What are Cryptocurrencies?

In basic terms a cryptocurrency is a medium for exchange online. A cryptocurrency has a number of cryptographical functions which are there to support financial transactions. Most cryptocurrencies use the blockchain technology platform (more on this a little later) as it offers immutability, transparency and decentralization.

Cryptocurrencies are not controlled by any central powers – not yet at least. This is deliberate because the whole idea of cryptocurrency and Bitcoin is that they provide immunity from government interference and control.

A cryptocurrency can be transferred from one person to another by using public and private keys. There are minimal processing fees involved with cryptocurrency transactions which are part of their appeal. Usually financial institutions have high charges for any monetary transaction.

Cryptocurrencies were invented by accident. The inventor of Bitcoin, Satoshi Nakamoto, created a peer to peer electronic cash system and Bitcoin was a byproduct of this system. Before this there had been numerous attempts to create a digital cash system but all had failed.

The key to the success of Nakamoto’s system was that it provided a decentralized financial network rather than the established centralized system. If you wanted to set up your own digital cash system you would need to create a payment network that provided three key things:

1. Accounts
2. Balances
3. Transactions

A problem that all payment networks face is “double spending”. This is all about preventing spending the same amount twice. Up until the creation of Nakamoto’s system this had always been achieved using central server balance records (this is still in existence today).

With a decentralized payment network there is no central server. Instead every single network entity or node has to perform its job properly. They all need to have a list of transactions so they can monitor if future transactions are a “double spend” or valid.

All of the peers of a decentralized payment network have to agree on everything – there has to be complete consensus. If this doesn’t happen then the transaction will not take place. The problem was how to achieve this total consensus without a central server. Nakamoto figured this out.

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