Cryptocurrency

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A cryptocurrency is a type of currency which uses digital files as money. Usually, the files are created using the same methods as cryptography (the science of hiding information). Digital signatures can be used to keep the transactions secure, and let other people check that the transactions are real.[1][2][3] The first cryptocurrencies were made to be independent of government-issued currencies.

Cryptocurrencies use 'decentralized control',[4] which means that they aren't controlled by one person or government. This is different to 'centralized' electronic money and central banks.[5] The control of each cryptocurrency works through a distributed ledger (a list of transactions shared by everyone), usually a blockchain [6], that serves as a public financial transaction database.[7]Bitcoin, first released as open-source software in 2009, is often called the first decentralized cryptocurrency.[8] Since then, over 4,000 cryptocurrencies (sometimes called 'altcoins', which is short for alternative coins) have been created.

The value problem[change | change source]

In many cases, cryptocurrencies cannot be converted to real currencies; it is only possible to convert them to other cryptocurrencies, or to use them to buy things. Some cryptocurrencies can be converted to real currencies: They usually have a high volatility, and using them carries a high risk.[9] They are also a target for so-called Pump-and-Dump-Attacks.[10] They act like a big distributed economic system: As they are not issued or controlled by central banks, their value is difficult to influence: For this reason, they cannot really take the place of a stable currency.[11]

Cryptocurrencies are prone to speculation, which makes buliding a system of more or less stable exchange rates very difficult.[12] Another problem is the inequality of distribution: Many cryptocurrencires are held by only few people. As an example: about 1.000 people hold half of the total amount of bitcoins in the world. This means that if any of these persons starts using their cryptocurrency, this has an effect on the exchange rate. It also means that these people have a great influence on the value of the currency, and are able to change its value easily.[13] The currency itself only documents ownership changes. Exchange rates of cryptocurrencies are established outside the system. Exchange rates are issued by brokers and traders; their indication is no guarantee that the currency is traded at the value proposed. In itself, the unit of cryptocurrency has no value.

In contrast to cyptocurrencies, real currencies are issued and controlled by central banks. Certain econnomic phenomena such as inflation or deflation may change the value (and exchange rate) of a currency. The people who own units of the currency have no direct influence on its value.

Formal definition[change | change source]

According to Jan Lansky, a cryptocurrency is a system that meets six conditions:[14]

  1. The system does not require a central authority, distributed achieve consensus on its state [sic].
  2. The system keeps an overview of cryptocurrency units and their ownership.
  3. The system defines if new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the how to create new units, and how to determine the ownership of these new units.
  4. Ownership of cryptocurrency units can be proved exclusively cryptographically.
  5. The owner of a unit of cryptocurrency can transfer this unit. For this transfer to be successful, the current owner must prove the ownership.
  6. If two different instructions for changing the ownership of the same cryptographic units are entered at the same time, the system performs at most one of them.

In March 2018, the word "cryptocurrency" was added to the Merriam-Webster Dictionary.[15]

References[change | change source]

  1. Andy Greenberg (20 April 2011). "Crypto Currency". Forbes.com. Archived from the original on 31 August 2014. Retrieved 8 August 2014. Cite uses deprecated parameter |deadurl= (help)
  2. Cryptocurrencies: A Brief Thematic Review Archived 2017-12-25 at the Wayback Machine. Economics of Networks Journal. Social Science Research Network (SSRN). Date accessed 28 august 2017.
  3. Schueffel, Patrick (2017). The Concise Fintech Compendium. Fribourg: School of Management Fribourg/Switzerland. Archived from the original on 2017-10-24. Cite uses deprecated parameter |deadurl= (help)
  4. McDonnell, Patrick "PK" (9 September 2015). "What Is The Difference Between Bitcoin, Forex, and Gold". NewsBTC. Archived from the original on 16 September 2015. Retrieved 15 September 2015. Cite uses deprecated parameter |deadurl= (help)
  5. Allison, Ian (8 September 2015). "If Banks Want Benefits of Blockchains, They Must Go Permissionless". NewsBTC. Archived from the original on 12 September 2015. Retrieved 15 September 2015. Cite uses deprecated parameter |deadurl= (help)
  6. Walters, Steve (27 Sep 2017). "Beginners Guide to Blockchains". Coin Bureau. Retrieved 25 Jun 2018.
  7. Matteo D’Agnolo. "All you need to know about Bitcoin". timesofindia-economictimes. Archived from the original on 2015-10-26. Cite uses deprecated parameter |deadurl= (help)
  8. Sagona-Stophel, Katherine. "Bitcoin 101 white paper" (PDF). Thomson Reuters. Archived from the original (PDF) on 13 Aug 2016. Retrieved 11 July 2016.
  9. "Bitcoin's Volatility Problem: Why Today's Selloff Won't Be the Last". Businessweek. 2013-12-05. Retrieved 2013-12-29.
  10. "A crypto-currency primer: Bitcoin vs. Litecoin". ZDNet. 2013-12-14. Retrieved 2013-12-29.
  11. Chicago Fed Letter: Bitcoin: A primer (englisch; PDF; 180 kB)
  12. Philip Banse: Digitale Währung mit starken Schwankungen. In: Deutschlandfunk. 30. Dezember 2013.
  13. "Cyber experts unearth massive bitcoin scam". 2013-12-10.
  14. Lansky, Jan (January 2018). "Possible State Approaches to Cryptocurrencies". Journal of Systems Integration 9/1: 19–31. doi:10.20470/jsi.v9i1.335. http://si-journal.org/index.php/JSI/article/viewFile/335/325. 
  15. "The Dictionary Just Got a Whole Lot Bigger". Merriam-Webster. March 2018. Retrieved March 5, 2018.