A digital currency that is secured by cryptography
and is, typically, used as a medium of exchange within a peer-to-peer (P2P)
digital economic system. The use of cryptographic techniques is what ensures that these systems are completely immune to fraud and counterfeiting.
The first cryptocurrency to be ever created was Bitcoin
, introduced by pseudonymous developer Satoshi Nakamoto
, in 2009. Nakamoto’s goal was to create a novel electronic payment system that would allow digital financial transactions to occur between users without the need for intermediaries, such as banks or governmental institutions.
Most cryptocurrency systems work through a decentralized framework that is collectively maintained by a distributed network of computers. Each computer (or device) that joins the network is referred to as a node
. In simple terms, a node is any physical device that is connected to a network and that is able to send, receive and forward information. Each node is categorized according to the functions it performs within the system. For instance, the Bitcoin network is made of, at least, seven different types of nodes, and the nodes that perform all available functions are known as full nodes.
Cryptocurrency systems are considered decentralized because they don't rely on a centralized point of authority. The network nodes are widely distributed around the world and the issuance and management of cryptocurrency units are based on pre-programmed algorithms
and mathematical proofs. However, each cryptocurrency works in a particular way, which results in varying degrees of decentralization. In other words, some cryptocurrencies may be considered more decentralized than others, depending on the network structure and on how the nodes are distributed.
Most cryptocurrency systems rely on a public distributed ledger known as a blockchain
, which is basically an ever-growing list of records that are highly resistant to modification. As the name suggests, a blockchain is made of a linear chain of blocks
and, in the context of cryptocurrencies, it is responsible for keeping a permanent record of all confirmed transactions (and related data) - all secured by cryptography. Generally speaking, every cryptocurrency works on top of a blockchain that works according to a predefined set of rules (i.e. an underlying protocol). The protocol is what defines how the blockchain and the cryptocurrency system should operate.