Few people know or remember, that cryptocurrencies originated as a derivative product of another invention. In fact, Satoshi Nakamoto had no intention of inventing another currency.
The most important part of his invention, when he gave the world the whitepaper of bitcoin or” A Peer-to-Peer Electronic Cash System” was that he managed to create a way to create a decentralized payment system. Throughout the 90s of the 20th century, attempts were made to create a digital system, but all these attempts failed miserably. But developing a system as if it were a peer-to-peer file exchange was the right choice
To set up a payment network you need accounts, user profiles and transactions. Easy to understand but then the biggest issue is to prevent users from spending the same money twice with different entities. To solve this, we use a central server that keeps track of all user balances. But if we do not have this authority or do not want a central entity to certify and monitor users, how do we solve the problem?
In a peer-to-peer network, every single node must have a list of transactions and check that they are valid. Most importantly, all nodes must agree with the approved transactions, because otherwise the network immediately collapses.
No one knew how to solve this network consensus problem until ‘Satoshi’s invention.
If we take away all the marketing and halo of mystery around cryptocurrencies, and go to the ‘bones of their definition , we could define them as “a database with limited writeability within it that no one can change unless it meets specific conditions.” This sounds like the definition of a bank account in any bank.
To give a correct definition, cryptocurrencies are a method of exchanging value based on internet technology, which use cryptography to carry out financial transactions that are decentralized, transparent and immutable thanks to blockchain technology.
In currencies such as Bitcoin, the database is managed by the various nodes in the network. Each node has a shared ledger inside which the values of each account and the transactions made are put. Transactions are files that say Gigi gave Y btc to Pancrazio and this transaction was signed by Gigi’s private key and then sent to the network.
The transaction is known immediately by the network but it takes some time to get it approved. Approval or rather confirmation of the transaction is one of the key parts of the technology. A confirmed transaction is immutable.
Only miners can confirm transactions, through the process called Mining. Mining involves closing blocks of transactions in the blockchain. Before doing this, however, miners must check the transactions, approve them and enter them into the network. When they are confirmed they become part of the blockchain. And to do this they receive other cryptocurrencies as payment.
Technically anyone can become a miner, since there is no central authority that can approve us or not. Of course it takes security rules to make sure that the network is not destroyed by those who have an interest in its demise. In the case of Bitcoin, the system is called proof of work, which is based on the SHA 256 Hash Algorithm and involves the miner finding a hash, to connect the closing block with the previous block. We can define it, to keep it simple, as a cryptographic puzzle to be solved. Solving it, the reward will be some bitcoins. And this is the only way to create new bitcoins.
Cryptography, therefore mathematics, makes the system secure.
So we are not talking about trust between humans, which can be bought or blackmailed. You cannot blackmail or kidnap the child of a mathematical operation.
Some of the most interesting properties of cryptocurrencies are:
Irreversibility: no one after confirmation can cancel a transaction. Wrong address? Nothing can be done about it. Your pc was stolen with the private key? Nothing can be done. The safety net is not there.
Pseudonymity: no account or transaction is connected to real life. However, if you have done a KYC somewhere, your identity is traceable.
Fast and global: transactions are virtually instantaneous, the speed of confirmation depends on the coin, but of ranges from second to 10 min in Bitcoin. They have no borders though since the network is global.
Secure: As long as you own the private key you are safe. Big coins are unlikely to be hacked unless there are deliberate bugs.
Permissionless: you don’t have to ask anyone for permission to use your coins. No one can stop you from using them.
Limited Number of Coins: A good portion of cryptocurrencies have a limited supply, such as Bitcoin with its 21 million. In contrast, DOGE has an unlimited supply with a huge daily production. The limited supply is obviously an advantage in terms of maintaining value.
Think about how useful these properties can be to citizen freedom.