Cryptocurrency is a new asset class. Bitcoin is the first cryptocurrency released to the world in 2009 by inventor Satoshi Nakamoto using blockchain technology. Since then, people all across the world have used blockchain technology to develop their own cryptocurrency for a variety of different uses.
What is bitcoin?
Bitcoin promises to be global digital cash. Money which is not controlled by any government or company. Some call it the people’s money or the Internet of money. It exists only in digital format and is not backed by any physical asset or government. Bitcoin has gained value because people give it value since it is useful to them, and also because there will only ever be 21 million bitcoin, which means unlike dollars no government or person can inflate the money supply. Wherever people have access to the Internet, they can send bitcoin to anyone in the world with similar convenience to sending an email.
Who is Satoshi Nakamoto?
We don’t know. The inventor of bitcoin went by the name Satoshi Nakamoto. However, we don’t believe this is his real name. Satoshi communicated to the world on the Internet but stopped contributing many years ago. We don’t know whether Satoshi was one person, a group, or whether he or they are still alive. In the end, it doesn’t really matter, because bitcoin continues to be improved by many people all across the world.
What is cryptocurrency?
Bitcoin is meant to be money and uses cryptography for security purposes, and so combining the words cryptography and currency we get "cryptocurrency". Now the world uses cryptocurrency to refer to similar assets. There are many thousands of cryptocurrencies, sometimes collectively referred to as altcoins (any cryptocurrency which isn’t bitcoin), including ether, dash, EOS, monero, augur, NEO. Although currency is in the name, many cryptocurrencies are not actually trying to be a new form of money, but rather using the underlying blockchain technology to provide other uses.
What is Ethereum?
The Ethereum blockchain’s native cryptocurrency is called “ether” and is an example of a cryptocurrency whose primary goal is not to be money. Rather, ether is more akin to fuel which powers smart contracts on the Ethereum blockchain (more on smart contracts below). Some like to refer to Ethereum as the world computer. This is because it is a decentralised platform to run applications in a peer-to-peer environment over the Internet.
What is a smart contract?
Very basically, a smart contract is a set of instructions which automatically execute a certain way depending on the outcome of something. A better term may be self-executing contracts. You agree to terms with someone, and then depending on whether A or B happens, the contract will execute as per the terms of the contract. So, if you agree to purchase my car for $20,000, we can use a smart contract whereby upon you depositing $20,000 into my account, ownership of the car immediately transfers to you. No middleman is required to execute the transfer, as it is automatically processed on the blockchain.
What is the blockchain?
The blockchain is essentially just a publicly available ledger or book of records with a key characteristic being that once a record is placed on the blockchain it cannot be changed or deleted. When Person A transfers bitcoin to Person B, this transaction is written to the blockchain, which verifies that Person B is now the owner of that bitcoin. The breakthrough with blockchain is that this registry system is processed in a decentralised, permissionless and secure environment.
What is decentralisation?
When talking about decentralisation and blockchain, we basically mean that no one entity, such as a government or bank, controls the system. Instead, many people across the Internet participate in verifying and securing the public ledger and do so in a permissionless manner. This means that no one has to go to a central party to ask permission to participate, since they can download and run the appropriate software to send transactions without asking for permission, and many miners spread out across the world secure the network without asking anyone for permission to do so.
What is mining?
Cryptocurrency mining is the process of creating and securing the blockchain. Those people doing this are referred to as "miners". They operate computer hardware and software which receives, verifies and transmits valid transactions throughout the network. They also perform a “proof of work” function to build the blockchain. This means their computers are continually trying to solve complex puzzles and the first miner to solve each new puzzle provides proof and as a reward creates the next block in the chain, thereby securing the blockchain and settling transactions. Miners are incentivised to do this as the winning miner collects transaction fees and is permitted to create a certain amount of new cryptocurrency. Not all blockchains use the same method to secure the network and some, like bitcoin, require far more sophistication to participate compared to others.