​What is Cryptocurrency?

Among other things, cryptocurrency is a digital form of currency that is being used increasingly all over the world. If compared with the current traditional fiat currencies such as US Dollars and Euro Dollars, cryptocurrency is far more efficient in terms of usage and transaction costs. The first cryptocurrency to begin trading was Bitcoin in 2009. Since then, we have seen numerous cryptocurrencies being created with new algorithms  to better suit a future economy.

People often think of cryptocurrency only as virtual money or a transaction system. But if you look closer you’ll see that the monetary aspect is just the tip of the iceberg. That’s because cryptocurrencies and the blockchain are a groundbreaking internet technology for which money is merely one of the possible applications.

What is Cryptocurrency and How Does The Blockchain Work?

What is Money and Why Does it Exist?

Money exists to facilitate trade. Through the centuries, trade has become incredibly complex with everyone trading with everyone else worldwide. Trade is recorded in bookkeeping systems which are generally closed to the public. This is the reason why we use third parties and middlemen who we trust to facilitate and approve our transactions. Think governments, banks, accountants, notaries and the paper money in your wallet.  We call these trusted third parties.

Understanding the Essence of Cryptocurrency & Blockchain Technology

This brings us to the essence of cryptocurrency.  Cryptocurrency software enables a network of computers to maintain a collective bookkeeping system via the internet. This bookkeeping system is neither closed nor in control of one party or central authority.  Rather, it is public, and available in one digital ledger which is fully distributed across the network. We call this the blockchain. In the blockchain, all the transactions are logged, including information about the time, date, participants and amount of every single transaction. Each node in the network owns a full copy of the blockchain. On the basis of complicated, state-of-the-art, mathematical principles, the transactions are verified by the cryptocurrency miners who maintain the ledger. The mathematical principles also ensure that these nodes automatically and continuously agree about the current state of the ledger and every transaction in it. If anyone attempts to corrupt a transaction, the nodes will not arrive at a consensus and hence will refuse to incorporate the transaction in the blockchain. So every transaction is public and thousands of nodes unanimously agreed that a transaction has occurred on date X at time Y. It’s almost like there’s a notary present at every transaction. This way everyone have access to a shared single source of truth.

It’s Not Just Smarter Programmable Money

The ledger does not care whether a cryptocurrency represents a certain amount of Euros or Dollars, or anything else of value, or property for that matter. Users can decide for themselves what a unit of cryptocurrency represents. A cryptocurrency like Bitcoin is divisible in to 100 million units and each unit is both individually identifiable and programmable. This means that users can assign properties to each unit.  Users can program a unit to represent a US dollar, a Euro cent, or a share in a company, a kilowatt of energy or digital certificate of ownership.

Because of if this, cryptocurrencies and blockchain technology could be used for more than simply money and payments. A cryptocurrency can represent many kinds of property. A thousand barrels of oil, award credits or a vote during an election for example.

Moreover, cryptocurrency protocols allow us to make our currency smarter and to automate our cash and money flows. Imagine a health care allowance in dollars or Euros that can only be used to pay for health care at certified parties. In this case, whether someone actually follows the rules is no longer verified in the bureaucratic process afterwards. You simply program these rules into the money compliance up front. The unit can even be programmed in such a way that it will automatically be returned to the provider if the receiver doesn’t use it after a certain amount of time. This way the provider can ensure that allowances are not horded.

A company can control its spending in the same way. By programming budgets for salaries machinery, materials and maintenance so that the respective money is specified and cannot be spent on other things.  Automating such matters leads to considerable decrease in bureaucracy.