cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets.[1][2][3] Cryptocurrencies are classified as a subset of digital currencies and are also classified as a subset of alternative currencies and virtual currencies. Cryptocurrencies use decentralized control[4] as opposed to centralized electronic money and central banking systems.[5] The decentralized control of each cryptocurrency works through a blockchain, which is a public transaction database, functioning as a distributed ledger.[6]
Bitcoin, created in 2009, was the first decentralized cryptocurrency.[7] Since then, numerous other cryptocurrencies have been created.[8]These are frequently called altcoins, as a blend of alternative coin.[9][10][11]
Overview[edit]
Decentralized cryptocurrency is produced by the entire cryptocurrency system collectively, at a rate which is defined when the system is created and which is publicly known. In centralized banking and economic systems such as the Federal Reserve System, corporate boards or governments control the supply of currency by printing units of fiat money or demanding additions to digital banking ledgers. In case of decentralized cryptocurrency, companies or governments cannot produce new units, and have not so far provided backing for other firms, banks or corporate entities which hold asset value measured in it. The underlying technical system upon which decentralized cryptocurrencies are based was created by the group or individual known as Satoshi Nakamoto.[12]
As of September 2017, over a thousand cryptocurrency specifications exist; most are similar to and derive from the first fully implemented decentralized cryptocurrency, bitcoin. Within cryptocurrency systems the safety, integrity and balance of ledgers is maintained by a community of mutually distrustful parties referred to as miners: members of the general public using their computers to help validate and timestamp transactions, adding them to the ledger in accordance with a particular timestamping scheme.[13] Miners have a financial incentive to maintain the security of a cryptocurrency ledger.[12]
Most cryptocurrencies are designed to gradually decrease production of currency, placing an ultimate cap on the total amount of currency that will ever be in circulation, mimicking precious metals.[1][14] Compared with ordinary currencies held by financial institutions or kept as cash on hand, cryptocurrencies can be more difficult for seizure by law enforcement.[1] This difficulty is derived from leveraging cryptographic technologies.
Architecture[edit]
Blockchain[edit]
The validity of each cryptocurrency coins is provided by a blockchain. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography.[12][15] Each block typically contains a hash pointer as a link to a previous block,[15] a timestamp and transaction data.[16] By design, blockchains are inherently resistant to modification of the data. It is "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way".[17] For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.
Blockchains are secure by design and are an example of a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been achieved with a blockchain.[18] It solves the double spending problem without the need of a trusted authority or central server.
The block time is the average time it takes for the network to generate one extra block in the blockchain.[19] Some blockchains create a new block as frequently as every five seconds.[20] By the time of block completion, the included data becomes verifiable. This is practically when the money transaction takes place, so a shorter block time means faster transactions. The block time for ether is set to between 14 to 15 seconds, while for bitcoin it is 10 minutes.[21]
Timestamping[edit]
Cryptocurrencies use various timestamping schemes to avoid the need for a trusted third party to timestamp transactions added to the blockchain ledger.
Proof-of-work schemes[edit]
The first timestamping scheme invented was the proof-of-work scheme. The most widely used proof-of-work schemes are based on SHA-256, which was introduced by bitcoin, and scrypt, which is used by currencies such as Litecoin.[22] The latter now dominates over the world of cryptocurrencies, with at least 480 confirmed implementations.[23]
Some other hashing algorithms that are used for proof-of-work include CryptoNight, Blake, SHA-3, and X11.
Modifications of the proof-of-work algorithm have been created to address the problem of scaling, such as the way the IOTA ledger works. IOTA uses a simplified Proof-of-work algorithm making use of directed acyclic graph.[24] A new transaction becomes part of the ledger after its sender does a small amount of proof-of-work. Each network participant is therefore also a miner, however without any economic incentive other than enabling their own transactions.[24][25] This system scales automatically as it gets used more.[26]
Proof-of-stake and combined schemes[edit]
Some cryptocurrencies use a combined proof-of-work/proof-of-stake scheme.[22][27] The proof-of-stake is a method of securing a cryptocurrency network and achieving distributed consensus through requesting users to show ownership of a certain amount of currency. It is different from proof-of-work systems that run difficult hashing algorithms to validate electronic transactions. The scheme is largely dependent on the coin, and there's currently no standard form of it.
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