Cryptocurrencies from a technological and Internet point of view in a dynamic and spectacular way are beginning to become one of the elements of the global financial system.
The most known and the most widespread of their representative - bitcoin (BTC) - is increasingly noticeable in the press, online forums and, recently, legal provisions and regulations. This means that also the governments of individual countries and international financial organizations see crypts as not only a technological novelty but also as a competitor or partner (depending on the approach to the issue) in the financial markets.
What is a cryptocurrency?
The word crypto (kryptos) comes from Greek and means "hidden". In many languages the crypto added to another word changes its meaning in this area. In a literal translation, a cryptocurrency is a "hidden currency". However, the semantic similarity of cryptocurrencies is much closer to cryptology, the domain of knowledge from the borderline of logic, mathematics and computer science dealing with secrecy, and in a manner protected against access to information by unauthorized people.
The term cryptocurrency was first described by the American computer engineer and computer scientist of Chinese origin Wei Dai. This engineer working as a Microsoft cryptography specialist, fascinated with cryptology, mathematics and various theories of anarchy, published in 1998 the concept of "B-money, an anonymous, distributed electronic cash system" which describes the concept of a new payment instrument that is impossible to be controlled by centralize control both in terms of generation (emission) as well as distribution.
The B-money which Wei Dai describes is to be based on the following principles, which, moreover, the creation of Bitcoin was based on a decade later:
1/ emission, distribution and transactions require a specific amount of computational work performed by central processing units of computers
2/ the work done is verified by the community, let's call it network, which updates the data in the "transactional consolidated book" by means of mathematical calculations
3/ a member of the network community who performs calculations for a transaction or emission receives remuneration for his / her work
4/ the replacement of the cryptocurrency takes place by means of collective accounting and authentication using cryptographic hashes.
5/ contracts are enforced by issuing and signing transactions with digital signatures (ie public key cryptography)
Ten years after the concept of b-money an outline of a new currency came to life - bitcoin (BCT), created by Satoshi Nakamato - probably a fictitious character, and perhaps a group of people who hid under this pseudonym.
The identity of the creator of bitcoin is a topic for a separate article and still the answer to the question of who it is remains in the sphere of conjecture. Bitcoin operates on the basis of principles defined by Wei almost a decade ago, but in order for it to appear realistically on the market, technology that would enable the above-mentioned conditions (blockchain) had to appear earlier.
In fact, it was only the development and implementation of blockchain technology that allowed to create what we now call a cryptocurrency. The first block called Genesis appeared in 2009, and the first customers and the first bitcoin transactions appeared within a few days later. The crypto-currency Bitcoin has become a fact, not just the idea of programmers and mathematicians.For a person from outside the IT environment who does not have the knowledge about numerical sequences and other mathematical nuances like block chains or cryptographic keys, all these technological assumptions are probably completely incomprehensible.
Therefore, for a better understanding of the subject, I suggest to look at BTC through the purpose of its creation declared by its creators.
Why was the cryptocurrency created?
Both Wei Dai and creator of bitcoin, Satoshi Nakamato, were looking for an alternative to fiat money (Latin fides-faith). This little known name hides today's currencies / cash present on global financial markets. Fiat money is colloquially speaking paper money or means of payment whose value is not based on its physical value (eg a banknote, after all a piece of colored paper) but on trust in its issuer / producer, in fact central banks of countries that emit / print their currencies . It is worth noting that the gold coin issued by some central bank will also be fiat money if its market value is greater than the value of the gold from which it was made. The money, the introduction of which was wrongly attributed to the Phoenicians, allowed mankind to go from local barter transactions to real trade.
The concept of fiat money is derived from the time when gold or silver was used as a payment instrument, and trusted institutions (bank, chamber of commerce, guild of craftsmen) stored ore guaranteeing its safe storage while issuing to the owner a paper certificate that authorized to collect their gold or silver in other branches of these institutions. With time, the paper certificate itself began to serve as a means of exchange in payment transactions, and this meant that the value of a paper certificate was no longer just stored gold or silver and the trust in the issuer of the certificate that stored them.
Contemporary economic systems are based on issuing money by central banks that implement monetary policy of states. The main instrument regulating the amount of money in circulation is the interest rate on loans granted by central banks. The purpose of changes in interest rates is to keep the stability of the economy of a given country.
Of course, the central bank is also a monopolist in the issue of money which is a legal currency in a given country. The concept of cryptocurrency was supposed to be an alternative to conventional means of payment.
Because both Dai and Nakamoto acknowledged that the world financial system has long ceased to be controlled by citizens within the tools available in democracy, is subject to market manipulation, does not guarantee the anonymity of transactions, is highly oppressive and limits the right to the protection of personal interests.
And of course, banks are the villain of the financial system because shareholders 'profits are a priority for their actions, which often leads to violation of clients' rights.
And at the end, and perhaps most importantly: the banks controlling the financial system control the entire trade experience in the world, which, according to the above-mentioned men, is contrary to the definition of a free market.
Therefore, their concept of a new currency was to ensure the anonymity of the transaction participants while at the same time making it public, base the currency emissions and its distribution on mathematical algorithms and not political decisions and ensure the irremovability of transactions and their authorization also based on mathematical algorithms and a distributed registration system.
Nakamoto has created a virtual currency whose number "on the market" has been pre-limited to 21 million bitcoins, with each bitcoin being divided into 100,000,000 smaller units called satoshi. Bitcoin functions virtually in the network of Internet connections, computers and other devices that use its software.
The generation of bitcoins and their subsequent transfer is based on the use of blockchain technology. The "block chain" is a specific transactional virtual register that has two important features: it is written on all connected central units and has a sequential structure, i.e. each subsequent transaction is added to the previous one and must be matched to it by using mathematical algorithms. The distribution of the BTC emitted and transactions carried out on the entire network ensures that these data are not removable.
In contrast, the structure of the chain of encrypted blocks that are created and combined based on solving complex mathematical activities is a real technological breakthrough that really allowed crypts to be created. The block chain is a specific arrangement of blocks, each of which has its own name, list of user transactions and also a shortcut of the previous block's content. In order to attach another block to our chain, a specific calculation work must be performed by the network units.
The results of calculations (so-called proof of work) will authenticate the new block and allow it to match the previous correct block in the chain if, of course, the math task is done correctly. Any interference or attempt to change the chain will not allow the addition of a new block.
By definition, this prevents duplication and falsification of bitcoins. If these explanations are not very clear below there’s the definition from Wikipedia:
“A blockchain, originally block chain, is a growing list of records, called blocks, which are linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data (generally represented as a Merkle tree). By design, a blockchain is resistant to modification of the data. It is "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way". For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for inter-node communication and validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without alteration of all subsequent blocks, which requires consensus of the network majority. Although blockchain records are not unalterable, blockchains may be considered secure by design and exemplify a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been claimed with a blockchain.”
Calculations are performed by participants connected to the network using their computing devices. Because they are more and more often specialized in electronic systems of high computing power that "dig" through large numbers and characters, they are called "excavators" and their owners are "diggers" or "miners". Each "digger" collects from the network all unconfirmed transactions, each of which includes, among others, the cryptographic "cipher" (hashes) of the previous valid block stored in the system.
Then, using its computing power, it attempts to break the cryptographic code of this block with certain features, which requires a predictable number of trials and errors. When he finds a solution, he announces it to the rest of the network. Other participants verify the broken code, receiving a newly resolved block, checking its correctness before accepting and adding to the chain.
For the solution of a given algorithm, the " digger" is rewarded by the network, which means that by solving the cryptographic tasks significant for the network he "digs" his prize in the form of bitcoin. The first-come-first-served principle applies, so the probability of bitcoin extraction depends on the ratio of computing power brought to the network through it to the sum of the computing power provided by all other "diggers".
Each new block in the chain after joining and verifying new transactions is generated every 10 minutes and currently the prize paid to the "diggers" is 12.5 BTC (to be shared, of course, among the winners). When the BTC network started in 2009, the payment for the block was 50 BTC.
The creator of bitcoin has introduced to the system a tool called "bitcoin halving" which with every 210,000 blocks generated (this occurs every four years) reduces the prize, or emissions of new bitcoins by half. The next halving is expected in 2020 and will reduce the prize for the block to 6.25 BTC. This mechanism is to prevent exceeding the maximum number of emissions, that is 21,000,000 BTC. Is bitcoin or cryptocurrency rightly called the currency of the future? In the current state of its use, it seems doubtful.
Let's look at what's happening now with bitcoin. T he cryptocurrency was created as an alternative to "state" money, eliminating its greatest disadvantages and at the same time providing the user with security and anonymity of the funds used.
And as long as BTC is used as a means of payment in commercial transactions as global as retail, the creators' assumptions are met.
Confidence and faith in BTC transactions guaranteed by blockchain technology (cryptographic keys, use of distributed records and registers, etc.) makes it an ideal payment instrument, especially in online transactions. It is a kind of return to the past, a trade that has since barter changed to settlements based on the assessment of the value of goods and services, but there has not yet appeared a monopoly of banks with their paper banknotes. Before the invention of paper money, people traded on the basis of clearing books, assigning values to their goods and services - instead of exchanging money.