Chapter 3: Cryptocurrency

A cryptocurrency, also known as a crypto-currency, crypto, or coin, is a kind of digital money that is meant to function as a medium of exchange via the use of a computer network. It is not dependent on any central authority, such as a government or bank, to sustain or maintain it.

A digital ledger is a computer database that uses strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership. Individual coin ownership records are stored in the digital ledger. This allows for the verification of the transfer of coin ownership.

Bitcoin was the first cryptocurrency to operate without a central authority and was made available for download as open-source software in 2009. Following the launch of Bitcoin, a large number of other cryptocurrencies have been developed.

An early version of cryptographic electronic payments was thought of and developed in 1983 by an American cryptographer by the name of David Chaum. This anonymous type of cryptographic electronic money was named ecash. In order to withdraw Digicash from a bank and select certain encryption keys before it could be delivered to a destination, the user of the Digicash system was forced to utilize special software. This made it impossible for the bank that issued the digital money, the government, or any other third party to track the digital currency.

On 1996, the National Security Agency (NSA) produced a document detailing a cryptocurrency system titled "How to Make a Mint: the Cryptography of Anonymous Electronic Cash." The article was first published in an MIT mailing list before being made public by the NSA. Bit gold (not to be confused with the later gold-based exchange, BitGold) was described as an electronic currency system that required users to complete a proof of work function with solutions being cryptographically put together and published. This system, along with Bitcoin and other cryptocurrencies that would follow it, is what led to the development of the cryptocurrency market.

Bitcoin, the world's first decentralized cryptocurrency, was developed in 2009 by a developer known only as Satoshi Nakamoto, who is thought to be a pseudonym. Within its proof-of-work protocol, it made use of a cryptographic hash algorithm known as SHA-256.

Jan Lansky defines a cryptocurrency as any digital asset or system that satisfies the following six conditions:

The state of the system may be maintained without the need for a centralized authority thanks to the use of distributed consensus.

The system maintains a record of all bitcoin units as well as the ownership of those units.

The mechanism determines whether or not fresh units of the coin may be generated. If new units of cryptocurrency are able to be formed, the system will describe the conditions surrounding their birth and the method by which ownership of these new units will be ascertained.

Proof of ownership of cryptocurrency units may be shown only via the use of cryptography.

Transactions that include a change in ownership of the cryptographic units may be carried out using the system without any problems. Only an entity that can provide evidence of its present ownership of these units may make a transaction statement.

In the event that two distinct instructions for transferring ownership of the same cryptographic units are entered at the same time, the system will only carry out one of those instructions.

In March of 2018, the Merriam-Webster Dictionary expanded its coverage to include the term cryptocurrency.

Due to Bitcoin's status as the prototypical protocol for use in the creation of altcoins, all tokens, cryptocurrencies, and other forms of digital assets that are not Bitcoin are referred to together as alternative cryptocurrencies.

When contrasted to Bitcoin, altcoins often include fundamentally distinct characteristics. For instance, in contrast to Bitcoin's block processing time of 10 minutes, Litecoin's goal is to complete one every 2.5 minutes. This makes it possible for Litecoin to confirm transactions more quickly than Bitcoin.

Alternate cryptocurrencies known as stablecoins are those that aim to have a constant value in terms of their buying power.

The whole cryptocurrency system works together to generate decentralized cryptocurrency at a rate that is determined at the time the system is formed and is made publically available. This rate is known to the public. In financial and economic systems that are centralized like the Federal Reserve System in the United States, corporate boards or governments are in charge of controlling the supply of money. In the case of decentralized cryptocurrencies, enterprises or governments are unable to create new units, and they have not offered any kind of support for other businesses, banks, or corporate organizations that possess asset value measured in it. The organization or person who goes by the name Satoshi Nakamoto is credited with the creation of the fundamental technological framework upon which decentralized cryptocurrencies are founded. In a blockchain that uses proof-of-stake, sometimes known as PoS for short, holders of the linked cryptocurrency confirm transactions. These holders are commonly gathered together in stake pools.

The majority of cryptographic currencies are programmed to limit the maximum quantity of a particular currency that may ever be in circulation. This is accomplished by reducing the rate at which the money can be created.

The legitimacy of each cryptocurrency's coins is guaranteed by a distributed ledger known as a blockchain. A blockchain is a collection of records, also known as blocks, that are connected to one another and safeguarded via the use of cryptography. This list is continually expanding. A blockchain is often administered by a peer-to-peer network that collectively adheres to a protocol for verifying new blocks. This is done so that the blockchain may be used as a distributed ledger. Once data has been recorded in a specific block, it cannot be changed in a retroactive manner without also changing the data in all following blocks, which needs the cooperation of the majority of users on the network.

Blockchains, which are an example of a distributed computing system with high Byzantine fault tolerance, are inherently secure due to the nature of the system. As a result, decentralized consensus has been accomplished with the help of a blockchain.

A computer that is connected to a cryptocurrency network is referred to as a node in the cryptocurrency industry. The node contributes to the network of the cryptocurrency in one of three ways: by validating transactions, by relaying transactions, or by hosting a copy of the blockchain. When it comes to the transmission of transactions, each computer that makes up the network (a node) has its own copy of the blockchain associated with the cryptocurrency that it supports. When a transaction is made, the node that created the transaction broadcasts the information of the transaction to other nodes across the node network using encryption. This ensures that the transaction, along with every other transaction, is visible to all of the nodes in the network.

People who own nodes are either volunteers, those who are hosted by the organization or entity that is responsible for building the technology behind the bitcoin blockchain network, or people who are tempted to host a node in order to get incentives from hosting the node network.

To "prove" the legitimacy of transactions uploaded to the blockchain ledger without the requirement for a trusted third party, cryptocurrencies utilize a variety of timestamping systems.

The proof-of-work approach was the very first timestamping method that was ever developed. SHA-256 and scrypt are the two proof-of-work methods that have seen the most widespread use.

CryptoNight, Blake, SHA-3, and X11 are a few examples of other hashing algorithms that may be used for proof-of-work.

The proof-of-stake technique is yet another way that may be used. Users are asked to demonstrate that they are in possession of a certain quantity of a cryptocurrency as part of the proof-of-stake protocol, which is a way for protecting a cryptocurrency network and establishing distributed consensus. It is not the same as proof-of-work systems, which confirm electronic transactions by using complex hashing algorithms. The coin plays a very important role in the system, although there is not yet a standardized version of it. A hybrid proof-of-work and proof-of-stake consensus mechanism is used by some cryptocurrencies.

Mining is the process of verifying transactions that takes place inside cryptocurrency networks. Miners that are successful in their endeavors are rewarded with newly created bitcoin for their efforts. By providing an additional incentive for participants to contribute to the overall processing power of the network, the reward lowers the transaction fees that are charged. The usage of specialized processors such as FPGAs and ASICs that execute complicated hashing algorithms like as SHA-256 and scrypt has enhanced the pace at which hashes can be generated. Hashes are used to verify any transaction.

A number of miners collaborate to share resources and their processing power across a network in order to divide the reward fairly and according to the amount of effort that each miner contributes to increasing the likelihood of discovering a block. Members of the mining pool who provide a valid partial proof-of-work are rewarded with a "share" of the cryptocurrency.

The Chinese government has, as of the beginning of February 2018, put a stop to the trade of virtual currencies, outlawed initial coin...