What is cryptocurrency: everything you need to know!
This introduction explains the most important thing about crypto-currencies. After reading it, you'll know more than most people.
Today, cryptocurrencies (Buy Cryptos) have become a worldwide phenomenon known to most people.
What is cryptocurrency?
In 2016, you will have trouble finding a major bank, a large accounting firm, a major software company or a government that has not yet looked for crypto-currencies, published an article about them or launched a project called Blockchain.
But beyond the turmoil and press releases, an overwhelming majority of people They often do not even understand basic concepts.
Few people know it, but crypts have emerged as a parallel project to another larger project. Satoshi Nakamoto, the mysterious inventor of Bitcoin, never wanted to create a currency in the first place. He wanted above all to create a system of digital cash peer-to-peer. In a letter on SourceForge, he announced in 2009: "This is the first draft on Bitcoin, a new electronic payment system that uses a peer-to-peer network, is completely decentralized, and does not rely on any server or central authority. ".
Cryptocurrency, what is it really?
If you remove all the noise around the cryptocurrency and reduce it to a simple definition, you will find that it is only limited entries. It may seem trivial, but believe it or not, that's exactly what a cryptocurrency is.
Take the case of your money in your bank account: what else is it but an entry in a database, which can be modified according to very specific conditions?
The same goes for coins and notes: they are entries of a physical and public database, which you can exchange according to certain conditions.
Money revolves around this concept: a verified entry into a kind of database of accounts, balances and transactions.
The same goes for crypto-currencies: a huge database, public and accessible, verifiable and immutable, where each peer is part of the network, has a copy of the network, and history of all transactions performed on the network.
A transaction is a line from the database, which says Bob sent X Bitcoin to Alice.
Each transaction needs to be confirmed by other network users before being validated and registered. This concept of confirmation is central to crypto-currencies. We can all that is confirmed when we talk about cryptos.
Once a transaction is confirmed, it is entered in the blockchain, the global database of the network. It can not be removed anymore.
So let's go through the whole story. What is cryptocurrency?
- Where does cryptocurrency come from?
- Why should you know more about cryptocurrency?
- And what do you need to know about cryptocurrency?
What is cryptocurrency and how has cryptocurrency become a secondary product of digital currency?
Few people know this, but cryptocurrencies have emerged as the by-product of another invention. Satoshi Nakamoto, the unknown inventor of Bitcoin, the first cryptocurrency and still the most important, never intended to invent a currency.
After noting the failure of all centralized attempts, Satoshi attempted to implement a digital payment system without a central entity.
It was this decision that gave birth to cryptocurrency. This is the missing link found by Satoshi to make digital money. The reason is a bit technical and complex, but if you understand it, you'll know more about crypto-currencies than most people. So let's try to simplify things as much as possible.
To make digital money, you need a payment network with accounts, balances and transactions. A major problem that any payment network must solve is to prevent what is called the double expense: to prevent the same entity from spending twice the same amount. Generally, it is a central server that records balances.
In a decentralized network, you do not have this server. It is therefore necessary that each entity of the network does this work. Each peer in the network must have a list of all transactions to check whether future transactions will be valid or an attempt to double-spend.
It was this decision that gave birth to cryptocurrency. This is the missing link found by Satoshi to make digital money. The reason is a bit technical and complex, but if you understand it, you'll know more about crypto-currencies than most people. So let's try to simplify things as much as possible.
To make digital money, you need a payment network with accounts, balances and transactions. A major problem that any payment network must solve is to prevent what is called the double expense: to prevent the same entity from spending twice the same amount. Generally, it is a central server that records balances.
In a decentralized network, you do not have this server. It is therefore necessary that each entity of the network does this work. Each peer in the network must have a list of all transactions to check whether future transactions will be valid or an attempt to double-spend.
But how can these entities maintain consensus on these recordings?
If the peers of the network do not agree on a single balance, even minor, everything is broken. We need an absolute consensus. Usually, once again, it is a central authority that declares the balances to be in good condition. But how to reach a consensus without a central authority?
Nobody knew it before the arrival of Satoshi. Satoshi proved that so. Its main innovation has been to reach a consensus without central authority. Crypto-currencies are part of this solution - the part that made the solution exciting, fascinating and helped spread worldwide.
What are crypto-currencies, concretely?
If you remove all the excitement around crypto-currencies and reduce them to a simple definition, you will find that they are only limited entries in a database that no one can modify without fulfilling certain conditions. It may seem trivial, but believe it or not, you are exactly defining a currency.
Take the money from your bank account: what are other than entries in a database that can only be changed under specific conditions? You can even take coins and physical notes. What are they other than limited entries in a public physical database that can only be changed if you meet the requirement of physically owning coins and notes? Money is nothing more than a verified entry into a kind of database of accounts, balances and transactions.
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How do miners create coins and confirm transactions?
Let's look at the mechanism that governs crypto-currency databases. A cryptocurrency like Bitcoin consists of a peer-to-peer network. Each pair has a record of the complete history of all transactions and therefore the balance of each account.
A transaction is a file that says "Bob gives X Bitcoins to Alice" and that is signed by Bob's private key. It's basic cryptography with public key, nothing special
How it works ?
Someone asks for a transaction.
The requested transaction is broadcast over the peer-to-peer network, consisting of computers called nodes.
Validation
The node network validates the transaction and the status of the user using the known algorithms.
A validated transaction may involve cryptocurrency, contracts, records, or other information.
Once validated, the transaction is combined with others to form a new block of data for the registry.
The new block is then added to the existing blockchain, permanently and immutably.
Cryptocurrency Has no intrinsic value and therefore can not be traded for a commodity, such as gold.
Does not have physical form and only exists on the network.
Its supply is not determined by a central bank and the network is fully decentralized.It is only after a certain period of time that it is confirmed.
Confirmation is an essential concept for crypto-currencies. One could say that cryptocurrencies are just a matter of confirmation.
As long as a transaction is not confirmed, it is pending and can be falsified. When a transaction is confirmed, it is engraved in the marble. It is no longer falsifiable, it can not be reversed, it is part of an immutable record of historical transactions of the Blockchain.
Only minors can confirm transactions. It's their job in a cryptocurrency network. They take the transactions, stamp them as legitimate and spread them over the network. Once a transaction is confirmed by a minor, each node must add it to its database. She is part of the blockchain.
For this work, minors are rewarded with a cryptocurrency token, for example by bitcoins. The activity of the minor being the most important part of the cryptocurrency system, we will dwell on it and examine it more closely.
Read on to learn about What is cryptocurrency: everything you need to know!
What do the miners do?
Everyone can be minor. Since a decentralized network is not empowered to delegate this task, a cryptocurrency must have a mechanism to prevent a ruling party from abusing it. Imagine someone creating thousands of peers and spreading falsified transactions. The system would break immediately.
Thus, Satoshi has defined the rule that minors must invest part of their computer to qualify for this task. In fact, they have to find a hash - the product of a cryptographic function - that connects the new block to its predecessor. This is called proof of work. For Bitcoin, it is based on the SHA 256 Hash algorithm.
You do not need to know the details of SHA 256. You only need to know that it can be the basis of a cryptological jigsaw puzzle that the miners concur in solving. After finding a solution, a minor can build a block and add it to the blockchain
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Bitcoins can only be created if minors solve a cryptographic puzzle. As the difficulty of this puzzle increases the amount of computing power invested by all miners, there is only a specific amount of cryptocurrency tokens that can be created in a given amount of time. This is part of the consensus that no network peer can break.
Revolutionary properties
If you think about it, Bitcoin, as a decentralized network of peers that maintain a consensus on accounts and balances, is more of a currency than the numbers you see in your bank account. What else are these numbers like entries in a database - a database that can be modified by people you do not see and by rules you do not know?
Fundamentally, cryptocurrencies are token-related entries in decentralized consensus databases. They are called CRYPTO-currencies because the process of preserving consensus is secured by robust cryptography. Crypto-currencies are built on cryptography. They are not secured by people or by trust, but by mathematics. An asteroid is more likely to fall on your house than a Bitcoin address is compromised.
Regarding the properties of crypto-currencies, we need to separate the transactional properties from the monetary properties. Although most crypto-currencies share a set of common properties, they are not engraved in stone.
Regarding the properties of crypto-currencies, we need to separate the transactional properties from the monetary properties. Although most crypto-currencies share a set of common properties, they are not engraved in stone.
Transactional properties:
- Irreversible: After confirmation, a transaction can not be canceled. Per person. And nobody means nobody. Not you, your bank, the President of the United States, Satoshi, or your minor. Nobody. If you send money, you send it. Point bar. No one can help you if you have sent your funds to a scammer or if a hacker has stolen them from your computer. There is no safety net.
Nickname: Neither transactions nor accounts are linked to real-world identities. You receive bitcoins on so-called addresses, which are similar to random strings of about 30 characters. Although it is generally possible to analyze the flow of transactions, it is not necessarily possible to connect the real identity of the users to these addresses.
Fast and global: Transactions spread almost instantly over the network and are confirmed in minutes. Because they occur in a global network of computers, they are completely indifferent to your physical location. It does not matter if I send bitcoins to my neighbor or someone on the other side of the world.
Secured: Cryptocurrency funds are locked in a public key crypto system. Powerful cryptography and the magic of large numbers make it impossible to break this mechanism. You do not have to ask anyone to use cryptocurrency. It's just software that everyone can download for free. After installing it, you can receive and send bitcoins or other crypto-currencies. Nobody can stop you. There is no guard.
After confirmation, a transaction can not be canceled. Per person. And nobody means nobody. Not you, your bank, the President of the United States, Satoshi, or your minor. Nobody. If you send money, you send it. Point bar. No one can help you if you have sent your funds to a scammer or if a hacker has stolen them from your computer. There is no safety net.
Pseudonym
No accounts are linked to real-world identities. You receive bitcoins on so-called addresses, which are similar to random strings of about 30 characters. Although it is generally possible to analyze the flow of transactions, it is not necessarily possible to connect the real identity of the users to these addresses.
Fast and global
Transactions spread almost instantly over the network and are confirmed in minutes. Because they occur in a global network of computers, they are completely indifferent to your physical location. It does not matter if I send bitcoins to my neighbor or someone on the other side of the world.
Secured
Only the owner of the private key can send cryptocurrency. Powerful cryptography and the magic of large numbers make it impossible to break this mechanism. A Bitcoin address is more secure.
Without authorization
You do not have to ask anyone to use cryptocurrency. It's just software that everyone can download for free. After installing it, you can receive and send bitcoins or other crypto-currencies. Nobody can stop you. There is no guard.
Monetary properties:
- Controlled supply: Most crypto-currencies limit the supply of tokens. In bitcoin, the offer decreases over time and will reach its final number by 2140. All crypto-currencies control the supply of the token by a schedule written in the code. This means that the money supply of a cryptocurrency at any time in the future can be roughly calculated today. There is no surprise.
- No debt but bearer: The currency in your bank account is created by the debt, and the numbers you see on your ledger represent only debts. It is a debt recognition system. Crypto-currencies do not represent debts. They just represent themselves. They are money as tangible as gold coins.
Bitcoin, a means of payment without permission, irreversible and pseudonymous, is an attack against the control of banks and governments on the monetary transactions of their citizens. You can not prevent someone from using Bitcoin, you can not prevent someone from accepting a payment, you can not cancel a transaction.
As a money whose supply is limited, controlled and which is not modifiable by a government, a bank or any other central institution, crypto-currencies attack the scope of monetary policy. They prevent central banks from controlling inflation or deflation by manipulating the money supply.
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Cryptocurrency: the dawn of a new economy
It is mainly because of their revolutionary properties that crypto-currencies have been successful. Their inventor, Satoshi Nakamoto, did not even dream of it. While all other attempts to create a digital money system did not attract enough users, Bitcoin had something that provoked enthusiasm and fascination. Sometimes it's more like a religion than a technology.
US mobile payments expected to reach $ 142 billion by 2019
- Peer-to-Peer Transfers
- Physical payments
- Remote payments
- Peer to peer
Peer-to-peer transfers occur when someone pays another person via a mobile device. The device uses either a downloaded application or a web application to initiate, authenticate or transfer funds.
Remote
"Remote" payments occur when a buyer buys goods or services via a mobile device, but without the seller being in the presence of the seller, and the goods are not delivered immediately (as in the case of the sale online).
Source: Forrester Study, US Mobile Payments Forecast, 2014 to 2019, November 17, 2014
Crypto-currencies are digital gold. Safe money, safe from political influence. Crypto-currencies are also a fast and comfortable means of payment of global reach. They are sufficiently private and anonymous to serve as a means of payment for the black market and any other illegal economic activity.
But if crypto-currencies are used more for payment, their use as a means of speculation and a store of value eclipses the aspects related to payment. Crypto-currencies have created a highly dynamic and growing market for investors and speculators. Marketplaces such as Okcoin, Poloniex or Shapeshift allow trading hundreds of crypto-currencies. Their daily trading volume exceeds that of the main European stock exchanges.
At the same time, the practice of ICO (Initial Coin Distribution), mainly facilitated by Ethereum's smart contracts, has given life to highly successful crowdfunding projects, in which an idea is often enough to raise millions of dollars. In the case of "The DAO", it was more than $ 150 million.
It is common for a coin to earn 10% a day - sometimes 100% - to lose just as much the next day.
Decentralization as a central element of crypto-currency
The most important part of his invention was the decentralized character of it. In the 1990s, many people tried to create a digital currency, but they all failed. "After more than a decade of failures, they see this as a lost cause, I hope they will make the distinction, since it is the first time that we do not rely on a trusted third party for our system, "shared Satoshi Nakamoto in an email to a collaborator.
For Satoshi, it was simple: it was the centralized character that was problematic. This decision to create and rely on a decentralized network gave birth to cryptocurrencies.
What does this change concretely? We will explain it in a very simple way.
To create a digital cash system, you need a payment network with accounts, balances and transactions between each account. Rather easy to understand until then. A major problem for each payment network is the following: an entity must never spend twice the same amount. And for that, a control must be realized by a central server, which keeps a trace of the sums which each individual of the network has.
This happens every day when you make a payment by credit card. You insert your credit card in the machine, the machine asks your bank to check if you have funds. Your bank sends a positive reply to Mastercard or VISA, which confirms to the machine. The machine receives the validation and withdraws the funds.
In a totally decentralized network, this server to perform this task does not exist. Then it is necessary that each actor of the network makes the job, or part of the job. Each peer in the network will have a copy of all the transactions made on that network in order to perform the checks when necessary.
Crypto-currencies in 2019: the era of institutionalization
If we take cryptocurrency on a macro scale, ie global, we can divide the market into 3 main periods: in 2009, there was Bitcoin; from 2011 to 2014, the altcoins; then from 2015 to 2018, the utilitarian tokens.
Today, we have entered a 4th era: that of Institutionalization.
The 4th era will therefore be led by financial institutions, banks and even central banks. And if they bring large sums of money with them, crypto as a whole flirts with the devil and gets closer to the traditional financial system.
Eras 2 & 3 both arrived with a promise to replace or repair the problems of the previous generation. If it is still a little early to say for the 3rd generation, we can still say that they both failed.
Today, with the death of ICOs and the rise of systems similar to the traditional world of finance (stablecoins, ETFs and others), we see the first signs of a new era for cryptocurrency: era of institutionalization.
At the beginning of the year, we saw the peak of the 3rd era, led by a course of Bitcoin that kept rising and rising, a booming market, accompanied by a madness of ICOs. Meanwhile, working quietly in the background, we could see the old people in the area trying to understand and tame this new beast. Understanding how to take control of a new form of money is not easy.
ETFs, or Exchange Traded Funds
ETFs are financial instruments indexed to the price of an asset. They have been created to facilitate access and liquidity. And some want to do it for bitcoin.
Without going into detail, one of the basic principles in an exchange-traded fund is that the fund's operating entity may create shares for the ETF as long as they represent the underlying asset.
Since 2013 and the very first bitcoin ETF application made to the SEC, 25 trials have been attempted. They have all been denied except one, who is still waiting for a decision.
The reasons are often different: impossibility of regulating the market, massive manipulation of prices, lack of security for investors.
Some people think that a bitcoin ETF will end up being accepted at some point. People want easy access to the cryptos market, and the institutions are working on that. For an ETF to be approved, the market as a whole must be under control: the market must be regulated and subject to the same controls as the traditional market, third-party custodians must guarantee the institutional funds.
Most institutional investors do not have the knowledge to enter the cryptos market. With bitcoins ETFs, they will be able to easily access and benefit from them in order to diversify their investment strategy and their portfolio.
This event would be a very large influx of money on the market, increasing price and adoption.
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