Cryptocurrencies such as Bitcoin started in 2009 and it has changed the world forever. It was the first form of internet money to solve the double-spend problem in a decentralized system. This new invention generated huge shockwaves in the financial world and the economy at large. Today we are still reckoning with the consequences of the invention and the final results won't be seen in many decades into the future.
After Bitcoin came, a flood of altcoins copying the original design of Satoshi Nakamoto started to appear. Then the advent of Ethereum and the programmable blockchains which created the ICO boom of the 2017 and 2018. Now, the Decentralized Finance phenomenon is sweeping the space. In a little more than a decade, blockchain has already undergone massive changes and it has not even begun expanding its adoption base.
In light of all of these developments, it is important to take a step back and ask a basic question. What are cryptocurrencies? The answer has become more complex in recent years, yet it is the defining conundrum at the core of the technology. Because in the end, this digital decentralized cash will transform the world forever.
An example of the impact of cryptocurrencies is that 89% of executives say digital assets will be very important.
The Beginning
Internet entrepreneurs had an early dream of migrating money to the web through digital cash. Attempts such as DigiCash and e-gold were made in the 90s, but they eventually failed due to various reasons such as technology immaturity, poor adoption, and lack of infrastructure. However, the main challenge was the problem of a trusted third party as all attempts relied on a central system to control user balances. This design posed a risk of dishonest actions and made it difficult to track them. While emerging technologies aimed to solve this problem, the Dotcom crash put an end to the cycle and the dream of fully digitized cash faded away.
In 2009 history was made with the paper Bitcoin: A Peer-to-Peer Electronic Cash System. The document described a network of interconnected computers forming a decentralized ledger capable of tracking transactions and keeping a global balance of amounts. The system would accomplish this without the need for a central authority keeping track of all the financial movements.
The described money, named Bitcoin, would progressively be generated by the network as it engaged in mining. A computationally intensive process is used to validate transactions and secure the network's integrity. With this, in 2009 the mysterious Satoshi Nakamoto had solved the double-spend problem and the trusted third party design. The first is a flaw that would allow a malicious actor to use the same funds twice for different transactions, previously trusting a central authority was the only way to prevent this type of fraud. The world would never be the same.
Characteristics of a Cryptocurrency
A cryptocurrency is a cryptographically secured form of digital cash which makes it almost impossible to counterfeit. Its ledger doesn't depend on a central authority to be kept up to date. Most current cryptocurrencies depend on a data structure known as the blockchain. In which transactions, or computations, are organized in batches known as blocks, where each new addition refers to the previous by hashing the information contained in the preceding block. But this is not always the case.
So we have that cryptocurrencies are:
- Secured by cryptography hence the name.
- Run-on a distributed system.
- Don't depend on a central authority.
- Use a self-updating ledger.
- Can be accessed from anywhere in the world with an internet connection.
This is a broad set of characteristics that can be applied to many of the cryptocurrencies that have emerged in the last decade. Many had made modifications and improvements to the original design.
Types of cryptocurrencies
There are many ways to classify cryptocurrencies. Here we will use a generational approach.
First-generation: the very first generation of cryptocurrencies all based on the design of Bitcoin using blockchain and Proof of Work examples besides Bitcoin are: Litecoin, Bitcoin Gold, Bitcoin Cash, Monero, etc. Forks of the bitcoin network and some privacy coins.
Read A History of Bitcoin Forks for more information.
Second-generation: these are known as programmable blockchains. Here the main cryptocurrency of the network is not only used as money, but also as a way to pay the network for running smart contracts. Small programs that can be used to perform operations running on top of the blockchain. Also, here we see the first coins that do not use blockchain as a data structure. The main example is of course Ethereum but others are Tron, IOTA, etc.
Third generation: these are projects that are looking to improve the second generation. Generally using Proof of Stake as a consensus mechanism. They are not yet fully operational, so it is kind of hard to make a definite claim about them. Some examples are Cardano, Tezos, Cosmos, etc.
The world of cryptocurrencies has changed rapidly in an incredibly short amount of time. From its humble beginning, it has captured the imagination of the world and has begun transforming the world's economy. The future of this technology is just beginning to take shape, but even at this early stage has made an enormous impact.
Cryptocurrencies are here to stay. There is no way to erase the technology now that it has already been used by so many. The changes to come will make it faster and more friendly to use, but the building blocks of this future are being laid right here, right now.
