The first cryptocurrency, bitcoin, was created almost ten years ago. Most likely, you’ve only heard of bitcoin and possibly Ripple and Ethereum—the three most popular digital currencies. There are actually more than 2000 cryptocurrencies. If you’re so inclined, you could use your own time, money, and team of coders to produce one yourself. We’ll try to keep a complex concept simple by using bitcoin to look at the how and why behind cryptocurrency.
The First Coin
Bitcoin was first utilized in January 2009 by Satoshi Nakamoto, an alias used by the inventor. It was originally devised as a peer-to-peer payment system. The idea was to decentralize transactions and make them independent of any financial institution. This meant no middle man and lower transaction fees.
There is a finite number of bitcoin—21M to be exact. This limit is expected to be reached in 2140. The invention of this new currency ushered in startups such as blockchain, bitpay, and coinstream.
Blockchain Technology’s Role
Blockchain is the virtual ledger that stores cryptocurrency transactions. All blockchain information is encrypted and stored on servers and hard drives across the world. This decentralization safeguards against cyber attacks—kind of like stashing your money in a bunch of different places. The main tenets of this technology are decentralization, removal of a third party, and fast transactions. The idea is that by having this information widely dispersed and public, it’s always open to verification. In a traditional banking system, transactions can get hung up because of bank hours and cross-border regulations. Bitcoin transactions are validated and verified by people all over the world, which means transactions can take place with fewer slowdowns.
Mining with a Computer
Mining has to do with how bitcoin is gathered using computers to solve complex mathematical equations. When an equation is solved, new bitcoins are generated. Bitcoin mining can continue until the 21M total has been depleted.
There are bitcoin farms around the world used for mining. This is a way to pool resources to avoid the expense if an individual endeavor. The miner who solves the equation, therefore verifying transactions in the ledger, gets a block reward. This is a payment in virtual coins and the process is referred to as proof of work.
Another method of transaction verification is proof of stake. This model is based on virtual currency ownership and the stakeholder who gets to verify the next block of transactions is chosen. The more currency you own, the better your shot of verifying transactions. With proof of stake, the transaction fee tied to the block of transactions is awarded to the stakeholder who completes the verifications.
How Do I Spend Cryptocurrency?
If you want to spend your bitcoin, you’ll need a digital wallet. This is a software program used to store private and public keys. These keys are used by blockchain to send and receive digital currency. If Joe is sending bitcoin to Lauren, Joe’s private key stored in his wallet must match the public address to which the currency is assigned. If there’s a match, Joe’s digital wallet balance will decrease and Lauren’s will increase. The transaction is denoted by a record on the blockchain.
Wallets can be broken down into three distinct categories: software, hardware, and paper. Software wallets can operate via a desktop, mobile or online application. A hardware wallet features private keys stored on a device such as a USB. A paper wallet is a hard copy of your public and private keys.
Big Banks vs. Cryptocurrency
The relationship between financial institutions and cryptocurrency is complex. Essentially, cryptocurrencies were developed to simplify P2P transactions and bypass big banks. Banks say cryptocurrencies are volatile and can be used for money laundering. There’s no doubt the rapid growth of cryptocurrencies is threatening financial institutions. That said, banks are still intimately tied to monetary transactions. Banks have created the structure we all use to handle money. And they perform all sorts of services not offered by cryptocurrencies: mortgages, safety deposit boxes, wealth management, etc. Cryptocurrencies could either work in conjunction with banks or take over some traditionally bank-related transactions. There’s even a crypto called Ripple that’s focused on working with financial institutions.
Where Can I Spend Bitcoin?
More and more companies are accepting bitcoin for payment. Here are just a few major retailers and service providers open to your bitcoin shopping:
- Subway
- OKCupid
- Wikipedia
- some Etsy vendors
- Whole Foods via a gift card
- San Jose Earthquakes (MLS team)
- The Libertarian Party
- Simon Fraser University bookstore
- Shopify.com
The Future of Cryptocurrency
By all accounts, bitcoin is just the tip of the iceberg. Cryptocurrencies will likely continue to evolve to better serve users. As more businesses accept cryptocurrency, more people will be inclined to use it. The whole concept could also use some simplification to make it more accessible to a public accustomed to standard monetary transactions. As with most internet-based systems, cryptocurrency has the potential to gain momentum quickly. The next ten years of bitcoin may look very different than the first ten years.
