What is a currency?
Before we get into the details about cryptocurrency let’s briefly define what a currency is first:
- Store of value
- Unit of account
- Medium of exchange
Store of Value
Money has value if it is scarce, in other words if it has a limited supply. Too much of something usually reduces the value of that something. Which is why people collect things like rare art, wines and gold jewellery.
Unit of Account
Money requires some sort of accounting system (or ledger) to record the positive and negative balances between people who exchange good and services. If you spend 10 units of money to buy a drink, you receive the drink and the seller receives 10 units of currency. In a cash system this works perfectly fine since you have 10 less currency and the seller has plus 10 through the exchange. In a digital system however a ledger needs to make sure that 10 units is deducted from your account and added to the seller’s account. This ensures fairness in the system.
Medium of Exchange
A medium of exchange is something which can be easily transferred between buyers and sellers. Chickens are not good mediums of exchange. They are hard to handle and do not last for long periods of time. Coins and paper money have worked quite well since they are small and easy to carry around.
What is cryptography
Crypto stands for cryptography. Cryptography is the process of converting ordinary text into jumbled up text so that only the sender and receiver have the correct information. This is important when sending private and sensitive information like passwords and digital money.
Most cryptocurrency uses a type of cryptography called public key cryptography. This system allows each user to have a public key and a private key. The public key can be made available to anyone if you want them to send you digital currency. The private key should always remain safe and private because it will allow the owner of that key to unlock their funds. In another article we will talk about the safety considerations of keeping your digital funds safe.
What is a cryptocurrency?
With secure cryptography we are now able to send money across the world in a secure way with public and private keys. But any definition on cryptocurrency would be incomplete without exploring the king of them all, bitcoin. Let’s use bitcoin as the main example to come back to our definition of money above.
- will only ever have 21 million coins. Because there are so few it’s value will remain high as long as people use it
- uses a decentralised ledger system (accounting system) to make sure that the correct amounts are debited and credited to peoples accounts. This solves the unit of account listed above in the definition of money
- is digital and easy to exchange with others. While speed and larger adoption by the population are still issues, solutions are actively in development.
This is a fairly simple definition of cryptocurrency. A lot more can be said about how they are built. Mathematics and technology are coming together to make our lives easier.. but more importantly to remove control of our money from governments and banks which for many centuries have abused their power and robbed the people of their wealth.