In the next series of articles, we will be focusing on cryptocurrencies, an type of currency enabled by an emerging technology called blockchain that is set to revolutionize the financial sector.
What Is a Cryptocurrency?
According to Crypto Currency facts, a cryptocurrency is a “digital currency that uses encryption (cryptography) to generate money and to verify transactions. Transactions are added to a public ledger – also called a Transaction Block Chain – and new coins are created through a process known as mining.” Today, numerous cryptocurrencies, such as Bitcoin, are well known, used, and exchanged globally by individuals and financial institutions.
Historically, cyptocurrencies are roughly 20 years old. Nick Szabo’s “bit gold” was the first decentralized digital cryptocurrency, an early precursor to Bitcoin, and can be traced back to 1998. Bit gold is considered the first precursor to bitcoin. In 2008, Satoshi Nakamoto (an anonymous person and/or group) released a paper detailing what would become Bitcoin shortly thereafter.
Today, there are close to 1000 cryptocurrencies available for trade in online markets. As of 2017, the total market capitalization of all cryptocurrencies exceeded $100 billion. With cryptocurrencies taking such large market capitalization, it has become important for firms wishing to evolve with and adapt to the new millennial customers that have an affinity to these technologies to understand how they work, and how they are evolving along with the marketplace.
How Do Cryptocurrencies Work?
A cryptocurrency is “an encrypted decentralized digital currency transferred between peers and confirmed in a public ledger via a process known as mining.”. In order to enable a cryptocurrency, it requires (1) a public ledger that records transactions (this is achieved transparently, securely – through encryption, and accurately – by using transaction blockchains), (2) transactions occurring between various parties, and (3) miners that confirm the transactions and store them in the public ledgers by solving a complex mathematical problem (a process known as proof of system).
Through the use of cryptography and encryption techniques, the identities of the owners of these cryptocurrencies remain unknown throughout the transactions. Moreover, mining can be achieved by anyone as it is open source. After each transaction occurs and is recorded in the public ledger via mining, the transaction blockchain (the ledger) grows by one block (transaction) and can not be altered again, as it is confirmed by everyone viewing the ledger.
In order to optimize this system and to make it scalable, cryptocurrencies are decentralized and enacted on peer-to-peer networks. This bypasses the traditional economic currencies that usually required the oversight of a central bank. However, the system does have to deal with cybersecurity threats like all other digital technologies. In April 2016, according to Etienne Goffin and Toon Vanderschueren at Needle Strategy “a decentralized venture fund called the DAO raised $150 million using an initial coin offering. Hackers found a weakness in the code and exploited it, stealing about $60 million in the process.”
Since Bitcoin’s inception in January 2009, thousands of cryptocurrencies have emerged. Though the individual currencies may not remain, the concept is here to stay. I will continue to explore the cryptocurrency space in the weeks to come, and my next article will highlight the potential impact of cryptocurrencies on the Financial Services Sector.
