What is Cryptocurrency?

Whether you're a wide-eyed blockchain newbie or tech-savvy enthusiast, prepare yourself for the learning adventure of a lifetime. We'll be your tour guide through this extraordinary new world of cryptocurrency and decentralized digital networks. A world that promises to shape the very future of money, power, governance and beyond.  

You may have noticed cryptos like Bitcoin, Ethereum and even meme-inspired Dogecoin dominating headlines over the past few years... Tales of overnight millionaires, irrational exuberance, crashes and controversy.  

In this intro course, we'll cover everything you need to confidently navigate this brave new landscape. What exactly is cryptocurrency? How did Bitcoin (and other coins) come to be? What can they be used for, both now and in the future? And most importantly, how everyday folks fit into the equation.  

We'll tackle these questions and many more in this curriculum. Think of this as Crypto 101—the comprehensive prerequisite to more advanced technical courses to follow.  

Before we dive deep into this brave new world of digital assets and decentralized technology, we have to start with the basics.  

By now, you know what good old currency is - those paper bills and metal coins used to buy goods that have been around forever. But let's quickly define it anyway. Currency serves as money circulating within an economy, allowing people to assign and exchange value. It evolved across history from physical commodities to minted coins to fiat paper and it is backed by governing institutions. The general characteristics of money are: divisible, portable, acceptable, scarce, durable, and stable in value.  

Today, however, there is a revolutionary new form of internet-native currency called cryptocurrency. Backed by cryptography instead of governments, cryptocurrency enables fast, borderless digital transactions. It does so without requiring centralized intermediaries like financial institutions (like banks, credit card companies or services like PayPal). This opens up accessibility, efficiency, and innovations across finance and beyond!  

Let's level-set on foundational concepts before circling back to the futuristic possibilities later.  

By now, you know that cryptocurrency can be used like other digital payment systems. However, the use cases go far beyond transferring money.

But how does the system actually work? Who runs it, and how do they record all of the information? How does the network protect itself from fraud or hacking attempts?

It all comes down to a revolutionary technology called blockchain.

Blockchain is a digital ledger that stores information. It’s similar to a traditional payment ledger but is much more secure, transparent, and accurate.

For instance, after a piece of information is added to the blockchain, it can’t be tampered with. Not by anyone, including a government or bank. Going back to the first transaction, all the information is public and stored across a decentralized network.

Since no single party controls the ledger, blockchains are verifiable by anyone and create a record of information that all can trust.

Here’s how blockchain works in regard to cryptocurrency:

1. When you initiate a transaction, that information is distributed to a network of independent validators, called nodes.
2. The network uses complex algorithms to reach a consensus about the validity of your transaction.
3. Then, it’s grouped with other verified transactions. These groups are called blocks.
4. Each new block is added to the end of the chain, establishing it as a permanent public record. No one can go back and alter any information once it has been added to the blockchain.

Why is cryptocurrency built on blockchain technology? Because it replaces trust in third parties, making every transaction more secure, more accurate, and more efficient.

Another advantage of blockchain is its flexibility. It isn’t just limited to financial transactions. Blockchain can be used to track anything from supply chains to voting records. Its adaptability is what makes it so attractive to different crypto projects.

There are so many other benefits of blockchain technology. It has an unlimited range of applications that are already disrupting global industries. We don’t have room to go in-depth here, but if you’d like to take a deep dive into the world of blockchain, this is a great place to start.

Before answering this one, let’s ask a different question. Why does any currency have value?

In the past, currency was tied to the value of underlying assets, like gold or silver. Precious metals have intrinsic properties that give them value, such as scarcity and the costs of extraction. However, money today is no longer backed by these value-preserving assets. In 1971, the U.S. de-coupled the dollar from the gold in its reserves. The world has been using fiat currency ever since.

Without the backing of the gold standard, central banks can print an unlimited supply of banknotes.

So how do fiat currencies hold value? Essentially, because people have faith that their money possesses the value that their government claims it does. This is a precarious position, and global events can cause this perception to shift very quickly.

• Value of cryptocurrency: Cryptocurrency derives its value from both intrinsic and external factors. It has characteristics like scarcity that make it similar to gold and other valuable assets. But like fiat, it’s also influenced by trust and demand in the market.

Unlike fiat money, it isn’t directly tied to any country’s legal policies, inflation rate, or economic performance. While these factors do play a part in the performance of the crypto market overall, it is more affected by global, not national, trends.

Here are a few factors that influence the perceived value of cryptocurrencies.

• Utility, adoption, and exchange: Demand is a primary driver of value. Without users, cryptocurrency is practically worthless. Crypto is valuable because people believe it is, and data shows a booming demand for it. In 2021, the global crypto adoption rate jumped 880% over the previous year.

As more cryptocurrencies are developed to suit different use cases, the demand should only increase. Crypto is not only limited to finance and smart contracts. There are already tokens for cloud storage, music streaming, and in-game purchases. With each application, the more crypto’s value is tied to practical, real-world assets.

Another influential factor is the role that crypto exchanges have on demand and value. When a token is listed on a major exchange, it almost always experiences an increase in price and demand. This is because these exchanges enable a broader base of users to access new tokens, which drives up the value of the crypto market as a whole.

• Coin scarcity: Most cryptocurrencies have inbuilt mechanisms for regulating their token supply. For instance, there’s a reason why Bitcoin is often referred to as ‘digital gold.’ It has a supply cap of 21 million bitcoins, and over 90% of its tokens are already in circulation. To ensure a decreasing rate of token supply, the mining rate is halved every four years.

Ethereum, the second-largest cryptocurrency, has recently introduced measures for ‘burning’ tokens. This process could lead to ETH being a deflationary cryptocurrency. At the time of writing, over $1 billion in ETH has already been burned.

• Market competition: There are thousands of different cryptocurrencies. Each one is competing to gain traction in the market. Just like the stock market, robust competition is key to maintaining demand and value.

Many large cryptocurrency projects, such as Bitcoin, Ethereum, and Cardano, have growing ecosystems that rely on these base currencies for operation and support. Whether they’re needed as trading pairs or to secure the native blockchain, leading cryptocurrencies enable smaller projects to gain a foothold in the market.

• Regulatory clarity: While governments cannot manipulate the technology behind cryptocurrency, they can still regulate usage and infrastructure. China’s recent ban on Bitcoin mining and the subsequent drop in global hash rates is a prime example of what can happen when a country takes an opposing stance on crypto.

On the other hand, an increasing number of countries are setting up regulatory frameworks around cryptocurrency. In June 2021, El Salvador became the first nation to officially adopt Bitcoin as legal tender. Other countries may soon follow suit, and with more regulatory approval, the demand for cryptocurrency will only increase.

Cryptocurrency was born from a similar but not equal idea – the concept of digital cash. In 2008, Bitcoin’s unknown creator, Satoshi Nakamoto, released a whitepaper titled Bitcoin: A Peer-to-peer Electronic Cash System. The technology described in this paper became Bitcoin, the precursor to all other cryptocurrencies on the market today.

Satoshi envisioned a financial system that was free from the influence of centralized authorities. It would enable direct transactions between peers without any intermediaries.

Though many people had tried to create such a system before, Satoshi was the first to solve the ‘double-spend problem. In other words, how could you prevent someone from spending the same digital token twice? Previously, such a problem would have required oversight from a governing body.

The solution was blockchain – a revolutionary system that could achieve consensus about the validity of information without supervision from a centralized authority. We’ll go further into detail about blockchain later. For now, know that it’s a way to establish a permanent, unchangeable ledger of data.

Cryptocurrencies represent a new form of money built for the internet age. Unlike cash or bank account funds, cryptocurrencies exist exclusively in the digital world. They allow value to be exchanged between parties worldwide through blockchain technology.  

Think of cryptocurrencies like 21st-century upgrades to traditional forms of money we're familiar with:  

• For security, paper money depends on physical materials, serial numbers, and bank vault storage. Cryptocurrencies rely on advanced cryptography for digital security. Decentralization helps non-censorable distribution across the internet.  
• Bank account balances represent IOUs from private institutions entrusted to store deposits. Cryptocurrency ownership is proven by the possession of cryptographic keys. These mathematically control coins on public blockchains.  
• Gold bars must be physically secured and assayed for authenticity guarantees. Cryptocurrency tokens can be checked against their underlying blockchain to ensure validity.  

The first cryptocurrency, Bitcoin, emerged in 2009 from the pseudonymous Satoshi Nakamoto. It pioneered the use of blockchain to record transactions in a transparent, incorruptible manner. All without relying on banks or governments.  

Think of blockchains like shared public accounting ledgers. An international volunteer network of participants constantly updates it—in Bitcoin’s case, every ten minutes. We'll explore it in more detail later in the curriculum. Advanced cryptography replaces fallible human credit agencies. Digital consensus enables cooperation at scale, aligning economic incentives.  

Together, these innovations unlock peer-to-peer transactions for the digital age across borders.  

There are a few standout attributes that set cryptocurrencies apart:  

• Decentralized - Instead of central group control, participatory peer-to-peer networks manage activities. Thousands of volunteer nodes follow protocols. They update ledgers and process transactions without hierarchy. This reduces singular points of failure.  
• Secure - Advanced cryptographic techniques like public-key encryption guarantee tamper-proof, fraud-resistant transactions. Digital signatures prevent counterfeiting. Hashing algorithms enable transparency. Decentralized records prevent systemic corruption, enabling “trustlessness."  
• Transparent Yet Private - Public ledgers allow anyone to view transactions. That guarantees integrity. Yet, users maintain pseudo-anonymity by default through random addresses unlinked to real-world identities.
• Permissionless - Because most blockchains are public, participation requires no access permissions, identity checks, or gatekeeper approval. Anyone worldwide can access, use, build, or support open cryptocurrency networks 24/7. This market freedom expands financial inclusion.  

Medium of Exchange - Pay for goods, services, or transfer funds peer-to-peer. For example, a shopper can scan a QR code to pay a merchant directly from a mobile crypto wallet. No cash, bank or credit cards are involved.

Store of Value - Cryptocurrencies like Bitcoin are often classified as a store of value because they are digital assets that can be held over time. They operate on decentralized networks, and some have a fixed supply, which can impact their value. Their market value is subject to fluctuations based on supply and demand.

Unit of Account - Provide a universal metric to quantify, display, denominate, and record the value of other assets and offerings. Real estate and insurance premiums can utilize token prices as benchmarks. As adoption grows, expanded crypto valuation history aids consistent accounting.  

But let's look beyond basic money functionality. Cryptocurrency systems enable programmable capabilities and embeddable governance through code.  

For example, the Ethereum blockchain supports smart contracts and decentralized applications. These can all be used for finance, gaming, social platforms, and more. These software programs feature security, transparency, and automation, transferring blockchain's strengths to the respective applications built on top of them.  

Cryptocurrency is decentralized, meaning no single group controls it. Some other potential benefits of a decentralized currency can include but not limited to:

• Increased Security: Enhancing security by distributing control and reducing single fail points.  
• Censorship Resistance: Decentralization provides a space that is censorship resistant form bad actor parties or organizations.
• Transparency: A decentralization network builds trust through transparent and verifiable transactions.  
• Elimination of Intermediaries: By reducing or removing middlemen in financial transactions reduces the cost and inefficiencies. Essentially creating a P2P Network where participants interact with other participants directly.  
• Improved Accessibility: Decentralization opens financial services to unbanked populations globally.  
• Enhanced Privacy: Although transactions are visible, the pseudonymous nature of blockchains protects user privacy compared to conventional centralized systems.  

For these reasons and more, cryptocurrency and blockchain technology hold promise to deliver inclusive financial services to the nearly 2 billion unbanked individuals globally, and in a self-sovereign manner.

It helps to distinguish between cryptocurrency tokens and their underlying blockchain networks. These enable secondary functions and technical capabilities.  

For example, Bitcoin runs on its blockchain, which is optimized for transferring value from one wallet to another. Meanwhile, the Ethereum blockchain allows developers to build decentralized applications on top. These manifest as tokens with additional capabilities related to utilities, governance rights, etc.  

Ethereum tokens follow specific formatting standards like ERC-20. This interoperability allows them to be exchanged on secondary markets. When discussing cryptocurrency, we primarily refer to coins native to their blockchains.  

As we wrap up this intoduction to cryptocurrency, remember that this is just the start of an exciting journey. Cryptocurrencies like Bitcoin and Ethereum are more than digital money; they’re reshaping the world of finance and technology. They enable peer-to-peer transactions and empower decentralized applications and are opening new opportunities for innovation and financial inclusion.

Whether you're intrigued by tech, eyeing potential investment opportunities, or curious about its broader impact, staying informed is key. The crypto world is rapidly evolving, with endless possibilities on the horizon. Keep exploring and staying curious. The digital currency landscape is vast and full of potential and now you’re better equipped to navigate this fast-paced ecosystem. 

Further Readings

• A Brief History of Cryptocurrency
• Key Concepts of Cryptocurrency