This article provides a simple introduction to cryptocurrencies, helping to explain what it is and how does it work. In summary, a cryptocurrency is a digital form of money, which has been encrypted, to make it more secure and therefore more difficult to counterfeit.
What is Cryptocurrency?
The word ‘cryptocurrency’ is built from two parts; the first being the word ‘crypto’ which relates to its encryption technology and the second part of the word being ‘currency’ which tells us that is it money. As technology evolves at an increasingly rapid rate and online payments become more and more common, cryptocurrency has been designed to allow for more secure online transactions. Cryptocurrencies create the opportunity to make the financial transaction model leaner, helping to reduce transaction fees and overheads associated to payment processing.
However it is also worth bearing in mind that as cryptocurrencies are digital and therefore virtual, they are not necessarily backed by anything except their own market strength, and can also be lost if the encryption keys and tokens are lost in order to access the funds. With this cryptocurrencies are not supported by any tangible substance as seen in past traditional currencies, such as being backed by gold or silver for example.
Definition of a Cryptocurrency
In 2018, Jan Lansky from the University of Finance and Administration in Prague provided a useful definition of what is a Cryptocurrency, in that: -
- The system does not require a central authority; its state is maintained through distributed consensus.
- The system keeps an overview of cryptocurrency units and their ownership.
- The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
- Ownership of cryptocurrency units can be proved exclusively cryptographically.
- The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
- If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.