How E-Currencies Work

This introduction explains the most important thing about crypto-currencies. After you read it, you’ll know more than most people.

Today, crypto-currencies (buying Cryptos) have become a global phenomenon known to most people. Although this phenomenon remains somewhat geek and misunderstood by the general public, banks, governments, and many businesses are aware of its importance.

What is crypto-money?

In 2016, you will find it difficult to find a large bank, a large accounting firm, a major software publisher or a government that has not yet researched crypto-currencies, published an article about them or launched a project called Blockchain. (Follow our courses on the Blockchain to learn more about the Blockchain) thomas-carper-us-senator-bitcoin “” virtual currencies, especially perhaps Bitcoin, have stimulated the imagination of some, sown fear among others, and confused the rest of us.- Thomas Carper, American senator

But beyond the bustle and press releases, an overwhelming majority of people – even bankers, consultants, scientists, and developers – have a very limited knowledge of crypto-currencies. They often fail to understand the basic concepts.

Then go through the whole story. What are crypto-currencies?

  • Where’s the cryptocurrency coming from?
  • Why should you know more about crypto-money?
  • And what do you need to know about cryptocurrency?

What is crypto-currency and how did crypto-currencies become a secondary product of digital currency?

Not many people know this, but cryptocurrencies have emerged as the by-product of another invention. Satoshi Nakamoto, the unknown inventor of Bitcoin, the first and always most important crypto-currency, never intended to invent a currency.

In his Bitcoin release of late 2008, Satoshi said he had developed “an electronic payment system in peer-to-peer””.

His goal was to invent something; many people could not create before digital money.

“Announce the first release of Bitcoin, a new electronic payment system that uses a peer-to-peer network to prevent double-spending. It is completely decentralized, with no server or central authority.””- Satoshi Nakamoto, January 09, 2009, announcing Bitcoin on SourceForge.

The most important part of Satoshi’s invention was to find a way to develop a decentralized digital payment system. In the 1990s, there were many attempts to create a digital currency, but they all failed.

“”After more than a decade of failing systems based on trusted third parties (Digicash, etc.), they are seen as a lost cause. I hope they can see the difference, that this is the first time, I think, that we are trying a system without a trusted third party.””- Satoshi Nakamoto in an email to Dustin Trammell

After observing the failure of all the centralized attempts, Satoshi tried to set up a digital payment system without a central entity. Like a peer-to-peer network for file sharing.

It was this decision that gave birth to crypto-money. It’s the missing link Satoshi found to make digital silver. The reason is a bit technical and complex, but if you understand it, you will learn more about crypto-currencies than most people. So let’s try to make this as simple as possible.

To make digital money, you need a payment network with accounts, balances and transactions. It’s easy to understand. A major problem that any payment network has to solve is to prevent what is called double spending : to prevent the same entity from spending twice the same amount. Usually, it’s a central server that records sales.

In a decentralized network, you don’t have this server. It is therefore necessary for each entity of the network to do this work. Each peer in the network must have a list of all transactions to verify whether future transactions will be valid or an attempt at double expense.

But how can these entities maintain a consensus on these registrations?

If the peers of the network do not agree on a single balance, even a minor one, everything is broken. There must be an absolute consensus. Usually, it is again a central authority that reports the balances as being in good condition. But how can we achieve consensus without a central authority?

No one knew until Satoshi arrived. No one even thought it was possible

Satoshi proved that he did. Its main innovation has been to achieve consensus without a central authority. Crypto-currencies are part of this solution – the part that made the solution exciting, fascinating, and helped it spread around the world.

What are crypto-currencies, concretely?

If you remove all the fuss about crypto-currencies and reduce them to a simple definition, you will find that they are only limited entries in a database that no one can change without meeting certain conditions. This may seem trivial, but, believe it or not, you define a currency exactly that way.

Take the money from your bank account: what else is it than entries in a database that can only be changed under specific conditions ? You can even take coins and physical notes. What are other than limited entries in a public physical database that can only be changed if you meet the condition of physically possessing coins and banknotes ? Money is nothing more than a verified entry in some sort of database of accounts, balances and transactions.

How do miners create coins and confirm transactions ?

Let’s look at the mechanism that governs crypto-currency databases. A crypto-currency like Bitcoin is a peer-to-peer network. Each pair has a record of the complete history of all transactions and thus the balance of each account.

A transaction is a file that says, “”Bob gives Alice X Bitcoins”” and is signed by Bob’s private key. It’s basic public key cryptography, nothing special. Once signed, a transaction is broadcast on the network and sent from one peer to another. It’s basic peer-to-peer technology. Nothing at all, again.