The emergence of cryptocurrency is already taking over in our daily transactions. Cryptocurrency is a digital asset that exists in the crypto world with many referring to it as ”digital gold”. But what really is cryptocurrency? You must be wondering.
This is a digital asset intended to be used as a medium of exchange. Clearly, this is a close substitute for money. However, it uses a strong cryptography to secure financial transactions, to verify the transfer of assets and control the creation of additional units. All cryptocurrency is either virtual currency, digital currency or alternative currency. It is imperative to note that all cryptocurrencies use a decentralized system of control as opposed to the centralized systems of banks and other financial institutions. These decentralized systems work through a distributed ledger technology that serves a public financial database. Normally, a blockchain is used.
What is a blockchain?
This a continuously growing list of records which are linked and secured using cryptography. This list is called blocks. A block chain is an open, distributed ledger which can be used to record transactions between two parties in a manner that is verifiable and permanent. To enable a block to get used as a distributed ledger, it is managed by a peer-to-peer network which collectively adheres to a protocol for validation of new blocks. Once the data is recorded in any book, it cannot be altered without the alteration of all other blocks. Therefore, blockchains are secure by design and also act as an example of distributed computing system.
The History of cryptography
David Chaum, an American cryptographer discovered an anonymous cryptographic electronic money that was called ecash. This happened in the year 1983. In the year 1995, David implemented it through Digicash. Digicash was an early form of cryptographic electronic payments that required user software in order to withdraw notes from a bank. It also allowed the designation of specific encrypted keys before being sent to a recipient. This property allowed the digital currency to be untraceable by the government, the issuing bank or any third party.
Following increased efforts in the following years, Bitcoin was created in the year 2009. This was the first decentralized cryptocurrency and was created by Satoshi Nakamoto, a pseudonymous developer. Bitcoin used SHA-256 as its cryptographic hash function (proof-of-work scheme). From the release of bitcoin, the following cryptocurrencies were also released.
1. Namecoin (April 2011)
2. Litecoin (October 2011)
These three coins and many others are referred to as altcoins. The term is used to refer to the alternative variants of bitcoin or simply other cryptocurrencies.
It is also imperative to note that cryptocurrencies are exchanged over the internet. This means that their use is primarily outside the banking systems and other governmental institutions. The cryptocurrency exchanges include exchange of cryptocurrency with other assets or with other digital currencies. Conventional fiat money is an example of an asset that can be traded with cryptocurrency.
These refer to a proposed mechanism whereby one cryptocurrency will be able to get exchanged directly from another cryptocurrency. This means that with atomic swaps, there wouldn’t be a need for participation third party in the exchange.