Cryptocurrency is digital money. It exists only in digital form and it is an alternative to money issued and backed by governments. Cryptocurrency is inevitably connected with cryptography. Cryptography is used to store and transmit cryptocurrency in an encrypted way. Possession of cryptocurrency is based on a so-called private key. A private key is a sophisticated form of cryptography ensuring that can be handled only by the owner with cryptocurrency. There are as many private keys as a number of coins or tokens for the particular cryptocurrency.
Cryptocurrency wallets are needed to store cryptocurrencies. The wallet contains addresses for receiving and sending cryptocurrency. Sending cryptocurrency to peer is simple. The sender just asks for the recipient‘s address and then sends cryptocurrencies from his own wallet to the recipient‘s address. Wallet addresses are used in forms of either sequence of characters or QR codes. Transactions are mostly fast and take few seconds or minutes.
Majority of cryptocurrencies are decentralized. It means that there is no central point for managing or regulating transactions. Transactions are peer-to-peer meaning that the cryptocurrency is going directly from the sender to the recipient.
Peer-to-peer transactions are possible due to resolving a so-called double-spend problems. It must be ensured that peer-to-peer transactions are irreversible and a sender cannot use the same cryptocurrency coin twice. This is ensured by a cryptocurrency network. More specifically by a so-called blockchain, residing on nodes in the network.
The blockchain is a sequence of blocks and every block contains all the details of a performed transaction. There are more nodes in the cryptocurrency network which store the blockchain. Thus it is nearly impossible to change the blockchain by attacking single nodes. New blocks are added to the blockchain from the origin of a particular cryptocurrency up to present time and majority of nodes must agree to add a new one at the end. Once a new block is added it is forever in the blockchain.
If a blockchain is public, everyone can find any transaction in it. In a blockchain, there are often only sender and recipient addresses, transaction ID‘s and amount of cryptocurrency which has been transferred. That is why cryptocurrencies are often considered as an anonymous currency.
Bitcoin is the first decentralized cryptocurrency created in 2009 by pseudonymous developer Satoshi Nakamoto. Based on the success of Bitcoin, hundreds of new cryptocurrencies have been launched. They were given the name “altcoins“, meaning they are alternatives to Bitcoin. The most famous alternative to Bitcoin is probably Litecoin which was launched in 2011.
The second most successful cryptocurrency is Ethereum which introduced smart contracts and enables the use of the so-called tokens. Tokens are assets that reside on top of Ethereum‘s blockchain.
Thousands of people are keen on creating cryptocurrency wallets and buying digital money every day. Internet shops and coffee bars are more and more willing to accept Bitcoin and altcoins as a mean of payment. Usage of cryptocurrencies rises every day and it seems that the future is bright for Bitcoin and some other altcoins.