Introduction to Cryptocurrency

Updated: May 21, 2021

A cryptocurrency (or crypto) is a form of digital cash that enables individuals to transmit value in a digital setting. We will go through why it is unique, what public-key cryptography is and the differences between cryptocurrencies and tokens. Finally, we will talk about crypto wallets and how we invest in cryptocurrency.

What is cryptocurrency?

A cryptocurrency (or crypto) is a form of digital cash that enables individuals to transmit value in a digital setting.

You may be wondering how this sort of system differs from PayPal or the digital banking app you have on your phone. They certainly appear to serve the same use cases on the surface – paying friends, making purchases from your favorite website – but under the hood, they couldn’t be more different.


What makes cryptocurrency unique?

Cryptocurrency is unique for many reasons. Its primary function, though, is to serve as an electronic cash system that isn’t owned by any one party.


A good cryptocurrency will be decentralized. There isn’t a central bank or subset of users that can change the rules without reaching consensus. The network participants (nodes) run software that connects them to other participants so that they can share information between themselves.

On the left is what you’d expect something like a bank to use. Users must communicate via the central server. On the right, there is no hierarchy: nodes are interconnected and relay information between themselves.


The decentralization of cryptocurrency networks makes them highly resistant to shutdown or censorship. In contrast, to cripple a centralized network, you just need to disrupt the main server. If a bank had its database wiped and there were no backups, it would be very difficult to determine users’ balances.


In cryptocurrency, nodes keep a copy of the database. Everyone effectively acts as their own server. Individual nodes can go offline, but their peers will still be able to get information off of other nodes.


Cryptocurrencies are therefore functional 24 hours a day, 365 days a year. They allow for the transfer of value anywhere around the globe without the intervention of intermediaries. This is why we often refer to them as permissionless: anyone with an Internet connection can transmit funds.


Why is it called cryptocurrency?

The term “cryptocurrency” is a portmanteau of cryptography and currency. This is simply because cryptocurrency makes extensive use of cryptographic techniques to secure transactions between users.


What is public-key cryptography?

Public-key cryptography underpins cryptocurrency networks. It’s what users rely on to send and receive funds.


In a public-key cryptography scheme, you have a public key and a private key. A private key is essentially a massive number that would be impossible for anyone to guess. It’s often hard to wrap your head around just how big this number is.


For Bitcoin, guessing a private key is about as likely as correctly guessing the outcome of 256 coin tosses. With current computers, you wouldn’t even be able to crack someone’s key before the heat death of the universe.


Anyways, as the name might suggest, you need to keep your private key secret. But from this key, you can generate a public one. The public one can safely be handed out to anyone. It’s feasibly impossible for them to reverse-engineer the public key to get your private one.


You can also create digital signatures by signing data with your private key. It’s analogous to signing a document in the real world. The main difference is that anyone can say with certainty whether a signature is valid by comparing it with the matching public key. This way, the user doesn’t need to reveal their private key, but can still prove their ownership of it.


In cryptocurrencies, you can only spend your funds if you’ve got the corresponding private key. When you make a transaction, you’re announcing to the network that you want to move your currency. This is announced in a message (i.e., transaction), which is signed and added to the cryptocurrency’s database (the blockchain). As mentioned, you need your private key to create the digital signature. And since anyone can see the database, they can check that your transaction is valid by checking the signature.

Who invented cryptocurrency?

There have been a handful of attempts at digital cash schemes over the years, but the first of the cryptocurrencies was Bitcoin, which was released in 2009. It was created by a person or group of people using the pseudonym Satoshi Nakamoto. To this day, their true identity remains unknown.


Bitcoin spawned a huge number of subsequent cryptocurrencies – some aiming to compete, and others seeking to integrate features not available in Bitcoin. Nowadays, many blockchains do not just allow users to send and receive funds, but to run decentralized applications using smart contracts. Ethereum is perhaps the most popular example of such a blockchain.

What is the difference between cryptocurrencies and tokens?

At first glance, cryptocurrencies and tokens appear identical. Both are traded on exchanges and can be sent between blockchain addresses.


Cryptocurrencies are exclusively meant to serve as money, whether as a medium of exchange, store of value, or both. Each unit is functionally fungible, meaning that one coin is worth as much as another.


Bitcoin and other early cryptocurrencies were designed as currency, but later blockchains sought to do more. Ethereum, for instance, does not just provide currency functionality. It allows developers to run code (smart contracts) on a distributed network, and to create tokens for a variety of decentralized applications.


Tokens can be used like cryptocurrencies, but they’re more flexible. You can mint millions of identical ones, or a select few with unique properties. They can serve as anything from digital receipts representing a stake in a company to loyalty points.


On a smart-contract-capable protocol, the base currency (used to pay for transactions or applications) is separate from its tokens. In Ethereum, for instance, the native currency is ether (ETH), and it must be used to create and transfer tokens within the Ethereum network. These tokens are implemented according to standards like ERC-20 or ERC-721.


What is a crypto wallet?

Essentially, a cryptocurrency wallet is something that holds your private keys. It can be a purpose-built device (a hardware wallet), an application on your PC or smartphone, or even a piece of paper.


Wallets are the interface that most users will rely on to interact with a cryptocurrency network. Different types will offer different kinds of functionality – evidently, a paper wallet cannot sign transactions or display current prices in fiat currency.


For convenience, software wallets (e.g. Trust Wallet) are considered superior for day-to-day payments. For security, hardware wallets are virtually unmatched in their ability to keep private keys away from prying eyes. Cryptocurrency users tend to keep funds in both types of wallets.

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