Chances are you have come across terms like BitCoin, digital/cryptocurrency and Block Chain. Maybe it was on the nightly news in a report about the rising/tanking BitCoin economy, or maybe you have up close and personal experience with BitCoin-requesting ransomware. But beyond that, if you’re like a whole lot of people out there, you may be kind of in the dark, thinking “Am I the only person left on the planet who doesn’t entirely know what this computer-based currency thing is all about??”
Never fear, you’re not the only person still confused by these terms and the buzz around digital and crypto currencies. In fact, a recent survey conducted by Coin Center found that 65% of American adults know absolutely nothing about BitCoins. Moreover, what people are more often familiar with is the role digital currencies play in cyber crime, which puts the entire industry in a bit of a negative light. On top of that, it’s inventor(s) is anonymous, going under the pseudonym of Satoshi Nakamoto, which further casts the whole thing in a mysterious aura. And just the fact that it’s a completely new and digital concept is enough to make many people skeptical of the entire industry.
But despite all the mystery and fear of the unknown, investments in digital currencies are growing at a steady pace. One BitCoin is worth $3935.22 as of this writing and analysts expect that figure to rise. It also is not subject to inflation, as it was designed to be a controlled supply of just 21 million coins, and more of it cannot just be “minted” on the will of a government or central bank, if the need were to arise. This is great because inflation is what causes prices of goods and services to skyrocket and purchasing value to fall — and this is inherently impossible in the BitCoin economy.
Moreover, the transaction fees for buying, selling and trading are nominal, making transfers via BitCoin far more affordable than traditional bank transfers, it’s inherently secure and anonymous and it can be used anywhere with an internet connection, making it an ideal means of currency for people living in areas with underdeveloped financial infrastructures. With all these advantages, it’s probably a good idea to become at least familiar with the basics. In this post we’ll break down the most elementary concepts of this new(ish) and intriguing industry.
Digital Currency – Any currency stored and transferred digitally. Although similar in concept to physical money, it can be centralized (i.e. printed through the auspices of a government) just as physical money is, or decentralized (i.e. controlled by different sources and as such are not subject to government regulations). You may come across the terms cryptocurrency and virtual currency — both are forms of digital currency. Virtual currency is usually used in the context of online gaming, whereas cryptocurrency is what is really making headlines. When we talk about digital currencies that are helping shape a new economic reality, this is what we’re referring to.
BitCoin – The first and largest cryptocurrency. It is paperless and can be sent via the internet with no middle man, making the fees far lower than in traditional money transfers. They can be bought on exchanges for Dollars or Euros and the names of buyers and sellers are kept anonymous, for better or worse.
BTC – How BitCoin is typically abbreviated on exchanges.
Block Chain – As mentioned above, there are no traditional regulations in the cryptocurrency realm. To ensure that things are kept legal and no fraud is committed, each time a transaction takes place, it is put onto an incorruptible ledger called the Block Chain. This is essentially an ever-expanding and time-stamped list of each BitCoin, Ethereum or other cryptocurrency transaction that takes place. Two of the most distinctive characteristics about the Block Chain model is that it’s distributed, which means that anyone with a node (see below) can view it, and once inserted, blocks cannot be altered which greatly reduces the ability to commit fraud. Additionally, it is secured with public and private encryption keys so that data stored on it cannot be corrupted by hackers.
Ether/Ethereum Network – The second-most valuable and common cryptocurrency after BitCoin. It’s similar in concept to BitCoin but was designed to be used for more than just digital payments. It focuses on the idea of sharing any data via its Block Chain network so that it’s inherently tamper-proof, the same way transactions uploaded to the BitCoin Block Chain are tamper-proof. This idea could prove to be hugely valuable when it comes to smart contracts, or contracts that are converted into code and are stored on the Ethereum network Block Chain. These contracts are usually programmed using “if-then” premises, which essentially means that if one person does X (for example, pays $1000 in Ether to another person), the conditions of the contract will then be triggered to occur (for example, a digital car key will be sent to the person who sent the Ether). What’s more, these contracts are stored on the Block Chain and are available for everyone to see. Thus, if one side fulfills their end of the deal, the other party cannot simply weasel their way out of the contract.
Mining – This is how new BitCoins are “generated” and how new transactions are verified and added to the Block Chain ledger. As mentioned above, BitCoin was designed so that the currency is released in a controlled manner, rather than a haphazard one to prevent inflation. When Satoshi Nakamoto created the currency, she/he/they designed the system so that there will never be more than 21 million of them produced in total. This was done intentionally to mimic the way that a limited amount of precious metals can be unearthed to produce physical gold and silver. Miners are volunteers who use computers that run specific programs and hardware that attempt to solve complex math problems and are thus designed to “unearth” new BitCoins at a controlled rate. The first computer to solve the equation is rewarded with a newly unearthed BitCoin for its efforts.
Node – A volunteer computer on the Block Chain network where BitCoins or Ether is mined and transactions are recorded.
Wallet – Similar to a physical bank account, this is where cryptocurrency is sent from, received to, and stored. This is also where the private and public encryption keys are kept. There are many options depending on the form of cryptocurrency you use, all with their own advantages and disadvantages.
AltCoins – Any other forms of cryptocurrency that work on the same principles as BitCoin and Ethereum. Right now there are about 900 or so AltCoins.
Okay; now you’ve got the basics of the industry down-pat. Going from Greenbacks to code-based cash is a major shift, but as society becomes ever-more digitally centered, this may just be another inevitability. Also back to that cyber-crime thing, if you ever do get hit with ransomware that demands payment in BTC, it’s probably a good idea to have at least some familiarity with the system beforehand. Meanwhile, in Part 2 of this series, we’ll explore the role of cryptocurrency in cyber crime, what’s being done to thwart criminals and what’s coming up on the horizon.