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Alke Wigren
A cryptocurrency, crypto-currency, or crypto[a] is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.[2] It is a decentralized system for verifying that the parties to a transaction have the money they claim to have, eliminating the need for traditional intermediaries, such as banks, when funds are being transferred between two entities.[3]
Individual coin ownership records are stored in a digital ledger, which is a computerized database using strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership.[4][5][6] Despite their name, cryptocurrencies are not considered to be currencies in the traditional sense, and while varying treatments have been applied to them, including classification as commodities, securities, and currencies, cryptocurrencies are generally viewed as a distinct asset class in practice.[7][8][9] Some crypto schemes use validators to maintain the cryptocurrency. In a proof-of-stake model, owners put up their tokens as collateral. In return, they get authority over the token in proportion to the amount they stake. Generally, these token stakers get additional ownership in the token over time via network fees, newly minted tokens, or other such reward mechanisms.[10]
Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority. Cryptocurrencies typically use decentralized control as opposed to a central bank digital currency (CBDC).[11] When a cryptocurrency is minted, created prior to issuance, or issued by a single issuer, it is generally considered centralized. When implemented with decentralized control, each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.[12]
The first cryptocurrency was Bitcoin, which was first released as open-source software in 2009. As of June 2023, there were more than 25,000 other cryptocurrencies in the marketplace, of which more than 40 had a market capitalization exceeding $1 billion.[13]
In 1996, the National Security Agency published a paper entitled How to Make a Mint: The Cryptography of Anonymous Electronic Cash, describing a cryptocurrency system. The paper was first published in an MIT mailing list[17] and later in 1997 in The American Law Review.[18]
In September 2021, the government of China, the single largest market for cryptocurrency, declared all cryptocurrency transactions illegal. This completed a crackdown on cryptocurrency that had previously banned the operation of intermediaries and miners within China.[31]
On 15 September 2022, the world's second largest cryptocurrency at that time, Ethereum transitioned its consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS) in an upgrade process known as "the Merge". According to the Ethereum Founder, the upgrade can cut both Ethereum's energy use and carbon-dioxide emissions by 99.9%.[32]
On 11 November 2022, FTX Trading Ltd., a cryptocurrency exchange, which also operated a crypto hedge fund, and had been valued at $18 billion,[33] filed for bankruptcy.[34] The financial impact of the collapse extended beyond the immediate FTX customer base, as reported,[35] while, at a Reuters conference, financial industry executives said that "regulators must step in to protect crypto investors."[36] Technology analyst Avivah Litan commented on the cryptocurrency ecosystem that "everything...needs to improve dramatically in terms of user experience, controls, safety, customer service."[37]
Cryptocurrency is produced by an entire cryptocurrency system collectively, at a rate which is defined when the system is created and which is publicly stated. In centralized banking and economic systems such as the US Federal Reserve System, corporate boards or governments control the supply of currency.[citation needed] In the case of cryptocurrency, companies or governments cannot produce new units, and have not so far provided backing for other firms, banks or corporate entities which hold asset value measured in it. The underlying technical system upon which cryptocurrencies are based was created by Satoshi Nakamoto.[59]
Within a proof-of-work system such as Bitcoin, the safety, integrity and balance of ledgers is maintained by a community of mutually distrustful parties referred to as miners. Miners use their computers to help validate and timestamp transactions, adding them to the ledger in accordance with a particular timestamping scheme.[21] In a proof-of-stake blockchain, transactions are validated by holders of the associated cryptocurrency, sometimes grouped together in stake pools.
The validity of each cryptocurrency's coins is provided by a blockchain. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography.[59][61] Each block typically contains a hash pointer as a link to a previous block,[61] a timestamp and transaction data.[62] By design, blockchains are inherently resistant to modification of the data. It is "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way".[63] For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.
A node is a computer that connects to a cryptocurrency network. The node supports the cryptocurrency's network through either relaying transactions, validation, or hosting a copy of the blockchain. In terms of relaying transactions, each network computer (node) has a copy of the blockchain of the cryptocurrency it supports. When a transaction is made, the node creating the transaction broadcasts details of the transaction using encryption to other nodes throughout the node network so that the transaction (and every other transaction) is known.
Node owners are either volunteers, those hosted by the organization or body responsible for developing the cryptocurrency blockchain network technology, or those who are enticed to host a node to receive rewards from hosting the node network.[65]
Another method is called the proof-of-stake scheme. Proof-of-stake is a method of securing a cryptocurrency network and achieving distributed consensus through requesting users to show ownership of a certain amount of currency. It is different from proof-of-work systems that run difficult hashing algorithms to validate electronic transactions. The scheme is largely dependent on the coin, and there is currently no standard form of it. Some cryptocurrencies use a combined proof-of-work and proof-of-stake scheme.[23]
On a blockchain, mining is the validation of transactions. For this effort, successful miners obtain new cryptocurrency as a reward. The reward decreases transaction fees by creating a complementary incentive to contribute to the processing power of the network. The rate of generating hashes, which validate any transaction, has been increased by the use of specialized machines such as FPGAs and ASICs running complex hashing algorithms like SHA-256 and scrypt.[66] This arms race for cheaper-yet-efficient machines has existed since Bitcoin was introduced in 2009.[66] Mining is measured by hash rate typically in TH/s.[67]
As of February 2018[update], the Chinese Government has halted trading of virtual currency, banned initial coin offerings and shut down mining. Many Chinese miners have since relocated to Canada[70] and Texas.[71] One company is operating data centers for mining operations at Canadian oil and gas field sites, due to low gas prices.[72] In June 2018, Hydro Quebec proposed to the provincial government to allocate 500 megawatts of power to crypto companies for mining.[73] According to a February 2018 report from Fortune, Iceland has become a haven for cryptocurrency miners in part because of its cheap electricity.[74]
In March 2018, the city of Plattsburgh, New York put an 18-month moratorium on all cryptocurrency mining in an effort to preserve natural resources and the "character and direction" of the city.[75] In 2021, Kazakhstan became the second-biggest crypto-currency mining country, producing 18.1% of the global exahash rate. The country built a compound containing 50,000 computers near Ekibastuz.[76]
A cryptocurrency wallet is a means of storing the public and private "keys" (address) or seed which can be used to receive or spend the cryptocurrency.[82] With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency. With the public key, it is possible for others to send currency to the wallet.
There exist multiple methods of storing keys or seed in a wallet. These methods range from using paper wallets (which are public, private or seed keys written on paper), to using hardware wallets (which are hardware to store your wallet information), to a digital wallet (which is a computer with a software hosting your wallet information), to hosting your wallet using an exchange where cryptocurrency is traded, or by storing your wallet information on a digital medium such as plaintext.[83]
Bitcoin is pseudonymous, rather than anonymous; the cryptocurrency in a wallet is not tied to a person, but rather to one or more specific keys (or "addresses").[84] Thereby, Bitcoin owners are not immediately identifiable, but all transactions are publicly available in the blockchain.[85] Still, cryptocurrency exchanges are often required by law to collect the personal information of their users.[86]
The rewards paid to miners increase the supply of the cryptocurrency. By making sure that verifying transactions is a costly business, the integrity of the network can be preserved as long as benevolent nodes control a majority of computing power. The verification algorithm requires a lot of processing power, and thus electricity in order to make verification costly enough to accurately validate public blockchain. Not only do miners have to factor in the costs associated with expensive equipment necessary to stand a chance of solving a hash problem, they further must consider the significant amount of electrical power in search of the solution. Generally, the block rewards outweigh electricity and equipment costs, but this may not always be the case.[91]
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