Cryptocurrencies are known commonly as a speculative currency or risky investment – to invest in one of these coins is to believe that the value of its use created by demand or by the service offered by the company will increase over time.
In order to judge their value, understanding the technology that makes them tick is vital. They are just one development created by coders and organizations to utilize blockchain technology.
A blockchain is a network of computers connected by the Internet, working to consolidate and record the movement of data. Each block of data is dependent on the validity of the last, forming a chain. These movements are authenticated with the use of digital signatures and private keys.
The data can represent anything from money to a car or can of soda, or even to something along the lines of a “like” on a social media platform. Some coins offer the ability to code contracts into these transactions. In its most simple form, this would be a single trigger, such as a date, increased or decreased value or completion of a task.
Bitcoin was not the first of these, although it has become the “face” of the industry. It was actually based off a system proposed by Adam Back called HashCash in 1997, which was rooted even further back in a paper written by Cynthia Dwork and Moni Naor in 1992. The initial purpose was to combat spam emails but has inspired a new world of possibilities.
As with all technology, cryptocurrencies are a crossroads of much technological advancement and must be seen as a work in progress.
An example might be the development and use of radio waves. This wireless communication of voice then moved to visual for TV, further to data as digital TV and now moves our telephone calls across the globe with satellites. All of this is only possible because of a myriad of scientific discoveries and many unrelated uses of electricity. Similar to the advent of the World Wide Web, very few people understood the vast scope of possibilities it allowed beyond e-mails at that time.
In all of these examples, the main function is moving information or data. A sound or an image becomes a radio wave and is then converted back to the original image. Improving the quality of this output has pushed the boundaries of technology to the point that we can video chat with someone on the opposite side of the Earth.
Cryptocurrencies are pushing the boundaries of how we use the Internet. They aim to streamline the processes used everyday to move data and make transactions in a way that is more transparent and provides the greatest security.
As is, their value is in their use or speculative use, and determined by popular demand as with any other product. Depending on how the company is formed and their specific blockchain design, their “coin” might not be intended to be used as currency at all. In some situations they can simply be seen as placeholders or receipts.
In theory, they have several major benefits:
- cut the many fees of banking and digital payments
- simplify the process of legally owning and operating businesses
- offer a stable currency to countries in turmoil
- increase transparency for businesses and central authorities like banks, governments and non-profits.
The fact that it is based on a network of unassociated computers is the single most important factor of a blockchain’s utility. It is decentralized. The information is only recorded when in consensus with the network as a whole. Many people value this in light of potential government overreach in their country. Blockchains are able to cut out the middle-man without sacrificing security.
One major myth is that Bitcoin allows a user to remain anonymous. The movement and acceptability of any data to a blockchain network through mining is dependent on proper encryption, but this does not mean sender and receivers are unknown, and there are some coins that allow for complete anonymity. The vital terms in this process are Asymmetric cryptography and digital signatures. These elements create the distinction between a digital currency and a cryptocurrency.
Encryption has existed for just about as long as we have real evidence of written word. Creating a cipher is a method for systematically distorting messages so that only the intended party can decode the message, hence the term “decipher.”
A basic example of this would be switching each letter in a note with the letter it precedes in the alphabet (C = B, B = A, A = Z). BLOCK would become CMPDL, and is a very simple example of a cipher key.
This idea has long been used to transmit messages in times of war.
Since the Internet gained prominence there has been a growing fear of hackers. In our current method of storing information, hackers can breach the computer systems of a centralized authority, such as a bank, payment processor, or digital shopping host to gain direct access to the most vital information of an individual. This is because when we use our credit cards online or pay with direct bank transfers, the explicit digits of those account numbers are involved in the transaction.
With cryptocurrencies, all of this information is distributed across the network. Any tampering with information would alert the network and be denied for not aligning with the network consensus.
A digital wallet holds a given coin or coins and is most often a computer program or phone app, but they can also be store “cold” on a flash drive, unconnected to the Internet. Here, unlike your digital bank account, you alone control this information. These wallets can be general, for use with several coins, or specific to only one coin.
Each wallet has a unique address, and the owner of the wallet has a key to it that allows full access to its contents – a private key.
Asymmetric cryptography – is used to create a public key from this private key that provides a distinct destination for payments to your wallet. The formula used for this process is simple for computers to do in the direction to create it, but basically impossible to work backwards from – asymmetric. In this way, no one can decipher your private key from your public key.
Digital signatures – provide the method for authenticating these transactions. It is a string of numbers and letters that identifies only yo but does not actually contain your private key, banking information or anything else valuable. A transaction from a given wallet can only be sent with the digital signature to match the owner of the wallet.
Process – a private key accesses funds, and are coupled with a public key destination to create a transaction that is sent with the signature of the owner of the wallet.
Mining or Staking – the task of receiving these transactions and hashing them until there are enough to fill a block. Block-size varies depending on the coin, because it affects the transactions speed and security of the transaction data when moving across the network.