The Riches of Cryptocurrency

Almost 12 years after Satoshi Nakamoto announced having developed, "A Peer-to-Peer Electronic Cash System," his unintended creation, the Bitcoin, reached a record high of $19,783.

It’s true, Nakamoto never actually intended to invent a currency. But the first and still most important cryptocurrency kicked off a global phenomenon that promises to usher in the age of decentralized digital cash system.

But as trendy as the term “cryptocurrency” has become what it is today, most people still don’t know what it is or how it actually works.

“A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990s. I hope it's obvious it was only the centrally controlled nature of those systems that doomed them. I think this is the first time we're trying a decentralized, non-trust-based system.” —Satoshi Nakamoto, Creator of Bitcoin.

Bitcoin is an open source implementation of P2P currency.

What is cryptocurrency?

A cryptocurrency is a form of digital money that uses cryptography to translate legible information into an uncrackable code. The process makes the currency difficult to counterfeit. Part of its charm is due to the fact that this virtual currency is not issued by any central institution, making it—at least in theory—impervious to any government interference.

How does it work?

In our centralized system, a central server oversees digital cash transactions. That is done in order to prevent double spending: One entity spends the same amount twice.

A decentralized system does not require this central server. Every single entity of the network and every peer needs to have a list of all transactions to ensure they are valid and not an attempt to double spend.

Physical currency does not present such an issue. Once you hand someone a $5 bill to buy a bottle of soda, you no longer have it, so the chance of using that same $5 bill to buy something else from another store is not possible. With digital currency, however, there is a risk the holder could make a copy of the digital token and use it in another transaction while retaining the original.

So a digital transaction is a file indicating that "John gives X amount of cryptocurrency to Mary," and then that file is signed by John’s private key. The transaction is then broadcasted to the entire network from peer to peer, but only after a specific amount of time it gets confirmed.

Now, confirmation is everything when it comes to cryptocurrencies.

Enter the miners.

Once a transaction is confirmed, it is no longer forgeable and it is part of an unchangeable transactions record—a public ledger called blockchain.

In a cryptocurrency-network, transaction confirmation is a job done by miners. Once a transaction is confirmed by a miner, every computer (node) in the network has to add it to its database. The transaction is now part of the blockchain.

Miners get paid for their work as auditors. Miners are rewarded with a token of the cryptocurrency; for example, Bitcoins. Once a miner has verified one megabyte worth of Bitcoin transactions, for instance, they are eligible to receive a certain amount in that said currency.

A new era?

In a nutshell, cryptocurrencies are limited database entries in a decentralized consensus-based system. Since the currency relies on strong cryptography, the process is secured not by people, but by math.

Cryptocurrency is money that is safe from political influence. In other words, digital gold. It is a quick, convenient way of payment on a global scale that promises to increase in value over time. It is also a means of speculation (investment). The industry gave birth to a dynamic, fast-paced market for those with the money and/or patience to invest.

The daily trade volume of exchanges such as Poloniex or Okcoin exceeds that of major European stock exchanges.

Of course, this rich environment of digital money breeds inconsistencies and unpredictable fluctuations. A coin might grow in value by 10 percent one day, just to lose the same two days later.

Here is a list of the six most popular cryptocurrencies other than Bitcoin.

1. Litecoin (LTC)

Created by Charlie Lee, an MIT graduate, Litecoin is like Bitcoin in many ways. It has a faster block generation rate and provides faster transaction confirmation. There is a growing number of merchants who accept Litecoin.

2. Monero (XMR)

Marketed as a secure, untraceable currency, Monero has been launched with a strong focus on scalability and privacy. Thanks to a technique called Ring Signatures, the user can be safely tucked in a group of cryptographic signatures that all appear valid while the real one cannot be isolated.

3. Ethereum (ETH)

Launched in 2015, the applications on Ethereum are run on its platform-specific cryptographic token, Ether—which is like a vehicle for moving around on the Ethereum platform. Ethereum (ETH) has a market capital of $41.4 billion, second among all cryptocurrencies after Bitcoin.

4. Dash

It offers more anonymity than Bitcoin, as it functions on a master code network that makes transactions close to untraceable. Originally known as Darkcoin, the rebranding kept its technological features such as Darksend and InstantX.

5. Zcash (ZEC)

Zcash provides selective transparency of transactions. It offers users the choice of protected transactions by encrypting content through advanced cryptographic techniques and zero-knowledge proof construction.

6. Ripple (XRP)

Ripple offers immediate, low-cost international payments. Ripple allows banks to provide cross-border payments in real-time and has a market capitalization of $1.26 billion.

The Bottom Line

Bitcoin remains by far the most popular cryptocurrency, in terms of user base and market capitalization. Even though most cryptocurrencies have zero non-speculative impact, others such as Ripple and Ethereum are becoming popular. Make no mistake, cryptocurrencies are here to stay, but how many of them will be able to survive amid the growing competition within the industry is a notion that still remains to be seen.