Cryptocurrency has only existed for a decade or so, but it’s already revolutionized the world of finance. And there is so much more to come in the future.
The word “cryptocurrency” takes its name from a combination of cryptography and currency. Cryptography is the study and practice of securing information to keep it safe from third-party adversaries, and currency is obviously a system or medium for exchanging value. Combine the two and you have a secure method of creating and moving digital money, which in this case resides on a peer-to-peer exchange system.
Bitcoin was famously the first of this new kind of currency, created in 2009 by an unknown individual or group called Satoshi Nakamoto. Their idea was to create a method of moving value securely across borders without the need for an intermediary such as a bank or government. The new currency would be entirely independent of any single overarching influencer, and as such would be free from interference.
The majority of cryptocurrency systems use a decentralized framework that’s maintained collectively by a distributed computer network. Each physical device on the network that can send, receive and forward information is called a node. There are different types of nodes, and each of them performs a specific function. To take bitcoin as an example, it uses at least seven different types of nodes, but you can get nodes that perform every function and these are known as full nodes.
When the word “decentralized” is used in relation to a cryptocurrency, it’s referring to the concept of there not being a central authority that’s in control of it. All of those nodes are distributed around the world and they are all entirely independent of each other. They control the issuing and management of the cryptocurrency using mathematical proofs and algorithms, but there is no other link between them.
This isn’t to say that all cryptocurrencies are equally decentralized, in fact, the amount of decentralization varies between platforms, depending on each individual network’s structure.
Something that most cryptocurrencies have in common is a distributed public ledger known as a blockchain. This is a public record of all transactions on the network which grows organically with use. Each time someone creates or spends a unit of the virtual currency the details of the transaction are added as new blocks of data to the ever-growing chain and made secure by cryptography.
In general, each cryptocurrency sits on top of a blockchain that works in accordance with a predetermined list of rules. Taken as a whole, these rules add up to become a protocol that determines how the blockchain and the cryptocurrency should work.