account balance which is also entries on their bank’s database doesn’t increase or decrease randomly unless they satisfy certain conditions. It is worth mentioning that Cryptocurrencies utilize very complex code systems to encrypt sensitive data transfers and to secure their units of exchange.
FEATURES OF CRYPTOCURRENCIES
IRREVERSIBLE: As soon as a transaction is confirmed on the network it cannot be reversed and no amount of pressure can be brought to bear on the network to effect a reversal if fund is sent erroneously.
INTANGIBLE: It is intangible because the transfer of Bitcoin is from addresses made from blockchains and addresses are not linked to real-world entities even though it is still possible to assess and track the flow of transactions.
INSTANT AND GLOBAL: Transactions involving Cryptocurrencies are done on the network almost instantly with confirmation taking place in a few minutes. Moreover, the network has a global reach and anybody can transfer/receive funds anywhere in the world.
SECURE: Cryptocurrencies are hard to duplicate because developers use advanced mathematical and computer programming principles to secure them. They employ protocols to give users a high degree of anonymity, and to make transactions and flow of fund hard to link to any individual or group. As a result, funds are usually locked by means of the public key while owners of the private key may send cryptocurrencies.
NO PERMISSION REQUIRED: There is no need to seek permission from any authority to perform transactions and all that is needed is for users to download the software. For instance, sending/receiving Bitcoin or any Cryptocurrency for that matter only requires the software which often comes free.
MONETARY FEATURES
LIMITED SUPPLY: Many Cryptocurrencies have a finite supply of tokens that usually lasts within a period, after which the supply runs out. It is possible to monitor the number of Cryptocurrency tokens in supply whether in the future or at the moment via algorithms written in them. Consequently, it makes Cryptocurrencies to have intrinsic deflationary attributes that are similar to gold and other valuable metals.
DEBT-FREE: Unlike fiat currencies, they have no representation of debts and the only thing that is evident is just the currency numbers appearing as entries.
DECENTRALIZED: It is not manipulable by any central authorities or governments because supply and value are controlled by the activities of their users while Cryptocurrency funds cannot be frozen or seized.
EXCHANGEABLE: You can exchange the numerous Cryptocurrencies into fiat currencies like U.S. dollar, British pound, European euro, Chinese Yen etc through exchanges.
ILLIQUID AND VOLATILITY: Even though it is a potentially rewarding investment for some, investing in Cryptocurrency comes with a lot of risks and shortcomings like illiquidity and value volatility. And they are often used to facilitate black market and criminal activities, thereby causing many countries to want to regulate them.
To be continued…
REFERENCES
- Martucci Brian What Is Cryptocurrency – How It Works, History & Bitcoin Alternatives, www.moneycrashers.com/cryptocurrency-history-bitcoin-alternatives/
- Rosic Ameer, What is Cryptocurrency: Everything You Need To Know [Ultimate Guide], 2017, www.blockgeeks.com/guides/what-is-cryptocurrency/
