What is a cryptocurrency?

Cryptocurrencies are a hot topic these days, but what actually is a cryptocurrency?

The definition of a cryptocurrency

The simple definition of a cryptocurrency is a currency secured by cryptography. In general these are decentralised meaning they are not controlled by a central organisation e.g. a bank. Cryptocurrencies are also sometimes known as digital currencies, however, the majority of our “normal” currency is digital too so this doesn’t really fit.

Cryptocurrency

Bitcoin was the first cryptocurrency, released in 2009 by Satoshi Nakomoto and at that time defining exactly what a cryptocurrency was was a lot easier as there was only one. Nowadays with thousands of cryptocurrencies in existence that definition becomes a lot more blurred.

According to Jan Lanksy, a cryptocurrency researcher there are 6 statements a currency must adhere to in order to be considered a cryptocurrency, this has widely been accepted as a pretty accurate defintion. The 6 statements are:

 

  1. The system does not require a central authority, distributed achieve consensus on its state.
  2. The system keeps an overview of cryptocurrency units and their ownership.
  3. The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
  4. Ownership of cryptocurrency units can be proved exclusively cryptographically.
  5. The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
  6. If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.

 

The technology that allows Bitcoin to meet all of the above statements is known as the Blockchain. This is a cryptographically secured log of all transactions that have ever occurred within Bitcoin.

We mentioned previously that describing cryptocurrencies as digital currencies wasn’t very accurate and, as you can see from the above, there is actually no requirement for cryptocurrencies to be digital at all. It would be entirely possible, but not very practical, to operate a cryptocurrency without a computer at all.

One important thing about cryptocurrencies and what makes them interesting is that, as you can see from the statements above, legitimate ownership of the currency is provable, this means that it is impossible to forge cryptocurrencies.

For more information on our view on cryptocurrencies please read our article on why we believe in cryptocurrencies.