Cryptocurrency

A cryptocurrency is a digital medium of exchange. The first cryptocurrency to begin trading was Bitcoin in 2009. Since then, numerous cryptocurrencies have become available. Fundamentally, cryptocurrencies are specifications regarding the use of currency which seek to incorporate principles of cryptography to implement a distributed, decentralized and secure information economy. When comparing cryptocurrencies to fiat money, the most notable difference is in how no group or individual may accelerate, stunt or in any other way significantly abuse the production of money. Instead, only a certain amount of cryptocurrency is produced by the entire cryptocurrency system collectively, at a rate which is bounded by a value both prior defined and publicly known.

Dozens of cryptocurrency specifications have been defined, and most are similar to and derived from the first fully implemented cryptocurrency protocol, Bitcoin.^{[citation needed]} Within cryptocurrency systems, the safety, integrity, and balance of all ledgers is ensured by a swarm of mutually distrustful parties, referred to as miners, who are, for the most part, general members of the public, actively protecting the network by maintaining a high hash-rate difficulty for their chance at receiving a randomly distributed small fee. Subverting the underlying security of a cryptocurrency is mathematically possible, but the cost may be unfeasibly high. For example, against Bitcoin's proof-of-work based system, an attacker would need computational power greater than that controlled by the entire swarm of miners in order to even have 1 / 2^(# authentication rounds for this cryptocurrency - 1) of a chance, which means directly circumventing Bitcoin's security may be a task well beyond even a technology company the size of Google.^{[citation needed]}

Most cryptocurrencies are designed to gradually introduce new units of currency, placing an ultimate cap on the total amount of currency that will ever be in circulation. This is done both to mimic the scarcity (and value) of precious metals and to avoid hyperinflation.^[1][2] As a result, such cryptocurrencies tend to experience hyperdeflation as they grow in popularity and the amount of the currency in circulation approaches this finite cap. ^[3] Compared with ordinary currencies held by financial institutions or kept as cash on hand, cryptocurrencies are less susceptible to seizure by law enforcement.^[1][4] Existing cryptocurrencies are all pseudonymous, though additions such as Zerocoin and its distributed laundry feature have been suggested, which would allow for anonymity.^[5][6][7]

History

Early attempts to integrate cryptography with electronic money were made by David Chaum, via DigiCash and ecash, which used cryptography to anonymise electronic money transactions, albeit with centralized issuing and clearing.^[8]

The first cryptocurrency was Bitcoin, which was created in 2009 by pseudonymous developer Satoshi Nakamoto, and used SHA-256 as its proof-of-work scheme.^[9][10][11] Later on, other major cryptocurrencies, such as Namecoin (an attempt at a decentralized DNS, which would make internet censorship very difficult), Litecoin (which uses scrypt as a proof-of-work, as well as having faster transaction confirmations), Peercoin (which uses a proof-of-work/proof-of-stake hybrid, and has inflation of about 1%) and Freicoin (which implements Silvio Gesell's concept of Freigeld by adding demurrage) were also created.^[12] Many other cryptocurrencies have been created, though not all have been successful, especially those that brought few innovations.

For the first two years of existence, cryptocurrencies gradually gained attention from the media and public.^[13] Since 2011, interest has rapidly increased, especially during the rapid price rise of Bitcoin in April 2013.

Proof-of-work schemes

The most widely used proof-of-work schemes are SHA-256, which was introduced by Bitcoin, and scrypt, which is used by currencies such as Litecoin.^[12] Some cryptocurrencies, such as Peercoin, use a combined proof-of-work/proof-of-stake scheme.^[12][14]

Notable cryptocurrencies

This is a list of notable cryptocurrencies. By December 2013 there were more than 60 cryptocurrencies available for trade in online markets.^[15]

Notes

1. ↑ 1.0 1.1 1.2 December 2013 data.
2. ↑ The first widely known decentralized ledger currency.
3. ↑ A unique cryptocurrency based on peer to peer debt transfer. The term Ripple can also refer to both the digital currency (also known as XRP), or to the payment network on which it and other digital currencies can be traded.
4. ↑ The first scrypt cryptocurrency.
5. ↑ A cryptocurrency that also acts as an alternative, decentralized DNS.
6. ↑ The first cryptocurrency to be based on an internet meme.

Criticism

• Some have expressed concern that cryptocurrencies are extremely risky due to their very high volatility^[40] and potential for pump and dump schemes^[41]
• Some cryptocurrency systems are pre-mined, have hidden launches, or have extreme rewards for the first miners.^[42] Pre-mining means currency is generated by the currency's founders prior to mining code being released to the public.^[43] It often refers to a deceptive practice, but can also be used as an inherent part of a digital cryptocurrency's design, as in the case of Ripple.^[44]
• Most cryptocurrencies are duplicates of existing cryptocurrencies with minor changes and no novel technical developments. One such, "Coinye West", a comedy cryptocurrency alluding to the rapper Kanye West, was served a cease-and-desist letter on January 7, 2014.^[45]
• Very few cryptocurrencies can be exchanged for fiat currencies and instead can only be traded for other cryptocurrencies. Banks generally do not offer services for them and sometimes refuse to offer services to virtual-currency companies.^[46]
• Regulators in several countries have warned against their use and some have taken concrete regulatory measures to dissuade users.^[47]

Major markets

Cryptocurrencies can be traded for other currencies through various online exchanges.

Other than two or three primary cryptocurrencies, most cannot, as yet, be used to purchase goods or services.^{[<span title="Useful to know when "as yet" referred, and to clarify the uncertainty between 2 vs. 3 currencies (January 2014)">citation needed]}

See also

References