Cryptocurrencies

Only few people know that cryptocurrencies emerged as a side product of another invention. "Satoshi Nakamoto", how people started to call the unknown inventor of the first and still most important cryptocurrency called Bitcoin, never intended to invent a currency.

In his first announcement of Bitcoin in late 2008 he said he developed "A Peer-to-Peer Electronic Cash System."

His goal was to invent something; many people failed to create before digital cash.

"Announcing the first release of Bitcoin, a new electronic cash system that uses a peer-to-peer network to prevent double-spending. It's completely decentralized with no server or central authority."  - Satoshi Nakamoto, 9th of January 2009, announcing Bitcoin on SourceForge.

The most important part of Satoshi's work was that he found a way to build a decentralized digital cash system, which in the nineties was a big invention, as there have been many attempts to create digital money, but all failed.

"After more than a decade of failed Trusted Third Party based systems (Digicash, etc.), they see it as a lost cause. I hope they can make the distinction, that this is the first time I know of that we're trying a non-trust based system." - Satoshi Nakamoto in an E-Mail to Dustin Trammell.

After seeing all the centralized attempts fail, Satoshi tried to build a digital cash system without a central entity. Like a Peer-to-Peer network for file sharing.

This decision became the birth of cryptocurrency. They are the missing piece Satoshi found to realize digital cash. The reason why is a bit technical and complex, but if you get it, you'll know more about cryptocurrencies than most people do. So, let's try to make it as easy as possible:

To realize digital cash, you need a payment network with accounts, balances, and transaction. That's easy to understand. One major problem every payment network has to solve, is to prevent the so-called double spending, which means to prevent, that one entity spends the same amount twice. Usually, this is done by a central server who keeps record about the balances.

In a decentralized network, you don't have this server. So, you need every single entity of the network to do this job. Every peer in the network needs to have a list with all transactions to check if future transactions are valid or an attempt to double spend.

But how can these entities keep a consensus about these records?

If the peers of the network disagree about only one single, minor balance, everything is broken. They need an absolute consensus. Usually, you take, again, a central authority to declare the correct state of balances. But how can you achieve consensus without a central authority?

Nobody did know until Satoshi emerged out of nowhere. In fact, nobody believed it was even possible.

Satoshi proved it was. His major innovation was to achieve consensus without a central authority. Cryptocurrencies are a part of this solution - the part that made the solution thrilling, fascinating and helped it to roll over the world.

How it works

Let's have a look at the mechanism ruling the databases of cryptocurrencies. A cryptocurrency like Bitcoin consists of a network of peers. Every peer has a record of the complete history of all transactions and thus of the balance of every account.

A transaction is a file that says, "Bob gives X Bitcoin to Alice" and is signed by Bob's private key. It's basic public key cryptography, nothing special at all. After signed, a transaction is broadcasted in the network, sent from one peer to every other peer. This is basic p2p-technology. Nothing special at all, again.

The transaction is known almost immediately by the whole network. But only after a specific amount of time it gets confirmed.

Confirmation is a critical concept in cryptocurrencies. You could say that cryptocurrencies are all about confirmation.

If a transaction is unconfirmed, it is pending and can be forged. When a transaction is confirmed, it is set in stone. It is no longer forgeable, it can't be reversed, it is part of an immutable record of historical transactions: of the so-called blockchain.

Only miners can confirm transactions. This is their job in a cryptocurrency-network. They take transactions, stamp them as legit and spread them in the network. After a transaction is confirmed by a miner, every node has to add it to its database. It has become part of the blockchain.

For this job, the miners get rewarded with a token of the cryptocurrency, for example with Bitcoins. 

Cryptocurrencies: dawn of a new economy

Mostly due to its revolutionary properties cryptocurrencies have become a success their inventor, Satoshi Nakamoto, didn't dare to dream of it. While every other attempt to create a digital cash system didn't attract a critical mass of users, Bitcoin had something that provoked enthusiasm and fascination. Sometimes it feels more like religion than technology. 

Cryptocurrencies are digital gold. Sound money that is secure from political influence. Money that promises to preserve and increase its value over time. Cryptocurrencies are also a fast and comfortable means of payment with a worldwide scope, and they are private and anonymous enough to serve as a means of payment for black markets and any other outlawed economic activity.

But while cryptocurrencies are more used for payment, its use as a means of speculation and a store of value dwarfs the payment aspects. Cryptocurrencies gave birth to an incredibly dynamic, fast-growing market for investors and speculators. Exchanges like Okcoin, poloniex or shapeshift enables the trade of hundreds of cryptocurrencies. Their daily trade volume exceeds that of major European stock exchanges.

At the same time, the praxis of Initial Coin Distribution (ICO), mostly facilitated by Ethereum's smart contracts, gave live to incredibly successful crowdfunding projects, in which often an idea is enough to collect millions of dollars. In the case of "The DAO" it has been more than 150 million dollars.

In this rich ecosystem of coins and token, you experience extreme volatility. It's common that a coin gains 10 percent a day - sometimes 100 percent - just to lose the same at the next day. If you are lucky, your coin's value grows up to 1000 percent in one or two weeks.

While Bitcoin remains by far the most famous cryptocurrency and most other cryptocurrencies have zero non-speculative impact, investors and users should keep an eye on several cryptocurrencies. Here we present the most popular cryptocurrencies of today.