Added to the Merriam-Webster Dictionary in March 2018; cryptocurrency is the buzzword of the day; in fact cryptocurrencies have become a global phenomenon known to most people but very little; including banks, governments and companies really understand what they are and certainly not how they work. This article is part one of a series of articles that will attempt to demystify cryptocurrencies by providing a historical context of their invention, how they work and the impact they have had and will continue to have on Canadian businesses and overall economy.
The root word Crypt is a Latin word meaning “to hide” or “be hidden” as in the underground vault beneath a church used as a burial place. Since currency is a system of money or legal tender; does this mean we are talking about buried treasure? Not quite. Investopedia defines Cryptocurrency as “a digital or virtual currency that uses cryptography for security.” Cryptography is the practice and study of techniques, like encryption, for secure communication in the presence of third parties called adversaries. Theoretically, the existence of this security feature makes the counterfeit of cryptocurrency difficult and because one of its defining features is the fact that is not issued by any central authority it is therefore also immune to government interference and/or manipulation. The decentralized control of each cryptocurrency works through a “blockchain”, which is a public transaction database, functioning as a distributed ledger but I will elaborate more on this process in the subsequent article. For now all you need to know is that cryptocurrency is digital currency that is different from electronic money which is the digital equivalent of cash. The monetary value of electronic money is stored on a technical device in the possession of the customer. The amount of stored monetary value is decreased or increased, as appropriate, whenever the owner of the device uses it to make a purchase, sale, loading or unloading transaction. While digital currency on the other hand is an electronically issued currency, the transferability of which is not guaranteed by the state (European Banking Authority,2014). Digital currencies may be divided into centralised and decentralised types. Centralised digital currencies are most often issued by a private actor; i.e. WoW Gold (Debeauvais et. al., 2012). Cryptocurrencies are able to achieve their identifying decentralized nature by using a peer to peer architecture.
The invention of Cryptocurrency
Satoshi Nakamoto (2008), the name used by the unknown person or people who designed bitcoin and created its original reference implementation in 2009; are often credited with the invention of cryptocurrencies. However, cryptocurrency researcher Jan Lansky presents a nuanced historical context in the literature review of his article Possible State Approaches to Cryptocurrencies (2018), wherein by he attributes credit to the combination of knowledge that gave rise to bitcoin to Chaum et al. (1983, 1988, 2002) and Harber & Stornetta (1997). Lansky is able to explain how Chaum et al. drew up the first digital currency system to “ensure anonymity and double spending attack protection” well in advance of Satoshi and how Harber & Stornetta drew up a data structure that was the predecessor of the block chain structure. It is also important to note that Satoshi Nakamoto never intended to invent a currency in the first place. In fact Satoshi’s goal was to create digital cash. Satoshi made an announcement of the development of Bitcoin in late 2008; touting it as “a peer-to-peer Electronic Cash System.” Satoshi’s rationale was that peer to peer network would replace failed centralized attempts at digital currency. This decentralized network of peers did not suffer from having a central server in order to prevent so-called double spending, a unique problem for digital currencies because digital information can be reproduced relatively easily. In other words, a double spend is an attack where the given set of coins is spent in more than one transaction. The beauty of cryptocurrency is it is able achieve consensus among the peers in the network without a central authority. How is this possible? Simple, cryptocurrencies use limited entries in a database that can’t be altered.
Following in the path created by Bitcoin, it has been reported that there are over 700 cryptocurrencies in existence today. These subsequent cryptocurrencies are referred to as altcoins. The question that is being asked now is will these alternative currencies eventually supplant conventional currencies and become as ubiquitous as their predecessors? For now that remains to be seen.
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