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Finance 2.0: What is Cryptocurrency?

What is Cryptocurrency?

What is a Cryptocurrency?

Cryptocurrency is a digital asset that is used as virtual currency, mainly due to the reason that it is nearly impossible to double-spend or counterfeit, being secured by cryptography. Unlike other currencies, it does not exist in any physical form. Created in 2008, Bitcoin was the world’s first Cryptocurrency.

Unlike other currencies, cryptocurrencies are not issued by a central authority, making them immune from government regulation or manipulation, a large part of its appeal.

 

What determines if something is a Cryptocurrency?

Jan Lansky defined six conditions that a system needs to meet the formal definition of cryptocurrency:

 

  1. No central authority is required, the system is maintained as a result of distributed consensus
  2. The system maintains an overview of units and the ownership of these units
  3. The system determines if a new unit can be created and if it cant, it defines their origin and how to determine unit ownership.
  4. Unit ownership can be exclusively proved cryptographically
  5. Ownership of the units can be changed (Transacted) but a Transaction statement can only be issued by the proved owner of the units.
  6. The system will only perform one instruction for change of ownership if two or more instructions are entered.

 

How are Cryptocurrencies created?

Cryptocurrencies are created through a process called mining, a decentralised and competitive process where individuals with specialised hardware are rewarded by a network for their services with tokens, or crypto units such as Bitcoins in exchange.

With Bitcoin, since it’s created at a fixed rate, there are diminishing returns. If more individuals attempt to mine one coin, it becomes increasingly difficult to make a profit with each new addition to the network. This is one of the key reasons that Bitcoin has increased in value over time, as its popularity grew.

 

What is Blockchain?

The validity of a cryptocurrency is established with a blockchain, which is a continuously growing list of blocks – records – that are secured and linked by cryptography. Resistant to data modification, each block contains a timestamp, transaction data and a hash pointer that links to a previous block.

Blockchains are managed by peer-to-peer networks, acting as a decentralised, open, distributed ledger that maintains permanent, verifiable transaction records between two parties. The peer-to-peer network validates a new block by collectively adhering to agreed protocols. Once a record is made, the data in the block cannot be amended without also amended all the subsequent, linked blocks in the chain.

 

What is Bitcoin and what makes it have value?

Bitcoin is one of the first cryptocurrencies and it has value because it is considered to be a form of ‘money’. It can be used to purchase physical goods and services. Bitcoin adheres to the six characteristics of money;

 

  1. Durability – Endures (such like gold which backs fiat currencies)
  2. Fungibility – Can be exchanged for assets
  3. Portability – Can be moved
  4. Divisibility – Can be divided into smaller parts
  5. Scarcity – Is difficult to come by
  6. Recognisability – Acknowledged and accepted as form of payment

The more Bitcoin is accepted by banks, merchants, institutions and individuals, the more value it is perceived to have, as it normalises into a valid payment method.

 

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