What is Cryptocurrency ?

A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a digital ledger or computerized database using strong cryptography to secure transaction record entries, to control the creation of additional digital coin  records, and to verify the transfer of coin ownership. It typically does not exist in physical form (like paper money) and is typically not issued by a central authority. 

Some cryptocurrencies use decentralized control as opposed to centralized digital currency and central banking systems. When a cryptocurrency is minted or created prior to issuance or held on a centralized exchange, it is generally considered centralized.  When implemented with decentralized control, each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.

Bitcoin, first released as open-source software in 2009, is the first decentralized cryptocurrency. Since the release of bitcoin, over 6,000 altcoins (alternative variants of bitcoin, or other cryptocurrencies) have been created.

History of Cryptocurrency

In 1983, the American cryptographer David Chaum conceived an anonymous cryptographic electronic money called ecash.  Later, in 1995, he implemented it through Digicash,  an early form of cryptographic electronic payments which required user software in order to withdraw notes from a bank and designate specific encrypted keys before it can be sent to a recipient.  This allowed the digital currency to be untraceable by the issuing bank, the government, or any third party.
In 1996, the NSA published a paper entitled How to Make a Mint: The Cryptography of Anonymous Electronic Cash, Reference a Cryptocurrency System, first publishing it in an MIT mailing list  and later in 1997, in The American Law Review (Vol.  . 46, Issue 4).

 In 1998, Wei Dai published a description of "b-money", characterized as an anonymous, distributed electronic cash system.Shortly thereafter, Nick Szabo described bit gold. Like bitcoin and other cryptocurrencies that would follow it, bit gold (not to be confused with the later gold-based exchange, BitGold) was described as an electronic currency system which required users to complete a proof of work function with solutions being cryptographically put together  and published.
The first decentralized cryptocurrency, bitcoin, was created in 2009 by presumably pseudonymous developer Satoshi Nakamoto.  It used SHA-256, a cryptographic hash function, as its proof-of-work scheme.  In April 2011, Namecoin was created as an attempt at creating a decentralized DNS, which would make internet censorship very difficult.  Soon after, in October 2011, Litecoin was released.  It was the first successful cryptocurrency to use scrypt as its hash function instead of SHA-256.  Another notable cryptocurrency, Peercoin was the first to use a proof-of-work / proof-of-stake hybrid.
On 6 August 2014, the UK announced its Treasury had been commissioned to do a study of cryptocurrencies, and what role, if any, they can play in the UK economy.  The study was also to report on whether regulation should be considered.

Cryptocurrency in Economics:

Cryptocurrencies are used primarily outside existing banking and governmental institutions and are exchanged over the Internet.

 Block rewards

Proof-of-work cryptocurrencies, such as Bitcoin, offer block rewards incentives for miners.  There has been an implicit belief that whether miners are paid by block rewards or transaction fees does not affect the security of the blockchain, but some studies show that this is not the case.

The rewards paid to miners increases the supply of the cryptocurrency.  By making sure that verifying transactions is a costly business, the integrity of the network can be preserved as long as benevolent nodes control a majority of computing power.  The verification algorithm requires a lot of processing power, and thus electricity in order to make verification costly enough to accurately validate public blockchain.  Not only do miners have to factor in the costs associated with expensive equipment necessary to stand a chance of solving a hash problem, they further must consider the significant amount of electrical power in search of the solution.  Generally, the block rewards outweigh electricity and equipment costs, but this may not always be the case.
 The current value, not the long-term value, of the cryptocurrency supports the reward scheme to incentivize miners to engage in costly mining activities.  Some sources claim that the current Bitcoin design is very inefficient, generating a welfare loss of 1.4% relative to an efficient cash system.  The main source for this inefficiency is the large mining cost, which is estimated to be 360 ​​Million USD per year.  This translates into users being willing to accept a cash system with an inflation rate of 230% before being better off using Bitcoin as a means of payment.  However, the efficiency of the Bitcoin system can be significantly improved by optimizing the rate of coin creation and minimizing transaction fees.  Another potential improvement is to eliminate inefficient mining activities by changing the consensus protocol altogether.

 Transaction fees

Transaction fees for cryptocurrency depend mainly on the supply of network capacity at the time, versus the demand from the currency holder for a faster transaction. The currency holder can choose a specific transaction fee, while network entities process transactions in order of  highest offered fee to lowest. Cryptocurrency exchanges can simplify the process for currency holders by offering priority alternatives and thereby determine which fee will likely cause the transaction to be processed in the requested time. 
For ether, transaction fees differ by computational complexity, bandwidth use, and storage needs, while bitcoin transaction fees differ by transaction size and whether the transaction uses SegWit.  In September 2018, the median transaction fee for ether corresponded to $ 0.017, while for bitcoin it corresponded to $ 0.55.
Some cryptocurrencies have no transaction fees, and instead rely on client-side proof-of-work as the transaction prioritization and anti-spam mechanism.

Post a Comment