LearnCrypto

What Are Cryptocurrencies?

A cryptocurrency is a digital or virtual currency that uses cryptography for security and is decentralized, meaning it is not controlled by a central authority such as a government or financial institution.

Cryptocurrencies are built on a distributed ledger technology, such as a blockchain, which allows for secure and transparent record-keeping of transactions. This decentralized nature of cryptocurrencies makes them resistant to censorship, fraud, and other forms of interference.

The most well-known and widely used cryptocurrency is Bitcoin, which was created in 2009. Since then, many other cryptocurrencies have been created, each with its own unique features and characteristics.

Cryptocurrencies can be used as a medium of exchange, like traditional currencies, to buy and sell goods and services. They can also be used as a store of value, similar to gold or other precious metals, or as a way to invest and speculate on the currency’s future value.

Cryptocurrencies are typically traded on online exchanges and can also be stored in specialized digital and hardware wallets. The value of cryptocurrencies is determined by supply and demand on the market, and they are known for their volatility, with prices often fluctuating rapidly.

What is decentralized ledger technology?

Distributed ledger technology (DLT) refers to a type of database distributed across a computer network rather than being stored in a central location. This decentralized nature of DLT allows for secure and transparent record-keeping of transactions and other data.

One of the most well-known examples of DLT is the blockchain, which is the technology that underpins many cryptocurrencies, such as Bitcoin and Ethereum. In a blockchain, transactions are recorded in blocks, then cryptographically linked together to form a chain.

In addition to the blockchain, there are other types of DLT, such as directed acyclic graphs (DAGs) and hash graphs. These technologies have their own unique characteristics and features, but they all share the common principle of being decentralized and distributed across a network of computers.

DLT has many potential applications, including finance, supply chain management, and voting systems. It allows for secure and transparent record-keeping, as well as enabling new forms of decentralized and trustless systems.

Blockchain

A blockchain comprises a series of blocks, which are cryptographically linked together to form a chain.

Each block in the chain contains a record of multiple transactions and a unique code called a “hash” that links it to the previous block in the chain. This allows for a secure and immutable record of all transactions on the blockchain. It is virtually impossible to alter the data in a block without also changing the hash of the subsequent blocks in the chain.

In addition to the transaction data, each block in the blockchain also contains a “nonce,” a random number used to solve a complex cryptographic puzzle. This puzzle-solving process, known as “mining,” is performed by special nodes on the network called “miners.” There are variations on this concept, such as proof-of-stake blockchains, where miners are called “validators.”

When a participant successfully solves the puzzle and adds a new block to the chain, they are rewarded with a certain amount of the platform’s native token and any transaction fees associated with the transactions in the block. This incentivizes miners to contribute their computational power to the network and helps maintain the blockchain’s security and integrity.

Blockchains can be either public or permissioned. In a public blockchain, anyone can participate as a miner or user of the platform, and the transactions are transparent and visible to anyone on the network. In a permissioned blockchain, only authorized individuals or entities can participate as miners or users, and the transactions may be private or visible only to certain participants.

Hash graphs

Hash graphs are a type of distributed ledger technology (DLT) similar to the blockchain but with some key differences. Like the blockchain, a hash graph is composed of a series of blocks, which are cryptographically linked together to form a chain.

However, unlike the blockchain, where blocks are linearly added to the chain, a hash graph allows for blocks to be added to the chain more flexibly and efficiently. This is because a hash graph uses a data structure called a “directed acyclic graph” (DAG), which allows multiple blocks to be added to the chain simultaneously rather than one at a time.

In addition, a hash graph also uses a consensus algorithm called “gossip about gossip” to achieve consensus on the order and validity of transactions. In this algorithm, each node on the network communicates with a small number of other nodes. The information about transactions and other events is “gossiped” from node to node until it reaches all nodes on the network.

This allows for faster and more efficient consensus on the state of the network, as well as enabling new features and capabilities, such as the ability to support smart contracts and decentralized applications (dApps).

Overall, hash graphs are a type of DLT similar to the blockchain but with some key differences, such as the use of a DAG data structure and a gossip-based consensus algorithm.

Directed acyclic graphs (DAG)

A directed acyclic graph (DAG) is a type of data structure composed of a set of nodes (vertices) and edges, where the edges have a direction and do not form cycles.

DAGs are used in many fields, including computer science, mathematics, and network theory. In the context of distributed ledger technology (DLT), DAGs are used as an alternative to the blockchain. They allow for more efficient and scalable record-keeping of transactions and other data.

In a DAG-based DLT, transactions are represented as nodes in the graph, and the edges between the nodes represent the relationships between the transactions. This allows multiple transactions to be added to the graph simultaneously rather than one at a time, as is the case with the blockchain.

In addition, DAGs can be used in conjunction with different consensus algorithms, such as Proof-of-Work (PoW) or Proof-of-Stake (PoS), to achieve consensus on the state of the network. This allows for secure and transparent record-keeping, as well as enabling new features and capabilities, such as the ability to support smart contracts and decentralized applications (dApps).

Summary on the use of blockchain, hash graphs, and DAG in cryptocurrencies

We know about cryptocurrencies’ use of blockchain, but what about the other two?

Some cryptocurrencies use hash graphs and directed acyclic graphs (DAGs) as their underlying distributed ledger technology (DLT).

Cryptocurrencies that use hash graphs, such as Hedera Hashgraph and Swirlds, aim to improve upon the blockchain by using a supposedly more efficient and flexible data structure and a different consensus algorithm.

Some cryptocurrencies that use DAGs are IOTA and Nano.

While most cryptocurrencies use the blockchain as their underlying DLT, some use alternative technologies, such as hash graphs and DAGs, to offer different features and capabilities.

History and key figures in the development of cryptocurrencies 

The idea for cryptocurrencies was first proposed in 1998 by a group of researchers, including Wei Dai, who published a paper outlining the concept of a “b-money” system. This system would use cryptographic techniques to enable secure and anonymous transactions without a central authority.

The b-money proposal was influenced by the Cypherpunk movement, a group of individuals who believed in the power of cryptography and privacy-enhancing technologies to enable new forms of decentralized, anonymous, and secure communication and commerce. B-money was never implemented as a working system. Still, it was influential in developing other digital currencies and was the subject of much discussion and debate in the cryptography and computer science communities.

This development was also influenced by the work of David Chaum, who had previously proposed the idea of “digital cash” to enable secure and anonymous electronic transactions.

It was not until 2009 that the first practical implementation of a cryptocurrency, Bitcoin, was created by an anonymous individual or group known as Satoshi Nakamoto. Bitcoin was released as open-source software and quickly gained traction as a decentralized, secure, and transparent way to transfer value over the internet.

Since the creation of Bitcoin, many other cryptocurrencies have been created, each with its unique features and characteristics. These cryptocurrencies are used as a medium of exchange, a store of value, or a way to invest and speculate on the currency’s future value.

Altcoins

The term “altcoins” refers to all alternative cryptocurrencies to Bitcoin. The idea of each altcoin project is to offer different underlying technology compared to Bitcoin. This includes the opportunity to develop decentralized applications (dApps), integrate smart contracts, multichain compatibility, etc. 

Altcoins often have underlying differences when compared to Bitcoin. For example, Litecoin aims to process a block every 2.5 minutes, rather than Bitcoin’s 10 minutes, which allows Litecoin to confirm transactions faster than Bitcoin. Another example is Ethereum, which has smart contract functionality that enables decentralized applications to be run on its blockchain. Ethereum was the most used blockchain in 2020, according to Bloomberg News. In 2016, it had the most extensive “following” of any altcoin, according to the New York Times.

Litecoin (LTC)

Litecoin is a cryptocurrency created in 2011 by Charlie Lee, a former Google engineer. It is based on the Bitcoin protocol, but it has many differences that make it faster and more efficient than the original crypto.

One of the key differences between Litecoin and Bitcoin is that the former has faster transaction times. This is because it uses a different mining algorithm called “scrypt,” which is designed to be more efficient and require less computational power than the SHA-256 algorithm used by BTC. As a result, Litecoin transactions can be processed more quickly, and the network can handle a higher volume of transactions.

In addition to its faster transaction times, LTC has a larger maximum supply (84 million tokens) than Bitcoin.

 Litecoin has gained a significant following since its creation and is now one of the top cryptocurrencies by market capitalization.

Ethereum (ETH)

Currently, the second largest and most popular cryptocurrency is Ethereum.  

Ethereum is a decentralized platform that enables the creation of smart contracts and decentralized applications. It was created by Vitalik Buterin, a programmer and cryptocurrency researcher, and was officially announced in a white paper in 2013.

Buterin had been involved in developing Bitcoin and other cryptocurrencies, and he saw the potential for using blockchain technology to enable a wide range of decentralized applications beyond just digital currencies. He developed the concept of Ethereum as a platform for building these applications, and he assembled a team of developers to help build and launch the platform.

Ethereum was officially launched on July 30, 2015, with the release of the “Frontier” version of the Ethereum software. Since then, the platform has grown significantly and is now widely used for various applications, including decentralized finance (DeFi), prediction markets, and supply chain management. It has also spawned several related projects and technologies, such as Ethereum Classic and Solidity, a programming language specifically designed for building smart contracts on Ethereum.

Dogecoin (DOGE)

Dogecoin is a cryptocurrency that was created in 2013 as a joke, based on a popular internet meme featuring a Shiba Inu dog. Billy Markus, a programmer from Portland, Oregon, and Jackson Palmer, an Australian marketer, created it.

Dogecoin was originally intended as a lighthearted and humorous take on the growing trend of cryptocurrency. Still, it quickly gained a significant following and has become a widely used digital currency. It is based on the same technology as Bitcoin but has some differences, including a larger maximum supply of coins and faster block times.

Dogecoin has been used for various purposes, including charitable fundraising and online tipping. It has also gained a reputation as a more “friendly” and approachable cryptocurrency and has a large and active community of users and supporters.

Stablecoins

A stablecoin is a digital currency pegged to a “stable” currency such as fiat money (US dollar, euro, etc.) or gold. People use stablecoins to escape the volatility of the crypto market and preserve their capital.

Who is Wei Dai?

Wei Dai is a computer scientist and cryptographer known for his work on the concept of “b-money,” which was an early precursor to the development of the blockchain and cryptocurrencies.

Dai was born in China and received his undergraduate degree in computer science from Tsinghua University in Beijing. He then moved to the United States, where he received his master’s degree in computer science from the University of Washington.

His paper, outlining the idea of a decentralized, cryptographic digital currency, is considered to be an important precursor to the development of blockchain and cryptocurrencies.

Who is David Chaum?

David Chaum is a computer scientist and cryptographer known for his work on digital cash and privacy-enhancing technologies.

Chaum received his Ph.D. in computer science from the University of California, Berkeley, in 1979. He has since held positions at several universities and research institutions, including the University of California, Santa Barbara, and the University of Amsterdam.

In the early 1980s, Chaum proposed the idea of “digital cash,” which would use cryptographic techniques to enable secure and anonymous electronic transactions. 

He developed a prototype of a digital cash system called eCash, which several banks and other financial institutions tested. In order to create eCash, Chaum developed a prototype system called DigiCash, which used a technique called “blinding” to ensure the anonymity of the transactions.

Blinding is a cryptographic technique to ensure the anonymity of transactions in a digital currency system. It works by “hiding” the identity of the sender and receiver of a transaction, as well as the amount of the transaction, from any third parties who may be observing the network.

The blinding technique uses one-way mathematical functions, such as the modular exponentiation function, to “encrypt” the transaction information. This allows the transaction’s sender and receiver to know the transaction’s details, but it prevents anyone else from being able to observe or infer this information.

Some banks and financial institutions Chaum approached to test e-cash, and DigiCash included Citibank, the Dutch Rabobank, and the Dutch Central Bank. However, despite some initial interest, the e-cash system was not widely adopted, and the company that Chaum founded to commercialize it, DigiCash, filed for bankruptcy in 1998.

Chaum has also worked on other privacy-enhancing technologies, such as anonymous credentials and voting systems. He is the founder of several companies, including DigiCash and CipherTrust, and he is considered a pioneer in cryptography and digital currency.

Who is Nick Szabo?

Nick Szabo is a Hungarian-American computer scientist, cryptographer, legal scholar, and entrepreneur best known for his pioneering work in the field of digital currency. He is credited with inventing the concept of “smart contracts,” which use cryptographic technology to enable secure, automated agreements between two or more parties. 

He has also contributed to research in distributed systems, game theory, and artificial intelligence. In addition to his intellectual pursuits, Szabo has also been an active entrepreneur, founding several digital currency-related companies. He currently works as a consultant and advisor to various organizations within the tech and finance industries.

Who is Hal Finney?

Hal Finney was a computer scientist and cryptography researcher who played a significant role in the early development of Bitcoin, the first decentralized digital currency. He was one of the first people to receive a test transaction of Bitcoin from the currency’s creator, Satoshi Nakamoto, and he played a crucial role in testing and debugging the system in its early stages.

Finney was an early adopter and advocate of Bitcoin and was actively involved in the cryptocurrency community. He wrote extensively about Bitcoin and other cryptographic technologies and helped promote these technologies’ use to a broader audience.

Finney was born in 1956 and received a bachelor’s degree in computer science from the California Institute of Technology. He worked as a software engineer and computer scientist at various companies, including Xerox PARC and PGP Corporation, and was known for his expertise in cryptography and security.

In addition to his work on Bitcoin, Finney was also involved in developing other cryptographic technologies and was a respected figure in the cryptography and computer science communities. He passed away in 2014 at 58 due to complications from ALS, also known as Lou Gehrig’s disease.

Who is Vitalik Buterin?

Vitalik Buterin is a programmer and cryptocurrency researcher best known as the co-founder of Ethereum, a decentralized platform that enables the creation of smart contracts and decentralized applications. He was born in Russia in 1994 and later moved to Canada, where he became interested in cryptocurrencies as a teenager.

Buterin was an early adopter and advocate of Bitcoin and became involved in the cryptocurrency community at a young age. He co-founded Bitcoin Magazine in 2011 and later became a key contributor to the development of Ethereum.

In 2013, Buterin published a white paper outlining the concept of Ethereum, and he assembled a team of developers to help build and launch the platform. The project was officially launched in 2015, and it has grown significantly, becoming one of the world’s most widely used and influential decentralized platforms.

Buterin is highly respected in the cryptocurrency and computer science communities for his contributions to these fields, and he is widely recognized as a thought leader and innovator in blockchain technology.

The Mt. Gox incident

Mt. Gox (short for “Magic: The Gathering Online eXchange”) was a cryptocurrency exchange that operated from 2010 to 2014. It was launched by programmer Jed McCaleb as a platform for trading Magic: The Gathering cards but later expanded to include Bitcoin trading. At its peak, Mt. Gox was the largest cryptocurrency exchange in the world, handling over 70% of all Bitcoin transactions.

In 2011, Mt. Gox suffered its first significant hack, resulting in the theft of over 8,000 Bitcoin. The company recovered from the hack and continued to grow, but it faced many other challenges, including lawsuits and regulatory issues.

The collapse of Mt. Gox had a major impact on the cryptocurrency market and led to a loss of confidence in the security of cryptocurrency exchanges. In February 2014, Mt. Gox suspended trading and filed for bankruptcy, citing the loss of 850,000 Bitcoin due to a “technical issue” that allowed hackers to steal the funds. The company later revealed that it had found 200,000 of the lost Bitcoin, but the rest were gone for good.

In the aftermath of the Mt. Gox disaster, the cryptocurrency exchange industry implemented many measures to improve security and prevent similar breaches from occurring. Today, many exchanges have robust security measures in place, including multi-factor authentication and cold storage of assets, to protect against theft and hacking.

Binance – the largest cryptocurrency exchange right now

Binance is a cryptocurrency exchange founded in 2017 by Changpeng Zhao, a Chinese-Canadian programmer and entrepreneur. The company was initially based in China but later moved to Japan and Malta to avoid regulatory issues.

Binance quickly gained popularity among cryptocurrency traders due to its wide range of altcoins and high trading volume. The exchange processed over $2 billion in trades in its first year of operation. In 2018, Binance launched its cryptocurrency, Binance Coin (BNB), used as a utility token on the platform and has since become one of the top-ranked cryptocurrencies by market capitalization.

In 2019, Binance announced plans to launch a decentralized exchange (DEX), allowing users to trade cryptocurrencies directly without needing a central authority. The DEX was launched in April 2019 and has since become one of the leading decentralized exchanges in the world.

In addition to its exchange business, Binance has ventured into other areas, including the launch of a margin trading platform, the acquisition of several companies in the cryptocurrency industry, and the development of a blockchain-based public charity platform called the Binance Charity Foundation.

Overall, Binance has become one of the most successful and influential companies in the cryptocurrency industry, with a strong presence in the global market and a reputation for innovation and growth.

Storing cryptocurrency

There are two ways to store your cryptocurrency – cold and hot storage. Cold storage means the assets are stored ‘offline’ in hardware wallets such as Ledger. Hot storage means that the digital assets are held in a “wallet” connected to the internet – such as exchange wallets (Binance, Coinbase, Kraken, etc.) and digital wallets (e.g., MetaMask).

In basic terms, the crypto wallet stores your public and private “keys,” which can be used to send and receive cryptocurrency.

 Conclusion

Cryptocurrencies can revolutionize the way financial transactions are conducted and could potentially disrupt traditional financial systems. They have already gained significant mainstream adoption and are being used for various purposes, including making purchases, storing value, and as a means of exchange.

However, this new asset class is still in the early stages of development and is highly volatile. It still needs to be widely accepted, and regulatory and legal issues must be addressed. There is also the risk of cyberattacks and other security issues that could impact the use of cryptocurrencies.

Despite these challenges, many experts believe that cryptocurrencies have the potential to become a widely accepted and integral part of the global financial system. They offer the potential for faster, cheaper, and more secure financial transactions, and could potentially make financial services more accessible to underserved communities.