Introduction to Cryptocurrency

 

Bitcoin: The First Cryptocurrency

 

The first (and consequently one of the most primitive) cryptocurrency, "Bitcoin," was released by an otherwise anonymous entity, known as "Satoshi Nakamoto," in 2009. In order to understand cryptocurrency in general, it is therefore helpful to first understand just what Bitcoin is and how it works. Other cryptocurrencies can then be most easily understood in terms of their differences from Bitcoin.

 

Bitcoin Addresses:

 

Before delving into the slightly technical details of Bitcoin, it may be best to start with that part of Bitcoin which individuals interact with most frequently: Bitcoin addresses. An individual can create and use any number of Bitcoin addresses, each of which can send, receive, or hold any amount of the Bitcoin cryptocurrency.

 

Every Bitcoin address of the type listed above is known technically as a "public address." This is because these addresses are publicly viewable by others. After all, if you want someone to send Bitcoin to you, you need to provide them with an address to send it to; conversely, in order to send Bitcoin to someone else, they need to provide you with one of their addresses for you to send Bitcoin to.

 

There is another type of Bitcoin address, known as a "private address." Every public address has a private address associated with it. While the public address is used to receive Bitcoin, the private address is needed to spend Bitcoin. (Under most normal circumstances, however, one does not actually need to directly access these private addresses themselves in order to spend Bitcoin, since this is handled by their Bitcoin "wallet" software in the background.) It is therefore very important to KEEP your private addresses private, as revealing them to someone else would allow that person to spend or steal any Bitcoin stored in that address. Finally, an important mathematical or cryptographic property of these public/private Bitcoin address pairs is that it is possible to derive the public key if one knows the private key, but impossible to derive the private key from the public key.

 

Since the entire Bitcoin blockchain serves as a public ledger of all Bitcoin transactions, it is possible to follow the path of Bitcoins as they are created and sent from one Bitcoin address to another. While these addresses are anonymous in the sense that they are not inherently associated with particular individuals, in practice it is often possible to determine the ownership and use of bitcoins by particular individuals, by correlating public addresses whose owners are known (perhaps because they published them in an online store, or otherwise had their identity associated with them) with information publicly available in the blockchain. Bitcoin is thus often said to be "pseudo-anonymous," rather than truly anonymous.

 

The Bitcoin Protocol:

 

The term, "Bitcoin" may refer to either the "cryptocurrency" itself, or to the "peer-to-peer" networked software which is used to maintain the Bitcoin "blockchain." The "blockchain" is the central (but not the only) innovation upon which Bitcoin depends. It is a "public ledger" consisting of groups, or "blocks," of transactions, with these blocks "chained" together sequentially, back to the original "genesis" block, first created by Satoshi Nakamoto in 2009.

 

The protocol of the Bitcoin peer-to-peer software, i.e., the "Bitcoin protocol" is designed so that every "node" in the network contains its own copy of the blockchain, and is able to verify the validity of new blocks and add them to the blockchain as they are created. Blocks are created by a "Bitcoin miners" who process Bitcoin transactions, and are paid both a "transaction fee" and a "block reward" for this service. The transaction fee is paid by the person who is spending the Bitcoin, and the block reward consists of new Bitcoins which are created anew, or "mined," each time a block is processed.

 

An important part of mining Bitcoin (i.e., processing blocks of transactions) involves solving a unique cryptographic problem, which changes from block to block. Miners compete to be the first to solve this problem, and receive the transaction fees and block reward. The Bitcoin protocol is designed so that, on average, once every ten minutes some miner solves this problem and creates a new block to be added to the blockchain, at which point all the miners then move on to compete to solve the cryptographic problem involved in the next block of transactions. If blocks are being solved too quickly, then the protocol readjusts the cryptographic problems harder; if they are being solved too slowly, then the protocol readjusts the cryptographic problems easier. This readjustment allows the protocol to "tune" the difficulty of the cryptographic problems so that they are solved, on average, once every ten minutes.

 

Because it takes an average of ten minutes to process a new block, this also means that it take an average of ten minutes to receive one confirmation for a Bitcoin transaction. Furthermore, typically anywhere from two to six such confirmations are considered necessary for a Bitcoin transaction to be considered "finalized."

 

At first, each block reward (starting with the genesis block) was exactly 50 Bitcoins. The protocol has an automatic "diminishing of returns" built in, so that at some point the block reward dropped to 25 Bitcoins, then 12.5, then 6.25, and so on. The rate at which new coins are mined is known as the "emission rate." Eventually the emission rate will diminish to zero, so miners will get no block reward at all, but will only get the transaction fees associated with new blocks. This automatic diminishing emission rate is designed so that there will only ever be about 21 million Bitcoins created, with the majority being created within the first few years of its inception.

 

The Altcoins

 

Bitcoin Clones

 

The Bitcoin software which was released by Satoshi Nakamoto was "open source," meaning that its code is openly available for review by anyone, and also that it can be freely copied and modified by anyone as well. Due to the incredible success of Bitcoin, and the open source nature of the Bitcoin software, it was really only a matter of time before a number of new cryptocurrencies, often with various differences from Bitcoin, were released; collectively, these other cryptocurrencies are known as "altcoins."

 

The first altcoin was "Litecoin." This was essentially a clone of Bitcoin, with a faster blocktime, a higher total supply, and a modified mining algorithm, but no real significant technological advantages over bitcoin itself.

 

Another early altcoin was "Dogecoin." This was created as a sort of "joke coin," but wound up attracting a rather large following. There was also "Potcoin," intended for use in the cannabis industry. In fact, countless coins have sprung up which were claimed to be intended for this or that specific industry, or based around some sort of meme or other, but which really had no significant advantage over the original Bitcoin.

 

Dash and PIVX

 

One early altcoin which did have very significant advantages over Bitcoin was originally known as "Xcoin," but then rebranded to "Darkcoin," and later to "Dash." (We'll just call it "Dash" in order to avoid confusion between its different names at different points in its history.) The two primary advantages which Dash innovated are instant transactions and true anonymity. This is accomplished through its unique two-tier peer-to-peer network, consisting of "normal" nodes, which are analogous to normal Bitcoin nodes, and a number of special nodes, called "masternodes." (1000 Dash are required to run a masternode. This serves to ensure that each masternode owner has a significant stake in the "health" of the Dash network.) Masternodes are paid for the services they provide for the Dash network; in addition to instant transactions and true anonymity, the masternode network also provides funding for such things as software and protocol upgrades, marketing, and other projects which the masternode operators deem valuable to the Dash network as a whole. This system allows the Dash protocol to agilely respond to any problems or technical limitations and "evolve" much faster than almost any other cryptocurrency.

 

The success of Dash eventually lead to the creation of a "Dash clone" called "PIVX," which stands for "Private, Instant, Verified Transactions." PIVX has many of the same features as Dash, such as instant transactions, anonymous transactions, and a masternode network. PIVX also implements a "Proof of Stake" (PoS) algorithm, which allows PIVX holders to earn additional PIVX simply for holding coin in the official PIVX wallet, and keeping the wallet connected to the network. (PoS stands in contrast to the more traditional "Proof of Work," or PoW, implemented in the "mining" of Bitcoin.) It also adds an additional anonymizing protocol, the zCoin protocol, on top of the anonymization already provided by the masternodes, to create an extremely secure, privacy-focused coin.

 

Both Dash and PIVX have very low transactions fees, compared to other coins. (The Dash transaction fee is currently about one cent, or about 215 times cheaper than Bitcoin transactions.) Their far lower transaction fees, combined with instant transactions and anonymity, make Dash and PIVX uniquely suited for a real-world, real-time payment system. Instant transactions, in particular, make it possible to use Dash and PIVX as payment methods in brick-and-mortar retail establishments, without any sort of third party "middleman" needed to complete the transaction.

 

Other Notable Coins and Innovations

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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