The definition of a cryptocurrency is ‘a form of digital currency based on blockchain and protected by cryptography’. In general, money can be physical and tangible, as in the case of the banknotes and coins we keep in our wallets. However, it can also be entirely digital like cryptocurrencies. One should not confuse cryptocurrencies with fiat currencies that can be exchanged virtually: our online bank accounts can transfer money digitally but this always involves fiat. However, coins, a type of cryptocurrency, share the properties of money: they are medium of exchange, store of value and unit of account.
Cryptocurrencies in a nutshell, unlike all other currencies, are not issued by governments but by private individuals via an algorithm. Cryptocurrencies are currencies generated and managed by mathematical functions and therefore not susceptible to arbitrary decisions. Algorithms ensure transparency and impartiality. It follows that cryptocurrencies are peer-to-peer: they do not require intermediaries but are sent from ‘peer’ to ‘peer’, i.e. they are exchanged between participants in the same network. Cryptocurrencies, in fact, can be exchanged between users through the payment of small fees and no third-party entities are needed. Cryptocurrencies are therefore independent of governments and banks: this makes them global, as do their economic systems, i.e. without geographical or legal borders. Developing cryptocurrencies is possible thanks to the blockchain, a distributed digital ledger on a decentralised network of nodes.
The etymology of cryptocurrency refers to the technology on which it is based, namely cryptography. This guarantees the privacy of users and the security of the blockchain in which all transaction data is transcribed. Specifically, the cryptography that is used by cryptocurrencies is called public key cryptography.
The origin of cryptocurrencies dates back to the late 1990s, during which time the idea of electronic and anonymous crypto-based currencies was developed. Although earlier experiments existed, the first truly adopted and recognised cryptocurrency was only developed in 2009: Bitcoin. From this year onwards, many other cryptocurrencies with different characteristics and functions have emerged; these have been dubbed ‘altcoins’, or ‘alternative coins’, compared to Bitcoin as the first standard. The best known of the altcoins is ether (ETH), the coin on the Ethereum blockchain, second to Bitcoin in market cap.
Cryptocurrencies can be of two types: coin or token, which are distinguished by the nature of the link to the blockchain on which they are based. Indeed, a coin is a cryptocurrency native to a blockchain, while a token is based on an existing blockchain created by a third party. Another criterion for categorising cryptocurrencies is the consensus mechanism used by their blockchain, mainly Proof-of-Work or Proof-of-Stake.