Cryptocurrency - what is it?

Cryptocurrency, or digital money, is a virtual means of payment and an investment resource whose operation is based on a distributed accounting system. As interpreted by the Court of Justice of the European Union, cryptocurrencies are full-fledged means of payment and are therefore exempt from VAT, which applies to goods and services.

What are cryptocurrencies?

In the cryptocurrency market we currently have over 10,000 functioning coins and projects. Each of these projects represents a certain vision and different mechanisms of action, but what are cryptocurrencies? Virtual money or digital currencies is of course an apt name, while we cannot stop at this simplification.

All because of the sophisticated nature of cryptocurrencies. As I managed to mention, crypto is based on a distributed, or in other words decentralised, accounting system. What is the unusual specificity of this solution?

The philosophy of cryptocurrencies - You are your bank

In the world of cryptocurrencies there is no overarching authority - such as a central bank - that can stop or reverse transactions. Everyone is their own bank, which in addition to the independent and completely free transfer of funds means that the funds of each user are as safe as the user himself will take care of this safety.

Cryptocurrencies mostly use advanced encryption algorithms that prevent unauthorised access to funds. The only circumstances that may contribute to the loss of virtual money is a gap in the security of a given cryptocurrency, which allows the theft of funds (which happens very rarely, it is even a margin), and the second possibility - which is 99% of cases of loss of funds, that is the loss of access to the wallet combined with the publication of data to operate the wallet, or private key.

An open and decentralised accounting system

This is what the blockchain, or Blockchain, is. Transactions stored on the chain are irreversible and anonymous - the block that contains information about transactions contains encrypted data, such as wallet addresses or keys needed to carry out the transaction.

The blockchain of each cryptocurrency has a unique specification. The bitcoin blockchain, despite many similarities, is different from the blockchain technology used for Litecoin or Ethereum.

What are the differences?

The best example of the differences, are the creation times of new blocks, which has a significant impact on the speed of transactions. With Bitcoin, a block is created every 10 minutes, while with Litecoin this time is reduced to 2.5 minutes.

Blockchain technology does not have an overarching authority - we are back to the principle of being your own bank. Instead of one strong authority that has the power to confirm or reject transactions, blockchain is based on independent nodes - Nodes, which take care of confirming users' transactions, thus preventing the problem of double spending, meaning that a user cannot spend the same money twice.

Confirming transactions can be done on a variety of consensuses - the most common is PoW - or proof-of-work, but an increasingly popular solution, especially due to its low resource requirements, is PoS - or proof-of-stake.

To understand exactly how Blockchain works, be sure to check out our article on the subject.

An alternative to Blockchain

The cryptocurrency market has already seen the emergence of technologies that have the potential to lead a revolution in the payments industry - digital currencies based, for example, on DAG (Directed Acyclic Graph). In this solution, it is not the nodes that confirm users' transactions, but the transactions confirm each other. Every transaction carried out in a currency that uses DAG, for example IOTA, must confirm two transactions.

DAG, unlike blockchain, scales with the number of transactions, which in theory means it makes no difference whether it handles 100, 1,000 or 1,000,000 transactions per second. By comparison, Bitcoin handles about 5 virtual payments per second.

What cryptocurrencies do DAG use?

In addition to IOTA, we still have NANO and OBYTE, among others. While the DAG model has the potential to become Blockchain 3.0, developers still need time to master the new technology and realise its full potential. Currently existing solutions are vulnerable to attacks and have baby-age defects, which means that we will have to wait for the revolution of the good old Blockchain technology, despite its scalability problems.

A brief history of cryptocurrencies

Everyone has probably heard about the beginning of Bitcoin (BTC) - 2009, Satoshi Nakamoto... Of course. These are very important moments in the history of crypto - even groundbreaking (and that's why we'll come back to them), but they are not the actual beginnings of an idea or a working concept that could claim to be the actual pioneer of the fi