From CryptoWiki
Jump to: navigation, search

A cryptocurrency is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency. A cryptocurrency uses decentralized consensus technology to keep track of who owns how much of the cryptocurrency.

Formal definition

According to Jan Lansky, a cryptocurrency is a system that meets all of the following six conditions:[1]

  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.


Until about the 1970s, cryptography was mainly practiced in secret by military or spy agencies. However, that changed when two publications brought it out of the closet into public awareness: the US government publication of the Data Encryption Standard (DES), a block cipher which became very widely used; and the first publicly available work on public-key cryptography, by Whitfield Diffie and Martin Hellman.

In 1983 the American cryptographer David Chaum conceived an anonymous cryptographic electronic money called ecash.[2][3] Later, in 1995, he implemented it through Digicash,[4] an early form of cryptographic electronic payments which required user software in order to withdraw notes from a bank and designate specific encrypted keys before it can be sent to a recipient. This allowed the digital currency to be untraceable by the issuing bank, the government, or a third party.

In the 1990s, the idea of cryptocurrencies was discussed on the cypherpunks mailing list and there was several attempts to create one. Satoshi Nakamoto first published his idea for bitcoin and blockchain technology on the cypherpunks mailing list, at that point, many mailing list participants had given up on the idea of cryptocurrencies and though that it was impossible to create.

In 1996 the NSA published a paper entitled How to Make a Mint: the Cryptography of Anonymous Electronic Cash, describing a Cryptocurrency system first publishing it in a MIT mailing list[5] and later in 1997, in The American Law Review (Vol. 46, Issue 4).[6]

In 1998, Wei Dai published a description of "b-money", an anonymous, distributed electronic cash system.[7] Shortly thereafter, Nick Szabo created "bit gold".[8] Like bitcoin and other cryptocurrencies that would follow it, bit gold (not to be confused with the later gold-based exchange, BitGold) was an electronic currency system which required users to complete a proof of work function with solutions being cryptographically put together and published. A currency system based on a reusable proof of work was later created by Hal Finney who followed the work of Dai and Szabo.

The first decentralized cryptocurrency, bitcoin, was created in 2009 by pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function, as its proof-of-work scheme.[9][10] In April 2011, Namecoin was created as an attempt at forming a decentralized DNS, which would make internet censorship very difficult. Soon after, in October 2011, Litecoin was released. It was the first successful cryptocurrency to use scrypt as its hash function instead of SHA-256. Another notable cryptocurrency, Peercoin was the first to use a proof-of-work/proof-of-stake hybrid.[11] IOTA was the first cryptocurrency not based on a blockchain, and instead uses the Tangle.[12][13] Built on a custom blockchain,[14] The Divi Project allows for easy exchange between currencies from within the wallet[15] and the ability to use personal identifying information for transactions.[16] Many other cryptocurrencies have been created though few have been successful, as they have brought little in the way of technical innovation.[17] On 6 August 2014, the UK announced its Treasury had been commissioned to do a study of cryptocurrencies, and what role, if any, they can play in the UK economy. The study was also to report on whether regulation should be considered.[18]

Obtaining cryptocurrency

Cryptocurrencies can be traded on a cryptocurrency exchange. Buying cryptocurrency from a person through sites like localbitcoins is another option. Cryptocurrency ATMs can be used to buy cryptocurrency with cash or a credit card from an ATM-like machine. With these options a user ends up with actual cryptocurrency, see the section on storing cryptocurrency for how they should be stored.

Investors who wants to speculate on the price of cryptocurrencies can also buy financial instruments that tracks the price of a cryptocurrency instead of buying the actual cryptocurrency. This can be done through instruments CFDs, ETN and ETFs. Cryptocurrency CFDs are typically bought on social trading platforms like eToro or Plus500, while ETNs and ETFs are traded on stock exchanges.

Buying cryptocurrency is not the only way of obtaining it. Participating as a node in a cryptocurrency’s peer-to-peer network and helping to secure the network generally pays the node cryptocurrency for the effort. This process has many names based on the exact mechanism used. In a cryptocurrency using a proof-of-work system the process in called mining. In a cryptocurrency using a proof-of-stake system, the process is called staking. In a system using proof-of-resource the process is called farming.

Storing cryptocurrency

Main article storing cryptocurrency

Cryptocurrency is stored in a cryptocurrency wallet. A cryptocurrency wallet can be on a user’s computer or it can be an online wallet provided by an exchange or an online wallet provider. Cryptocurrency can also be stored more securely in cold storage through a paper wallet or a hardware wallet. Paper wallets does not need to be made of paper, but can instead be made of more durable materials, for example steel as in cryptosteel.

Applications of cryptocurrency


  1. Lansky, Jan (January 2018). "Possible State Approaches to Cryptocurrencies". Journal of Systems Integration. 9/1: 19–31. doi:10.20470/jsi.v9i1.335 (inactive 2018-02-13). 
  2. "Archived copy" (PDF). Archived (PDF) from the original on 2014-12-18. Retrieved 2014-10-26. 
  3. "Archived copy" (PDF). Archived (PDF) from the original on 2011-09-03. Retrieved 2012-10-10. 
  4. Pitta, Julie. "Requiem for a Bright Idea". Archived from the original on 30 August 2017. Retrieved 11 January 2018. 
  5. "How To Make A Mint: The Cryptography of Anonymous Electronic Cash". Archived from the original on 26 October 2017. Retrieved 11 January 2018. 
  6. Laurie, Law,; Susan, Sabett,; Jerry, Solinas, (11 January 1997). "How to Make a Mint: The Cryptography of Anonymous Electronic Cash". American University Law Review. 46 (4). Archived from the original on 12 January 2018. Retrieved 11 January 2018. 
  7. Wei Dai (1998). "B-Money". Archived from the original on 2011-10-04. 
  8. "Bitcoin: The Cryptoanarchists’ Answer to Cash". IEEE Spectrum. Archived from the original on 2012-06-04. Around the same time, Nick Szabo, a computer scientist who now blogs about law and the history of money, was one of the first to imagine a new digital currency from the ground up. Although many consider his scheme, which he calls “bit gold,” to be a precursor to Bitcoin 
  9. Cite error: Invalid <ref> tag; no text was provided for refs named primer
  10. Bitcoin developer chats about regulation, open source, and the elusive Satoshi Nakamoto Archived 2014-10-03 at the Wayback Machine., PCWorld, 26-05-2013
  11. Cite error: Invalid <ref> tag; no text was provided for refs named ars1
  12. Popov, Serguei (2016). "The Tangle Whitepaper" (PDF). Archived (PDF) from the original on 2017-09-29. 
  13. Sønstebø, David (2016). "IOTA First Chapter Synopsis". 
  14. EconoTimes. "The Divi Project Aims to Disrupt the Cryptocurrency Industry". EconoTimes. Archived from the original on 2018-01-24. Retrieved 2017-12-18. 
  15. "The Divi Project – Crypto for the Masses?". Cryptomorrow – Cryptocurrency, Bitcoin Etc. 2017-10-12. Retrieved 2017-12-18. 
  16. "4 Trends That Show Bitcoin and Ethereum Are Getting Ready for the Mass Market". 2017-10-25. Retrieved 2017-12-18. 
  17. "Are Any Altcoins Currently Useful? No, Says Monero Developer Riccardo Spagni". Bitcoin Magazines. Archived from the original on 11 June 2016. Retrieved 31 May 2016. 
  18. "UK launches initiative to explore potential of virtual currencies". The UK News. Archived from the original on 10 November 2014. Retrieved 8 August 2014.