Hi everyone, and welcome to one of my fundamentals explained.
Today's topic is the concept of cryptocurrency.
So, what is a cryptocurrency?
A cryptocurrency is a type of digital currency that uses cryptographic proofs for
confirmation of transactions. We will discuss this a little bit further, but for now let's check what makes a cryptocurrency unique from the other types of currencies.
In essence, there are three features that are unique to cryptocurrencies and these only came together after the paper from Satoshi Nakamoto titled 'Bitcoin: A Peer-to-Peer Electronic Cash System'.
The three features are:
- Ensuring pseudo-anonymity;
- Independence from central authority;
- Double spending attack protection;
All these features are unique to cryptocurrencies and no other type of currency has them all at the same time.
Let's quickly check each of these features in a bit more detail.
Ensuring pseudo-anonymity
This basically means that the users of this currency, if following the rules when executing the transactions (sending coins between accounts) cannot be easily identified. However, of course the user can choose to reveal their identity, or a third party could gain access to it. But the point is, by design the user cannot be identified when using cryptocurrencies.
Independence from central authority
Here is the main focus of this channel, to discuss decentralization. So we will discuss that a lot here, but for now it's enough to say that decentralized means that there is no central authority that can change the consensus rules of the cryptocurrency system. Meaning that, if a change is to be made, then the majority (usually 75-95%) of the cryptocurrency operators need to agree to this change. I should point out that these changes should happen very sporadically. For example, Bitcoin Cash is a cryptocurrency that is a result of a prolonged disagreement on how to handle the bitcoin scalability problem. A group of people not content with the Segregated Witness bitcoin rule change decided to increase bitcoin transaction capacity eight times. So, here there wasn't a majority agreement so they hard forked bitcoin.
Also important to note that because of this lack of central authority, cryptocurrencies cannot be regulated by force or abolished; they can only stop existing by themselves, usually when users of the cryptocurrency lose confidence in it, for example due to technical attacks or hacks.
Double spending attack protection
So this is an interesting problem. Basically means that the owner of cryptocurrency units cannot use the same cryptocurrency units to pay to two different recipients. Once the cryptocurrency units are sent to one recipient, an attempt at sending them to another one is rejected as an invalid transaction.
As you know, this problem doesn't exist in real life, if for example you pay someone with a one dollar note then you cannot use the same one dollar note to pay someone else. However, in cryptocurrencies it is a bit more complex than that because of the lack of a central authority.
So that's all I wanted to talk about the concept of cryptocurrency.
Thank you so much for reading, let me know if you have any questions in the comments and I hope to see you soon.