Definition of

Cryptocurrency

July 2021

EDITED
BY IHAGH GODWIN

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 Motivation & Environment
Presents:
Definition of Cryptocurrency

Copyright Free: You may distribute

without permission, and share with

anybody

Edited by Ihagh G.

MSc (Water Resources & Environmental Eng.),

BSc (Civil Engineering), and 7 years university

teaching experience

Editor, Motivation & Environment

Email: [email protected]

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Definition of Cryptocurrency

Between 2009 and 2011, Bitcoin was the only cryptocurrency in

existence until alternative coins—also known as altcoins—were

created to improve on anonymity, speed, and security, amongst

other properties associated with the field of cryptocurrency which

Bitcoin pioneered.

There are many cryptocurrencies out there; in fact, as of April

2021, there were over 9,500 cryptocurrencies in circulation listed

on the Coinmarketcap. This number is expected to increase in

the future as people’s interest in cryptocurrencies keeps rising.

Although you might have heard about cryptocurrencies and

known how it works, it’s possible you still don’t know what

cryptocurrency actually is, or what means. The topic of

cryptocurrencies and the blockchain technology that drives them

can be a bit confusing.

So, what is cryptocurrency? This article uses relatable

terminology to explain in detail what cryptocurrency is, and the

science of cryptography that decentralizes and drives

cryptocurrencies, and makes them secure; generally, the

following topics are discussed:

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  Definition of Cryptocurrency

 Cryptocurrencies are driven by the basics of

cryptography

 Cryptography’s three main encryption methods used in

cryptocurrency

 Cryptocurrencies and Traditional Currencies

 5 benefits of cryptocurrencies that differentiate them

from fiat currencies

Definition of Cryptocurrency

Simply stated, cryptocurrency is digital currency or money.

Technically speaking, cryptocurrency is a decentralized digital

currency that is created based on the cryptographic principles

(principles of cryptography) that are applied in blockchain

technology.

Cryptography is a branch of scientific knowledge or mathematics

that analyzes and deciphers codes and ciphertexts and

cryptograms to secure information by converting it into

unintelligible forms that provide security, enhance and maintain

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decentralization, and make it impossible or extremely difficult for

third parties to understand.

Cryptocurrencies are driven by the basics of cryptography

Cryptocurrencies are driven by cryptography: the scripting

language used in most cryptocurrencies is created with

cryptography as its major pillar. The “crypto” in the word

“cryptography” and “cryptocurrency” means “secret.”

In the world of cryptocurrency, the word “crypto” is synonymous

with being “anonymous”. In ancient times, cryptography was

used to send hidden messages. In fact, the term “cryptography”

was derived from the Greek word “krypto logos” which means

“secret writing”. The sender of a message would “encrypt” a

message by using a “key”, and the receiver of the message would

have to “decrypt” it.

When used in cryptocurrencies and their underlying blockchain

technology, cryptography makes it difficult to create fake

cryptocurrency tokens; on the other hand, it creates more

transparency over the number of tokens created and issued to

clients and held by them.

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Cryptocurrencies use cryptography to keep their platforms safe,

anonymous, and protected from double-spending which is a

situation whereby a client’s cryptocurrency could be used more

than once.

Cryptocurrency platforms use cryptography in a way that makes

it possible for anyone to open a cryptocurrency account without

requesting permission from a third party or third parties. Instead

of using names, account numbers, and passwords—like

traditional or fiat currency platforms (banks, PayPal, etc.) do,

cryptocurrency platforms use public keys as account numbers

and digital signatures as passwords.

In the world of cryptocurrency, anyone can use a public key as

their account number and can create their own cryptocurrency

account with their computer without asking a third party for an

account number and credentials to access or operate their

account.

An account can be created by selecting a private key (which is a

random number) and deriving a public key from it. A public key

is generated from a private key; a private key is a random

number because it is selected at random.

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The account numbers of most cryptocurrencies, which are called

“addresses”, are mathematically derived from public keys.

Cryptocurrency addresses are the cryptocurrency accounts that

people send/transfer cryptocurrencies from or use to receive

cryptocurrency payments from other cryptocurrency addresses

within the same platform (Bitcoin, Ethereum, Litecoin, etc.).

Nobody can spend any cryptocurrency from the address that

belongs to its owner unless the owner gives someone or anyone

else their private key. The owner of a cryptocurrency address is

at liberty to create as many addresses as they want; their

cryptocurrency wallet (which stores cryptocurrency) would

manage the addresses on their behalf.

In the cryptocurrency world, although third parties have been

eliminated in creating cryptocurrency accounts, there are

actually parties involved in the central bookkeeping; however,

such parties act in a decentralized manner with no actual party,

person, or computer being in complete control of cryptocurrency

bookkeeping.

Cryptography’s three main encryption methods used in

cryptocurrency

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1. Hashing or hash function

Hashing is used in cryptocurrency platforms like Bitcoin to guess

the combination of a block’s lock, maintain the structure of

blockchain data, encode clients’ addresses/accounts, and make

it possible to mine new blocks. After a client inputs

initial/original data, the hash function operates on the data and

creates an output that is smaller in size but represents the

original data.

2. Symmetric cryptography

In symmetric encryption, which is the easiest method employed

in cryptography, both the sender and receiver of data use only

one secret key; the major drawback of this encryption method is

that before the initial data can be encrypted, every party in a

transaction has to exchange the secret key used to encrypt the

initial data.

3. Asymmetric cryptography

In asymmetric encryption, two keys are used: a public key and a

private key. The receiver can use their public key to encrypt the

initial message or data sent from someone else and received by

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them; however, the receiver can only use their private key to

decrypt the initial data or message sent.

Nodes

For the sake of clarity, it has to be stated that nodes are not

among the main encryption methods. Nodes are the computers,

printers, or cellphones that are connected to the internet and are

on the blockchain network. In the type of cryptography used in

cryptocurrency, nodes serve as electronic devices that do

bookkeeping in the blockchain network of respective

cryptocurrencies and make the decentralization of

cryptocurrencies possible.

Cryptocurrencies and Traditional Currencies

Bitcoin was the first cryptocurrency to be created, and many

other cryptocurrencies have been created over the years after

Bitcoin was established. Although cryptocurrencies like Bitcoin

are created through a process called “mining”, not all

cryptocurrencies are being mined. The process of mining or

creating cryptocurrencies is very different from the traditional

method of mining ore and precious metals.

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Traditional or fiat currencies like the dollar, pound, and euro—

which are not cryptocurrencies—can be digitally transferred, but

cryptocurrencies (Bitcoin, Ethereum, Litecoin, etc.) can’t be

digitally transferred in the same way that fiat currencies can

because there is a difference between their respective transfer

processes and the technology that drives them.

Regardless of whether a cryptocurrency is mined or not mined,

its transaction needs validation in its own blockchain network;

this implies that transactions have to be verified by people in the

network in order to provide proof for the transactions and ensure

that the same cryptocurrency token hasn’t been spent twice. The

extent of validation in a cryptocurrency network is completely

different from the one applicable to fiat currencies.

Although each cryptocurrency is gradually becoming mainstream

like traditional currencies that are being used to make payments

electronically on some platforms, traditional currencies aren’t

created and transferred the same way cryptocurrencies are

created and transferred.

5 benefits of cryptocurrencies that differentiate them from

traditional/fiat currencies

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Until quite recently—probably a few years ago—many people

underrated how important cryptocurrencies they would become

in the near future. Cryptocurrencies help in areas where the

world’s traditional currencies have issues. The main benefits of

cryptocurrencies are:

1. They empower people to be in charge of their own money.

Governments and central banks have a lot of control over fiat

currency, and in many instances, have frozen people’s accounts

and denied them access to their funds because of one reason or

another. Governments may even decide to get rid of high-value

banknotes the way India did in 2016 when it wiped out 550- and

1000-rupee notes from circulation; these notes represented

around 87% of the total cash in circulation.

2. They make it possible for currencies, mostly

cryptocurrencies, to be transferred much faster and at less

expensive rates because middlemen or third parties aren’t

involved. On the other hand, the transfer of fiat currencies is

usually slow, and transactions are expensive because of the

involvement of middlemen or third parties such as brokers,

banks, and escrows, etc.

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3. They make it easy for most of the world’s unbanked and

underbanked population to have access to the financial

services offered by the blockchain technology of its

respective platforms. On the other hand, fiat currencies make it

difficult for approximately half the world’s population (over 3

billion people) to have sufficient access to modern-day financial

services.

4. They reduce corruption and provide a much more fair-

playing field because they are decentralized and not

controlled by governments or banks. With fiat currencies, there

is a consistent rise in financial inequality around the world.

Usually, when one person or few people are in power, there is a

high possibility for them to abuse power and increase it.

5. They increase in value and don’t tend to create

inflation/negative effects of inflation because, unlike fiat

currencies, they can’t be printed excessively. Most

cryptocurrencies are limited to a number of coins that can be

printed. There is no way for a central authority or the blockchain

to simply create more coins to add to the predetermined or

existing supply. With fiat currencies, there are problems and

negative impacts of inflation because governments and central

with serious economic problems. However, when governments

print more money, the value of their currencies drops to such an

extent that inflation drastically increases and makes it difficult or

impossible for its citizens to buy everyday goods and services.

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