Have you heard of crypto-currencies and want to invest in this type of asset? Do you have questions because their operation is not entirely clear to you? It’s normal, cryptocurrencies and the underlying technology, the blockchain, can seem complicated. To enlighten you, we have written this article explaining what a cryptocurrency is (with a complete definition) and how it works.
What are cryptocurrencies?
Cryptocurrencies are digital currencies that rely on blockchain technology to provide transaction security, transparency, and reliability. Cryptocurrencies do not have a physical existence like coins or bills.
They are also not legal tender and are not regulated by a central bank or any financial authority. Indeed, the price of a crypto-currency depends essentially on the demand for the asset in question.
To obtain crypto-currencies, it is also possible to go through intermediaries such as trading platforms that hold and protect these assets for you. If you are interested in investing in this type of digital asset, read the rest of the article to learn more about cryptocurrencies.
Blockchain, the technology on which cryptocurrencies are based
To ensure transparency, security and reliability of transactions, cryptocurrencies rely on an underlying technology called blockchain.
Blockchain is a distributed database between nodes in a computer network. In other words, it is an information storage system distributed over hundreds or even thousands of computers. In this system, all contributors to the network own a copy of the database. This copy is updated simultaneously.
Unlike a traditional database whose information is structured in the form of tables, the blockchain allows data to be recorded in the form of blocks. A block is used to group information. Once the block is full, it is sealed with a computer code and is added to the previous block, hence the name blockchain . This way of structuring and recording information makes this database tamper-proof. This technology therefore makes it possible to exchange value in digital form, value materialized by crypto-currency (we also speak of crypto).
The blockchain is transparent. That is, anyone can view the transactions that have taken place on the network. Indeed, each node (each participant) has a copy of the database on its computer, which makes it possible to know the history of all the exchanges. The code of a blockchain, in most cases, is open source. This means that anyone can consult it and suggest improvements.
The blockchain is secured in two ways. As mentioned earlier, everyone has a copy of the database, which implies that a network participant cannot modify it without the others noticing. The blockchain is also secured by the fact that each block is closed by a hash function.
In this way, to be able to change the block in question, it would be necessary to be able to modify 51% of the copies of the blockchain simultaneously, which would require far too many computer resources. Thus, the information recorded on the blockchain can be consulted by everyone and cannot be falsified.
The decentralization, transparency and security enabled by blockchain technology have facilitated the development of digital currencies.
If today there are more than 10,000 crypto-currencies, the first of them, Bitcoin, is also the most important. We are going to tell you a little more about the birth of the concept of cryptocurrency.
The origins of crypto-currencies, cypherpunks and the creation of Bitcoin
The origins of Bitcoin date back to the early 90s when cypherpunks (crypto anarchists in French) began to meet and exchange ideas.
Cypherpunks are individuals passionate about cryptography whose goal is to enable the protection of private data on the Internet. This movement, born in San Francisco, later became global. The cypherpunks exchanged their ideas intended to create a free Internet thanks to an e-mail list.
The various works of this movement will serve as the basis for a mysterious individual named Satoshi Nakamoto for the creation of the most famous digital currency today, Bitcoin.
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In the context of the subprime crisis in 2008, Satoshi Nakamoto works and shares a “digital currency system, entirely peer-to-peer, without trusted third parties”. Helped by other cryptographers, Satoshi Nakamoto commissioned the Bitcoin network on January 3, 2009.
For the first time, individuals can exchange value with confidence through a decentralized network. If in the early years, Bitcoin was mainly used on the dark web to pay for illegal transactions, this asset has since grown in popularity to the point of interest of the majority of traditional investors.
The limited supply, the increasing mining difficulty and the fact that it is not controlled by any entity make Bitcoin digital gold today. Indeed, this crypto-asset is seen by many as the safest store of value today. But while Bitcoin uses blockchain for monetary exchange, this technology is not limited to this use.