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Cryptocurrency - Introduction

Cryptocurrency has taken the world by storm every since the introduction of Bitcoin back in 2009. Since then, there have been many new types of cryptocurrencies that have sprouted, some similar, others quite different. In the end though, they all pretty much follow the same vision the creator of Bitcoin had: decentralized remittance.


The term Cryptocurrency became synonymous with "Bitcoin" upon its open-source release in 2009. Since it was the first, and still most popular cryptocurrency around, we'll be using Bitcoin as basis for this page.


How It Works


The system is peer-to-peer, and transactions take place between users directly, without an intermediary. These transactions are verified by network nodes and recorded in a public distributed ledger called a blockchain. Since the system works without a central repository or single administrator, bitcoin is called the first decentralized digital currency. - Wikipedia.org


Blockchain

The blockchain is public ledger that holds and records all Bitcoin transactions. A network of computers maintain the ledger. The blockchain is distributed among all computers (nodes) in the network; which include all transactions, for verification of validity. 


About once every ten minutes, a group of validated transactions (a block) is created, added to the blockchain, and then distributed to all other nodes for update. This lets the Bitcoin software know that that particular Bitcoin has been spent, this system ensures that Bitcoin isn't double-spent.


Transactions

Transactions are stored with the following format: Payer A sends X bitcoins to Payee C. Once a transaction has been requested, it is then stored on the current network node and transmitted to other nodes and their copy of the ledger for confirmation of validity. What's more, transactions need to have the digital signature of every owner requesting a transaction.


Transaction Fees

While paying a transaction fee is not required, miner's choose to prioritize transactions that include a higher fee. Also, priority is given to older unspent transactions.


Units

Bitcoin is the basis unit of measurement within the Bitcoin software (obviously). Bitcoin can be represented by the following symbols: BTC, XBT, and ₿. The smallest unit of measure for Bitcoin is one hundred millionth of a Bitcoin (0.00000001) and is names after the creator Satoshi.


Denominations

10-3 (0.001)
millibitcoin

mBTC

10-6 (0.000001)

microbitcoin, bit

μBTC

10-8 (0.00000001)
Satoshi

Satoshi


Mining

Miner's play a crucial role in the Bitcoin world. Not only do they maintain the blockchain they make sure that all transactions are valid, they also create new Bitcoin. They create new Bitcoin by completing very complex mathematical calculations which require sophisticated computer equipment (at the stage Bitcoin is at now) to calculate.


Cryptocurrency Wallets

Just like a physical wallet let's you store physical cash, a cryptocurrency wallet lets you store your electronic cash (i.e. Bitcoin, Ethereum, etc), in a way. What's actually stored on your wallet are the credentials for your Bitcoin holdings. With these credentials you can request a transaction for your Bitcoin through the blockchain.


Wallet Types

  • Full Clients verify transactions directly on a local copy of the blockchain (that you would download to your computer). However, due to the size and complexity of the of the blockchain, it isn't suitable for all computers or devices. (minimum download of approx. 2 GB)
  • Lightweight clients basically communicate with a full client to conduct transactions but don't require that the full blockchain to be installed. This allows them to be installed on devices such as smartphones. A certain level of trust must be given to the server running the software. While the server cannot steal Bitcoins, they can report incorrect values to the user.
  • Online wallets work similarly to lightweight clients and can be easier to use. Rather than storing your credentials on hardware (i.e. Smartphone, Tablet, PC, etc.), they are stored on the wallet provider's server. For these types of wallets it is imperative that you fully trust the provider because, a security breach on the server, or a malicious server, can steal your Bitcoin.
  • Physical wallets can store bitcoins completely offline. You can print your Bitcoin address and your secret key (credentials) onto paper, for example. Some even print these credentials on a coin, for novelty purposes.


Ownership

Much like fiat currency (cash), owners of Bitcoin can spend their cryptocurrency associated with a specific address. To do so the spender must supply their private key (credential). Without the private key transactions cannot be complete. The Bitcoin network validates the signature (private key) using the public key.


Very Important: If your private key is lost, the network has no other way to recognize ownership of the Bitcoin in question, and those Bitcoins cannot be spent and are lost. There was a case of this back in 2013 of one man who accidentally discarded 7,500 Bitcoins that were stored on a hard-drive he threw away. This is the equivalent of approximately $31 million Canadian dollars (2017).


Privacy

Bitcoin is not tied to any real-world entities, they use address instead making they pseudonymous. Do keep in mind that all transactions on the Bitcoin network are listed in the blockchain and are thus public. Also, transactions can be linked to owners through "idioms of use". Additionally, Bitcoin exchanges may be required by law to collect personal information.


For added security, a new Bitcoin address can be generated for each transaction. Also, coins can be "mixed" to offer an even higher level of privacy. How this works is that, instead of sending your Bitcoins directly to the receiver, you can send them to a third-party mixing service which will then send your coin to freshly created wallet addresses. This makes it much more difficult for anyone to trace.


Conclusion

While Bitcoin was received with open arms, it does have it's quirks to contend with. With the roller-coaster price fluctuations, government legislation, financial institutions being wary of cryptocurrency, Bitcoin's future was in question. However, even after all this it's going stronger than ever. This is a clear indication that the general population is tired of current remittance systems (centralized) and prefer something that is more in their control. We believe it will only get stronger.


References:

  1. Wikipedia.org - Cryptocurrency
  2. Investopedia.com - Cryptocurrency Definition



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