Blockchain 101

From Digital Currency to Cryptocurrency

All the digital currencies that existed prior to Bitcoin had one feature in common, a central server or authority. While these systems worked, they had a serious drawback that was lamented by many in the digital currency community; they were centralized services. 

This centralization ran counter to the peer-to-peer dream of many digital pioneers, like the renown “cypherpunks,” and introduced security and privacy risks. However, this centralization existed for one very good reason, the “Double-Spend Problem.” This term, “Double Spend Problem”, refers to the fact that digital goods are very easy to copy. Someone in possession of a digital token, even one that is managed with cryptography, can still copy that token rapidly and repeatedly. It doesn’t take long to realize that a currency who anyone holder can easily make copies of won’t hold it’s value for long.

Making a copy of a digital token and attempting to spend it more than once is called double spending. It was this possibility that forced early digital currency systems to implement central servers that functioned as a clearinghouse.

In this centralized system, if Alice wants to send one coin to Bob she can’t do so directly. Her transaction needs to be sent to the central server which can effectively deduct one coin from her account and credit one coin to Bob. The transaction relies on the central server for processing.

While many in the digital currency cypherpunk world attempted to address this issue, Satoshi Nakamoto was the first to find success.

The concept behind Nakamoto’s solution is simple, instead of one server or entity keeping track of who has what coin at what time, the entire network does this work. Bitcoin software creates a ledger of transactions which is copied and shared among all the nodes on the network.

 

DEFINING CRYPTOCURRENCY


Cryptocurrencies are a digital store of monetary value the primary use of which is for buying and selling goods, services, or property. Cryptocurrencies are cryptographically secured against counterfeit and often are not issued or controlled by any centralized authority. Cryptocurrencies can be referred to as tokens or coins. We’ll cover the difference between the two in an upcoming lesson. The most popular cryptocurrency is bitcoin, though there are currently thousands of different cryptocurrency options.

A key aspect of cryptocurrency is that it is decentralized. There is no central authority with the ability to control your cryptocurrency. There is no one entity that controls the monetary policy of a cryptocurrency. Decentralization is enabled by solving the Byzantine Generals’ Problem. This ensures that the system will continue to function even if a user tries to pass along invalid data. We’ll explore this problem in the next lesson.