What are cryptocurrencies?
Cryptocurrencies are digital assets designed to work as a medium of exchange that use cryptography to secure their transactions, control the creation of additional units and to verify the transfer of assets. Cryptocurrencies use decentralized control as opposed to centralized electronic money and central banking systems. The decentralized control of each cryptocurrency works through a blockchain, which is a public transaction database, functioning as a distributed ledger created to maintain the privacy of each transaction.
A brief history of cryptocurrencies
The first example of cryptocurrency was eCash, anonymous encrypted electronic money, introduced in 1983. Some other projects worth mentioning were b-money and Bit Gold, as Bitcoin’s predecessors.
At the end of 2008, a document (whitepaper) called “Bitcoin: A Peer-to-Peer Electronic Cash System” was published, written by a person or a group of people under the pseudonym Satoshi Nakamoto. The key difference between Bitcoin and previous cryptocurrencies, such as b-money and HashCash is Proof of Work algorithm that serves to validate transactions within Bitcoin blockchain. This innovation solved the problem of double spending which meant that a single unit of currency could have been spent several times. The first Bitcoin transaction ever occured in January 2009, between Satoshi Nakamoto and a programmer Hal Finney. In the beginning the Bitcoin network had a lot of obstacles and failures. One of today’s problem is Bitcoin’s scalability resulting high transaction fees as well as long confirmation time of transactions. Such problem resulted in understanding Bitcoin as a store of value instead of the original idea to be used as a payment solution.
Two years later came the first altcoin (alternative coin), a cryptocurrency alternative to Bitcoin called Namecoin. Its main purpose was decentralized domain registration, maintenance and paying for services in certain amount of Namecoins. Some of the most important altcoins that emerged shortly after Namecoin were Litecoin, Peercoin and Dogecoin.
In 2014, for the first time capital was raised through an Initial Coin Offering (ICO) to fund a cryptocurrency project called Ethereum. Ethereum is a blockchain-based platform and operating system that features Smart Contracts (contracts that self-execute when certain conditions are met), also it enables the development of decentralized applications (currently more than 1,000 projects are made on top of Ethereum platform).
Over time, new blockchain projects appear which are considered the “Ethereum killer”, such as Cardano. It is the third generation of cryptocurrencies that aim to solve all existing problems regarding scalability, interoperability and platform sustainability. It is safe to say that cryptocurrencies are still in early stages and that the market competitiveness stimulates innovation day by day.